THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
HKGFBU-MWE-XN02
10.10.12
HKR selvv2dc
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20-Mar-2012 07:51 EST
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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 12(g) OF THE SECURITIES EXCHANGE
ACT OF 1934
OR
⌧
(cid:0)
(cid:0)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2011
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from to
OR
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
Date of event requiring this shell company report
Commission file number: 001-34238
THE9 LIMITED
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrant’s name into English)
Cayman Islands
(Jurisdiction of incorporation or organization)
Building No. 3, 690 Bibo Road
Zhang Jiang Hi-Tech Park
Pudong New Area, Pudong
Shanghai 201203
People’s Republic of China
(Address of principal executive offices)
THE9 LIMITED
FORM 20-F
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HKGFBU-MWE-XN02
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Page 2 of 3
George Lai, Chief Financial Officer
Tel: +86-21-5172-9999
Facsimile number: +86-21-5172-9903
Building No. 3, 690 Bibo Road
Zhang Jiang Hi-Tech Park
Pudong New Area, Pudong
Shanghai 201203
People’s Republic of China
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
American Depositary Shares, each
representing one ordinary shares, par value $0.01 per
share
Nasdaq Global Market
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period
covered by the annual report.
28,783,929 ordinary shares, par value $0.01 per share, as of December 31, 2011.
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 during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files). Yes
No
⌧
(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):
(cid:0)
⌧
(cid:0)
Large accelerated filer
Accelerated filer
Non-accelerated filer
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this
filing:
⌧
US GAAP
International Financial Reporting Standards as issued
(cid:0)
by the International Accounting Standards Board
(cid:0)
Other
* If “Other” has been checked in response to the previous question, indicate by check mark which financial statement Item the
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
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registrant has elected to follow.
(cid:0)
(cid:0)
Item 17
Item 18
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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
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d)
(cid:0)
(cid:0)
of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes
No
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
HKGFBU-MWE-XN03
10.10.12
HKR nelas0dc
HKG
TABLE OF CONTENTS
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KEY INFORMATION
OFFER STATISTICS AND EXPECTED TIMETABLE
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
INTRODUCTION
PART I
Item 1.
Item 2.
Item 3.
Item 4.
INFORMATION ON THE COMPANY
Item 4A. UNRESOLVED STAFF COMMENTS
Item 5.
Item 6.
Item 7.
Item 8.
Item 9.
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
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
FINANCIAL INFORMATION
THE OFFER AND LISTING
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
PART III
Item 17. FINANCIAL STATEMENTS
Item 18. FINANCIAL STATEMENTS
Item 19. EXHIBITS
1
2
2
2
2
26
41
41
58
65
67
69
70
81
82
83
83
83
83
85
85
85
86
86
86
86
86
86
86
86
86
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
HKGFBU-MWE-XN03
10.10.12
HKR nelas0dc
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INTRODUCTION
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In this annual report, unless otherwise indicated, (1) the terms “we,” “us,” “our company,” “our” and “The9” refer to The9
Limited and, as context may require, its subsidiaries and our affiliated entities, (2) the terms “affiliated entities” refer to our affiliated
PRC entities, namely Shanghai The9 Information Technology Co., Ltd., or Shanghai IT, and Shanghai Huopu Cloud Computing
Terminal Technology Co., Ltd., or Huopu Cloud, as well as our other affiliated entities, namely Shanghai Jiucheng Advertisement
Co., Ltd., or Shanghai Jiucheng Advertisement, Shanghai Jiushi Interactive Network Technology Co., Ltd., or Jiushi, Hangzhou Fire
Rain Network Technology Co., Ltd., or Fire Rain, Shenzhen Wanyouyinli Technology Co., Ltd., or Wanyouyl, and Shanghai
Mengxiang Hulian Digital Technology Co., Ltd., (3) the terms “shares” and “ordinary shares” refer to our ordinary shares, and
“ADSs” refers to our American Depositary Shares, each of which represents one ordinary share, and “ADRs” refers to the American
Depositary Receipts, which evidence our ADSs, (4) “China” and “PRC” refer to the People’s Republic of China, and solely for the
purpose of this annual report, excluding Taiwan, Hong Kong and Macau, (5) all references to “RMB” and “Renminbi” are to the legal
currency of China and all references to “U.S. dollars,” “dollars,” “US$” and “$” are to the legal currency of the United States, (6) all
discrepancies in any table between the amounts identified as total amounts and the sum of the amounts listed therein are due to
rounding, and (7) all translations from RMB to U.S. dollars and from U.S. dollars to RMB in this annual report were made at a rate of
RMB6.2939 to US$1.00, the noon buying rate in effect as of December 30, 2011.
This annual report on Form 20-F includes our audited consolidated statements of operations for the years ended December 31,
2009, 2010 and 2011, and consolidated balance sheet data as of December 31, 2010 and 2011.
We and certain selling shareholders of our company completed the initial public offering of 6,075,000 ADSs, each representing
one ordinary share, par value US$0.01 per share, on December 20, 2004. On December 15, 2004, we listed our ADSs on the Nasdaq
Global Market, or Nasdaq, under the ticker symbol “NCTY.”
1
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN09
10.10.12
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Page 1 of 1
Item 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not Applicable.
Item 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
PART I
Not Applicable.
Item 3.
A. Selected Financial Data
KEY INFORMATION
The following table presents selected consolidated financial information for our company. You should read the following
information in conjunction with “Item 5. Operating and Financial Review and Prospects” below. The selected consolidated statement
of operations data for the years ended December 31, 2009, 2010 and 2011 and the selected consolidated balance sheet data as of
December 31, 2010 and 2011 have been derived from our audited consolidated financial statements and should be read in conjunction
with those statements, which are included in this annual report beginning on page F-1. The selected consolidated statement of
operations data for the years ended December 31, 2007 and 2008 and the selected consolidated balance sheet data as of December 31,
2007, 2008 and 2009 have been derived from our audited consolidated financial statements, which are not included in this annual
report.
2007
RMB
2008
RMB
Year Ended December 31,
2010
RMB
2009
RMB
(in thousands, except for share and per ADS)
2011
RMB
US$
(1)
Consolidated Statement of Operation Data
Revenues
Sales taxes
Net revenues
Cost of services
Gross profit (loss)
Operating expenses
Other operating income
Profit (loss) from operations
Interest income
Other income (expense), net
Income (loss) before income tax (expense) benefit, gain on
investment disposal, impairment loss on investments and
share of loss in equity investments
Income tax (expense) benefit
Income (loss) before gain on investment disposal,
impairment loss on investments and share of loss in
equity investments
Gain on investment disposal
Impairment loss on investments
Share of loss in equity investments, net of taxes
Net income (loss)
Less: Net income (loss) attributable to noncontrolling
Net income (loss) attributable to holders of ordinary shares
Net income (loss) attributable to holders of ordinary shares
interest
(2)
per share
Basic
Diluted
Net income (loss) attributable to holders of ordinary shares
per ADS
(3)
Basic
Diluted
(6,089)
(94,639)
(70,522)
(5,676)
(42,113)
1,350,129 1,806,130 802,629 108,514 112,466 17,869
(968)
1,279,607 1,711,491 760,516 102,838 106,377 16,901
(6,215)
(997,949)
713,542
(419) 67,259 10,686
(578,993) (530,884) (353,365) (477,284) (75,833)
4,130
134,549 (482,841) (353,784) (384,032) (61,017)
4,833
56,691
(104)
(18,967)
(700,047)
579,560
(343,695)
—
235,865
50,656
(30,054)
30,501 23,183 30,416
(653)
61,840 19,259
(712,473) (103,257) (39,118)
— 25,993
48,043
—
—
256,467
(9,269)
247,198
—
(627)
(5,679)
240,892
172,273 (390,500) (311,342) (354,269) (56,288)
—
(47,929)
(7,368)
5,536
—
—
124,344 (384,964) (318,710) (354,269) (56,288)
7,060
—
—
(25,922)
(531)
(2,241)
96,181 (409,932) (518,711) (313,176) (49,759)
6,828 44,435
—
(3,342)
(22,412) (196,116)
(2,556) (10,713)
—
240,892
(655)
(4,583)
(4,780) (19,099) (28,846)
96,836 (405,152) (499,612) (284,330) (45,176)
8.79
8.72
3.50
3.50
(15.94)
(15.94)
(19.89)
(19.89)
(11.39)
(11.39)
(1.81)
(1.81)
8.79
8.72
3.50
3.50
(15.94)
(15.94)
(19.89)
(19.89)
(11.39)
(11.39)
(1.81)
(1.81)
2
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
RRWIN-XENP143
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Page 1 of 1
Consolidated Balance Sheet Data
Cash and cash equivalents
Non-current assets
Total assets
Total current liabilities
Total equity
Total liabilities and equity
2007
RMB
2008
RMB
Year Ended December 31,
2009
RMB
2010
RMB
2011
RMB
US$
(1)
(in thousands, except for per share and per ADS)
769,023
2,215,282 2,152,586 1,675,081 1,416,189 1,071,726 170,280
831,342
295,886 460,228 73,123
3,246,101 3,263,009 2,324,958 1,857,339 1,628,894 258,805
440,011
316,319 311,525 49,496
2,806,090 2,719,242 2,013,450 1,535,217 1,251,831 198,896
3,246,101 3,263,009 2,324,958 1,857,339 1,628,894 258,805
543,767
311,508
522,161
(1) Translation from RMB amounts into U.S. dollars was made at a rate of RMB6.2939 to US$1.00 for the convenience of the
reader only. See “— Exchange Rate Information.”
(2) We adopted authoritative guidance regarding accounting for noncontrolling interests on January 1, 2009, retrospectively.
(3) Each ADS represents one ordinary share.
Exchange Rate Information
Our business is primarily conducted in China and almost all of our revenues are denominated in RMB. This annual report
contains translations of RMB amounts into U.S. dollars based on the noon buying rate in the city of New York for cable transfers of
RMB, as certified for customs purposes by the Federal Reserve Bank of New York for period ends indicated through December 2008
and the H.10 weekly statistical release of the Federal Reserve Board for period ends indicated from and after January 2009. For your
convenience, this annual report contains translations of some RMB or U.S. dollar amounts for 2011 at US$1.00: RMB6.2939, which
was the noon buying rate in effect as of December 30, 2011. The prevailing rate on March 16, 2012 was US$1.00: RMB6.3222. We
make no representation that any RMB or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or RMB, as
the case may be, at any particular rate, the rates stated below, or at all. The PRC government imposes controls over its foreign
currency reserves in part through direct regulation of the conversion of RMB into foreign currency and through restrictions on foreign
exchange activities.
The following table sets forth information concerning exchange rates between the RMB 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 our other periodic reports or any other information to be provided to you. The source of these
rates is the Federal Reserve Bank of New York.
Period
2006
2007
2008
2009
2010
2011
2012
September
October
November
December
January
February
March (through March 16, 2012)
Period end Average
(1)
Noon Buying Rate
7.8041
7.2946
6.8225
6.8259
6.6000
6.3780
6.3547
6.3765
6.2939
6.3080
6.2935
6.3222
7.9579
7.5806
6.9193
6.8295
6.7603
Low
8.0702
7.8127
7.2946
6.8470
6.8330
High
7.8041
7.2946
6.7800
6.8176
6.6000
6.3885
6.3710
6.3564
6.3482
6.3975
6.3825
6.3839
6.3733
6.3780
6.3534
6.3400
6.2939
6.3119
6.2997
6.3153
6.3330
6.3120
6.3315
6.2940
6.2935
6.2982
(1) Annual averages are calculated from month-end rates. Monthly averages are calculated using the average of the daily rates
during the relevant period.
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THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
HKRPRFRS16
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B. Capitalization and Indebtedness
Not Applicable.
C. Reasons for the Offer and Use of Proceeds
Not Applicable.
D. Risk Factors
Risks Related to Our Company and Our Industry
We have incurred losses starting from the expiration of the license of World of Warcraft, or WoW. We may continue to incur
losses in the future and may not maintain profitability.
We incurred a net loss of RMB409.9 million in the year ended December 31, 2009 due to the non-renewal of the WoW
license agreement. We incurred a net loss of RMB518.7 million in the year ended December 31, 2010 and a net loss of RMB313.2
million (US$49.8 million) in the year ended December 31, 2011, because we have not identified a product to replace the WoW game
and we continue to incur product development expenses for our new products. We may continue to incur losses and may not be able
to achieve profitability.
We expect our operating expenses to increase as we expand our operations. Our ability to achieve profitability depends on
the competitiveness of our products and services as well as our ability to control costs and to provide new products and services to
meet the demands of our customers. Due to the numerous risks and uncertainties associated with our business, we may not be able to
achieve short-term or long-term profitability or at all. If we continue to incur losses and fail to achieve profitability in the future, the
market price of our ADSs could decline.
If we are unable to successfully establish new relationships with online game developers and maintain a satisfactory relationship
with the online game developers that have licensed games to us, our future results of operations and profitability will be materially
impacted.
We rely heavily on our relationships with online game developers that have licensed games to us. Despite our effort to
expand our capacity to develop our own proprietary games, we significantly rely and will continue to significantly rely on our
relationships with, among others, game licensors such as Webzen, Inc., or Webzen, Ndoors Corporation, or Ndoors, and USERJOY
Technology Co., Ltd., or USERJOY.
The licenses of the games we now operate generally have terms ranging from three to four years, and may or may not be
renewed upon expiration. As an illustration, until June 2009, we had relied heavily on our relationship with Blizzard Entertainment,
Inc. which permitted our subsidiary, China The9 Interactive Limited, or C9I, to operate WoW, in China through cooperation with
Shanghai IT, our affiliated PRC entity. Our agreement with Blizzard Entertainment, Inc., which expired on June 7, 2009, accounted
for approximately 88% of our total revenues in 2009. On November 22, 2010, our license agreement with HanbitSoft Inc., or
HanbitSoft, and IMC Games Co., Ltd. to operate Granado Espada, or GE, expired and was not renewed. Our game licenses may also
be terminated before expiration. For example, on December 2, 2010, we entered into an agreement with EA Swiss Sàrl to prematurely
terminate the EA Sports™ FIFA Online 2 license, which would otherwise have expired in May 2012, and to cease commercial
operation of the game in China. We ceased to operate the game in China in October 2011.
4
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
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In order for our business strategy to be successful in the near term, we will need to obtain new online game licenses and
renew existing licenses, in addition to developing proprietary games that are attractive to users. Our business depends significantly
upon our licenses to operate online games in China. Therefore, our business, financial condition and results of operations will be
materially impacted if we are unable to obtain new online game licenses in the future. In addition, if we are unable to maintain a
satisfactory relationship with the online game developers resulting in licenses not being renewed or licenses being prematurely
terminated, or should any of these game licensors either establish similar or more favorable relationships with our competitors in
violation of their contractual arrangements with us, or otherwise, our operating results and our business would be harmed. We cannot
assure you that any of our online game licensors will renew their license agreements with us, or grant us a license for any new online
games that they will develop or make available to us expansion packs for existing games. Any deterioration in our relationships with
our online game licensors could harm our future results of operations or the growth of our business.
Our business is intensely competitive and “hit” driven. If we do not deliver new “hit” products to the market, or if consumers
prefer our competitors’ products or services over those we provide, our operating results will suffer.
We operate in a highly competitive and dynamic market, and our future success depends not only on the popularity of our
existing online games but also, in large part, on our ability to develop and introduce new games that are attractive to our customers.
To achieve this, we will need to anticipate and effectively adapt to rapidly changing consumer tastes and preferences and
technological advances. The development of new games can be very difficult and requires high levels of innovation. We do not have
a proven track record of developing proprietary massively multiplayer online role playing games, or MMORPGs, massively
multiplayer online first-person shooter game, or MMOFPSs, web games, social games or mobile games. While new products are
regularly introduced, only a small number of “hit” titles account for a significant portion of total revenue in our industry. There is no
assurance that any new game, proprietary, licensed or otherwise, to be introduced by us from time to time, including those named in
“Item 4. Information on the Company—B. Business Overview—Products and Services,” could become “hit” products and widely
accepted by the customers and the market. “Hit” products offered by our competitors may take a larger share of the market than we
anticipate, which could cause revenues generated by our products to fall below expectations. If our competitors develop more
successful products, or offer similar products at lower price points or pursuant to payment models viewed as offering a better value
than we do, our business, financial condition and results of operations may be materially and adversely affected.
Also, in order to maintain the life span of our new online games, which we believe is typically four to five years for
successful online games or two to three years for most other online games, we need to continue to develop and release upgrades to our
new online games. We cannot assure you that we will be able to identify appropriate games or enter into arrangements with those
game developers to offer these games in China on terms acceptable to us or at all, or that we can maintain the expected life span of
our new online games. If we are not able to license, develop or acquire additional attractive online games with lasting appeal to users,
our business, financial condition and results of operations may be materially and adversely affected.
We may not be able to recover our market share and profitability as we operate in a highly competitive industry and compete
against many companies.
There are currently over 100 online game operators in China. We expect that, given the relatively low barriers to entry,
more companies will enter the online game industry in China and a wider range of online games will be introduced to the Chinese
market. Our competitors vary in size and include large companies, many of which have significantly greater financial, marketing and
game development resources and name recognition than we have, such as Tencent Inc., Shanda Games Limited, Netease.com, Inc.,
Perfect World Co., Ltd., Changyou.com Limited and Giant Interactive Group. As a result, we may not be able to devote adequate
resources to designing, developing or acquiring new games, undertaking extensive marketing campaigns, adopting aggressive pricing
policies, paying high compensation to game developers or compensating independent game developers to the same degree as certain
of our competitors do. Our competitors may introduce new business methods from time to time. If these new business methods turn to
be more attractive to customers than the business methods we currently use, our customers may switch to our competitors’ games, and
we may lose market share. We cannot assure you that we will be able to compete successfully against new or existing competitors, or
against new business methods implemented by them. In addition, the increasing competition we anticipate in the online game industry
may also reduce the number of our users or the growth rate of our user base or reduce the game points spending for in-game premium.
All of these competitive factors could materially and adversely affect our business, financial condition and results of operations and
prevent us from recovering market share and profitability.
5
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
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Page 1 of 1
Illegal game servers, unauthorized character enhancements and other infringements of our intellectual property rights, as well as
theft of in-game goods, could harm our business and reputation and materially and adversely affect our results of operation.
With the increase in the number of online game players in China, we have faced the risks of illegal game servers,
unauthorized character enhancements and other infringements of our intellectual property rights as well as the risk of theft of in-game
goods purchased by our customers. Our historical results of operations were materially and adversely affected by illegal game servers.
Although we have adopted a number of measures to address illegal server usage, misappropriation of our game server installation
software and the establishment of illegal game servers could harm our business and reputation and materially and adversely affect our
results of operations.
From time to time, we have detected a number of players who have gained an unfair advantage by installing tools that
fraudulently facilitate character progression. We have installed software patches designed to prevent unauthorized modifications to
our execution files. However, we cannot assure you that we will be able to identify and eliminate new illegal game servers,
unauthorized character enhancements or other infringements of our intellectual property rights in a timely manner, or at all. The
deletion of unauthorized character enhancements requires the affected players to restart with a new character from the starting level,
and this may cause some of these players to cease playing the game altogether. If we are unable to eliminate illegal servers,
unauthorized character enhancements or suffer other infringement of our intellectual property rights, our players’ perception of the
reliability of our games may be negatively impacted, which may reduce the number of players using our games, shorten the lifespan
of our games and adversely affect our results of operations.
Our business, financial condition and results of operations may be adversely affected by the downturn in the global or Chinese
economy.
The global financial markets experienced significant disruptions in 2008 and the effect of the crisis still persists. China’s
economy has also faced challenges. To the extent that there have been improvements in some areas, it is uncertain whether such
recovery is sustainable. Since we currently derive substantially all of our revenues from China, our business and prospects may be
affected by economic conditions in China. Moreover, a slowdown in the global or Chinese economy or the recurrence of any financial
disruptions in any jurisdiction, such as European Union, may have a material and adverse impact on available financing. The
weakness in the economy could erode investors’ confidence, which constitutes the basis of the equity markets. The recent financial
turmoil affecting the financial markets and banking system may significantly restrict our ability to obtain financing in the capital
markets or from financial institutions on commercially reasonable terms, or at all. We are uncertain about the extent to which the
recent global financial and economic crisis and slowdown of the Chinese economy may impact our business in the long term. There is
a risk that our business, results of operations and prospects would be materially and adversely affected by the global economic
downturn and the slowdown of the Chinese economy.
We face the risks of changing consumer preferences and uncertainty about market acceptance of our new products.
The online game industry is relatively new and constantly evolving in China. Customer demand for and market acceptance
of our online games is subject to a high degree of uncertainty. Our future operating results will depend on numerous factors beyond
our control. These factors include:
•
•
•
•
•
•
•
the popularity of new online games that we operate;
the introduction of new online games competing with or replacing our existing online games;
general economic conditions, particularly economic conditions affecting discretionary consumer spending;
changes in customer tastes and preferences;
the availability of other forms of entertainment;
critical reviews and public tastes and preferences, all of which change rapidly and cannot be predicted; and
customer demand for our in-game items.
6
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
RRWIN-XENP143
10.10.12
HKR jayab0dc
HKG
20-Mar-2012 07:42 EST
ˆ200FNeb!tHj2XGWwFŠ
6*
0C
200FNeb!tHj2XGWw
290862 TX 7
HTM
ESS
Page 1 of 1
Our ability to plan for product development and distribution and promotional activities will be significantly affected by our
ability to anticipate and adapt to relatively rapid changes in consumer tastes and preferences. Currently, one of the most popular types
of online games in China are MMORPGs. However, there is no assurance that MMORPGs will continue to be popular in China or
that their popularity will not be surpassed by new and different types of online or other games in the future. For example, other types
of online games, such as MMOFPS, web games, social games and mobile games have been gradually gaining popularity among game
players since 2009. A decline in the popularity of online and mobile games in general or the MMORPGs that we operate will likely
adversely affect our business and prospects.
In addition, we expect that as we introduce new MMORPGs, a certain portion of our existing customers will switch to the
new games. If this transfer of players from our existing games exceeds our expectations, we may have to adjust our marketing, pricing
and other business plans and, as a result, our business, financial condition and results of operations could be materially and adversely
affected.
Future acquisitions may have an adverse effect on our ability to manage our business and our results of operations.
Selective acquisitions form a part of our strategy to further expand our business. For example, we acquired the majority
interest in Red 5 Studios, Inc., or Red 5, to further strengthen our online game development capabilities. We believe that integration
of a new company’s operations and personnel into ours will require the significant attention of our management. The diversion of our
management’s attention away from our business and any difficulties encountered in the integration process could have an adverse
effect on our ability to manage our business. In addition, we have increasingly relied on our acquired subsidiaries to develop our own
proprietary games. For example, Red 5 is developing Firefall, a MMOFPS game, which we expect to launch in 2012. If our acquired
subsidiaries are unable to develop, launch and operate games that are commercially successful and appeal to game players, our
business, financial condition and results of operations may be materially and adversely affected.
We intend to selectively acquire companies, technologies and personnel that are complementary to our existing business.
Our ability to grow through future acquisitions, investments or organic means will depend on the availability of suitable acquisitions
and investment candidates at an acceptable cost, our ability to compete effectively to attract these candidates, and the availability of
financing to complete large acquisitions. We may face significant competition in acquiring new businesses or companies, which may
hinder the execution of our growth strategy. Future acquisitions or investments could result in a potential dilutive issuance of equity
securities or the incurrence of debt, contingent liabilities, impairment losses or amortization expenses related to goodwill and other
intangible assets, each of which could adversely affect our financial condition and results of operations. The benefits of an acquisition
or investment may also take considerable time to develop and we cannot be certain that any particular acquisition or investment will
produce its intended benefits. Future acquisitions would also expose us to potential risks, including risks associated with the
assimilation of new operations, technologies and personnel, unforeseen or hidden liabilities, the diversion of resources from our
existing businesses, sites and technologies, the inability to generate sufficient revenue to offset the costs and expenses of acquisitions,
and potential loss of, or harm to, our relationships with employees, customers, licensors and other suppliers as a result of the
integration of new businesses.
Future equity investments may have an adverse effect on our ability to manage our business.
We expand our business in part through selective equity investments. To date, we have acquired equity interests in various
online game developers, operators, and mobile game or application platforms. Equity investments create a unique problem in that we
are often limited in our ability to manage the products and strategies of the companies in which we invest. The diversion of our
management’s attention away from our business and any difficulties encountered in managing our interests in the respective investees
could have an adverse effect on our ability to manage our business. In addition, we may not recover our equity investments if the
companies in which we invest do not perform well and equity investments could result in the incurrence of impairment losses, which
could materially and adversely affect our results of operations.
7
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
RRWIN-XENP143
10.10.12
HKR jayab0dc
HKG
20-Mar-2012 06:54 EST
ˆ200FNeb!tHizXFDwmŠ
6*
0C
200FNeb!tHizXFDw
290862 TX 8
HTM
ESS
Page 1 of 1
Undetected programming errors or flaws in our games could harm our reputation or decrease market acceptance of our games,
which would materially and adversely affect our results of operations.
Our games may contain errors or flaws, which may only be discovered after their release, particularly as we launch new
games or introduce new features to existing games under tight time constraints. If our games contain programming errors or other
flaws, our customers may be less inclined to continue playing our games or to recommend our games to other potential customers,
and may switch to our competitors’ games. Undetected programming errors and game defects can disrupt our operations, adversely
affect the gaming experience of our users, harm our reputation, cause our customers to stop playing our games, divert our resources
and delay market acceptance of our games, any of which could materially and adversely affect our results of operations.
We may not be able to prevent others from infringing upon our intellectual property rights, which may harm our business and
expose us to litigation.
We regard our proprietary software, domain names, trade names, trademarks and similar intellectual properties as critical
to our success. Intellectual property rights and confidentiality protection in China may not be as effective as in the United States or
other countries. Monitoring and preventing the unauthorized use of proprietary technology is difficult and expensive. The steps we
have taken may be inadequate to prevent the misappropriation of our proprietary technology. Any misappropriation could have a
negative effect on our business and operating results. We may need to resort to court proceedings to enforce our intellectual property
rights in the future. Litigation relating to our intellectual property might result in substantial costs and diversion of resources and
management attention away from our business. See “— Risks Related to Doing Business in China — Uncertainties with respect to the
PRC legal system could adversely affect us.”
We may not be able to obtain additional financing to support our business and operation, and our equity or debt financings may
have an adverse effect on our business operation and share price.
We believe that our current cash and cash equivalents and cash flow from operations will be sufficient to meet our
anticipated cash needs for the foreseeable future. We may, however, require additional cash resources due to changes in business
conditions or other future developments, including any investments or acquisitions we may decide to pursue. We expect to incur more
product development costs to develop our proprietary online games. With mobile social gaming platform being one of our new
business directions, we expect to make significant investment to grow this business and expand our research and development team.
If our internal financial resources are insufficient to satisfy our cash requirements, we may seek additional financing through the
issuance of equity securities or through debt financing. Such financing may result in dilution to our existing shareholders’ interest or
increase in our debt service obligations. Incurrence of additional indebtedness could also result in operating and financing covenants
restricting our business operations. In addition, we cannot assure you that any such future financing will be available to us in amounts
or on terms acceptable to us, if at all.
Any failure to maintain a stable and effective online payment system could adversely affect our business and results of operations.
Online payment systems in China are developing fast and gaining more acceptance to consumers in China in recent years
than before. We rely on our internally-developed online payment systems, Pass9 system, for sales of our online game services to
consumers. Although our online payment systems are designed to support various third-party Internet payment channels in China, our
online payment systems may be disrupted by system failure, programming errors, computer hackers or any failure or disruption from
the Internet payment channels. See “— Our business may be harmed if our technology becomes obsolete or if our system
infrastructure fails to operate effectively.” In addition, we cannot assure you that we will continue to maintain favorable relationships
with the third-party Internet payment channels. If we fail to maintain a stable and favorable relationship with these channels, or
otherwise fail to effectively maintain our online payment systems, our business, financial condition and results of operations could be
materially and adversely affected.
Any failure to maintain a stable and efficient distribution network could adversely affect our business and results of operations.
We rely on a network of distributors throughout China for sales of our online game services, including our online game
points, to our customers. As a result, a substantial portion of our sales are carried out via a distribution network composed of third-
party distributors. Our national distributor sells its prepaid cards to over 20,000 local distributors and Internet cafés throughout China,
which in turn sell the cards to end users. End users can purchase our online game points with the prepaid cards. Currently, Beijing
HuiyuanNet Technology Co., Ltd. is our sole national distributor. We do not have long-term agreements with our distributor. A delay
or failure by our distributor to successfully market these products may adversely affect our business and results of operations. We
cannot assure you that we will continue to maintain favorable relationships with our distributor. If we fail to maintain a stable and
efficient distribution network, our business and results of operations could be materially and adversely affected.
8
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
RRWIN-XENP143
10.10.12
HKR jayab0dc
HKG
20-Mar-2012 06:53 EST
ˆ200FNeb!tHizTcMQ]Š
6*
0C
200FNeb!tHizTcMQ
290862 TX 9
HTM
ESS
Page 1 of 1
We rely on services and licenses from third parties to carry out our businesses, and if there is any negative development in these
services or licenses, our end users may cease to use our products and services.
In addition to our online payment systems and distribution systems for which we significantly rely on third party services,
we also rely on third-party services and licenses for our operations. For example, we rely on third party licenses for some of the
software underlying our technology platform, and we rely on China Telecom’s Internet data centers to host our servers. See “Item 4.
Information on the Company — B. Business Overview — Pricing, Distribution and Marketing.” In addition, we expect to continue to
derive a considerable amount of our revenues from our licensed online games in the near term.
Any interruption or any other negative development in our ability to rely on these services and licenses, such as material
deterioration of quality of the third party services or the loss of intellectual property relating to the license held by our licensors, could
have a material and adverse impact on our business operations. In particular, our game licensors may be subject to intellectual
property rights claims with respect to the games or software licensed to us. If such licensors cannot prevail on the legal proceedings
brought against them, we could lose the right to use the licensed games or software. Furthermore, if our arrangements with any of
these third parties are terminated or modified against our interest, we may not be able to find alternative solutions on a timely basis or
on terms favorable to us. If any of these events occur, our end users may cease using our products and services, and our business,
financial condition and results of operations may be materially and adversely affected.
Unexpected network interruptions caused by system failures or other internal or external factors may lead to user attrition,
revenue reductions and may harm our reputation.
Any failure to maintain satisfactory performances, reliability, security and availability of our network infrastructure may
cause significant harm to our reputation and our ability to attract and maintain users. The system hardware for our operations is
located in several cities in China. We maintain our backup system hardware and operate our back-end infrastructure in Shanghai,
Beijing, Shenzhen, Chengdu, Nanjing, Qingdao, Zhengzhou, Nantong and Hong Kong. Server interruptions, breakdowns or system
failures in the cities where we maintain our servers and system hardware, including failures that may be attributable to sustained
power shutdowns, or other events within or outside our control that could result in a sustained shutdown of all or a material portion of
our services, could adversely impact our ability to service our users.
Our network systems are also vulnerable to damage from computer viruses, fire, flood, earthquake, power loss,
telecommunications failures, computer hacking and similar events. We maintain property insurance policies covering our servers, but
do not have business interruption insurance.
Our business may be harmed if our technology becomes obsolete or if our system infrastructure fails to operate effectively.
The online game industry is subject to rapid technological change. We need to anticipate the emergence of new
technologies and games, assess their acceptance and make appropriate investments. If we are unable to do so, new technologies in
online game programming or operations could render our games obsolete or unattractive.
We use our internally developed Pass9 system and other software systems that support nearly all aspects of our billing and
payment transactions. Our business may be harmed if we are unable to upgrade our systems fast enough to accommodate future
traffic levels, avoid obsolescence or successfully integrate any newly developed or acquired technology with our existing systems.
Capacity constraints could cause unanticipated system disruptions and slower response times, affecting data transmission and game
play. These factors could, among other things, cause us to lose existing or potential customers and existing or potential game
development partners.
9
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
LANFBU-MWE-XN11
10.10.12
HKR nagag1dc
HKG
20-Mar-2012 06:54 EST
ˆ200FNeb!tHizZy6Q†Š
6*
0C
200FNeb!tHizZy6Q
290862 TX 10
HTM
ESS
Page 1 of 1
We have been and may be subject to future intellectual property rights claims or other claims, which could result in substantial
costs and diversion of our financial and management resources away from our business.
There is no assurance that our online games or other content posted on our websites or our mobile games do not or will not
infringe upon patents, valid copyrights or other intellectual property rights held by third parties. We may be subject to legal
proceedings and claims from time to time relating to the intellectual property of others. In addition, some of our employees were
previously employed at other companies, including our current and potential competitors. We also intend to hire additional personnel
to expand our product development and technical support teams. To the extent these employees have been involved in research at our
company similar to research in which they have been involved at their former employers, we may become subject to claims that such
employees have used or disclosed trade secrets or other proprietary information of their former employers.
In addition, our competitors may file lawsuits against us in order to gain an unfair competitive advantage over us. In
February 2010, Beijing Superior Court issued a judgment against us in a lawsuit filed by Beijing Founder Electronics Co., Ltd., which
ruled that WoW client installation packages sold by us in 2007 contained fonts that infringed Beijing Founder Electronics Co., Ltd.’s
intellectual property rights. Based on the judgment, we are required to compensate Beijing Founder Electronics Co., Ltd. an aggregate
amount of RMB1,570,000 (US$249,500). We have appealed the judgment and the case is pending as the date of this annual report.
If any such claim arises in the future, litigation or other dispute resolution proceedings may be necessary to retain our
ability to offer our current and future games, which could result in substantial costs and diversion of our financial and management
resources. Furthermore, if we are found to have violated the intellectual property rights of others, we may be enjoined from using
such intellectual property, incur additional costs to license or develop alternative games and be forced to pay fines and damages, each
of which may materially and adversely affect our business and results of operations.
We experience fluctuations in quarterly operating results.
Our quarterly operating results have fluctuated in the past and will continue to fluctuate in the future. These fluctuations in
operating results depend on a variety of factors, including the timing of new game launches and the expiration of existing game
licenses. Other factors include the demand for our products and the products of our competitors, the level of usage of illegal game
servers, the level of usage of the Internet, the size and rate of growth of the online game market and development and promotional
expenses related to the introduction of new products. In addition, because our game software is susceptible to unauthorized character
enhancements, we may periodically delete characters that are enhanced with unauthorized modifications. This has caused some
affected customers to stop playing the respective game, which, in the aggregate, may cause our operating results to fluctuate.
To a significant degree, our operating expenses are based on planned expenditures and our expectations regarding
prospective customer usage. Failure to meet our expectations could disproportionately and adversely affect our operating results in
any given quarter. As a result, we believe that our historical operating results may not necessarily be indicative of our future results.
Our business depends substantially on the continuing efforts of our senior executives, and our business may be severely disrupted
if we lose their services.
Our future success depends heavily upon the continued services of our senior executives. We rely on their expertise in
business operations, technology support and sales and marketing and on their relationships with our shareholders and distributors. We
do not maintain key-man life insurance for any of our key executives. If one or more of our key executives are unable or unwilling to
continue in their present positions, we may not be able to replace them easily or at all. As a result, our business may be severely
disrupted, our financial condition and results of operations may be materially and adversely affected, and we may incur additional
expense to recruit and train personnel.
Each of our executive officers has entered into an employment agreement with us, which contain confidentiality and non-
competition provisions. If any disputes arise between our executive officers and us, we cannot assure you the extent to which any of
these agreements could be enforced in China, where these executive officers reside and hold most of their assets, in light of
uncertainties with the PRC legal system. See “ — Risks Related to Doing Business in China — Uncertainties with respect to the PRC
legal system could adversely affect us.”
10
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN07
10.10.12
HKR balub0dc
HKG
20-Mar-2012 06:52 EST
ˆ200FNeb!tHiz7GWQ\Š
6*
0C
200FNeb!tHiz7GWQ
290862 TX 11
HTM
ESS
Page 1 of 1
If we are unable to attract, train and retain key individuals and highly skilled employees, our business may be adversely affected.
As our business expands, we need to hire and retain additional qualified employees, including skilled and experienced
online game developers. Since our industry is characterized by high demand and intense competition for talent, we may need to offer
higher compensation and other benefits in order to retain key personnel in the future. We cannot assure you that we will be able to
attract or retain the qualified game developers or other key personnel that we will need to achieve our business objectives.
PRC laws and regulations restrict foreign ownership of Internet content provision, Internet culture operation and Internet
publishing licenses, and substantial uncertainties exist with respect to the application and implementation of PRC laws and
regulations.
We are a Cayman Islands company and, as such, we are classified as a foreign enterprise under PRC laws. Various
regulations in China currently restrict foreign or foreign-owned entities from holding certain licenses required in China to provide
online game operation services over the Internet, including Internet content provision, or ICP, Internet culture operation and Internet
publishing licenses. In light of such restrictions, we rely on Shanghai IT, our affiliated PRC entity, to hold and maintain the licenses
necessary for the operation of our online games in China.
In July 2006, the Ministry of Information Industry (which has subsequently been reorganized as the Ministry of Industry
and Information Technology), or MIIT, issued a notice, or the New MII Notice, which prohibits ICP license holders from leasing,
transferring or selling a telecommunications business operating license to foreign investors in any form, or providing resources, sites
or facilities to any foreign investors for their illegal operation of a telecommunications business in China. The notice also requires that
ICP license holders and their shareholders directly own the domain names and trademarks used by such ICP license holders in their
daily operations. The notice further requires each ICP license holder to have the necessary facilities for its approved business
operations and to maintain such facilities in the regions covered by its license. In addition, all value-added telecommunication service
providers are required to maintain network and information security in accordance with the standards set forth under relevant PRC
regulations. The local authorities in charge of telecommunications services are required to ensure that existing ICP license holders
conduct a self-assessment of their compliance with the New MII Notice and submit status reports to MIIT before November 1, 2006.
Since the New MII Notice was issued, we have transferred to Shanghai IT all of the domain names used in our daily operations and
certain trademarks used in our daily operations, as required under the New MII Notice. All relevant transfers have been completed
and relevant approvals have been obtained.
In September 2009, the General Administration of Press and Publication, or GAPP, promulgated the Circular Regarding
the Implementation of the Department Reorganization Regulation by State Council and Relevant Interpretation by State Commission
Office for Public Sector Reform to Further Strengthen the Administration of Pre-approval on Online Games and Approval on Import
Online Games, or the GAPP Circular, which provides that foreign investors shall not control or participate in PRC online game
operation businesses indirectly or in a disguised manner by establishing joint venture companies or entering into relevant agreements
with, or by providing technical supports to, such PRC online game operation companies, or by inputting the users’ registration,
account management or game card consumption directly into the interconnected gaming platform or fighting platform controlled or
owned by the foreign investor. It is not clear whether the regulatory authority of GAPP applies to the regulation of ownership
structures of online game companies based in China and online game operation in China. Other government agencies that have
regulatory jurisdiction over the online game operations in China, such as the MOC and MIIT, did not join GAPP in issuing the GAPP
Circular. To date, the GAPP has not issued any interpretation of the GAPP Circular. It is not yet clear how this GAPP Circular will be
implemented.
If we or Shanghai IT are found to be in violation of any existing or future PRC laws or regulations, including the New MII
Notice and the GAPP Circular, the relevant governmental authorities, according to the nature of the violation, would have broad
discretion to adopt one or more of the following measures against us, including levying fines, confiscating our income or the income
of Shanghai IT, revoking our business licenses or the business license and/or other licenses of Shanghai IT, requiring us and Shanghai
IT to restructure our ownership structure or operations, and requiring us or Shanghai IT to discontinue any portion or all of our
operations related to online games. Any of these actions could cause significant disruption to our business operations and may
materially and adversely affect our business and financial condition and results of operations.
11
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
HKRPRFRS16
10.10.12
HKR pf_rend
HKG
16-Mar-2012 23:18 EST
ˆ200FNeb!tHbq7CWQ9Š
5*
0C
200FNeb!tHbq7CWQ
290862 TX 12
HTM
ESS
Page 1 of 1
Subject to the interpretation and implementation of the GAPP Circular, the ownership structure and the business operation
models of our PRC subsidiaries and affiliated PRC entities comply with all applicable PRC laws, rules and regulations, and no
consent, approval or license is required under any of the existing laws and regulations of China for their ownership structure and
business operation models except for those which we have already obtained or which would not have a material adverse effect on our
business or operations as a whole. There are, however, substantial uncertainties regarding the interpretation and application of current
or future PRC laws and regulations. Accordingly, we cannot assure you that PRC government authorities will ultimately take a view
that is consistent with the opinion of our PRC legal counsel.
For example, the Ministry of Commerce, or MOFCOM, promulgated the Rules of Ministry of Commerce on
Implementation of Security Review System of Mergers and Acquisitions of Domestic Enterprises by Foreign Investors in August
2011, or the MOFCOM Security Review Rules, to implement the Notice of the General Office of the State Council on Establishing
the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors promulgated on February 3,
2011, or Circular No. 6. The MOFCOM Security Review Rules came into effect on September 1, 2011 and replaced the Interim
Provisions of the Ministry of Commerce on Matters Relating to the Implementation of the Security Review System for Mergers and
Acquisitions of Domestic Enterprises by Foreign Investors promulgated by MOFCOM in March 2011. According to these circulars
and rules, a security review is required for mergers and acquisitions by foreign investors having “national defense and security”
concerns and mergers and acquisitions by which foreign investors may acquire the “de facto control” of domestic enterprises having
“national security” concerns. In addition, when deciding whether a specific merger or acquisition of a domestic enterprise by foreign
investors is subject to the security review, MOFCOM will look into the substance and actual impact of the transaction. The
MOFCOM Security Review Rules further prohibit foreign investors from bypassing the security review requirement by structuring
transactions through proxies, trusts, indirect investments, leases, loans, control through contractual arrangements or offshore
transactions. There is no explicit provision or official interpretation stating that our online game operation services falls into the scope
subject to the security review, and there is no requirement for foreign investors in those merger and acquisition transactions already
completed prior to the promulgation of Circular No. 6 to submit such transactions to MOFCOM for security review. As we have
already obtained the “de facto control” over our affiliated PRC entities prior to the effectiveness of these circulars and rules, we do
not believe we are required to submit our existing contractual arrangement to MOFCOM for security review. However, we are
advised by our PRC legal counsel that, as these circulars and rules are relatively new and as there is a lack of clear statutory
interpretation on the implementation of the same, there is no assurance that MOFCOM will have the same view as we do when
applying these national security review-related circulars and rules.
We could also face material and adverse tax consequences if the PRC tax authorities determine that our contractual
arrangements with Shanghai IT were not made on reasonable commercial terms or otherwise. If this were to occur, they may adjust
our income and expenses for PRC tax purposes in the form of a transfer pricing adjustment. A transfer pricing adjustment could result
in a reduction, for PRC tax purposes, of costs and expenses recorded by Shanghai IT, which could adversely affect us by:
(i) increasing Shanghai IT’s tax liability without reducing our PRC subsidiaries’ tax liability, which could further result in late
payment fees and other penalties to Shanghai IT for underpaid taxes; or (ii) limiting Shanghai IT’s ability to maintain preferential tax
treatments and other financial incentives.
We may not be able to get approval for renewing our current foreign games, or for licensing new foreign games, if the PRC
regulatory authorities promote a policy of domestic online or mobile game development and tighten approval criteria for online or
mobile game imports.
Our business depends heavily on licensing and operating foreign games and will continue to do so in the near future. In the
past, such foreign games mainly included MMORPGs or casual games. With mobile social gaming being one of our new businesses,
our business will also depend on licensing foreign mobile games. Since 2004, relevant government authorities have promulgated
several circulars, according to which the development of domestically developed online games, including mobile games, will be
strategically supported by the PRC government. For example, in July 2005, MIIT and the Ministry of Culture issued the Opinion on
Development and Management of Online Games, or the Opinion. The Opinion provided that domestic software development
companies, network service providers and content providers will be encouraged, guided and supported to develop and promote self-
developed and self-owned online games so that such games can take up a leading position in the domestic market and expand into the
international market.
12
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
RRWIN-XENP139
10.10.12
HKR arumv1dc
HKG
20-Mar-2012 06:55 EST
ˆ200FNeb!tHizlYqwJŠ
6*
0C
200FNeb!tHizlYqw
290862 TX 13
HTM
ESS
Page 1 of 1
The government will also encourage the development of derivative products to domestic online games. In support of this
policy, GAPP may tighten approval criteria for online game imports in an effort to protect the development of domestic online game
enterprises, as well as to limit the influence of foreign culture on Chinese youth. If GAPP implements such rules and policies, we may
not be able to get approval for renewing our current foreign game licenses or for licensing new foreign games, and our business,
financial condition and results of operations may be materially and adversely affected.
Failure to obtain or renew approvals or filings for online games and mobile games we operate may adversely affect our operations
or subject us to penalties.
The Ministry of Culture has promulgated laws and regulations that require, among other things, (i) the review and prior
approval of all new online games licensed from foreign game developers and related license agreements, (ii) the review of patches
and updates with substantial changes of games which have already been approved, and (iii) the filing of domestically developed
online games. Furthermore, online games, regardless of whether imported or domestic, will be subject to content review and approval
by GAPP prior to the commencement of games operations in China. Failure to obtain or renew approvals or complete filings for
online games or mobile games may materially delay or otherwise affect a game operator’s plan to launch new games, and the operator
may be subject to fines, the restriction or suspension of operations of the related games or revocation of licenses in the event that the
relevant governmental authority believes that the violation is severe.
We obtained the necessary approvals from, and completed the necessary filings with, the Ministry of Culture and GAPP
for operations of Soul of The Ultimate Nation, or SUN, Atlantica, World of Fighter, Kingdom Heroes 2 Online, Seoyugi, Q Jiang San
Guo and Winning Goal in China. We also obtained the necessary approvals from GAPP for operating ShenXianZhuan and Era Zero.
Consistent with the general practice of the mobile game industry in China, we have not yet completed filings with the Ministry of
Culture and GAPP for our mobile games before we commenced our mobile game operations. From time to time, we also rely on
certain third party licensors of domestically developed online games to obtain approvals and complete filings with the PRC regulatory
authorities. If such third party licensors fail to obtain the required approvals or complete the filings, we may not be able to continue
the operation of such games. If any such negative event occurs, our business, financial condition and results of operations may be
materially and adversely affected.
We depend on Shanghai IT to hold certain operating licenses. If Shanghai IT or its shareholders violate our contractual
arrangements, our business could be disrupted and our reputation may be harmed.
Because the PRC government restricts our ownership of ICP, Internet culture operation and Internet publishing businesses
in China, we depend on Shanghai IT, our affiliated PRC entity in which we have no ownership interest, to hold and maintain certain
licenses necessary for our business operations. Our relationship with Shanghai IT is governed by a series of contractual arrangements
that are intended to provide us with effective control over these entities, but these contractual arrangements may not be as effective in
providing control as direct ownership of these businesses. For example, Shanghai IT or its shareholders could violate their contractual
arrangement with us, or otherwise become unable to perform its contracts with us. As a result, we may lose the licenses required for
our online game operations and our reputation and business could be harmed.
The principal shareholders of our affiliated PRC entities have potential conflicts of interest with us, which may adversely affect
our business.
We have two affiliated PRC entities, namely Shanghai IT and Huopu Cloud. Yong Wang, our vice president, and Wei Ji,
one of our employees, are the principal shareholders of Shanghai IT. Our senior legal director, Junping Han, and finance director, Wei
Xiong, are the principal shareholders of Huopu Cloud. Thus, there may be conflicts of interest between their respective duties to our
company as management and employees and their respective shareholder interests in these affiliated PRC entities. We cannot assure
you that when conflicts of interest arise, these persons will act in our best interests or that conflicts of interests will be resolved in our
favor. These persons could violate their legal duties, including duties under their non-competition or employment agreements with us,
by engaging in activities that are not in the best interest in our company, such as diverting business opportunities from us. In any such
event, we would have to rely on the PRC legal system to enforce these agreements. Any legal proceeding could result in the
disruption of our business, diversion of our resources and the incurrence of substantial costs. See “— Risks Related to Doing Business
in China — Uncertainties with respect to the PRC legal system could adversely affect us.”
13
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
RRWIN-XENP143
10.10.12
HKR niths0dc
HKG
20-Mar-2012 07:36 EST
ˆ200FNeb!tHj1t1nw/Š
6*
0C
200FNeb!tHj1t1nw
290862 TX 14
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Our subsidiaries in China are subject to restrictions on paying dividends or making other payments.
From time to time, we may rely on dividends paid by our subsidiaries in China to fund our operations, such as paying
dividends to our shareholders or meeting obligations under any indebtedness incurred by us or our overseas subsidiaries. Current PRC
regulations restrict our subsidiaries in China from paying dividends in the following two principal aspects: (i) our subsidiaries in
China are only permitted to pay dividends out of their respective after-tax profits, if any, determined in accordance with PRC
accounting standards and regulations, and (ii) these entities are required to allocate at least 10% of their respective after-tax profits
each year, if any, to fund statutory reserve funds until the cumulative total of the allocated reserves reaches 50% of registered capital,
and a portion of their respective after-tax profits to their staff welfare and bonus reserve funds as determined by their respective
boards of directors or shareholders. These reserves are not distributable as dividends. See “Item 4. Information on the Company — B.
Business Overview — Government Regulations.” Further, if these entities incur debt on their behalf in the future, the instruments
governing such debt may restrict their ability to pay dividends or make other payments. Our inability to receive dividends or other
payments from our PRC subsidiaries may adversely affect our ability to continue to grow our business and make cash or other
distributions to the holders of our ordinary shares and ADSs. In addition, failure to comply with relevant State Administration of
Foreign Exchange, or SAFE, regulations may restrict the ability of our subsidiaries to make dividend payments to us. See “— Risks
Related to Doing Business in China — PRC regulations relating to the establishment of offshore special purpose companies by PRC
residents may subject our PRC resident shareholders or us to penalties and fines, and limit our ability to inject capital into our PRC
subsidiaries, limit our subsidiaries’ ability to increase their registered capital, distribute profits to us, or otherwise adversely affect us.”
We may not be able to successfully implement our growth strategies.
Our objective is to become a leading developer and operator of multi-platform games in China. In order to achieve this
objective, we are primarily focusing on developing proprietary games and obtaining licenses to games. We plan to further enhance
our game development capability and the diversity of our game portfolio and pipeline through selective game studio acquisitions
primarily in the U.S. and in China. We also plan to operate our proprietary games in selected overseas market. Since 2010, we have
invested in developing our mobile game business. We plan to primarily use licensed mobile social gaming platform software and
licensed mobile games from other developers in the near future. We expect to rely on OpenFeint Inc., or OpenFeint, for the license of
our mobile social gaming platform software, and our business partners include mobile game developers, telecom carriers and cell
phone manufacturers. Our business strategies may involve the development and marketing of new services and products for which
there are no established markets in China or in which we lack experience and expertise. As a result, we cannot assure you that we will
be able to deliver new products or services on a commercially viable basis or in a timely manner, or at all, or that we will be able to
successfully implement our other growth strategies. If any of these occur, our competitiveness may be harmed and our business,
financial condition and results of operations may be materially and adversely affected.
We could be liable for breaches of security on our websites and fraudulent transactions by users of our websites.
Currently, a portion of our transactions are conducted through our websites. In such transactions, secured transmission of
confidential information (such as customers’ credit card numbers and expiration dates, personal information and billing addresses)
over public networks is essential to maintain consumer confidence. Our current security measures may not be adequate to safeguard
against fraudulent transactions. 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 customers.
Existing major shareholders have substantial control over us and could delay or prevent a change in corporate control.
Incsight Limited, or Incsight, a company wholly-owned by Jun Zhu, our chairman and chief executive officer, and Bosma
Limited, or Bosma, the two largest shareholders of our company, collectively own a significant percentage of our outstanding
ordinary shares. Incsight and Bosma have entered into a voting agreement to vote together with respect to the election of our
directors. See “Item 6. Directors, Senior Management and Employees — C. Board Practices — Voting Agreement.” As a result, these
shareholders will continue to exert significant control over all matters requiring shareholder approval, including but not limited to, the
election of directors and approval of significant corporate transactions. This voting power could delay or prevent an acquisition of our
company on terms that other shareholders may desire. In addition, the rights of minority shareholders and the fiduciary obligations of
directors and majority shareholders in the Cayman Islands may not be as extensive as those in the United States or elsewhere, and the
ability to assert shareholder rights may be comparatively limited.
14
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
RRWIN-XENP143
10.10.12
HKR niths0dc
HKG
20-Mar-2012 07:36 EST
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6*
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200FNeb!tHj1oXpw
290862 TX 15
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Page 1 of 1
New income tax laws may increase our tax burden or the tax burden on the holders of our shares or ADSs, and tax benefits
available to us may be reduced or repealed, causing the value of your investment in us to suffer.
Our subsidiaries and affiliated entities in the PRC are subject to enterprise income tax, or EIT, on the taxable income as
reported in their respective statutory financial statements adjusted in accordance with the Corporate Income Tax Law of the People’s
Republic of China, or CIT Law, which was approved by the National People’s Congress on March 16, 2007. The CIT Law went into
effect as of January 1, 2008, which unified the tax rate generally applicable to both domestic and foreign-invested enterprises in the
PRC. Our subsidiaries and affiliated entities in the PRC are generally subject to EIT at a statutory rate of 25%. However, some
subsidiaries that are located in the Pudong New District of Shanghai and were established before March 2007 currently enjoy five-
year transitional EIT rates, which equate to phase-in rates of 18%, 20%, 22%, 24% and 25% for the five years from 2008 to 2012
according to local practice. Our subsidiaries and affiliated entities that hold a High and New Technology Enterprise, or HNTE,
qualification are entitled to enjoy a 15% preferential EIT rate.
In April 2007, China The9 Interactive (Beijing) Limited, or C9I Beijing, received approval from governmental authorities
to be classified as a HNTE. This classification allowed C9I Beijing to enjoy an EIT exemption for 2007-2009, and a 50% reduction of
the statutory rate in 2010-2012. In addition, Shanghai IT also applied and received approval from government authorities to be
classified as a HNTE. This approval allowed Shanghai IT to enjoy a 15% preferential EIT rate for 2008—2010. However, in April
2008, government authorities announced the new implementation rules for application and assessment of HNTEs. Each qualified
HNTE needs to re-apply for this qualification according to the new implementation rules. In particular, the HNTE qualification is
generally valid for a term of three years after the issuance of the approval certificate, and the enterprise is required to apply for re-
examination before the end of the term. As a result, C9I Beijing reapplied and received approvals for the HNTE qualification and
related preferential tax rates during the period of 2008-2010 from the government authorities. In addition, in October 2011, Shanghai
IT reapplied for the HNTE qualification and received approval from the governmental authorities. It has applied with the local tax
authorities for the approval of the 15% preferential EIT rate for 2011-2013 and we expect to obtain such approval in 2012. However,
we cannot assure you that our PRC subsidiaries or affiliated entities will meet these criteria and continue to be qualified as HNTEs by
the tax authorities in the future.
Moreover, unlike the tax regulations effective before 2008, which specifically exempted withholding taxes on dividends
payable to non-PRC investors from foreign-invested enterprises in the PRC, the CIT Law and its implementation rules provide that a
withholding income tax rate of 10% will be applicable to dividends payable by Chinese companies to non-PRC-resident enterprises
unless otherwise exempted or reduced according to treaties or arrangements between the PRC central government and the
governments of other countries or regions. While the Tax Agreement between the PRC and Hong Kong provides dividends paid by a
foreign-invested enterprise in the PRC to its corporate shareholder, which is considered a Hong Kong tax resident, will be subject to
withholding tax at the rate of 5% of total dividends, this is limited to instances where the corporate shareholder directly holds at least
25% of the shares of the company that is to pay dividends for at least twelve consecutive months immediately prior to receiving the
dividends and meets certain other criteria prescribed by the relevant regulations. Entitlement to a lower tax rate on dividends
according to tax treaties or arrangements between the PRC central government and governments of other countries or regions is
further subject to approval of the relevant tax authority.
Furthermore, the State Administration of Taxation, or SAT, promulgated the Notice on How to Understand and Determine
the Beneficial Owners in Tax Agreement in October 2009, or Circular 601, which provides guidance for determining whether a
resident of a contracting state is the “beneficial owner” of an item of income under China’s tax treaties and tax arrangements.
According to Circular 601, a beneficial owner generally must be engaged in substantive business activities. An agent or conduit
company will not be regarded as a beneficial owner and, therefore, will not be qualified for treaty benefits. A conduit company
normally refers to a company that is set up for the purpose of avoiding or reducing taxes or transferring or accumulating profits. We
cannot assure you that any dividends to be distributed by our subsidiaries to us or by us to our non-PRC shareholders and ADS
holders, whose jurisdiction of incorporation has a tax treaty with China providing a different withholding arrangement, will be
entitled to the benefits under the relevant withholding arrangement.
15
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
RRWIN-XENP143
10.10.12
HKR niths0dc
HKG
20-Mar-2012 07:35 EST
ˆ200FNeb!tHj1hfLw{Š
6*
0C
200FNeb!tHj1hfLw
290862 TX 16
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ESS
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In addition, the CIT Law deems an enterprise established offshore but having its management organ in the PRC as a
“resident enterprise” that will be subject to PRC tax at the rate of 25% on its global income. Under the Implementation Rules of the
CIT Law, the term “management organ” is defined as “an organ which has substantial and overall management and control over the
manufacturing and business operation, personnel, accounting, properties and other factors.” On April 22, 2009, the SAT further
issued a notice regarding recognizing an offshore-established enterprise controlled by PRC shareholders as a resident enterprise
according to its management organ. According to this notice, a foreign enterprise controlled by a PRC company or a PRC company
group shall be deemed a PRC resident enterprise, if (i) the senior management and the core management departments in charge of its
daily operations are mainly located and function in the PRC; (ii) its financial decisions and human resource decisions are subject to
the determination or approval of persons or institutions located in the PRC; (iii) its major assets, accounting books, company seals,
minutes and files of board meetings and shareholders’ meetings are located or kept in the PRC; and (iv) more than half of the
directors or senior management with voting rights reside in the PRC. Although our offshore companies are not controlled by any PRC
company or PRC company group, we cannot assure you that we will not be deemed to be a “resident enterprise” under the CIT Law
and thus be subject to PRC EIT on our global income.
According to the CIT Law and its implementation rules, dividends are exempted from income tax if such dividends are
received by a resident enterprise on equity interests it directly owns in another resident enterprise. However, foreign corporate holders
of our shares or ADSs may be subject to taxation at a rate of 10% on any dividends received from us or any gains realized from the
transfer of our shares or ADSs if we are deemed to be a resident enterprise or if such income is otherwise regarded as income from
“sources within the PRC.” The CIT Law empowers the PRC State Council to enact appropriate implementing rules and measures and
there is no guarantee that we or our subsidiaries will be entitled to any of the preferential tax treatments. Nor can we assure you that
the tax authorities will not, in the future, discontinue any of our preferential tax treatments, potentially with retroactive effect. Any
significant increase in the EIT rate under the CIT Law applicable to our PRC subsidiaries and affiliated entities, or the imposition of
withholding taxes on dividends payable by our subsidiaries to us, or an EIT levy on us or any of our subsidiaries or affiliated entities
registered outside the PRC, or dividends or capital gains received by our shareholders due to shares or ADSs held in us will have a
material adverse impact on our results of operations and financial conditions and the value of investments in us.
We are required to pay value added tax as a result of recent tax reform in Shanghai, and we may be subject to similar tax
treatments elsewhere in China.
On November 16, 2011, the Ministry of Finance and the SAT jointly issued the Circular on the Pilot Program for the
Collection of Value Added Tax Instead of Business Tax, or Circular 110, and the Circular on the Pilot Program for the Collection of
Value Added Tax Instead of Business Tax in the Transportation and Certain Modern Service Sectors in Shanghai, or Circular 111,
which became effective on January 1, 2012. Pursuant to Circular 110 and Circular 111, a tax reform pilot program came into effect in
Shanghai, which was chosen by the PRC government as the first pilot city for such reform. Starting from January 1, 2012, companies
which are designated by Shanghai local tax authorities as operating in certain modern service sectors are required to pay value added
tax, or VAT, in lieu of business tax. As a result of the pilot program, some of our services provided by Shanghai IT are subject to
VAT at the rate of 6%. Shanghai IT, as a General VAT Payer under the applicable tax regulations, may reduce its VAT payable
amount by the VAT which it has paid in connection with its purchasing activities, or its Input VAT. All services provided by
Shanghai Jiucheng Advertisement, Jiutuo (Shanghai) Information Technology Co., Ltd. and Huopu Cloud shall be subject to VAT at
the rate of 3%, and these companies as Small-scale VAT Payers under the applicable tax regulations may not reduce their VAT
payable by their Input VAT. Circular 110 and Circular 111 are newly introduced and there is significant uncertainty relating to the
interpretation and enforcement of such circulars by national and Shanghai local tax authorities and other relevant authorities. In
addition, such tax reform, in the form of pilot programs or otherwise, may be extended to other regions in which we operate. As a
result, we may be subject to more unfavorable tax treatment with respect to our business operations as a result of the VAT reform,
and our business, financial condition and results of operations could be materially and adversely affected.
16
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
HKRPRFRS16
10.10.12
HKR pf_rend
HKG
16-Mar-2012 23:18 EST
ˆ200FNeb!tHbqGWLw=Š
5*
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200FNeb!tHbqGWLw
290862 TX 17
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Strengthened scrutiny over acquisition transactions by the PRC tax authorities may have a negative impact on our acquisition
strategy.
In connection with the CIT Law, the Ministry of Finance and SAT jointly issued, on April 30, 2009, the Notice on Issues
Concerning Process of Enterprise Income Tax in Enterprise Restructuring Business, or Circular 59. On December 10, 2009, the SAT
issued the Notice on Strengthening the Management on Enterprise Income Tax for Non-resident Enterprises Equity Transfer, or
Circular 698. Both Circular 59 and Circular 698 became effective retroactively on January 1, 2008. Under the two circulars, non-
PRC-resident enterprises may be subject to income tax on capital gains generated from their transfers of equity interests in PRC
resident enterprises. The PRC tax authorities have the discretion under Circular 59 and Circular 698 to make adjustments to the
taxable capital gains based on the difference between the fair value of the equity interests transferred and the cost of the investment.
In addition, by promulgating and implementing the circulars, the PRC tax authorities have strengthened their scrutiny over the direct
or indirect transfer of equity interests in a PRC resident enterprise by a non-PRC-resident enterprise. For example, Circular 698
specifies that the PRC SAT is entitled to redefine the nature of an equity transfer where offshore vehicles are interposed for tax-
avoidance purposes and without reasonable commercial purpose. Since we pursue acquisitions as one of our growth strategies, and
have conducted and may conduct acquisitions involving complex corporate structures, the PRC tax authorities may, at their
discretion, adjust the capital gains or request us to submit additional documentation for their review in connection with any of our
acquisitions, thus causing us to incur additional acquisition costs.
We have adopted a shareholders rights plan, which, together with the other anti-takeover provisions of our articles of association,
could discourage a third party from acquiring us, which could limit our shareholders’ opportunity to sell their shares, including
ordinary shares represented by our ADSs, at a premium.
On January 8, 2009, our board of directors adopted a shareholder rights plan. Under the rights plan, one right was
distributed with respect to each of our ordinary shares outstanding at the close of business on January 22, 2009. In the event that,
subject to limited exceptions, a person or group obtains beneficial ownership of 15% or more of our voting securities (including by
acquisition of our ADSs representing ordinary shares), or enters into an acquisition transaction without the approval of our board of
directors, such person or group will become the acquiring person under the plan. As a result, these rights will entitle the holders, other
than the acquiring person, to purchase upon the exercise of such right the number of our ordinary shares having a market value of two
times the then current purchase price associated with the right. For example, at a purchase price of $14.50 per right, each right not
owned by an acquiring person would entitle its holder to purchase $29.00 worth of our ordinary shares for $14.50.
This rights plan and the other anti-takeover provisions of our amended and restated memorandum and articles of
association could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing
market prices by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction. Our
existing authorized ordinary shares confer on the holders of our ordinary shares equal rights, privileges and restrictions. The
shareholders have, by virtue of adoption of our third amended and restated memorandum and articles of association, authorized the
issuance of shares of par value of US$0.01 each without specifying any special rights, privileges and restrictions. Therefore, our
board of directors may, without further action by our shareholders, issue ordinary shares, or issue shares of such class and attach to
such shares special rights, privileges or restrictions, which may be different from those associated with our ordinary shares. Preferred
shares could also be issued quickly with terms calculated to delay or prevent a change in control of our company or make removal of
management more difficult. If our board of directors decides to issue ordinary shares or preferred shares, the price of our ADSs may
fall and the voting and other rights of the holders of our ordinary shares and ADSs may be materially and adversely affected.
We have limited business insurance coverage in China.
The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited
business insurance products. As a result, we do not have any business liability or disruption insurance coverage for our operations in
China. Any business disruption, litigation or natural disaster might result in our incurring substantial costs and the diversion of our
resources.
17
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
HKRPRFRS16
10.10.12
HKR pf_rend
HKG
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Some of our subsidiaries and affiliated entities in China engaged in certain business activities beyond the authorized scope of their
respective licenses, and if they are subject to administrative penalties or fines, our operating results may be adversely affected.
Some of our subsidiaries and affiliated entities in China engaged in business activities that were not within the authorized
scope of their respective licenses. Shanghai IT’s current ICP license, which is requisite for its online gaming business, was issued on
May 4, 2010, and is effective until May 4, 2015. Although Shanghai IT’s current main business is online games, it provides an
ancillary bulletin board service which is mainly used for communications among online game players and does not affect the
operations of Shanghai IT. Shanghai IT has not obtained approval for the license for bulletin board services. The relevant PRC
authorities have the authority to impose administrative fines or other penalties for violations, which may in turn adversely affect our
operating results.
Failure to achieve and maintain effective internal controls could have a material adverse effect on our business, results of
operations and the trading price of our ADSs.
We are subject to reporting obligations under the U.S. securities laws. The Securities and Exchange Commission, or the
SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, has adopted rules requiring public companies to include a report
of management in its annual report that contains management’s assessment of the effectiveness of such company’s internal controls
over financial reporting. In addition, beginning with the year ended December 31, 2007, we have been required to receive an
independent registered public accounting firm’s report on the effectiveness of our company’s internal controls over financial
reporting.
Our management has concluded that our internal controls over financial reporting are effective as of December 31, 2011.
However, if we fail to maintain effective internal controls 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 controls over financial reporting at a
reasonable assurance level. This could result in a loss of investor confidence in the reliability of our financial conditions which in turn
could negatively impact the trading price of our ADSs and result in lawsuits being filed against us by our shareholders or otherwise
harm our reputation. Furthermore, we have incurred and anticipate that we will continue to incur considerable costs and use
significant management time and other resources in an effort to comply with Section 404 and other requirements of the Sarbanes-
Oxley Act.
We face risks related to health epidemics and other natural disasters.
Our business could be adversely affected by H1N1, or swine influenza, avian flu, severe acute respiratory syndrome, or
SARS, or another epidemic or outbreak. An outbreak of swine influenza in Mexico in the summer of 2009 spread to China and there
have been confirmed cases of swine influenza in China. Any prolonged recurrence of swine influenza, avian flu, SARS or other
adverse public health developments in China may have a material adverse effect on our business operations. Our operations may be
impacted by a number of health-related factors, including, among other things, quarantines or closures of our offices which could
severely disrupt our operations, the sickness or death of our key officers and employees and closure of Internet cafés and other public
areas where people access the Internet. Any of the foregoing events or other unforeseen consequences of public health problems could
adversely affect our business and results of operations. We have not adopted any written preventive measures or contingency plans to
combat any future outbreak of swine influenza, avian flu, SARS or any other epidemic. In addition, other major natural disasters may
also adversely affect our business by, for example, causing disruptions of the Internet network or otherwise affecting access to our
games, or resulting in damages to our facilities.
Risks Related to Doing Business in China
Our business may be adversely affected by public opinion and government policies in China.
Currently, most of our recurring users are young males, including students. Due to the higher degree of user loyalty to
MMORPGs, easy access to PCs and Internet cafés, and lack of more appealing forms of entertainment in China, many teenagers
frequently play online games. This may result in these teenagers spending less time on, or refraining from, other activities, including
education and sports. Internet cafés, which are currently the most important outlets for online games, have been criticized by the
general public in China as exerting a negative influence on young people. Due primarily to such adverse public reaction, some local
governments in China have tightened their regulation of Internet café operations through, among other things, limiting the number of
new operating licenses issued and further reducing the hours during which Internet cafés are permitted to be open for business.
18
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
HKRPRFRS16
10.10.12
HKR pf_rend
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Also, local and higher-level governmental authorities may from time to time decide to more strictly enforce the customers’ age limit
and other requirements relating to Internet cafés as a result of the occurrence of, and the media attention on, gang fights, arson or
other incidents in or related to Internet cafés. As a significant portion of our customers access our games from Internet cafés, any
restrictions placed on Internet café operations could result in a reduction of the amount of time our customers spend on our online
games or a reduction or slowdown in the growth of our customer base, thus adversely affecting our business and results of operations.
In April 2007, various governmental authorities, including GAPP, MIIT, the Ministry of Education, the Ministry of Public
Security, and other relevant authorities jointly issued a circular concerning the mandatory implementation of an “anti-fatigue system”
in online games, which aims to protect the physical and psychological health of minors. This circular required all online games to
incorporate an “anti-fatigue system” and an identity verification system, both of which have limited the amount of time that a minor
or other user may continuously spend playing an online game. We have implemented such “anti-fatigue” and identification systems
on all of our online games as required. Since March 2011, various governmental authorities, including MIIT, the Ministry of
Education, the Ministry of Public Security, and other relevant authorities have jointly launched the “Online Game Parents
Guardianship Project for Minors,” which allows parents to require online game operators to take relevant measures to limit the time
spent by the minors playing online games and the minors’ access to their online game accounts. Further strengthening of these
systems, or enactment by the PRC government of any additional laws to further tighten its administration over the Internet and online
games or its supervision of Internet cafés may result in less time spent by customers or fewer customers playing our online games,
which may materially and adversely affect our business results and prospects for future growth.
Adverse changes in economic and political policies of the PRC government could have a material adverse effect on the overall
economic growth of China, which could adversely affect our business.
We conduct substantially all of our business operations in China. As the gaming industry is highly sensitive to business and
personal discretionary spending, it tends to decline during general economic downturns. Accordingly, our results of operations,
financial condition and prospects are subject to a significant degree to economic, political and legal developments in China. China’s
economy differs from the economies of most developed countries in many respects, including with respect to 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 twenty years, growth has been uneven across different regions and among
various economic sectors of China. The PRC government has implemented various measures to encourage economic development
and guide the allocation of resources. While some of these measures benefit the overall PRC economy, they may also have a negative
effect on us. 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
enacts to forestall economic downturns or shore up the PRC economy could affect our business.
The PRC economy has been transitioning from a planned economy to a more market-oriented economy. Although the PRC
government has implemented measures since the late 1970s emphasizing the utilization of market forces for economic reform, the
reduction of state ownership of productive assets and the establishment of improved corporate governance in business enterprises, a
substantial portion of productive assets in China are still owned by the PRC government. In addition, 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 payment of foreign currency-
denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Since
late 2003, the PRC government implemented a number of measures, such as raising interest rates and bank reserve requirements to
place additional limitations on the ability of commercial banks to make loans, in order to contain the growth of specific segments of
China’s economy that it believed to be overheating. These actions, as well as future actions and policies of the PRC government,
could materially affect our liquidity and access to capital and our ability to operate our business.
19
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
HKRPRFRS16
10.10.12
HKR pf_rend
HKG
16-Mar-2012 23:18 EST
ˆ200FNeb!tHbqMSlQ:Š
5*
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200FNeb!tHbqMSlQ
290862 TX 20
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ESS
Page 1 of 1
The laws and regulations governing the online game industry in China are developing and subject to future changes. If we fail to
obtain or maintain all applicable permits and approvals, our business and operations could be materially and adversely affected.
The online game industry in China is highly regulated by the PRC government. Various regulatory authorities of the PRC
central government, such as the State Council, MIIT, GAPP, the Ministry of Culture and the Ministry of Public Security, are
empowered to issue and implement regulations governing various aspects of the online games industry.
We are required to obtain applicable permits or approvals from different regulatory authorities in order to provide online
games to our customers. For example, an Internet content provider must obtain an ICP license in order to engage in any commercial
ICP operations within China. In addition, an online games operator must also obtain a license from the Ministry of Culture and a
license from GAPP in order to distribute games through the Internet. Furthermore, an online game operator is required to obtain
approval from the Ministry of Culture in order to distribute virtual currencies for online games such as prepaid value cards, prepaid
money or game points. If we fail to maintain any of these required permits or approvals, we may be subject to various penalties,
including fines and the discontinuation or restriction of our operations. Any such disruption in our business operations would
materially and adversely affect our financial condition and results of operations.
As the online games industry is at an early stage of development in China, new laws and regulations may be adopted from
time to time to require additional licenses and permits other than those we currently have, and may address new issues that arise from
time to time. For example, a new rule issued in June 2009 requires existing online game operators, such as our company, to obtain
additional approval from the Ministry of Culture for the issuance of virtual currencies to users for online game services within three
months. We obtained the approval on November 20, 2009. As a result, substantial uncertainties exist regarding the interpretation and
implementation of current and any future PRC laws and regulations applicable to the online gaming industry. However, we cannot
assure you that we will be able to timely obtain any new license required in the future, or at all. While we believe that we are in
compliance in all material respects with all applicable PRC laws and regulations currently in effect, we cannot assure you that we will
not be found in violation of any current or future PRC laws and regulations.
Intensified government regulation of Internet cafés could limit our ability to maintain or increase our revenues and expand our
customer base.
In April 2001, the PRC government began tightening its supervision of Internet cafés, closing down unlicensed Internet
cafés, and required those remaining open to install software to prevent access to sites deemed subversive and required web portals to
sign a pledge not to host subversive sites. Furthermore, the PRC government’s policy, which encourages the development of a limited
number of national and regional Internet café chains and discourages the establishment of independent Internet cafés, may slow the
overall growth of Internet cafés. Currently, the issuance of Internet café licenses is subject to the overall planning of the Ministry of
Culture and the local governments in respect of the total number and location of Internet cafés. Since 2004, the grant of new Internet
café licenses has been suspended from time to time, and was again suspended in 2007. We have not been expressly notified of any
suspensions in 2011, but the PRC government maintains strict controls on the granting of new licenses. As Internet cafés are the
primary venue for users to play our games, any reduction in the number, or any slowdown in the growth of, Internet cafés in China
will limit our ability to maintain or increase our revenues and expand our customer base, which will in turn materially and adversely
affect our business and results of operations.
Regulation and censorship of information disseminated 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 Internet websites.
The PRC government has adopted certain regulations governing Internet access and the distribution of news and other
information over the Internet. Under these regulations, Internet content providers and Internet publishers are prohibited from posting
or displaying over the Internet content that, among other things, violates PRC laws and regulations, impairs the national dignity of
China, or is obscene, superstitious, fraudulent or defamatory. Failure to comply with these requirements could result in the revocation
of ICP and other required licenses and the closure of the concerned websites. The website operator may also be held liable for such
prohibited information displayed on, retrieved from or linked to such website.
20
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
LANFBU-MWE-XN08
10.10.12
HKR balub0dc
HKG
20-Mar-2012 07:31 EST
ˆ200FNeb!tHj0lMxw=Š
8*
0C
200FNeb!tHj0lMxw
290862 TX 21
HTM
ESS
Page 1 of 1
The Ministry of Culture has promulgated laws and regulations that reiterate the government’s policies to prohibit the
distribution of games with violence, cruelty or other elements that are believed to have the potential effect of instigating crimes, and
to prevent the influx of harmful cultural products from overseas.
The Ministry of Culture has promulgated laws and regulations that require, among other things, (i) the review and prior
approval of (i) all new online games licensed from foreign game developers and related license agreements, (ii) the review of patches
and updates with substantial changes of games which have already been approved, and (iii) the filing of domestically developed
online games. Furthermore, online games, regardless of whether imported or domestic, will be subject to content review and approval
by GAPP prior to the commencement of games operations in China. Failure to obtain or renew approvals or to complete filings for
online games or mobile games may materially delay or otherwise affect game operator’s plans to launch new games, and the operator
may be subject to fines, restriction or suspension of operations of the related games or revocation of licenses in the event that the
relevant governmental authority believes that the violation is severe. We obtained the necessary approvals from and completed
necessary filings with the Ministry of Culture and GAPP for operations of SUN, Atlantica, World of Fighter, Kingdom Heroes 2
Online, Seoyugi, Q Jiang San Guo and Winning Goal in China. We also obtained the necessary approvals from GAPP for operating
ShenXianZhuan and Era Zero. Consistent with the general practice of the mobile game industry in China, we have not yet completed
filings with the Ministry of Culture and GAPP for our mobile games before we commenced our mobile game operations. If any such
negative event occurs, our business, financial condition and results of operations may be materially and adversely affected.
In addition, MIIT has published regulations that subject website operators to potential liability for content included on their
websites and the actions of users and others using their websites, including liability for violations of PRC laws prohibiting the
dissemination of content deemed to be socially destabilizing. The Ministry of Public Security has the authority to order any local
Internet service provider to block any Internet website maintained outside China at its sole discretion. Periodically, the Ministry of
Public Security has stopped the dissemination over the Internet of information which it believes to be socially destabilizing. The State
Secrecy Bureau, which is directly responsible for the protection of State secrets of the PRC government, is authorized to block any
website it deems to be leaking state secrets or failing to meet the relevant regulations relating to the protection of state secrets in the
dissemination of online information.
As these regulations are relatively new and subject to interpretation by the relevant authorities, it may not be possible for us
to determine in all cases the type of content that could result in liability for us as a website operator. In addition, we may not be able
to control or restrict the content of other Internet content providers linked to or accessible through our websites, or content generated
or placed on our websites by our users, despite our attempt to monitor such content. To the extent that regulatory authorities find any
portion of our content objectionable, they may require us to limit or eliminate the dissemination of such information or otherwise
curtail the nature of such content on our websites, which may reduce our user traffic and have a material adverse effect on our
financial condition and results of operations. In addition, we may be subject to significant penalties for violations of those regulations
arising from information displayed on, retrieved from or linked to our websites, including a suspension or shutdown of our operations.
Future movements in exchange rates between the U.S. dollar and the RMB may adversely affect the value of our ADSs.
We are exposed to foreign exchange risk arising from various currency exposures. Our payments to overseas game
developers and a portion of our financial assets are denominated in U.S. dollars while currently almost all of our revenues are
denominated in RMB, the legal currency in China. We have not used any forward contracts or currency borrowings to hedge our
exposure to foreign currency risk. The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by,
among other things, changes in political and economic conditions and China’s foreign exchange policies. On July 21, 2005, the PRC
government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar. Under the new policy, the RMB is
permitted to fluctuate within a managed band based on market supply and demand and by reference to a basket of certain foreign
currencies. This change in policy has resulted in an approximately more than 30% appreciation of the RMB against the U.S. dollar
since the introduction of new policy.
Our revenues and costs are mostly denominated in RMB, while a portion of our financial assets are denominated in U.S.
dollars. We rely substantially on dividends and other fees paid to us by our subsidiaries and affiliated entities in China. Any
significant appreciation of RMB against the U.S. dollar may adversely affect our cash flows, revenues, earnings and financial
position, and the value of, and any dividends payable on, our ADSs in U.S. dollars. For example, an appreciation of the RMB against
the U.S. dollar would make any new RMB denominated investments or expenditures more costly to us, to the extent that we need to
convert U.S. dollars into RMB for such purposes.
21
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
LANFBU-MWE-XN08
10.10.12
HKR balub0dc
HKG
20-Mar-2012 07:33 EST
ˆ200FNeb!tHj1BFVQ>Š
9*
0C
200FNeb!tHj1BFVQ
290862 TX 22
HTM
ESS
Page 1 of 1
Restrictions on currency exchange in China limit our ability to utilize our revenues effectively, make dividend payments and meet
our foreign currency denominated obligations.
Because substantially all of our revenues are in RMB, restrictions on currency exchange in China limit our ability to utilize
revenue generated in RMB to fund our business activities outside China, make dividend payments in U.S. dollars, or obtain and remit
sufficient foreign currency to satisfy our foreign currency-denominated obligations, such as paying license fees and royalty payments.
The principal regulation governing foreign currency exchange in China is the Foreign Exchange Administration Rules (1996), as
amended. Under such rules, the RMB is generally freely convertible for trade and service-related foreign exchange transactions, but
not for direct investment, loans or investment in securities outside China unless the prior approval of SAFE is obtained. Although the
PRC government regulations now allow greater convertibility of RMB for current account transactions, significant restrictions still
remain. For example, foreign exchange transactions under our PRC subsidiaries’ capital account, including principal payments in
respect of foreign currency-denominated obligations, remain subject to significant foreign exchange controls and the approval of
SAFE. These limitations could affect our ability to obtain foreign exchange for capital expenditures. We cannot be certain that the
PRC regulatory authorities will not impose more stringent restrictions on the convertibility of the RMB, especially with respect to
foreign exchange transactions.
PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC
resident shareholders or us to penalties and fines, and limit our ability to inject capital into our PRC subsidiaries, limit our
subsidiaries’ ability to increase their registered capital, distribute profits to us, or otherwise adversely affect us.
On October 21, 2005, SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-
raising and Reverse Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or Notice 75,
which became effective as of November 1, 2005. According to Notice 75, prior registration with the local SAFE branch is required
for PRC residents to establish or to control an offshore company for the purposes of financing that offshore company with assets or
equity interests in an onshore enterprise located in the PRC. An amendment to registration or filing with the local SAFE branch by
such PRC resident is also required for the injection of equity interests or assets of an onshore enterprise in the offshore company or
overseas funds raised by such offshore company, or any other material change involving a change in the capital or assets of the
offshore company.
Moreover, Notice 75 applies retroactively. As a result, PRC residents who have established or acquired control of offshore
companies that have made onshore investments in the PRC in the past are required to complete the relevant registration procedures
with the local SAFE branch by March 31, 2006. Under the relevant rules, failure to comply with the registration requirements set
forth in Notice 75 or the rules implementing Notice 75 may result in restrictions being imposed on the foreign exchange activities of
the relevant onshore company, including the increase of its registered capital, the payment of dividends and other distributions to its
offshore parent or affiliate and the capital inflow from the offshore entity, and may also subject the relevant onshore companies and
PRC residents to penalties under PRC foreign exchange administration regulations.
Since May 2007, SAFE has further issued relevant guidance to its local branches with respect to the operational process for
SAFE registration, which standardized more specific and stringent supervision of the registration relating to Notice 75 and imposed
obligations on onshore subsidiaries of offshore special purpose companies to coordinate with and supervise the beneficial owners of
the offshore entity who are PRC residents to complete the SAFE registration process and to disclose or make reports to SAFE for
such shareholdings of PRC residents in certain circumstances.
We have requested all of our shareholders who, based on our knowledge, are PRC residents or whose ultimate beneficial
owners are PRC residents to comply with all applicable SAFE registration requirements. However, we have no control over our
shareholders. We cannot assure you that the PRC beneficial owners of our company and our subsidiaries have completed the required
SAFE registrations or complied with other related requirements. Nor can we assure you that they will be in full compliance with the
SAFE registration in the future. Any non-compliance by the PRC beneficial owners of our company and our subsidiaries may subject
us or such PRC resident shareholders to fines and other penalties. It may also limit our ability to contribute additional capital to our
PRC subsidiaries and our subsidiaries’ ability to distribute profits or make other payments to us.
22
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN10
10.10.12
HKR shait0ap
HKG
17-Mar-2012 00:38 EST
ˆ200FNeb!tHbta&wwUŠ
6*
0C
200FNeb!tHbta&ww
290862 TX 23
HTM
ESS
Page 1 of 1
Uncertainties with respect to the PRC legal system could adversely affect us.
We conduct our business primarily through our subsidiaries and affiliated entities incorporated in China. These entities are
generally subject to laws and regulations applicable to foreign investment in China and, in particular, laws applicable to wholly-
foreign owned enterprises. In addition, we depend on Shanghai IT to honor its service agreement with us. Almost all of these
agreements are governed by PRC law and disputes arising out of these agreements are expected to be decided by arbitration in China.
The PRC legal system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential
value. Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign
investments in China. However, since the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations
and rules are not always uniform and enforcement of these laws, regulations and rules involves uncertainties, which may limit legal
protections available to us. In addition, any litigation in China may be protracted and result in substantial costs and diversion of
resources and management attention.
We may note be able to pursue growth through strategic acquisitions in China due to complicated procedures under PRC laws and
regulations for foreign investors to acquire PRC companies.
In recent years, certain PRC laws and regulations have established procedures and requirements that are expected to make
merger and acquisition activities in China by foreign investors more time-consuming and complex. These laws and regulations
include, without limitation, the Rules on the Merger and Acquisition of Domestic Enterprises by Foreign Investors, or the M&A
Rules, and the Anti-Monopoly Law and the MOFCOM Security Review Rules. For some instances, MOFCOM needs to be notified in
advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise. The approval by
MOFCOM may also need to be obtained in circumstances where overseas companies established or controlled by PRC enterprises or
residents acquire affiliated domestic companies. PRC laws and regulations also require certain merger and acquisition transactions to
be subject to merger control review or security review. The MOFCOM Security Review Rules, effective from September 1, 2011,
provide that, when deciding whether a specific merger or acquisition of a domestic enterprise by foreign investors shall be subject to
the security review by MOFCOM, the principle of substance over form shall be applied. In particular, foreign investors are prohibited
from bypassing the security review requirement by structuring transactions through proxies, trusts, indirect investments, leases, loans,
control through contractual arrangements or offshore transactions.
If the business of any target company that we expect to acquire becomes subject to the security review, we may not be able
to successfully complete the acquisition of such company, either by equity or asset acquisition, capital contribution or through any
contractual arrangement. Complying with the requirements of the PRC laws and regulations to complete acquisition transactions
could become more time-consuming and complex. Any required approval, such as approval by MOFCOM, may delay or inhibit our
ability to complete such transactions, which could affect our ability to grow our business or increase our market share.
The limited use of personal computers in China and the relatively high cost of Internet access with respect to per capita gross
domestic product may limit the development of the Internet in China and impede our growth.
Although the use of personal computers in China has increased in recent years, the penetration rate for personal computers in
China is significantly lower than in the United States and other developed countries. Furthermore, despite a decrease in the cost of
Internet access in China due to a decrease in the cost of personal computers and the introduction and expansion of broadband access,
the cost of Internet access in China still remains relatively high compared to the average per capita income. The limited use of
personal computers in China and the relatively high cost of Internet access may limit the growth of our business. In addition, there is
no assurance that there will not be any increase in Internet access or telecommunication fees in China. If that happens, the number of
our users may decrease and the growth of our user base may be materially impeded.
23
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
HKRPRFRS16
10.10.12
HKR pf_rend
HKG
16-Mar-2012 23:18 EST
ˆ200FNeb!tHbqR$jQ5Š
6*
0C
200FNeb!tHbqR$jQ
290862 TX 24
HTM
ESS
Page 1 of 1
The continued growth of China’s Internet market depends on the establishment of adequate telecommunications infrastructure.
Although private sector Internet service providers currently exist in China, almost all access to the Internet is maintained through
state-owned telecommunication operators under the administrative control and regulatory supervision of China’s MIIT. In addition,
the national networks in China connect to the Internet through government-controlled international gateways. These government-
controlled international gateways are the only channel through which a domestic PRC user can connect to the international Internet
network. We rely on this infrastructure to provide data communications capacity primarily through local telecommunications lines.
Although the government has announced plans to aggressively develop the national information infrastructure, we cannot assure you
that this infrastructure will be developed as planned or at all. In addition, we will have no access to alternative networks and services,
on a timely basis if at all, in the event of any infrastructure disruption or failure. The Internet infrastructure in China may not support
the demands necessary for the continued growth in Internet usage.
Risks Related to Our Shares and ADSs
We were a passive foreign investment company for the taxable year ended December 31, 2011, which could result in adverse
United States federal income tax consequences to U.S. Holders of our ADSs or ordinary shares.
Based on the market price of our ADSs and the value and composition of our assets, we believe we were a “passive foreign
investment company,” or PFIC, for U.S. federal income tax purposes for our taxable year ended December 31, 2011. In addition, it is
likely that one or more of our subsidiaries were also PFICs for such year. A non-U.S. corporation will be a PFIC for any taxable year
if either (1) at least 75% of its gross income for such year is passive income, or (2) at least 50% of the value of its assets (based on an
average of the quarterly values of the assets) during such year is attributable to assets that produce passive income or are held for the
production of passive income. We must make a separate determination after the close of each taxable year as to whether we were a
PFIC for that year. Because the value of our assets for purposes of the PFIC test will generally be determined by reference to the
market price of our ADSs or ordinary shares, our PFIC status will depend in large part on the market price of the ADSs or ordinary
shares, which may fluctuate significantly. Because we believe we were a PFIC for the taxable year ended December 31, 2011, certain
adverse U.S. federal income tax consequences could apply to U.S. Holders (as defined in “Item 10. Additional Information — E.
Taxation — United States Federal Income Taxation”) of our ADSs or ordinary shares with respect to any “excess distribution”
received from us and any gain from a sale or other disposition of the ADSs or ordinary shares. See “Item 10. Additional Information
— E. Taxation — United States Federal Income Taxation — Passive Foreign Investment Company.”
The future sales or issuance of a substantial number of our ADSs or ordinary shares could adversely affect the price of our ADSs.
If our shareholders sell substantial amounts of our ADSs, including those issued upon the exercise of outstanding options,
in the public market, the market price of our ADSs could fall. Such sales also might make it more difficult for us to sell equity or
equity-related securities in the future at a time and price that we deem appropriate. If any existing shareholder or shareholders sell a
substantial amount of ordinary shares, the prevailing market price for our ADSs could be adversely affected.
In addition, we may issue additional ordinary shares or ADSs for future acquisitions. If we pay for our future acquisitions
in whole or in part with additionally issued ordinary shares or ADSs, your ownership interest in our company would be diluted and
this, in turn, could have a material adverse effect on the price of our ADSs.
The market price for our ADSs may be volatile.
The market price for our ADSs is likely to be highly volatile and subject to wide fluctuations in response to factors
including the following:
•
actual or anticipated fluctuations in our quarterly operating results;
•
announcements of new games by us or our competitors;
24
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
HKGFBU-MWE-XN02
10.10.12
HKR kriss2dc
HKG
20-Mar-2012 07:26 EST
ˆ200FNeb!tHi&bl$QuŠ
7*
0C
200FNeb!tHi&bl$Q
290862 TX 25
HTM
ESS
Page 1 of 1
•
•
•
•
•
•
•
•
changes in financial estimates by securities analysts;
price fluctuations of publicly traded securities of other China-based companies engaging in Internet-related services
or other similar businesses;
conditions in the Internet or online game industries;
changes in the economic performance or market valuations of other Internet or online game companies;
announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital
commitments;
fluctuations in the exchange rates between the U.S. dollar and the RMB;
addition or departure of key personnel; and
pending and potential litigation.
In addition, the securities market has from time to time experienced significant price and volume fluctuations that are not
related to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the
market price of our ADSs.
You may face difficulties in protecting your interests, and our ability to protect our rights through the U.S. federal courts may be
limited, because we are incorporated under Cayman Islands law.
Our corporate affairs are governed by our memorandum and articles of association and by the Companies Law (2011
Revision) and common law of the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors
under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents in the United States. In
particular, the Cayman Islands has a less developed body of securities laws as compared to the United States, and provides
significantly less protection to investors. Therefore, our public shareholders may have more difficulties protecting their interests in the
face of actions by our management, directors or controlling shareholders than would shareholders of a corporation incorporated in a
jurisdiction in the United States. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative
action before the federal courts of the United States. As a result, our shareholders may not be able to protect their interests if they are
harmed in a manner that would otherwise enable them to sue in a United States federal court.
Your ability to bring an action against us or against our directors and officers, or to enforce a judgment against us or them, will be
limited because we are incorporated in the Cayman Islands, because we conduct a substantial portion of our operations in China
and because the majority of our directors and officers reside outside of the United States.
We are incorporated in the Cayman Islands, and we conduct a substantial portion of our operations through our wholly-
owned subsidiaries and affiliated entities in China. Most of our directors and officers reside outside of the United States and most of
the assets of those persons are located outside of the United States. As a result, it may be difficult or impossible for you to bring an
action against us or against these individuals in the Cayman Islands or in China in the event that you believe that your rights have
been infringed under the securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the
Cayman Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors and
officers.
You may not be able to exercise your right to vote.
As a holder of ADSs, you may instruct the depositary of our ADSs to vote the shares underlying your ADSs but only if we
ask the depositary to request your instruction. Otherwise, you will not be able to exercise your right to vote unless you withdraw the
shares. However, you may not know about a shareholders’ meeting enough in advance to withdraw the shares. Pursuant to our
amended and restated memorandum and articles of association, a shareholders’ meeting may be convened by us on seven business
days’ notice. If we ask for your instructions, the depositary will notify you of the upcoming vote and arrange to deliver our voting
materials to you. 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. Pursuant to the amended and revised Deposit Agreement dated November 2010 that we entered into with our
depositary, if after complying with the procedures set forth in the agreement, the depositary does not receive instructions from the
owner of a receipt on or before the instruction date, the depositary shall vote such deposited securities in accordance with the
recommendations of our board of directors as advised by our company in writing. In addition, the depositary and its agents are not
responsible for failing to carry out voting instructions or for the manner of carrying out voting instructions, if any such action or non-
action is in good faith. This means that you may not be able to exercise your right to vote and there may be nothing you can do if the
shares underlying your ADSs are not voted as you request.
25
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN05
10.10.12
HKR manil0dc
HKG
20-Mar-2012 11:32 EST
ˆ200FNeb!tHjJTiBw7Š
8*
0C
200FNeb!tHjJTiBw
290862 TX 26
HTM
ESS
Page 1 of 1
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 of 1933, as amended, or the Securities Act, or an exemption from the registration requirements is available. Also,
under the deposit agreement, the depositary bank will not make rights available to you unless the distribution to ADS holders of both
the rights and any related securities are either registered under the Securities Act, or exempt from registration under the Securities
Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause
such a registration statement to be declared effective. Moreover, we may not be able to establish an exemption from registration under
the Securities Act. The depositary may, but is not required to, sell such undistributed rights to third parties in this situation.
Accordingly, you may be unable to participate in our rights offerings and may experience dilution in your holdings.
You may not receive distributions on ordinary shares or any value for them if it is illegal or impractical to make them available to
you.
The depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives
on ordinary shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in
proportion to the number of ordinary shares your ADSs represent. However, the depositary is not responsible if it decides that it is
unlawful or impractical to make a distribution available to any holders of ADSs. We have no obligation to register ADSs, ordinary
shares, rights or other securities under U.S. securities laws. We also have no obligation to take any other action to permit the
distribution of ADSs, ordinary shares, rights or anything else to holders of ADSs. This means that you may not receive the
distribution we make on our ordinary shares or any value for them if it is illegal or impractical for us to make them available to you.
These restrictions may have a material adverse effect on the value of your ADSs.
You may be subject to limitations on transfer of your ADSs.
Your ADSs represented by the ADRs are transferable on the books of the depositary. However, the depositary may close
its transfer books at any time or from time to time when it deems expedient in connection with the performance of its duties. In
addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the
depositary are closed, or at any time if we or the depositary deem it advisable to do so because of any requirement of law or of any
government or governmental body, or under any provision of the deposit agreement, or for any other reason.
Item 4.
INFORMATION ON THE COMPANY
A. History and Development of the Company
We were incorporated in the Cayman Islands on December 22, 1999 under the name GameNow.net Limited and were
renamed The9 Limited in February 2004. We formed GameNow.net (Hong Kong) Limited, or GameNow, on January 17, 2000 in
Hong Kong, as a wholly-owned subsidiary. We have historically conducted our operations in large part through The9 Computer
Technology Consulting (Shanghai) Co., Ltd., or The9 Computer, a direct wholly-owned subsidiary of GameNow in China.
Due to the current restrictions on foreign ownership of ICP, Internet culture operation and advertising businesses in China,
we rely on the following two affiliated PRC entities in holding certain licenses and approvals necessary for our business operations
through a series of contractual arrangements with Shanghai IT and its shareholders:
•
•
Shanghai IT, which holds ICP, Internet culture operation and Internet publishing licenses;
Shanghai Jiucheng Advertisement (a wholly owned subsidiary of Shanghai IT), whose business license permits it to
conduct advertisement operations.
26
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN05
10.10.12
HKR manil0dc
HKG
20-Mar-2012 11:33 EST
ˆ200FNeb!tHjJZF8woŠ
7*
0C
200FNeb!tHjJZF8w
290862 TX 27
HTM
ESS
Page 1 of 1
Shanghai IT is owned by Yong Wang, our vice president, and Wei Ji, one of our employees. Shanghai Jiucheng
Advertisement is a subsidiary of Shanghai IT, and was incorporated in April 2007. In December 2010, Huopu Cloud was incorporated
to provide services for our online game operations and to provide website solutions. Huopu Cloud is owned by Junping Han, our
senior legal director, and Wei Xiong, our finance director. We do not have any ownership interest in Shanghai IT, Shanghai Jiucheng
Advertisement or Huopu Cloud. However, each of the individual shareholders of Shanghai IT and Huopu Cloud has entered into a
shareholder voting proxy agreement with us, under which each such shareholder has irrevocably granted us the power to exercise
voting rights on all matters to which he or she is entitled to vote. Each such shareholder has also entered into a call option agreement
with us, pursuant to which we and/or any other parties designated by us would be entitled to acquire all or part of the equity interests
in Shanghai IT and Huopu Cloud to the extent permitted by the then-effective PRC laws and regulations, for the minimum amount of
consideration permissible under applicable PRC laws and regulations. From 2001 to May 2005, we extended interest-free loans in an
aggregate amount of RMB23.0 million to Jun Zhu, the former shareholders of Shanghai IT, and Yong Wang, in connection with
capitalizing and increasing the registered capital of Shanghai IT. Under an agreement entered into between Jun Zhu, Wei Ji and other
parties thereto in November 2011, Jun Zhu assigned all his respective rights and obligations with respect to the loans to Wei Ji. In
December 2010, we extended interest-free loans in an aggregate amount of RMB50.0 million to the shareholders of Huopu Cloud, in
connection with capitalizing the registered capital of Huopu Cloud. These loans are repayable upon demand. The existing
shareholders of Shanghai IT and Huopu Cloud, Yong Wang and Wei Ji, Junping Han and Wei Xiong, have pledged all of their equity
interests in Shanghai IT and Huopu Cloud in favor of us under an equity pledge agreement, respectively. Each of the shareholders of
Shanghai IT and Huopu Cloud has registered the pledge of its equity interests with the relevant local administration for industry and
commerce pursuant to the new PRC Property Rights Law. In the event of a breach of any term in the loan agreement or any other
agreement by either Shanghai IT or Huopu Cloud or their shareholders, we will be entitled to enforce our rights as a pledgee under the
equity pledge agreement.
In April 2010, we acquired a controlling interest in Red 5, an online game developer based in the United States, through
the investment in its preferred shares. We then continued to acquire additional equity interest of Red 5 from its existing shareholders.
As a result of these transactions, we own approximately 88% of the equity interest in Red 5 on an as-converted basis. Red 5 is
currently developing Firefall, a MMOFPS game, which is expected to be launched in 2012.
Our principal executive office is located at Building No. 3, 690 Bibo Road, Zhangjiang Hi-Tech Park, Pudong New Area,
Shanghai 201203, People’s Republic of China, and our telephone number is +86-21-5172-9999. Our registered office in the Cayman
Islands is located at the offices of CARD Corporate Services Ltd, Zephyr House, Mary Street, PO Box 709 George Town, Grand
Cayman. Our agent for service of process in the United States is CT Corporation System located at 111 Eighth Avenue, New York,
New York 10011. In addition to our operational headquarters in Shanghai, we currently have operational subsidiaries located in the
U.S., Singapore and South Korea. We also have small branch offices in China including Beijing, Chengdu, Nanjing, Shenyang,
Wuhan and Xi’an. For the list of licensed and proprietary games of our company as of the date of this annual report, see “—B.
Business Overview — Products and Services.”
B. Business Overview
We primarily operate MMORPGs and other games that we own or license in China. Since February 2005, we have
launched, among others, eight MMORPGs and other games including web games, social games and mobile games. We commercially
launched WoW, a MMORPG licensed from Blizzard Entertainment, Inc., in China in June 2005 through China The9 Interactive
(Shanghai) Limited, or C9I Shanghai, and Shanghai IT. Since WoW’s commercial launch, we had relied on the game as a major
source of revenue. After the non-renewal of the WoW license, we continued to operate our other licensed and proprietary games, such
as SUN, Atlantica, Kingdom Heroes 2 Online, World of Fighter, ShenXianZhuan. Q Jiang San Guo and Winning Goal. In particular,
we focus on and devote substantial resources to our research and development efforts to develop our proprietary games with our
subsidiaries. For example, our consolidated subsidiary Fire Rain has developed ShenXianZhuan, a MMORPG, launched in August
2011. Our acquired subsidiary Red 5 is currently developing Firefall, a team-based shooter game. Our consolidated subsidiary
Wanyouyl is developing Era Zero, a MMORPG. In addition, we also obtained exclusive licenses to operate other games in mainland
China, including Seoyugi, Rosh, Free Realms and Planetside 2. We are now preparing the launch of Seoyugi, Rosh, Era Zero,
FreeRealms and Planetside 2 in 2012. For a description of the games we own or hold license to operate, see “—B. Business Overview
— Products and Services.”
27
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
HKGFBU-MWE-XN02
10.10.12
HKR kriss2dc
HKG
20-Mar-2012 07:31 EST
ˆ200FNeb!tHj0mY7QeŠ
6*
0C
200FNeb!tHj0mY7Q
290862 TX 28
HTM
ESS
Page 1 of 1
As mobile games have become increasingly popular in China, we are also developing our mobile social gaming platform
business. We established a mobile business unit in April 2010 and started to expand our business into the mobile Internet field. In
December 2010, we also entered into a license agreement with OpenFeint to use its mobile social gaming platform software in China
for a term of five years. In April 2011, we launched The9 Game Zone, a mobile social gaming platform in China powered by
OpenFeint.
We generated our online game service revenues primarily through an item-based revenue model, under which players can
play the games for free, but they are charged for purchases of in-game items, such as performance-enhancing items, clothing and
accessories. Our customers typically access our online games through PCs at home or in Internet cafés, or in the case of mobile
phones, through cell phones. They obtain in-game items primarily through our online payment systems or by purchasing our prepaid
cards at various retail outlets or purchasing online points at one of the more than 100,000 Internet cafés throughout China, which have
subscribed to our internally developed Pass9 system. Pass9 is a proprietary, fully integrated online membership management and
payment system, which offers one-stop account management and payment services to our customers and facilitates our payment
arrangements with distributors and Internet cafés. To ensure quality customer service and seamless operations, we maintain a
powerful technology platform consisting of numerous servers and network devices located in eleven Internet data centers throughout
China.
We plan to further expand the size and capabilities of our development team by recruiting additional talented program
developers, game designers and graphic artists. We also plan to introduce new game features and improve operations infrastructure to
meet evolving customer tastes and expectations. In addition, as part of our business strategies, we will continue to explore
opportunities to acquire online game studios that have strong game development capabilities.
Products and Services
Online Games
We offer online games including MMORPGs, web games, social games, mobile games and Internet Protocol TV games, or
TV games, that we have licensed or developed. Our other products and services include game operating support, website solutions
and advertisement and short message services.
In a typical MMORPG, thousands of players play in the same game world at the same time. MMORPG players can select a
specific character to compete with in the game with which they develop experience and enhance game attributes, which can be carried
over into the next higher game levels. MMORPGs incorporate many cutting-edge technology features, including:
sophisticated 2D, 2.5D or 3D graphics which create captivating screen scenes;
•
•
•
player upgrading system which allows players to attain higher game attributes with their characters as they develop
experience and enhanced game capabilities over time; and
instant messaging system which allows players to communicate with each other during the game and form groups
with other players, thereby coordinating their game skills to achieve collective objectives.
28
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
HKGFBU-MWE-XN02
10.10.12
HKR kriss2dc
HKG
20-Mar-2012 07:33 EST
ˆ200FNeb!tHj0@nlQZŠ
7*
0C
200FNeb!tHj0@nlQ
290862 TX 29
HTM
ESS
Page 1 of 1
As of December 31, 2011, we owned or had exclusive licenses to operate the following major MMORPGs, web games and
social games and other games in China and other countries:
Status
Commercially launched in
China in May 2007
Commercially launched in
China in June 2009
Commercially launched in
China in January 2010
Commercially launched in
China in May 2010
Commercially launched in
China in July 2010
Commercially launched in
China in October 2010
Commercially launched in
China in August 2011
In beta testing
In beta testing
In localization process
Game
SUN
Atlantica
Developer/ Licensor
Webzen, Inc.
Description
3D MMORPG
Ndoors Corporation
3D MMORPG
World of Fighter
The9
2D MMORPG
Kingdom Heroes 2 Online
USERJOY Technology Co.,
Ltd.
3D MMORPG
Winning Goal
Q Jiang San Guo
ShenXianZhuan
Firefall
Era Zero
Planetside 2
Free Realms
Seoyugi
Rosh
The9
The9
The9
The9
The9
Sony Online Entertainment
LLC
Web and social game
Social game
2.5D MMORPG
3D MMOFPS
3D MMOFPS
3D MMORPG
Sony Online Entertainment
LLC
3D cartoon fairy
online game
In beta testing
NNG Lab/ CJ Internet
Corporation
2D MMORPG
In beta testing
GalaxyGate
3D MMORPG
In beta testing
Our license agreement with EA Swiss Sàrl to operate EA Sports™ FIFA Online 2 was terminated and we ceased operating
this game in October 2011.
•
License of SUN from Webzen. In December 2005, we entered into an agreement with Webzen, a video game
developer in South Korea, pursuant to which we obtained an exclusive license from Webzen to operate SUN, a 3D
MMORPG, in mainland China. SUN was commercially launched in May 2007. Our license to operate SUN was
renewed on May 24, 2010 for another two-year term.
•
•
•
License of Atlantica from Ndoors. In April 2008, we entered into an agreement with Ndoors pursuant to which we
obtained an exclusive license from Ndoors to operate the Atlantica game, a 3D MMORPG, in mainland China. The
game was commercially launched in mainland China in June 2009.
Licensing to Third-Parties of World of Fighter. We licensed World of Fighter to game operators in South Korea in
December 2009, in Vietnam in March 2010 and in Thailand in June 2010. The game was commercially launched in
mainland China in January 2010, in Vietnam in September 2010 and in Thailand in March 2011. The South Korean
operator is preparing for the launch in South Korea in 2012.
License of Kingdom Heroes 2 Online from USERJOY. In July 2009, we entered into an agreement with USERJOY
an online game developer in Taiwan, pursuant to which we obtained an exclusive license from USERJOY to operate
Kingdom Heroes 2 Online in mainland China. The game was commercially launched in China in May 2010.
29
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
HKRPRFRS16
10.10.12
HKR pf_rend
HKG
16-Mar-2012 23:18 EST
ˆ200FNeb!tHbqZv6QqŠ
5*
0C
200FNeb!tHbqZv6Q
290862 TX 30
HTM
ESS
Page 1 of 1
•
Development of Winning Goal. We commercially launched our proprietary game Winning Goal in July 2010 in
mainland China for both the social and web versions. We licensed a web version of Winning Goal to game operators
in Southeast Asia, North America, and other countries. We also launched a social version of Winning Goal on
different social websites in China and other countries, including the major SNS platforms such as Sina Weibo,
Tencent and Facebook.
•
•
Development of Q Jiang San Guo. We commercially launched our proprietary social game Q Jiang San Guo in
October 2010 in different social websites in China and other countries.
License of ShenXianZhuan from Fire Rain and Investment in Fire Rain. In February 2009, we invested in Fire
Rain and obtained a 20% equity interest. We have a call option to acquire part or all of the other 80% equity interest
at a pre-determined price within 24 months from the commercial launch of the games developed by Fire Rain.
Pursuant to our agreement with Fire Rain, we obtained an exclusive license from Fire Rain to operate
ShenXianZhuan, a 2.5D MMORPG, in mainland China. In January 2010, we entered into an agreement with the
founders of Fire Rain to acquire an additional 5% equity interest to increase our shareholding in Fire Rain to 25%.
ShenXianZhuan was commercially launched in China in August 2011.
•
Development of Firefall. Since our acquisition of Red 5 in April 2010, Red 5 devoted substantially all of its
operating activities to the development of Firefall, a team-based shooter game. Red 5 had previously entered into a
game development and licensing agreement with Webzen, a third-party operator, in February 2006.
In September 2011, pursuant to a series of assignment arrangements, Webzen assigned the license of Firefall to Red
5 Singapore Pte. Ltd., or Red 5 Singapore, one of our wholly-owned subsidiaries. Upon the assignment, Red 5
Singapore will replace Webzen and become a party under the game development and licensing agreement between
Red 5 and Webzen, including the publishing rights in all of the countries worldwide other than the United States,
Canada and European countries, as well as all the intellectual properties related to Firefall. Red 5 will continue to
have the publishing right of Firefall in the United States, Canada and European countries. Webzen will no longer be
involved in marketing and publishing Firefall in any geographic region.
As part of the assignment arrangement, we paid US$10.0 million (RMB 62.9 million) and guaranteed to pay
US$12.7 million (RMB 79.9 million) to Webzen. We also pledged certain intellectual property in relation to the
game to secure the guaranteed amount. As of December 31, 2011, the amount payable for 2012 was estimated to be
US$ 3.2 million (RMB 20.0 million). In addition, Webzen will also share future revenues generated from the
licensing and royalties of Firefall for a certain period of time.
In November 2011, Red 5 Singapore granted a six-year license of Firefall to Garena Online Private Limited for
exclusive distribution rights in Taiwan, Singapore, Malaysia, Vietnam, Thailand, Indonesia, Hong Kong and the
Philippines, for US$23 million plus any royalties payable. This represents an important step in the global rollout
of Firefall.
License of Era Zero from Wanyouyl and Investment in Wanyouyl. From July 2009 to June 2010, we invested in
Wanyouyl and obtained a 20% equity interest and an exclusive global license to operate Era Zero, a 3D MMORPG.
Pursuant to the investment agreement, our equity interest in Wanyouyl can be increased to 40% depending on the
performance of Era Zero after its commercial launch.
License of Free Realms and Planetside 2 from Sony Online Entertainment LLC. In June 2010, we obtained an
exclusive license from Sony Online Entertainment LLC, an online game developer, to operate Free Realms and
Planetside 2 in mainland China and Hong Kong. In February 2011, we, through our wholly-owned subsidiary, The9
Korea Co., Ltd., obtained an exclusive license from Sony Online Entertainment LLC to operate Free Realms,
Planetside 2 and PoxNora, a MMORPG, in South Korea.
•
•
30
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
HKGFBU-MWE-XN02
10.10.12
HKR kriss2dc
HKG
20-Mar-2012 07:35 EST
ˆ200FNeb!tHj1ch!QEŠ
7*
0C
200FNeb!tHj1ch!Q
290862 TX 31
HTM
ESS
Page 1 of 1
•
•
License of Seoyugi from CJ Internet Corporation and NNG Lab. In November 2010, we entered into a license
agreement with CJ Internet Corporation as licensor and NNG Lab as developer, pursuant to which we obtained an
exclusive license to operate Seoyugi in mainland China.
License of Rosh from GalaxyGate. In September 2011, we entered into a license agreement with GalaxyGate,
pursuant to which we obtained an exclusive license to operate Rosh in mainland China.
Web Game Platform and Social Games. We set up a web game platform www.9c.com, which enables our customers to
access a wide range of web games including Winning Goal, Shen Xian Dao and other web games we jointly operate with other game
companies. We also launched social games including Q Jiang San Guo and Winning Goal on different social websites in both China
and other countries to provide social games to our customers.
In preparation for the commercial launch of a new game, we conduct “closed beta testing” of the game to resolve
operational issues, which is followed by “open beta testing” in which we allow our registered users to play without removing their in-
game data to ensure the performance consistency and stability of our operating systems. We can choose to start charging users at the
close of beta testing or at a later stage at our discretion.
Our online games offer ongoing play experience which allows our users to play the game online 24 hours a day, seven days
a week. Our users can access our online games from any location with an Internet connection. Substantially all of our users in China
access the game servers either from PCs at home or at Internet cafés equipped with multiple personal computers that have Internet
access. Currently, a significant portion of our users access the game through Internet cafés throughout China which sell prepaid game
cards or prepaid game points to their customers. To offset the impact of the limited use of online and credit card payment systems in
China, we have introduced a prepaid game playing time purchase and management system, Pass9. See “— B. Business Overview —
Membership Management and Payment System.”
Mobile Game Platform. We established a mobile business unit in April 2010 and started to expand our business into the
mobile Internet field. In July 2010, we made a strategic minority equity investment in OpenFeint, the developer and operator of a
leading mobile social gaming network. In December 2010, we also entered into a license agreement with OpenFeint to use its mobile
social gaming platform software in China for a term of five years. In April 2011, together with all the then existing shareholders of
OpenFeint, we sold all of our investments in OpenFeint to a third party and recognized a gain on the investment disposal. The five-
year software license in China is not affected by this sale. In April 2011, we launched The9 Game Zone, a mobile social gaming
platform in China powered by OpenFeint.
TV Game Platform. We have contracts with several Chinese telecom carriers and radio, film and television operators for
the development and maintenance of TV game platforms operated on Internet protocol television and digital television.
Other Products and Services.
Our other products and services mainly consist of game operating support, website solutions and advertisement and short
message services.
Game Operating Support, Website Solutions and Advertising Services. Our game operating support, website solutions and
advertising services primarily relate to providing game operating support, including payment collection and processing and other
online game related technical support.
SMS. Leveraging our existing user base, we offer several different SMS products and subscription packages that enable our
users to, among other things, transmit and receive SMS messages, receive password protection and other value-added services.
31
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
HKRPRFRS16
10.10.12
HKR pf_rend
HKG
Membership Management and Payment System
16-Mar-2012 23:19 EST
ˆ200FNeb!tHbqb7fQ7Š
5*
0C
200FNeb!tHbqb7fQ
290862 TX 32
HTM
ESS
Page 1 of 1
We established Pass9 in China, a pioneering integrated membership management and payment system in early 2001, which
allows us to maintain a single customer database that contains each customer’s profile and payment history. Pass9 provides one-stop
service to our customers, distributors and developers. Pass9 provides our customers with an integrated platform to log in, pay and use
any of the fee-based products and services we offer. It also allows our distributors to sell our online points to Internet cafés, and
enables Internet cafés to check the balance of their points and pay us on their customers’ behalf. In addition, Pass9 provides our game
development partners with a simple interface with which to integrate their games into our system.
Our integrated membership management and payment system also incorporates a variety of community-building features,
such as chat rooms, which provide registered users a platform to interact in real-time groups or one-on-one discussions, and bulletin
boards which allow registered users to post notes or inquiries and respond to other users’ notes or inquires. We believe these features
encourage user congregation on our site and facilitate player interaction for the games we offer.
Customer Service
Since our inception, we have continuously focused on providing excellent customer service in order to retain our existing
customers and to attract new customers. In November 2003, we received a 9001 service quality authentication certificate from the
International Organization for Standardization. We believe that we were the first online game operator in China to receive this
certification. Our online games customers can access our customer service center via phone or e-mail at any time, or visit our visitor
center in Shanghai during regular business hours.
We have in-game game masters dedicated to each of the online games that we operate. Game masters are responsible for
organizing in-game events, troubleshooting and actively and continuously monitoring the online game environment. Game masters
are available to respond to players’ inquiries, to initiate the bug reporting and removal processes, as well as to identify, record and
deal with players’ inappropriate behavior such as dishonesty, fraud or other conducts in violation of our rules and policies. We believe
that positioning game masters to monitor the gaming environment is important to us to maintain customer loyalty and to efficiently
address any technical problems that may arise.
Purchase of In-game Items
A customer can purchase in-game items through any of the following methods:
Prepaid Cards. A customer can purchase prepaid cards at retail outlets including convenience stores, supermarkets and
bookstores across China.
Prepaid Online Points. Over 100,000 Internet cafés across China have subscribed to our self-developed eSales System,
which is part of our Pass9 system and enables an Internet café to buy prepaid online points from our distributors and in turn sell these
same points to their customers.
Online Payment. A customer can access online games free of charge and buy in-game items online by charging a payment
directly to a credit or debit card.
Pricing, Distribution and Marketing
Pricing. We price a game near the end of the free testing period based on several factors, including the prices of other
comparable games, the technological and other features of the game, and the targeted marketing position of the game. Our prepaid
game cards are offered in a variety of denominations to provide users with maximum flexibility.
Distribution. Due to the limited availability of online payment systems in China, a substantial portion of our sales are
carried out via a distribution network composed of third-party distributors. We sell our in-game items and game playing time
primarily through sales of our online game points to end users via Beijing HuiyuanNet Technology Co., Ltd., a national online
distributor. Beijing HuiyuanNet Technology Co., Ltd. sells its prepaid cards to over 20,000 local distributors and Internet cafés
throughout China, which in turn sell them to end users. End users can purchase our online game points with the prepaid cards. In
addition, we also directly sell game points through our game players’ online accounts.
32
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN07
10.10.12
HKR balub0dc
HKG
20-Mar-2012 06:55 EST
ˆ200FNeb!tHizq2owNŠ
8*
0C
200FNeb!tHizq2ow
290862 TX 33
HTM
ESS
Page 1 of 1
Marketing. Our overall marketing strategy is to rapidly attract new customers and increase revenues from recurring
customers. The marketing programs and promotional activities that we employ to promote our games include:
Advertising and Online Promotion. We place advertisements in many game magazines and on online game sites, which are
updated regularly.
Cross-Marketing. We have cross-marketing relationships with major consumer brands, technology companies and major
telecom carriers. We believe that our cross-marketing relationships with well-known companies will increase the recognition of our
online game brands.
On-Site Promotion. We distribute free game-related posters, promotional prepaid cards for beginners, game-related
souvenirs such as watches, pens, mouse pads and calendars at trade shows, selected Internet cafés and computer stores.
In-Game Marketing. We conduct “in-game” marketing programs from time to time, including online adventures for grand
prizes.
Game Development and Licensing
We believe that the online game industry in China will continue its recent pattern of developing increasingly sophisticated
online games tailored to the local market. In order to remain competitive, we are focusing on developing new proprietary online
games. Our product development team is responsible for game design, technical development and art design. We also plan to further
enhance our game development capability and diversify our game portfolio and pipeline through selective acquisitions of game
studios primarily in the U.S. and China.
Our licensing process begins with a preliminary screening, review and testing of a game, followed by a cost analysis,
negotiations and ultimate licensing of a game, including all regulatory and approval processes. A team is then designated to conduct
“closed beta testing” of the game to resolve operational matters, followed by “open beta testing” during which our registered users
may play the game without removing their in-game data to ensure performance consistency and stability of our operation systems.
Testing generally takes three to six months, during which time we commence other marketing activities.
Technology
We aim to build a reliable and secure technology infrastructure to fully support our operations, and we maintain separate
technology networks for each of our games. Our current technology infrastructure consists of the following:
•
•
•
servers and network devices located in eleven Internet data centers throughout China as of December 31, 2011;
proprietary software, including game monitor tools, that are integrated with our websites and customer service
center operations; and
hardware platform and server sites primarily consisting of Inspur, Hewlett-Packard/Compaq, Dell and IBM servers;
EMC, HP and Cisco storage systems, and H3C network equipment.
We have a network operation team responsible for the stability and security of our network. The team monitors our server
and works to detect, record, analyze and solve problems that arise from out network. In addition, we frequently upgrade our game
server software to ensure the stability of our operation and to reduce the risks of hacking.
33
THE9 LIMITED
FORM 20-F
Competition
RR Donnelley ProFile
ACXFBU-MWE-XN07
10.10.12
HKR balub0dc
HKG
20-Mar-2012 07:14 EST
ˆ200FNeb!tHi#h9ZwÁŠ
6*
0C
200FNeb!tHi#h9Zw
290862 TX 34
HTM
ESS
Page 1 of 1
Our major competitors include, but are not limited to, online game operators in China. These include Shanda Games
Limited (which operates Legend of Mir, Dragon Nest and Aion), NetEase (which operates WoW, Westward Journey Online and
Fantasy Westward Journey), Changyou.com Limited (which operates Tian Long Ba Bu), Perfect World, Co. Ltd. (which operates
Perfect World and Zhu Xian), Giant Interactive Group (which operates ZT Online and Giant Online) and Tencent (which operates
Dungeon and Fighter, Cross Fire and QQ Dance.)
As we are in the process of developing our mobile social gaming platform business, we anticipate facing competition in the
mobile game industry. For example, mobile service providers, handset companies or other parties may introduce a mobile platform or
other business model to compete with us. The competition we face primarily relates to our user-base, relationships with content
developers, mobile device manufacturers, mobile service providers, key technologies as well as research and development
capabilities.
Our existing and potential competitors may compete with us on marketing activities, quality of online games and sales and
distribution networks. Some of our existing and potential competitors have greater financial and marketing resources than us. For a
discussion of risks relating to competition, see “Item 3. Key Information — D. Risk Factors — Risks Related to Our Company and
Our Industry — We may not be able to recover our market share and profitability as we operate in a highly competitive industry and
compete against many companies.”
Intellectual Property
Our intellectual property rights include trademarks and domain names associated with the name “the9” in China and
copyright and other rights associated with our websites, technology platform, self-developed software and other aspects of our
business. We regard our intellectual property rights as critical to our business. We rely on trademark and copyright law, trade secret
protection, non-competition and confidentiality agreements with our employees, and license agreements with our partners, to protect
our intellectual property rights. We require our employees to enter into agreements requiring them to keep confidential all information
relating to our customers, methods, business and trade secrets during and after their employment with us and assign their inventions
developed during their employment to us. Our employees are required to acknowledge and recognize that all inventions, trade secrets,
works of authorship, developments and other processes made by them during their employment are our property.
We have registered our domain names with third-party domain registration entities, and have legal rights over these
domain names through Shanghai IT, our affiliated PRC entity. We conduct our business under the “The9 Limited” brand name and
“the9” logo.
Legal Proceedings
See “Item 8. Financial Information — A. Consolidated Statements and Other Financial Information — Legal Proceedings.”
Government Regulations
Current PRC laws and regulations impose substantial restrictions on foreign ownership of the online gaming and ICP
businesses in China. As a result, we conduct our online gaming and ICP businesses in China through contractual arrangements with
Shanghai IT, Shanghai Jiucheng Advertisement and Huopu Cloud, our affiliated PRC entities. Shanghai IT is owned by Yong Wang
and Wei Ji, both of whom are PRC citizens. Huopu Cloud is owned by Junping Han and Wei Xiong, both of whom are also PRC
citizens.
In the opinion of our PRC counsel, Fangda Partners, subject to the interpretation and implementation of the GAPP
Circular, the ownership structure and the business operation models of our PRC subsidiaries and our affiliated PRC entities comply
with all applicable PRC laws, rules and regulations, and no consent, approval or license is required under any of the existing laws and
regulations of China for their ownership structure and business operation models except for those which we have already obtained or
which would not have a material adverse effect on our business or operations as a whole.
34
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
HKGFBU-MWE-XN02
10.10.12
HKR selvv2dc
HKG
20-Mar-2012 07:36 EST
ˆ200FNeb!tHj1xglwhŠ
5*
0C
200FNeb!tHj1xglw
290862 TX 35
HTM
ESS
Page 1 of 1
As the online games industry is at an early stage of development in China, new laws and regulations may be adopted from
time to time to require additional licenses and permits other than those we currently have, and address new issues that arise from time
to time. As a result, substantial uncertainties exist regarding the interpretation and implementation of current and any future PRC laws
and regulations applicable to the online games industry. See “Item 3. Key Information — D. Risk Factors — Risks Related to Doing
Business in China — The laws and regulations governing the online game industry in China are developing and subject to future
changes. If we fail to obtain or maintain all applicable permits and approvals, our business and operations could be materially and
adversely affected.”
Regulations on Internet Content Provision Service, Online Gaming and Internet Publishing
Our provision of online game-related content on our websites is subject to various PRC laws and regulations relating to the
telecommunications industry, Internet and online gaming, and is regulated by various government authorities, including MIIT, the
Ministry of Culture, GAPP and the State Administration for Industry and Commerce. The principal PRC regulations governing the
ICP industry as well as the online gaming services in China include:
•
•
•
•
•
•
•
•
•
Telecommunications Regulations (2000);
The Administrative Rules for Foreign Investments in Telecommunications Enterprises (2001), as amended in 2008;
The Administrative Measures for Telecommunications Business Operating License (2009);
The Internet Information Services Administrative Measures (2000);
The Tentative Measures for Administration of Internet Culture (2003), as amended and reissued in 2011;
The Notice on Several Issues Relating to the Implementation of The Tentative Measures for Administration of
Internet Culture (2003);
The Tentative Measures for Administration of Internet Publication (2002);
The Tentative Measures for Administration of Online Games (2010); and
The Foreign Investment Industrial Guidance Catalogue (2011).
In July 2006, MIIT issued a notice entitled “Notice on Strengthening Management of Foreign Investment in Operating
Value-Added Telecommunication Services,” or the New MII Notice. The New MII Notice prohibits ICP license holders from leasing,
transferring or selling a telecommunications business operating license to any foreign investors in any form, or providing any
resource, sites or facilities to any foreign investors for their illegal operation of telecommunications businesses in China. The notice
also requires that ICP license holders and their shareholders directly own the domain names and trademarks used by such ICP license
holders in their daily operations. The notice further requires each ICP license holder to have the necessary facilities for its approved
business operations and to maintain such facilities in the regions covered by its license. In addition, all the value-added
telecommunication service providers are required to maintain network and information security in accordance with the standards set
forth under relevant PRC regulations. The local authorities in charge of telecommunications services are required to ensure that
existing ICP license holders conduct a self-assessment of their compliance with the New MII Notice and submit status reports to
MIIT before November 1, 2006. For those which are not in compliance with the above requirements and further fail to rectify the
situation, the relevant governmental authorities would have broad discretion to adopt one or more measures against them, including
but not limited to revoking their operating licenses. See “Item 3. Key Information — D. Risk Factors — Risks Related to Our
Company and Our Industry — PRC laws and regulations restrict foreign ownership of Internet content provision, Internet culture
operation and Internet publishing licenses, and substantial uncertainties exist with respect to the application and implementation of
PRC laws and regulations.”
Under these regulations, a foreign investor is currently prohibited from owning more than 50% of the equity interest in a
PRC entity that provides value-added telecommunications services. ICP services are classified as value-added telecommunications
businesses, and a commercial operator of such services must obtain a value-added telecommunications business operating license for
ICP, or ICP License, from the appropriate telecommunications authorities in order to carry on any commercial ICP operations in
China.
35
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
RRWIN-XENP139
10.10.12
HKR arumv1dc
HKG
20-Mar-2012 11:32 EST
ˆ200FNeb!tHjJNksQÈŠ
6*
0C
200FNeb!tHjJNksQ
290862 TX 36
HTM
ESS
Page 1 of 1
With respect to the online gaming industry in China, since online games fall into the definition of “Internet culture
products” under The Tentative Measures for Internet Culture Administration (2011), a commercial operator of online games must, in
addition to obtaining the ICP License, obtain an Internet culture operation license from the appropriate culture administrative
authorities for its operation of online games. Furthermore, according to The Tentative Measures for Internet Publication
Administration (2002), the provision of online games is deemed an Internet publication activity. Therefore, approval from the
appropriate press and publication administrative authorities as an Internet publisher or cooperation with a licensed Internet publisher
is required for an online game operator to carry on its online gaming businesses in China. Furthermore, online games and mobile
games, regardless of whether imported or domestic, shall be subject to a content review and approval by or a filing with the Ministry
of Culture and GAPP prior to commencement of operations in China.
GAPP and MIIT jointly impose a license requirement for any company that intends to engage in Internet publishing,
defined as any act by an Internet information service provider to select, edit and process content or programs and to make such
content or programs publicly available on the Internet. Furthermore, the distribution of online game cards and CD-keys for online
gaming programs is subject to a licensing requirement. Shanghai IT holds the license necessary to distribute electronic publications,
which allows it to distribute prepaid cards and CD-Keys for the games we operate. We sell our prepaid cards and CD-Keys through
third-party distributors, which are responsible for maintaining requisite licenses for distributing our prepaid cards and CD Keys in
China.
On February 15, 2007, fourteen governmental authorities, including the Ministry of Culture, MIIT, the State
Administration for Industry and Commerce, and the People’s Bank of China, or the PBOC, jointly issued a circular entitled Circular
for Further Strengthening the Administration of Internet Café and Online Games. This circular gave the PBOC administrative
authority over virtual currencies issued by online game operators for use by players in online games to avoid the potential impact such
virtual currencies may have on the real-world financial systems. According to this circular, the volume that may be issued and the
purchase of such virtual currencies must be restricted, and virtual currency must not be used for the purchase of any physical
products, refunded with a premium or otherwise illegally traded. The Notice of Strengthening the Management of Virtual Currency of
Online Games promulgated by the Ministry of Culture and the MOFCOM on June 4, 2009 and the Tentative Measures for
Administration of Online Games promulgated by the Ministry of Culture on June 3, 2010 impose more restrictions and requirements
on online game operators that issue virtual currencies. According to the above regulations, an online game operator which issues
virtual currency used for online game services shall apply for approval from the Ministry of Culture. An online game operator shall
further report detailed rules of issuance for virtual currencies, such as distribution scope, pricing, and terms for refunds and shall
make certain periodic and supplementary filings as required by the relevant regulations. In addition, under the new rules, online game
operators are prohibited from assigning game tools or virtual currency to users by way of drawing lots, random samplings or other
arbitrary means in exchange for users’ cash or virtual currency. The new rules also require that service agreements entered into
between online game operators and end users contain the general terms of a standard online game service agreement issued by the
Ministry of Culture.
In September 2009, GAPP further promulgated the GAPP Circular, which provides that foreign investors are prohibited
from making investment and engaging in online game operation services by setting up foreign-invested enterprises in China. Further,
foreign investors shall not control and participate in PRC online game operation businesses indirectly or in a disguised manner by
establishing joint venture companies or entering into agreements with or providing technical support to such PRC online game
operation companies, or by inputting the users’ registration, account management, game cards consumption directly into the
interconnected gaming platform or fighting platform controlled or owned by the foreign investor. It is not clear whether the regulatory
authority of GAPP applies to the regulation of ownership structures of online game companies based in China and online game
operation in China. Other government agencies that have regulatory jurisdiction over the online game operations in China, such as the
MOC and MIIT, did not join GAPP in issuing the GAPP Circular. To date, GAPP has not issued any interpretation of the GAPP
Circular. It is not yet clear how this GAPP Circular will be implemented. The relevant governmental authorities have broad discretion
to adopt one or more of administrative measures against companies now in compliance with these measures, including revoking
relevant licenses and relevant registration. See “Item 3. Key Information — D. Risk Factors — Risks Related to Our Company and
Our Industry — PRC laws and regulations restrict foreign ownership of Internet content provision, Internet culture operation and
Internet publishing licenses, and substantial uncertainties exist with respect to the application and implementation of PRC laws and
regulations.”
36
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
HKGFBU-MWE-XN02
10.10.12
HKR selvv2dc
HKG
20-Mar-2012 07:38 EST
ˆ200FNeb!tHj26xHwYŠ
5*
0C
200FNeb!tHj26xHw
290862 TX 37
HTM
ESS
Page 1 of 1
The operation of SMS in China is classified as a value-added telecommunication business and SMS service providers shall
obtain the relevant value-added telecommunication business permits.
Furthermore, MIIT has promulgated rules requiring ICP license holders that provide online bulletin board services to
register with, and obtain approval from, the relevant telecommunication authorities.
Regulations on Internet Content
The PRC government has promulgated measures relating to Internet content through a number of ministries and agencies,
including MIIT, the Ministry of Culture and GAPP. These measures specifically prohibit Internet activities, including the operation of
online games that result in the publication of any content which is found to, among other things, propagate obscenity, gambling or
violence, instigate crimes, undermine public morality or the cultural traditions of the PRC, or compromise State security or secrets.
See “Item 3. Key Information — D. Risks Factors — Risks Related to Doing Business in China — The laws and regulations
governing the online game industry in China are developing and subject to future changes. If we fail to obtain or maintain all
applicable permits and approvals, our business and operations could be materially and adversely affected.” If an ICP license holder
violates these measures, the PRC government may revoke its ICP license and shut down its websites.
In April 2007, various governmental authorities, including GAPP, MIIT, the Ministry of Education, the Ministry of Public
Security, and other relevant authorities jointly issued a circular concerning the mandatory implementation of an “anti-fatigue system”
in online games, which was aimed at protecting the physical and psychological health of minors. This circular required all online
games to incorporate an “anti-fatigue system” and an identity verification system, both of which have limited the amount of time that
a minor or other user may continuously spend playing an online game. We have implemented such “anti-fatigue” and identification
systems on all of our online games as required. Since March 2011, various governmental authorities, including the Ministry of
Culture, MIIT, the Ministry of Education, the Ministry of Public Security, and other relevant authorities have jointly launched the
“Online Game Parents Guardianship Project for Minors”, which allows parents to require online game operators to take relevant
measures to limit the time spent by the minors on playing online games and the minors’ access to their online game accounts.
Additional requirements for anti-fatigue and identification systems in our games, as well as the implementation of any other measures
required by any new regulations the PRC government may enact to further tighten its administration of the Internet and online games,
and its supervision of Internet cafés, may limit or slow down our prospects for growth, or may materially and adversely affect our
business results. See “Item 3. Key Information — D. Risks Factors — Risks Related to Doing Business in China — Our business may
be adversely affected by public opinion and government policies in China.”
Internet content in China is also regulated and restricted from a state security standpoint. The National People’s Congress,
China’s national legislative body, has enacted a law that may subject to criminal punishment in China any effort to: (1) gain improper
entry into a computer or system of strategic importance; (2) disseminate politically disruptive information; (3) leak state secrets;
(4) spread false commercial information; or (5) infringe intellectual property rights.
The Ministry of Public Security has promulgated measures that prohibit the use of the Internet in ways which, among other
things, results in a leakage of state secrets or a spread of socially destabilizing content. The Ministry of Public Security has
supervision and inspection rights in this regard, and we may be subject to the jurisdiction of the local security bureaus. See “Item 3.
Key Information — D. Risks Factors — Risks Related to Doing Business in China — Regulation and censorship of information
disseminated 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 Internet websites.” If an ICP license holder violates these measures, the PRC government may revoke
its ICP license and shut down its websites.
37
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
RRWIN-XENP143
10.10.12
HKR jayab0dc
HKG
20-Mar-2012 07:54 EST
ˆ200FNeb!tHj3n6FwQŠ
5*
0C
200FNeb!tHj3n6Fw
290862 TX 38
HTM
ESS
Page 1 of 1
Regulations on Internet Cafés
Internet cafés are required to obtain a license from the Ministry of Culture and the State Administration for Industry and
Commerce, and are subject to requirements and regulations with respect to location, size, number of computers, age limit of
customers and business hours. Although we do not own or operate any Internet cafés, many Internet cafés distribute our virtual pre-
paid cards. The PRC government has enacted laws to intensify its regulation and administration of Internet cafés, which are currently
the primary venue for our users to play online games. Intensified government regulation of Internet cafés could restrict our ability to
maintain or increase our revenues and expand our customer base. See “Item 3. Key Information — D. Risks Factors — Risks Related
to Doing Business in China — Intensified government regulation of Internet cafés could limit our ability to maintain or increase our
revenues and expand our customer base.”
Regulations on Privacy Protection
PRC laws and regulations do not prohibit Internet content providers from collecting and analyzing personal information
from their users. We require our users to accept a user agreement whereby they agree to provide certain personal information to us.
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, MIIT or its local bureaus may
impose penalties and the Internet content provider may be liable for damages caused to its users.
Import Regulations
Our ability to obtain licenses for online games from abroad and import them into China is regulated in several ways. We
are required to register with the MOFCOM any license agreement with a foreign licensor that involves an import of technologies,
including online game software into China. Without that registration, we may not remit licensing fees out of China to any foreign
game licensor. In addition, the Ministry of Culture requires us to submit for its content review and/or approval any online games we
want to license from overseas game developers or any patch or updates for such game if it contains substantial changes. If we license
and operate games without that approval, the Ministry of Culture may impose penalties on us, including revoking the Internet culture
operation license required for the operation of online games in China. Also, pursuant to a jointly issued notice in July 2004, GAPP
and the State Copyright Bureau require us to obtain their approval for imported online game publications. Furthermore, the State
Copyright Bureau requires us to register copyright license agreements relating to imported software. Without the State Copyright
Bureau registration, we cannot remit licensing fees out of China to any foreign game licensor and we are not allowed to publish or
reproduce the imported game software in China.
Regulations on Intellectual Property Rights
The State Council and the State Copyright Bureau have promulgated various regulations and rules relating to the protection
of software in China. Under these regulations and rules, software owners, licensees and transferees may register their rights in
software with the State Copyright Bureau or its local branches and obtain software copyright registration certificates. Although such
registration is not mandatory under PRC law, software owners, licensees and transferees are encouraged to go through the registration
process and registered software rights may receive better protection. We have registered all of our in-house developed online games
with the State Copyright Bureau.
Regulations on Foreign Currency Exchange and Dividend Distribution
Foreign Currency Exchange. Foreign currency exchange regulation in China is primarily governed by the following rules:
•
•
Foreign Exchange Administration Rules (1996), as amended, or the Exchange Rules; and
Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), or the Administration Rules.
Pursuant to the Exchange Rules, the RMB is generally freely convertible for trade and service-related foreign exchange
transactions, but not for direct investment, loans, investment in securities, or other transactions through a capital account outside
China unless the prior approval of SAFE is obtained. Furthermore, foreign investment enterprises in China in general may purchase
foreign exchange without the approval of SAFE for trade and service-related foreign exchange transactions by providing commercial
documents evidencing these transactions. Foreign investment enterprises that need foreign exchange for the distribution of profits to
their shareholders may effect payment from their foreign exchange account or purchase and pay foreign exchange at the designated
foreign exchange banks to their foreign shareholders by producing board resolutions for such profit distribution. Under the
Administration Rules, based on their needs, foreign investment enterprises are permitted to open foreign exchange settlement
accounts for current account receipts and payments of foreign exchange along with specialized accounts for capital account receipts
and payments of foreign exchange at certain designated foreign exchange banks.
38
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
HKGFBU-MWE-XN03
10.10.12
HKR nelas0dc
HKG
20-Mar-2012 08:09 EST
ˆ200FNeb!tHj4kzLwBŠ
7*
0C
200FNeb!tHj4kzLw
290862 TX 39
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ESS
Page 1 of 1
Dividend Distribution. The principal regulations governing distribution of dividends of foreign holding companies include:
•
•
The Foreign Investment Enterprise Law (1986), as amended; and
Administrative Rules under the Foreign Investment Enterprise Law (2001).
Under these regulations, foreign investment enterprises in China may pay dividends only out of their accumulated profits,
if any, determined in accordance with PRC accounting standards and regulations. In addition, foreign investment enterprises in China
are required to allocate at least 10% of their respective profits each year, if any, to fund certain reserve funds until the cumulative total
of the allocated reserve funds reaches 50% of an enterprise’s registered capital and a portion of their respective after-tax profits to
their staff welfare and bonus reserve funds as determined by their respective board of directors or shareholders. These reserves are not
distributable as dividends.
Regulations on Foreign Exchange in Certain Onshore and Offshore Transactions
On October 21, 2005, SAFE issued the Notice 75 which became effective as of November 1, 2005.
According to Notice 75:
•
prior to establishing or assuming control of an offshore company for the purposes of financing that offshore
company with assets or equity interests in an onshore enterprise in the PRC, each PRC resident must complete the
overseas investment foreign exchange registration procedures with the 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 company upon either (1) the injection of equity interests or
assets of an onshore enterprise in the offshore company, or (2) the completion of any overseas fundraising by such
offshore company; and
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 company.
•
•
Under the relevant rules, failure to comply with the registration procedures set forth in Notice 75 or the rules implementing
Notice 75 may result in restrictions being imposed on the foreign exchange activities of the relevant onshore company, including an
increase of its registered capital, the payment of dividends and other distributions to its offshore parent or affiliate and the capital
inflow from the offshore entity, and may also subject the relevant onshore company and PRC residents to penalties under PRC
foreign exchange administration regulations.
Since May 2007, SAFE has further issued relevant guidance to its local branches with respect to the operational process for
SAFE registration, which standardized more specific and stringent supervision on the registration relating to Notice 75 and imposed
obligations on onshore subsidiaries of offshore special purpose companies to coordinate with and supervise the beneficial owners of
the offshore entity who are PRC residents to complete the SAFE registration process. As a result of the uncertainties relating to the
interpretation and implementation of Notice 75, we cannot predict how these regulations will affect our business operations or
strategies. For example, our present or future PRC subsidiaries’ ability to conduct foreign exchange activities, such as remittance of
dividends and foreign-currency-denominated borrowings, may be subject to compliance with such SAFE registration requirements by
relevant PRC residents, over whom we have no control. In addition, we cannot assure you that any such PRC residents will be able to
complete the necessary approval and registration procedures required by the SAFE regulations. We have requested all of our
shareholders who, based on our knowledge, are PRC residents or whose ultimate beneficial owners are PRC residents to comply with
all applicable SAFE registration requirements, but we have no control over our shareholders. We cannot assure you that the PRC
beneficial owners of our company and our subsidiaries have completed the required SAFE registrations. Nor can we assure you that
they will be in full compliance with the SAFE registration in the future. Any non-compliance by the PRC beneficial owners of our
company and our subsidiaries may subject us or such PRC resident shareholders to fines and other penalties. It may also limit our
ability to contribute additional capitals to our PRC subsidiaries and our subsidiaries’ ability to distribute profits or make other
payments to us.
39
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
LANFBU-MWE-XN18
10.10.12
HKR arumv1dc
HKG
22-Mar-2012 04:36 EST
ˆ200FNeb!tHq3XoCQxŠ
23*
0C
200FNeb!tHq3XoCQ
290862 TX 40
HTM
ESS
Page 1 of 1
g52y85
C. Organizational Structure
The following diagram illustrates our organizational structure, the place of formation, ownership interest of each of our
significant subsidiaries and affiliated entities that operate our major game platforms in China as of the date of this annual report:
D.
Property, Plants and Equipment
Our headquarters are located on premises comprising approximately 14,000 square meters in an office building in
Shanghai, China. We purchased the office building in which our headquarters are located, and lease all of our other premises from
unrelated third parties. In addition, we have subsidiaries located in the U.S., Singapore and South Korea and small branch offices in
Beijing, Nanjing, Wuhan, Xi’an, Chengdu and Shenyang, China. Our equipment consists substantially of numerous servers and
network devices located in eleven Internet data centers throughout China.
40
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
HKGFBU-MWE-XN03
10.10.12
HKR nelas0dc
HKG
Item 4A. UNRESOLVED STAFF COMMENTS
None.
20-Mar-2012 08:27 EST
ˆ200FNeb!tHj6R&nwÅŠ
8*
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200FNeb!tHj6R&nw
290862 TX 41
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Page 1 of 1
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. This report contains
forward-looking statements. See “ — H. Safe Harbor.” In evaluating our business, you should carefully consider the information
provided under the caption “Risk Factors” in this annual report. We caution you that our businesses and financial performance are
subject to substantial risks and uncertainties.
A. Operating Results
Until approximately mid-2009, we derived substantially all of our revenues through our wholly-owned subsidiary C9I and
its operation of WoW in China through cooperation with Shanghai IT. In 2009, approximately 88% of our total revenue was
attributable to the operation of WoW in China, including game playing time, merchandise sales and other related revenues. Our
license to operate the WoW game in China expired on June 7, 2009. As a result, our revenues decreased by 86.5% from RMB802.6
million in 2009 to RMB108.5 million in 2010.
Since the non-renewal of the WoW license, we have depended more on our relationships with other existing game
licensors, such as Webzen, Ndoors and USERJOY. We expect to continue to rely on the relationship with these licensors in the near
future. To broaden our product offerings, we have obtained exclusive licenses to operate additional online games in China, including
Seoyugi, Rosh, Free Realms and Planetside 2. In addition, we have devoted further resources to developing our proprietary games.
We currently rely on our subsidiaries, such as Red 5, Fire Rain and Wanyouyl, to develop our proprietary online games. We also
expect to increasingly rely on these proprietary games for our future growth. Currently, Red 5 is developing Firefall and Wanyouyl is
developing Era Zero; ShenXianZhuan was launched in August 2011.
We established a mobile business unit in April 2010 and started to expand our business into the mobile Internet field. In
July 2010, we made a strategic minority equity investment in OpenFeint, the developer and operator of a leading mobile social
gaming network. In December 2010, we entered into a license agreement with OpenFeint to use its mobile social gaming platform
software in China for a term of five years. In April 2011, together with all the then existing shareholders of OpenFeint, we sold all of
our investments in OpenFeint to a third party and recognized a gain on the investment disposal. The five-year software license in
China is not affected by this sale. In April 2011, we launched The9 Game Zone, which is a mobile social gaming platform in China
powered by OpenFeint.
Even though we have not identified a product to replace the WoW game, our revenues slightly increased to RMB112.5
million (US$17.9 million) in 2011 from RMB108.5 million in 2010.
The major factors affecting our results of operations and financial conditions include:
•
our revenues’ composition and sources of revenues;
•
•
our cost of services; and
our operating expenses.
Revenue Composition and Sources of Revenue. In 2009, 2010 and 2011, we generated substantially all of our revenues
from online game services, and a minor portion of our revenues from other services. The following table sets forth the revenues
generated from our online game services in China and other services, both as absolute amounts and as percentages of total revenues
for the periods indicated.
41
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
RRWIN-XENP139
10.10.12
HKR arumv1dc
HKG
20-Mar-2012 11:33 EST
ˆ200FNeb!tHjJdc@w.Š
10*
0C
200FNeb!tHjJdc@w
290862 TX 42
HTM
ESS
Page 1 of 1
Revenues:
Online game services
Other revenues
Total revenues
2009
RMB
%
For the Year Ended December 31,
2010
2011
RMB
(in thousands, except percentages)
% RMB US$
%
795,969 99.2 106,472 98.1 109,047 17,326 97.0
3.0
802,629 100.0 108,514 100.0 112,466 17,869 100.0
1.9 3,419
2,042
6,660
543
0.8
Online Game Services. In 2009, 2010 and 2011, revenues from our online game services amounted to RMB796.0 million,
RMB106.5 million and RMB109.0 million (US$17.3 million), respectively. The significant decrease in revenue from 2009 to 2010
was mainly due to the non-renewal of the WoW license agreement in June 2009.
We primarily generate our online game service revenues through item-based revenue models, although we previously
relied on a time-based revenue model for WoW prior to June 2009. Under an item-based revenue model, players of our games play
the games for free, but are charged for purchases of in-game items, such as performance-enhancing items, clothing and accessories
Thus, we generate revenues through the sale of such in-game premium features that players use game points to purchase. The
distribution of points to end users is typically made through sales of prepaid game cards and prepaid online points. Fees from prepaid
game cards and prepaid online points are deferred when initially received. This revenue is recognized over the life of the premium
features or as the premium features are consumed. Future usage patterns may differ from the historical usage patterns on which the
virtual items and services consumption model is based. We will continue to monitor the operational statistics and usage patterns
affecting our recognition of these revenues.
In the time-based model we adopted for WoW prior to June 2009, we generated online game service revenues through the
sale of playing time, mostly through sales of prepaid cards and prepaid online points to distributors who in turn sold them to end
users. Both prepaid cards and prepaid online points provided customers with a pre-specified length of game playing time. All prepaid
fees received from distributors were initially recognized as advances from customers. Prepaid fees were recognized as deferred
revenue upon the customers’ online registration and activation of their cards or online points, and then recognized as revenue upon
the actual usage of the game playing time by end customers or when the likelihood that we would provide further online game service
to those customers was remote.
Prior to 2011, we reported revenues from our Internet Protocol TV game, or TV game, services and overseas licensing
revenue under other revenues item. Such revenues amounted to RMB0.5 million and RMB4.7 million for the years ended
December 31, 2009 and 2010, respectively. Starting from January 1, 2011, as revenue from such businesses became more significant,
we have reclassified such revenue and reported it under online game services item, and our financial information has been
retrospectively adjusted to reflect such reclassification.
Other Revenues. Other revenues mainly include game operating support, website solutions and advertisement revenues
and short message services revenues. In 2009, 2010 and 2011, our other revenues amounted to RMB6.7 million, RMB2.0 million and
RMB3.4 million (US$0.5 million), respectively.
Cost of Services. Our cost of services consists of costs directly attributable to rendering our services, including online
game royalties, payroll, depreciation, maintenance and rental of operation sites, depreciation and amortization of computer equipment
and software, production costs for prepaid game cards, intangible assets amortization and other overhead expenses directly
attributable to the services we provide.
Operating Expenses. Our operating expenses consist primarily of product development expenses, sales and marketing
expenses, general and administrative expenses and impairment expenses.
Product Development Expenses. Our product development expenses consist primarily of compensation to our product
development personnel, outsourced research and development expenses, equipment and software depreciation charges and other
expenses for the development of online games. Our other product development costs include costs that we have incurred to develop
and maintain our websites. Our product development expenses amounted to RMB114.4 million, RMB139.4 million and
RMB212.1 million (US$33.7 million) for the year ended December 31, 2009, 2010 and 2011, respectively. We expect that our
product development expenses will continue to increase in the near future as we further expand our game development capabilities.
42
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
LANFBU-MWE-XN11
10.10.12
HKR nagag1dc
HKG
20-Mar-2012 08:02 EST
ˆ200FNeb!tHj4S$vQuŠ
9*
0C
200FNeb!tHj4S$vQ
290862 TX 43
HTM
ESS
Page 1 of 1
Sales and Marketing Expenses. Our sales and marketing expenses consist primarily of advertising and marketing expenses
incurred to promote our games and compensation expenses relating to our sales and marketing personnel. Our sales and marketing
expenses amounted to RMB112.5 million, RMB63.3 million and RMB90.5 million (US$14.4 million) for the year ended
December 31, 2009, 2010 and 2011, respectively. Marketing expenses generally increase during the periods when we launch our new
games.
General and Administrative Expenses. Our general and administrative expenses consist primarily of compensation and
travel expenses for our administrative staff, depreciation of property and equipment, entertainment expenses, administrative office
expenses, as well as fees paid to professional service providers for auditing and legal services. General and administration expenses
amounted to RMB225.1 million, RMB112.7 million and RMB174.7 million (US$27.8 million) for the year ended December 31,
2009, 2010 and 2011, respectively. We expect general and administrative expenses including share-based compensation expenses will
increase with the expansion of our business.
Impairment. Impairment charges relate to the impairment of certain equipment, intangible assets and goodwill. Impairment
expenses amounted to RMB78.9 million, RMB37.9 million and nil for the year ended December 31, 2009, 2010 and 2011,
respectively.
Other operating income. Our other operating income consists of the income generated from the release under applicable
laws of our liability relating to the unactivated WoW game point cards in 2011, which amounted to RMB26.0 million (US$4.1
million).
Impairment Provisions Related to the Non-renewal of the WoW License
As a result of the non-renewal of the WoW license agreement beyond June 7, 2009, we recorded impairment and certain
other charges in our consolidated financial statements for the year ended December 31, 2009 as follows:
•
•
•
•
A RMB103.2 million provision for royalty prepayments including withholding taxes that were paid in 2009 but not
consumed prior to the expiration of the WoW license on June 7, 2009;
RMB40.0 million of additional depreciation expenses related to computer equipment to reflect the change to a
shorter expected useful life of the underlying assets due to the non-renewal of the WoW license agreement;
A RMB30.2 million impairment for goodwill which was deemed recoverable as of December 31, 2008 based on our
company’s impairment test that includes the operating cash flow generated from WoW operations during the period
from January 1 to June 6, 2009, but was no longer recoverable following the expiration of the WoW license on
June 7, 2009; and
A RMB22.1 million provision for additional costs of services related to the refund of point cards, that amount of
which was the difference between the aggregate face value of the point cards and the net proceeds our company
received from the sales of those point cards.
We did not record any impairment related to the non-renewal of the WoW license agreement for the years ended
December 31, 2010 and 2011.
Holding Company Structure
We are a holding company incorporated in the Cayman Islands and rely primarily on dividends and other distributions
from our subsidiaries and our affiliates in China for our cash requirements. Current PRC regulations restrict our affiliated entities and
subsidiaries from paying dividends in the following two principal aspects: (i) our affiliated entities and subsidiaries in China are only
permitted to pay dividends out of their respective accumulated profits, if any, determined in accordance with PRC accounting
standards and regulations; and (ii) these entities are required to allocate at least 10% of their respective accumulated profits each year,
if any, to fund certain capital reserves until the cumulative total of the allocated reserves reach 50% of registered capital, and a portion
of their respective after-tax profits to their staff welfare and bonus reserve funds as determined by their respective boards of directors.
43
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
LANFBU-MWE-XN08
10.10.12
HKR balub0dc
HKG
20-Mar-2012 07:22 EST
ˆ200FNeb!tHi%o#ywiŠ
7*
0C
200FNeb!tHi%o#yw
290862 TX 44
HTM
ESS
Page 1 of 1
These reserves are not distributable as dividends. See “Item 4. Information on the Company — B. Business Overview — Government
Regulations.” In addition, failure to comply with relevant SAFE regulations may restrict the ability of our subsidiaries to make
dividend payments to us. See “Item 3. Key Information — D. Risk Factors — Risks Related to Doing Business in China — PRC
regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident
shareholders or us to penalties and fines, and limit our ability to inject capital into our PRC subsidiaries, limit our subsidiaries’ ability
to increase their registered capital, distribute profits to us, or otherwise adversely affect us.”
Regulations of Internet Business in China
The PRC government heavily regulates the Internet sector in China, including the legality of foreign investments in the
PRC Internet sector, the permit requirements for companies in the Internet industry and the existence and enforcement of restrictions
on Internet content and licensing. See “Item 4. Information on the Company — B. Business Overview — Government Regulations.”
In order to comply with restrictions imposed by current PRC laws and regulations on foreign ownership of ICP, Internet
culture operation, Internet publishing and advertising businesses in China, we operate our PRC online gaming and ICP businesses
through contractual arrangements with Shanghai IT, Shanghai Jiucheng Advertisement and Huopu Cloud. Shanghai IT and Shanghai
Jiucheng Advertisement are owned by Yong Wang and Wei Ji, both of whom are PRC citizens. Huopu Cloud is owned by Junping
Han and Wei Xiong, both of whom are also PRC citizens.
In April 2001, the PRC government began tightening its supervision of Internet cafés, closing down unlicensed Internet
cafés, requiring those remaining open to install software to prevent access to sites deemed subversive and requiring web portals to
sign a pledge not to host subversive sites. Furthermore, the PRC government’s policy, which encourages the development of a limited
number of national and regional Internet café chains and discourages the establishment of independent Internet cafés, may slow down
the overall growth of Internet cafés. The issuance of Internet café licenses has been suspended from time to time and was suspended
most recently in 2007. As Internet cafés are the primary venue for users to play our games, any reduction in the number, or any
slowdown in the growth of Internet cafés in China, or any tightening of the governmental requirements relating to the customer’s age,
business hours and other operational aspects of Internet cafés, could limit our ability to maintain or increase our revenues and expand
our customer base, which will materially and adversely affect our business and results of operations. Furthermore, the Ministry of
Culture has issued a notice to require, among other things, the review and prior approval of all new online games licensed from
foreign game developers and related license agreements. The pre-approval will not be granted if the Ministry of Culture finds the
content of the game objectionable or the terms of the related license agreement grossly unfairly to the Chinese licensee. There is no
assurance that we will be able to obtain the pre-approvals for our new licensed foreign games in a timely manner.
In 2007, various governmental authorities, including GAPP, MIIT, the Ministry of Education, the Ministry of Public
Security, and other relevant authorities jointly issued a circular concerning the mandatory implementation of an “anti-fatigue system”
in online games, which aimed to protect the physical and psychological health of minors. This law required all online games to
incorporate an “anti-fatigue system” and an identity verification system, both of which have limited the amount of time that a minor
or other users may continuously spend playing an online game as required. Since March 2011, various governmental authorities,
including the Ministry of Culture, MIIT, the Ministry of Education, the Ministry of Public Security, and other relevant authorities
have jointly launched the “Online Game Parents Guardianship Project for Minors”, which allows parents to require online game
operators to take relevant measures to limit the time spent by the minors playing online games and the minors’ access to their online
game accounts. We have implemented such “anti- fatigue” and identification systems on all of our online games. Further
strengthening of such anti-fatigue and identification systems or the implementation of any other measures required by any new
regulations the PRC government may enact to further tighten its administration of the Internet and online games, and its supervision
of Internet cafés, may limit or slow down our prospects for growth, or may materially and adversely affect our business results. See
“Item 3. Key Information — D. Risks Factors — Risks Related to Doing Business in China — Our business may be adversely
affected by public opinion and government policies in China.”
44
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
WCRFBU-MWE-XN04
10.10.12
HKR thanm0dc
HKG
21-Mar-2012 02:05 EST
ˆ200FNeb!tHlZ4TgwrŠ
9*
0C
200FNeb!tHlZ4Tgw
290862 TX 45
HTM
ESS
Page 1 of 1
Certain PRC regulatory authorities have published regulations that subject website operators to potential liability for
content included on their websites and the actions of users and others using their systems. As these regulations are relatively new and
subject to interpretation by the relevant authorities, it may not be possible for us to determine in all cases the type of content that
could result in liability for us as a website operator. To the extent PRC regulatory authorities find any portion of our content
objectionable, they may require us to limit or eliminate the dissemination of such information or otherwise curtail the nature of such
content on our websites, which may reduce our user traffic. In addition, we may be subject to significant penalties for violations of
those regulations arising from information displayed on, retrieved from or linked to our websites, including a suspension or shutdown
of our operations.
Income and Sales Taxes
The National People’s Congress of the PRC adopted and promulgated the CIT Law on March 16, 2007. The CIT Law went
into effect as of January 1, 2008, and unified the tax rate generally applicable to both domestic and foreign-invested enterprises in the
PRC. Our company’s subsidiaries and affiliated entities in the PRC are generally subject to CIT at a statutory rate of 25%. However,
some subsidiaries that are located in the Pudong New District of Shanghai, including The9 Computer and C9I Shanghai, and which
were established before March 2007, can enjoy five-year transitional reduced EIT rates, which refer to the phase-in rates of 18%,
20%, 22%, 24% and 25% for the five years from 2008 to 2012 according to local practice. Our subsidiaries that hold a HNTE
qualification are entitled to enjoy a 15% preferential EIT rate.
In April 2007, C9I Beijing received approval from governmental authorities to be classified as a HNTE. This classification
allowed C9I Beijing to enjoy an EIT exemption for 2007-2009, and a 50% reduction of the statutory rate in 2010-2012. In addition,
Shanghai IT also applied and received approval from government authorities to be classified as a HNTE. This approval allowed
Shanghai IT to enjoy a 15% preferential EIT rate for 2008—2010. However, in April 2008, government authorities announced the
new implementation rules for application and assessment of HNTEs. Each qualified HNTE needs to re-apply for this qualification
according to the new implementation rules. In particular, the HNTE qualification is generally valid for a term of three years after the
issuance of the approval certificate, and the enterprise is required to apply for re-examination before the end of the term. As a result,
C9I Beijing reapplied and received approvals for the HNTE qualification and related preferential tax rates during the period of 2008-
2010 from the government authorities. In addition, in October 2011, Shanghai IT reapplied for the HNTE qualification and received
approval from the governmental authorities. It has applied with the local tax authorities for the approval of the 15% preferential EIT
rate for 2011-2013 and we expect to obtain such approval in 2012. However, we cannot assure you that our PRC subsidiaries or
affiliated entities will meet these criteria and continue to be qualified as HNTEs by the tax authorities in the future.
In addition, under the CIT Law, enterprises organized under the laws of their respective jurisdictions outside the PRC may
be classified as either “non-resident enterprises” or “resident enterprises.” Non-resident enterprises are subject to withholding tax at
the rate of 20% with respect to their PRC-sourced dividend income if they have no establishment or place of business in the PRC or if
such income is not related to their establishment or place of business in the PRC, unless otherwise exempted or reduced according to
treaties or arrangements between the PRC central government and the governments of other countries or regions. The State Council
has reduced the withholding tax rate to 10% in the newly promulgated implementation rules of the CIT Law. As we are incorporated
in the Cayman Islands, we may be regarded as a “non-resident enterprise.” We hold equity interests in certain PRC subsidiaries
through subsidiaries in Hong Kong. According to the Tax Agreement between the PRC and Hong Kong, dividends paid by a foreign-
invested enterprise in the PRC to its corporate shareholder in Hong Kong holding 25% or more of its equity interest may be subject to
withholding tax at the maximum rate of 5% if certain criteria are met. Entitlement to such lower tax rate on dividends according to tax
treaties or arrangements between the PRC central government and governments of other countries or regions is further subject to
approval of relevant tax authority.
Furthermore, the SAT promulgated Circular 601 which provides guidance for determining whether a resident of a
contracting state is the “beneficial owner” of an Item of income under China’s tax treaties and tax arrangements. According to
Circular 601, a beneficial owner generally must be engaged in substantial business activities. An agent or conduit company will not
be regarded as a beneficial owner and, therefore, will not qualify for treaty benefits. The conduit company normally refers to a
company that is set up for the purpose of avoiding or reducing taxes or transferring or accumulating profits. We cannot assure you
that any dividends to be distributed by us or by our subsidiaries to our non-PRC shareholders and ADS holders whose jurisdiction of
incorporation has a tax treaty with China providing a different withholding arrangement will be entitled to the benefits under the
relevant withholding arrangement.
45
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
HKGFBU-MWE-XN03
10.10.12
HKR nelas0dc
HKG
20-Mar-2012 07:51 EST
ˆ200FNeb!tHj3Tj6Q#Š
6*
0C
200FNeb!tHj3Tj6Q
290862 TX 46
HTM
ESS
Page 1 of 1
The new law deems an enterprise established offshore but having its management organ in the PRC as a “resident
enterprise” that will be subject to PRC tax at the rate of 25% on its global income. Under the Implementation Rules of the New
Enterprise Income Tax Law, the term “management organ” is defined as “an organ which has substantial and overall management and
control over the manufacturing and business operation, personnel, accounting, properties and other factors.” On April 22, 2009, the
SAT further issued a notice regarding recognizing an offshore-established enterprise controlled by PRC shareholders as a resident
enterprise according to its management organ. According to this notice, a foreign enterprise controlled by a PRC company or a PRC
company group shall be deemed a PRC resident enterprise, if (i) the senior management and the core management departments in
charge of its daily operations are mainly located and function in the PRC; (ii) its financial decisions and human resource decisions are
subject to the determination or approval of persons or institutions located in the PRC; (iii) its major assets, accounting books,
company seals, minutes and files of board meetings and shareholders’ meetings are located or kept in the PRC; and (iv) more than
half of the directors or senior management with voting rights reside in the PRC. Although our offshore companies are not controlled
by any PRC company or PRC company group, we cannot assure you that we will not be deemed to be a “resident enterprise” under
the CIT Law and thus be subject to PRC EIT on our global income.
According to the CIT Law and its implementation rules, dividends are exempted from income tax if such dividends are
received by a PRC resident enterprise on equity interests it directly owns in another PRC resident enterprise. However, foreign
corporate holders of our shares or ADSs may be subject to taxation at a rate of 10% on any dividends received from us or any gains
realized from the transfer of our shares or ADSs if we are deemed to be a resident enterprise or if such income is otherwise regarded
as income “sourced within the PRC.” See “Item 3. Key Information — D. Risk Factors — Risks Related to Our Company and Our
Industry — New income tax laws may increase our tax burden or the tax burden on the holders of our shares or ADSs, and tax
benefits available to us may be reduced or repealed, causing the value of your investment in us to suffer.”
With respect to sales taxes, before December 31, 2011, all the services provided by our PRC subsidiaries were subject to
business taxes at the rate of 5%. In October, 2011, China’s Ministry of Finance and the SAT jointly issued the Circular 110 to launch
the VAT reform pilot program in Shanghai. Following the Circular 110, the Ministry of Finance and the SAT jointly issued the
Circular 111 in November 2011 to provide detailed implementation rules for the program. The two circulars, which would be
effective from January 1, 2012, stipulated that certain services, subject to the pilot programs, shall be subject to VAT instead of
business tax. As a result of the pilot program, some of our services provided by Shanghai IT are subject to VAT at the rate of 6%.
Shanghai IT, as a General VAT Payer under the applicable tax regulations, may reduce its Input VAT. All services provided by
Shanghai Jiucheng Advertisement, Jiutuo (Shanghai) Information Technology Co., Ltd. and Huopu Cloud shall be subject to VAT at
the rate of 3%, and these companies as Small-scale VAT Payers under the applicable tax regulations may not reduce their VAT
payable by their Input VAT.
Our subsidiaries in the United States are registered in California and are subject to U.S. federal corporate marginal income
tax at a rate of 34% and state income tax at a rate of 8.84%, respectively.
Consolidation of Variable Interest Entities, or VIEs.
PRC laws and regulations, including the GAPP Circular, currently prohibit or restrict foreign ownership of Internet-related
businesses. We applied our own assumptions, under the advice of our PRC legal counsel, to comply with these foreign ownership
restrictions. We operate our business through Shanghai IT and Huopu Cloud and have entered into a series of contractual
arrangements with Shanghai IT and Huopu Cloud and their equity owners. See the contractual arrangements set forth in “Item 7.
Major Shareholders and Related Party Transactions —B. Related Party Transactions.” As a result of these contractual arrangements,
the shareholders of Shanghai IT and Huopu Cloud irrevocably granted us the power to exercise all voting rights to which they are
entitled. In addition, we are entitled to receive service fees for services provided to Shanghai IT and Huopu Cloud. Thus, we receive
the economic benefits generated by Shanghai IT and Huopu Cloud, have the ability to effectively control Shanghai IT and Huopu
Cloud and we are considered the primary beneficiary of Shanghai IT and Huopu Cloud. Accordingly, Shanghai IT and Huopu Cloud
are consolidated VIEs of our company.
46
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
HKRPRFRS16
10.10.12
HKR pf_rend
HKG
16-Mar-2012 23:19 EST
ˆ200FNeb!tHbqsLFwPŠ
5*
0C
200FNeb!tHbqsLFw
290862 TX 47
HTM
ESS
Page 1 of 1
The GAPP Circular reiterates and reinforces the long-standing prohibition of foreign ownership of Internet-related
publication businesses via direct, indirect or disguised methods. However, it is not clear whether the regulatory authority of GAPP
applies to the regulation of ownership structures of online game companies based in China and online game operation in China. In
addition, the GAPP Circular does not specifically invalidate VIE agreements, and we are not aware of any online game companies
adopting similar contractual arrangements as ours having been penalized or ordered to terminate such arrangements since the GAPP
Circular first became effective. Therefore, we believe that our ability to direct the activities of Shanghai IT that most significantly
impact our economic performance is not affected by the GAPP Circular. Any changes in PRC laws and regulations that affect our
ability to control Shanghai IT and Huopu Cloud might preclude us from consolidating Shanghai IT and Huopu Cloud in the future.
Critical Accounting Policies
We prepare financial statements in conformity with U.S. Generally Accepted Accounting Principles, which requires us to
make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities
on the date of the financial statements, and the reported amounts of revenue and expenses during the financial reporting period. We
continually evaluate these estimates and assumptions based on the most recently available information, our own historical experience
and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Since the use of
estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our
accounting policies require higher degrees of judgment than others in their application. We consider the policies discussed below to
be critical to an understanding of our financial statements as their application assists management in making their business decisions.
Revenue Recognition
Online game services
We earn revenue from provision of online game operation services on our game servers and third party platform and from
games licensing business in overseas market.
Online game operation services on our game servers
We generate revenue primarily from the sale of our prepaid game cards and prepaid online points for our online game
services products to distributors who in turn ultimately sell them to customers.
There are two consumption models for our online game services. We recognize revenues when persuasive evidence of an
arrangement exists, services are delivered or performed, our price is fixed or determinable and collectability is reasonably assured.
Virtual item / service consumption model — online game services except WoW services
In the item-based revenue model, we generate online game service revenues through the sale of in-game premium features.
In this model, players can access our basic games free of charge and then may purchase game points to acquire in-game premium
features. The distribution of points to players is typically made through sales of prepaid game cards and prepaid online points. Fees of
prepaid game cards and prepaid online points are deferred when initially received. This revenue is recognized over the life of the
premium features or as the premium features are consumed.
For in-game premium features that are immediately consumed, revenue is recognized upon consumption. For premium
features with a stated expiration time, which ranges from one to 90 days, revenue is recognized ratably over the period starting from
when the feature is first used to the expiration time. For perpetual features with no predetermined expiration, revenue is recognized
ratably over the estimated average lives of the perpetual features, which are typically less than one year. When estimating the average
lives of the in-game perpetual features, we considers the average period that players typically play the game, other player behavior
patterns, and factors including the acceptance and popularity of expansion packs, promotional events launched, and market
conditions. Future usage patterns of players may differ from the historical usage patterns on which the virtual Item / service
consumption revenue recognition model is based. We continually monitor the operational statistics and usage patterns.
47
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
HKGFBU-MWE-XN03
10.10.12
HKR nelas0dc
HKG
20-Mar-2012 07:01 EST
ˆ200FNeb!tHi@Fyfw^Š
6*
0C
200FNeb!tHi@Fyfw
290862 TX 48
HTM
ESS
Page 1 of 1
Time consumption model — WoW services
In the time-based model applicable to WoW, we generated online game service revenues through the sale of playing time,
mostly through sales of prepaid cards and prepaid online points to distributors who in turn sold them to players. Both prepaid cards
and prepaid online points provided customers with a pre-specified length of game playing time. All prepaid fees received from
distributors were initially recognized as advances from customers. Prepaid fees were recognized as deferred revenue upon the players’
online registration and activation of their cards or online points, and then recognized as revenue upon the actual usage of the game
playing time by players or when the likelihood that we would provide further online game service to those players was remote.
First-time game players were required to purchase CD-Key in order to register a unique code for future game playing. We
determined whether an arrangement with multiple deliverables consisted of more than one unit of accounting and whether such
arrangement should be allocated among the separate units of accounting. Determining whether an arrangement consisted of more than
one unit of accounting and how consideration should be allocated among the separate units of accounting required significant
judgment, including judgment with regard to whether the delivered item(s) had value to the customer on a stand-alone basis and the
fair value of the undelivered item. Different judgments could result in different amounts and timing of revenue recognized. Such CD-
Key fees received from distributors were initially recognized as advances from customers. Prior to 2008, CD-Key fees were
amortized over a one-year period. Effective January 1, 2008, they were amortized over the shorter of one year or WoW’s remaining
license period ended on June 7, 2009, starting from the time when the game players activated the CD-Key. CD-Key fees were also
recognized as revenues when the likelihood that we would provide further online game service to those customers was remote.
Online game services over third party platform
For social games, TV games and certain web games, while they are also adopting the virtual item / service consumption
model, these games are launched on the third party game platforms and mobile carriers. Revenues from social and web games
operated through third party game platforms are recognized upon consumption of the in-game premium features with the amount net
of remittance to the third party game platforms as we do not set the pricing of the in-game currency of the third party game platforms.
Revenue from TV games operated through telecom carrier is recognized upon consumption of the in-game premium features with the
gross amount received by telecom carrier as we are the primary obligor of the game operation. The remittance to telecom carrier is
recognized as costs of services when incurred.
Overseas licensing revenue
We licenses our proprietary online games to operators in overseas markets from which we receive license fees and royalty
income in connection with their operation of the games. License fees are recognized over the license period upon the
commercialization of the game in the overseas market. Royalty income is recognized when earned, provided that collectability is
reasonably assured.
Other revenues
Other revenues include those generated from game operating support, website solutions and advertisement and short
message services.
Game operating support, website solutions and advertisement
Game operating support, website solutions and advertisement revenue include revenues generated from providing technical
support services, including website development and construction, hardware and software support, staff training, maintenance and
website advertisements to other customers. These revenues are recognized when delivery of the website advertisement has occurred
or when services have been rendered and the collection of the related fees is reasonably assured.
Short message services
Our contracts with various Chinese mobile carriers for the transmission of wireless short messaging services. Revenue is
recognized in the period in which services are performed, provided that no significant obligation remains, collection of receivables is
reasonably assured and the amount can be accurately estimated.
48
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
HKGFBU-MWE-XN03
10.10.12
HKR nelas0dc
HKG
20-Mar-2012 07:37 EST
ˆ200FNeb!tHj20qhwTŠ
6*
0C
200FNeb!tHj20qhw
290862 TX 49
HTM
ESS
Page 1 of 1
Product Development. We recognize software development costs for development of software, including online games, to
be sold or marketed to customers. As such, we expense software development costs incurred prior to technological feasibility. Once a
software product has reached technological feasibility, all subsequent software costs for that product are capitalized until that product
is released for sale or available for marketing. After an online game is released, the capitalized product development costs are
amortized over the estimated product life. The determination of whether an online game has reached technical feasibility requires
significant judgment by us. To date, we have essentially completed our software development concurrently with the establishment of
technological feasibility, and, accordingly, no such costs have been capitalized.
For website and internally used software development costs, we expense all costs that are incurred in connection with the
planning and implementation phases of development and costs that are associated with repair or maintenance of the existing websites
and software. Costs incurred in the development phase are capitalized and amortized over the estimated product life. Since our
inception, the amount of costs qualifying as capitalization has been immaterial, and as a result, all website and internally used
software development costs have been expensed as incurred.
Income Taxes. We account for income taxes under the asset and liability method. Deferred taxes are determined based
upon the differences between the carrying value of assets and liabilities for financial reporting and tax purposes at currently enacted
statutory tax rates for the years in which the differences are expected to reverse. The effect on deferred taxes of a change in tax rates
is recognized in income in the period of change.
A valuation allowance is provided on deferred tax assets to the extent that it is more likely than not that such deferred tax
assets will not be realized. Realization of the future tax benefits related to the deferred tax assets is dependent on many factors,
including our ability to generate taxable income within the period during which the temporary differences reverse or our tax loss carry
forwards expire, the outlook for the PRC economic environment, and the overall future industry outlook. We consider these factors in
reaching our conclusion on the recoverability of the deferred tax assets and determine the valuation allowances necessary at each
balance sheet date.
We recognize the impact of an uncertain income tax position at the largest amount that is more-likely-than-not to be
sustained upon audit by the relevant tax authority. As of December 31, 2009, 2010 and 2011, we did not have any material liability
for uncertain tax positions. Our policy is to recognize, if any, tax-related interest as interest expenses and penalties as income tax
expenses. For the years ended December 31, 2009, 2010 and 2011, we did not have any material interest and penalties associated with
tax positions.
Property, Equipment and Software. The carrying value of property, equipment and software is impacted by a number of
estimates and assumptions, including estimated useful lives, residual values and impairment charges. A review of long-lived assets for
impairment is required whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable from its undiscounted future cash flows. In 2009, 2010 and 2011, we recognized impairment provisions on computer
equipment of RMB21.2 million, RMB4.9 million and nil, respectively. Recognition of impairment charges requires significant
judgment. Any material differences to the estimates that have been used could result in differences in the amount and timing of the
impairment charges. Our computers and equipment for our online game services are amortized over an estimated useful life of
approximately three to four years.
Intangible assets. Our intangible assets consist primarily of intangible assets from business combinations and acquired
game licenses. We recognize intangible assets acquired through business combinations as assets separate from goodwill if they satisfy
either the “contractual-legal” or “separability” criterion. Intangible assets with definite lives are amortized over their estimated useful
lives and reviewed for impairment in accordance with relevant accounting guidance. Indefinite-lived intangible assets are tested for
impairment annually or more frequently if events or changes in circumstances indicate that the assets might be impaired. Intangible
assets, such as purchased technology, licenses, domain names and non-compete agreements, in-process research and development and
backlog, arising from the acquisitions of subsidiaries and VIEs are recognized and measured at fair value upon acquisition. The WoW
game-related intangible assets arising from a business combination transaction were amortized over the license term of the WoW
game of four years. In-process research and development is indefinite-lived until completion or abandonment of the associated
research and development efforts.
49
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
HKGFBU-MWE-XN03
10.10.12
HKR nelas0dc
HKG
20-Mar-2012 08:56 EST
ˆ200FNeb!tHj8#VCQ^Š
8*
0C
200FNeb!tHj8#VCQ
290862 TX 50
HTM
ESS
Page 1 of 1
Acquired game licenses are amortized on a straight-line basis over the shorter of the useful economic life of the relevant
online game or license period, which range from two to seven years. Amortization of upfront licensing fees commences upon the
commercial launch of the related online game.
Goodwill. Goodwill represents the excess of the purchase price over the fair value of the identifiable assets and liabilities
acquired as a result of an acquisition we make. Goodwill is not amortized, but tested for impairment annually, or more frequently if
events or changes in circumstances indicate that it might be impaired. In December of each year, we test impairment of goodwill at the
reporting unit level and recognize impairment in the event that the carrying value exceeds the fair value of each reporting unit. Goodwill
impairment assessment requires significant judgment, including assumptions used to determine the fair value of the reporting units. We
determine the fair value of our reporting units based on the present value of estimated future cash flows of the reporting units. If the
carrying amount is in excess of the fair value, step two requires the comparison of the implied fair value of the reporting unit’s goodwill
with the carrying amount of the reporting unit’s goodwill. Any excess of the carrying value of the reporting unit’s goodwill over the
implied fair value of the reporting unit’s goodwill is recorded as an impairment loss. After completing our annual impairment reviews
during the fourth quarters of 2009, we assessed the recoverability of goodwill and recognized full impairment of RMB30.2 million in
2009, as a result of the non-renewal of the WoW license. After completing our annual impairment reviews during the fourth quarter of
2010 and 2011, the reporting unit that was subject to the annual impairment testing had a fair value which exceeded its respective
carrying value by a significant margin. We concluded that goodwill was not impaired as of December 31, 2010 and 2011.
Share-Based Compensation. Under our Amended 2004 Stock Option Plan, we granted a total of 205,000 options to certain
of our employees and directors in 2008 and no new options in 2009. On September 1, 2009, we modified the exercise price of stock
options granted to certain senior officers and directors to US$7.36 per share, the market price on the date of modification. We granted a
total of 3,887,382 and 92,000 options to our employees and directors in 2010 and 2011, respectively.
We measure the cost of employee services received in exchange for stock-based compensation measured at the grant date fair
value of the award. For the awards that are modified, we determine the incremental cost as the excess of the fair value of the modified
award over the fair value of the original award immediately before its terms are modified, measured based on the share price and other
pertinent factors at that date. We recognize the compensation costs, net of the estimated forfeiture, on a straight-line basis over the
vesting period of the award, which generally ranges from two to four years. Forfeiture rates are estimated based on historical forfeiture
patterns and adjusted to reflect future changes in circumstances and facts, if any. If actual forfeitures differ from those estimates, the
estimates may be revised in subsequent periods. We use historical data to estimate pre-vesting option forfeitures and record stock-based
compensation expense only for those awards that are expected to vest.
Determining the fair value of stock options requires significant judgment. We measure the fair value of the stock options
using the Black-Scholes option-pricing model with assumptions made regarding expected term, volatility, risk-free interest rate, and
dividend yield. The expected term represents the period of time that the awards granted are expected to be outstanding. The expected
term is determined based on historical data on employee exercise and post-vesting employment termination behavior, or the “simplified”
method for stock option awards with the characteristics of “plain vanilla” options for 2009, 2010 and 2011. Expected volatilities are
based on historical volatilities of our ordinary shares and with consideration of historical volatilities of comparable companies. Risk-free
interest rate is based on US government bonds issued with maturity terms similar to the expected term of the stock-based awards. While
we paid a discretionary cash dividend in January 2009, we do not anticipate paying any recurring cash dividends in the foreseeable
future.
Other than the options granted under our Amended 2004 Stock Option Plan, in November 2008, as approved by our board of
directors, we granted equity warrants to Incsight, a company wholly-owned by Jun Zhu, our chairman and chief executive officer, to
purchase 552,196 of our ordinary shares, which expired in November 2011. Also, in September 2008, The9 Development Center
Limited, or TDC, a wholly-owned subsidiary of our company, approved its 2008 Stock Option Plan. On October 1, 2008, TDC granted
options to Jun Zhu and certain employees of TDC to purchase 18,961 ordinary shares of TDC. We recorded share-based compensation
for these equity warrants and TDC options in 2008 and 2009. In addition, on December 8, 2010, we granted 1,500,000 ordinary shares to
Jun Zhu, which will only be vested if our company achieves certain income targets and the shares are not entitled to receive dividends
until they become vested. We considered the grant of ordinary shares as an incentive to retain Mr. Jun Zhu’s services with our company.
The awarded non-vested shares would be valid for five years from December 8, 2010. The fair value of the granted non-vested shares is
US$6.48 per share, the market price on the date of grant. We recorded share-based compensation of RMB3.9 million (US$0.6 million)
for the year ended December 31, 2010.We record share-based compensation expenses for these performance-based awards based upon
our estimate of the probable outcome at the end of the performance period (i.e., the estimated performance against the performance
targets). We periodically adjust the cumulative share-based compensation recorded when the probable outcome for these performance-
based awards is updated based upon changes in actual and forecasted operating results. Our actual performance against the performance
targets could differ materially from our estimates. In May 2011, the Board of Directors granted 30,000 ordinary shares to each of our
four non-executive directors, of which 10,000 ordinary shares vest for each director on July 1 of each year from 2011 to 2013 so long as
such director continues his service as of such date. An aggregate of 40,000 ordinary shares vested in July 2011. The fair value of the
shares granted was US$6.03 per share, being the market price on the date of the grant.
50
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN02
10.10.12
HKR mohaa0dc
HKG
22-Mar-2012 00:45 EST
ˆ200FNeb!tHpQKCfQjŠ
8*
0C
200FNeb!tHpQKCfQ
290862 TX 51
HTM
ESS
Page 1 of 1
In February 2006, Red 5 adopted a Stock Incentive Plan, or Red 5 Stock Incentive Plan, under which Red 5 may grant to
its employees, director and consultants stock options to purchase common stocks or restricted stocks. We granted options to purchase
18,576,157 shares of common stock under the Red 5 Stock Incentive Plan from April 6, 2010 to December 31, 2011. We measure the
share-based compensation based on the fair value of the award as of the grant date. We measure the fair value of the stock options
using the Black-Scholes option-pricing model with assumptions made regarding the fair value of the common stock, expected term,
volatility, risk-free interest rate, and dividend yield.
In July 2011, we granted 20% non-vested equity interest of Jiushi, our newly-established affiliated entity wholly owned by
Huopu Cloud, to two of our employees as incentive to retain these two employees’ services with Jiushi for next three years. We
measure the share-based compensation based on the fair value of the award as of the grant date. We measure the fair value of the
granted equity interest as the proportional amount of the paid in capital of the newly established entity attributable to these two
employees.
Share-based compensation expenses of RMB71.2 million, RMB30.2 million and RMB53.3 million (US$8.5 million) were
recognized for the years ended December 31, 2009, 2010 and 2011, for options and warrants granted to our company’s employees
and directors, including incremental compensation cost of RMB13.4 million (US$2.1 million) in 2009 due to modification of the
option exercise price.
Impairment of Equity Investment. We assess our equity investments for other-than-temporary impairment by considering
factors as well as all relevant and available information including, but not limited to, current economic and market conditions, the
operating performance of the investee, including current earnings trends, and other company-specific information including recent
financing rounds. Impairment provision relating to investment in an equity investee of nil, RMB196.1 million and nil was recognized
in 2009, 2010 and 2011, respectively.
Impairment of Long-lived Assets and Intangible Assets. We review long-lived assets and intangible assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. We
assess the recoverability of long-lived assets and intangible assets (other than goodwill) by comparing the carrying amount to the
estimated future undiscounted cash flow associated with the related assets. We recognize impairment of long-lived assets and
intangible assets in the event that the net book value of such assets exceeds the estimated future undiscounted cash flow attributable to
such assets. We use estimates and judgment in our impairment tests, and if different estimates or judgments had been utilized, the
timing or the amount of the impairment charges could be different. Impairment charges relating to long-lived assets amounting to
RMB21.1 million, RMB4.9 million and nil were recognized in 2009, 2010 and 2011, respectively. Impairment charges relating to
intangible assets amounting to RMB27.5 million, RMB33.0 million and nil were recognized in 2009, 2010 and 2011, respectively.
Refund of WoW game points. As a result of non-renewal of WoW license on June 7, 2009, we announced a refund plan in
connection with unactivated WoW game point cards. According to the plan, unactivated WoW game point card holders are eligible to
receive a cash refund from us. We recorded a liability in connection with both unactivated points cards and activated but unconsumed
point cards of approximately RMB200.4 million, of which RMB4.0 million was refunded in 2009. If any of our liability to refund
such game points is released as matter under the applicable laws, the refund provision relating to such WoW game points will be
recorded as other operating income. The legal liability relating to the unactivated WoW game point cards was extinguished in
September 2011 under applicable laws and the associated liability amounting to RMB26.0 million (US$4.1 million) was recognized
as other operating income for the year ended December 31, 2011. The legal liability relating to the activated WoW game points, with
the amount of RMB170.0 million (US$27.0 million), remained in existence as of December 31, 2011. Such amount, to the extent not
refunded, will be released within 20 years from September 2009 based on legal opinions of our PRC legal counsel.
51
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
RRWIN-XENP139
10.10.12
HKR arumv1dc
HKG
20-Mar-2012 11:40 EST
ˆ200FNeb!tHjJ&rewlŠ
14*
0C
200FNeb!tHjJ&rew
290862 TX 52
HTM
ESS
Page 1 of 1
Results of Operations
The following table sets forth a summary of our consolidated statements of operations as a percentage of net revenues for
the periods indicated.
Consolidated Statement of Operation Data
Revenues :
(1)
Online game services
Other revenues
Sales taxes
Net revenues
Cost of services
Gross profit (loss)
Operating expenses:
Product development
Sales and marketing
General and administrative
Impairment of equipment, intangible assets and goodwill
Total operating expenses
Other operating income
Profit (loss) from operations
Interest income
Other income (expense), net
Income tax (expense) benefit
Gain on investment disposal
Impairment loss on investments
Share of loss in equity investments, net of taxes
Net income (loss)
Net loss attributable to noncontrolling interest
Net income (loss) attributable to holders of ordinary shares
Year Ended December 31,
2010
%
2009
%
2011
%
104.6
0.9
(5.5)
100.0
(93.7)
6.3
(15.0)
(14.8)
(29.6)
(10.4)
(69.8)
—
(63.5)
4.0
8.1
0.7
—
(2.9)
(0.3)
(53.9)
(0.6)
(53.3)
103.5
2.0
(5.5)
100.0
(100.4)
(0.4)
(135.6)
(61.5)
(109.6)
(36.9)
(343.6)
—
(344.0)
22.5
18.8
(7.2)
6.6
(190.7)
(10.4)
(504.4)
(18.6)
(485.8)
102.5
3.2
(5.7)
100.0
(36.8)
63.2
(199.4)
(85.1)
(164.2)
—
(448.7)
24.4
(361.1)
28.6
(0.6)
*
41.8
—
(3.1)
(294.4)
(27.1)
(267.3)
(1)
Prior to 2011, we reported revenues from our Internet Protocol TV game, or TV game, services and overseas licensing
revenue under other revenues item. Such revenues amounted to RMB0.5 million and RMB4.7 million for the years ended
December 31, 2009 and 2010, respectively. Starting from January 1, 2011, as revenue from such businesses became more
significant, we have reclassified such revenue and reported it under online game services item, and our financial information
has been retrospectively adjusted to reflect such reclassification.
*
Less than 0.1%
52
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
HKGFBU-MWE-XN03
10.10.12
HKR nelas0dc
HKG
20-Mar-2012 08:50 EST
ˆ200FNeb!tHj8VYNwÆŠ
8*
0C
200FNeb!tHj8VYNw
290862 TX 53
HTM
ESS
Page 1 of 1
Year 2011 Compared to Year 2010
Revenues. Our revenues increased by 3.6% from RMB108.5 million in 2010 to RMB112.5 million (US$17.9 million) in
2011, primarily due to the increase in revenues generated from our online game services.
Online Game Services. Our revenues from our online game services increased by 2.4% from RMB106.5 million in 2010 to
RMB109.0 million (US$17.3 million) in 2011 primarily due to the increase in revenues from TV games, web games and social
games.
Other Revenues. Revenues generated from other products and services increased by 67.4% from RMB2.0 million in 2010
to RMB3.4 million (US$0.5 million) in 2011. The increase is mainly due to the increase in revenues from game operating support and
advertisement services.
Cost of Services. Cost of services decreased by 62.1% from RMB103.3 million in 2010 to RMB39.1 million (US$6.2
million) in 2011. The decrease was primarily due to the decrease in royalties paid, as we had more in-house developed games in our
games portfolio in 2011 compared to 2010, and there was a one-off waiver of royalty payment in relation to a licensed game in 2011.
Operating Expenses. Operating expenses increased by 35.1% from RMB353.4 million in 2010 to RMB477.3 million
(US$75.8 million) in 2011. The increase was primarily attributable to the increases in our product development, general and
administrative and sales and marketing expenses.
Product Development Expenses. Product development expenses increased by 52.1% from RMB139.4 million in 2010 to
RMB212.1 million (US$33.7 million) in 2011. The increase was primarily due to our continuous efforts on the in-house game
developments, including the development of Firefall by Red 5.
Sales and Marketing Expenses. Sales and marketing expenses increased by 43.0% from RMB63.3 million in 2010 to
RMB90.5 million (US$14.4 million) in 2011. The increase in sales and marketing expenses was primarily attributable to the expenses
incurred in relation to the launch of ShenXianZhuan and preparation for the introduction of Firefall.
General and Administrative Expenses. General and administrative expenses increased by 55.0% from RMB112.7 million
to RMB174.7 million (US$27.8 million) in 2011, reflecting the increase of share based compensation in 2011 and expenses incurred
in connection with the expansion of our overseas subsidiaries in the U.S. and Singapore.
Impairment of Equipment, Intangible Assets and Goodwill. Impairment provision was RMB37.9 million in 2010 related to
impairment on certain licenses obtained and fixed assets, compared to nil in 2011.
Other Operating Income. As a result of non-renewal of WoW license in 2009, we announced a refund plan for the
unactivated WoW game point cards, which we recorded as liability to customers in September 2009. The legal liability relating to the
unactivated WoW game point cards was extinguished in September 2011 under applicable laws and the associated liability amounting
to RMB26.0 million (US$4.1 million) was recognized as other operating income for the year ended December 31, 2011.
Interest Income. Net interest income increased by 31.0% from RMB23.2 million in 2010 to RMB30.4 million (US$4.8
million) in 2011, mainly due to the increase of interest rates in banks in China.
Other Income (Expense). Other income is RMB19.3 million in 2010, compared to other expenses of RMB0.7 million
(US$0.1 million) in 2011, mainly due to the decrease of subsidies received and the increase of foreign exchange loss.
Income Tax Benefit (Expenses). Income tax expenses were nil in 2011 compared to income tax expenses of RMB7.4
million in 2010. The change was primarily due to the change in deferred tax.
Gain on Investment Disposal. In 2011, we recorded a gain on investment disposal of RMB44.4 million (US$7.1 million),
in connection to the disposal of our investments in OpenFeint in 2011.
53
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
RRWIN-XENP139
10.10.12
HKR arumv1dc
HKG
20-Mar-2012 07:01 EST
ˆ200FNeb!tHi@8BSQgŠ
7*
0C
200FNeb!tHi@8BSQ
290862 TX 54
HTM
ESS
Page 1 of 1
Impairment Loss on Investment. In 2011, we did not incur any impairment loss on investment. We had RMB196.1 million
of such losses in 2010.
Net Income (Loss) Attributable to Holders of Ordinary Shares. As a result of the cumulative effect of the above factors,
net loss attributable to our holders of ordinary shares was RMB284.3 million (US$45.2 million) in 2011, compared to the net income
of RMB499.6 million in 2010.
Year 2010 Compared to Year 2009
Revenues. Our revenues decreased by 86.5% from RMB802.6 million in 2009 to RMB108.5 million in 2010, primarily
due to the expiration of the WoW license, and the fact that we have not identified a product to replace the WoW game.
Online Game Services. Our revenues from our online game services decreased by 80.6% from RMB796.0 million in 2009
to RMB106.5 million in 2010 primarily due to the expiration of the WoW license.
Other Revenues. Revenues generated from other products and services decreased by 57.0% from RMB6.7 million in 2009
to RMB2.0 million in 2010. The decrease is mainly due to the decrease in SMS service income.
Cost of Services. Cost of services decreased by 85.5% from RMB712.5 million in 2009 to RMB103.3 million in 2010. The
decrease was primarily due to the expiration of the WoW license.
Operating Expenses. Operating expenses decreased by 33.4% from RMB530.9 million in 2009 to RMB353.4 million in
2010, primarily attributable to the expiration of the WoW license.
Product Development Expenses. Product development expenses increased by 21.8% from RMB114.4 million in 2009 to
RMB139.4 million in 2010. The increase was primarily due to additional research and development costs incurred by Red 5.
Sales and Marketing Expenses. Sales and marketing expenses decreased by 43.8% from RMB112.5 million in 2009 to
RMB63.3 million in 2010. The decrease in sales and marketing expenses in 2010 compared to 2009 was primarily attributable to the
decrease in advertising expenses of FIFA online 2 and Atlantica and the expiration of the WoW license.
General and Administrative Expenses. General and administrative expenses decreased by 49.9% from RMB225.1 million
in 2009 to RMB112.7 million in 2010. The decrease was primarily due to the expiration of the WoW license, which led to a reduction
in related labor costs, legal costs and taxes, and a decrease in share-based compensation.
Impairment of Equipment, Intangible Assets and Goodwill. Impairment provision was RMB37.9 million in 2010, compared
to RMB78.9 million in 2009. The 2010 figure included impairment on certain licenses obtained and fixed assets.
Interest Income. Net interest income decreased by 23.9% from RMB30.5 million in 2009 to RMB23.2 million in 2010,
mainly due to a decrease of the balance of cash in the bank.
Other Income (Expense). Other income decreased by 68.8% from RMB61.8 million in 2009 to RMB19.3 million in 2010,
primarily attributable to a decrease of subsidies received.
Income Tax Benefit (Expenses). Income tax expenses were RMB7.4 million in 2010, compared to an income tax benefit
of RMB5.5 million in 2009. The change was primarily due to the change in deferred tax.
Gain on Investment Disposal. In 2010, we had a gain on investment disposal of RMB6.8 million, primarily due to our sale
of an equity investment in June 2010 with a proceed of US$1 million. That investment had been written off in a prior impairment test.
54
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
RRWIN-XENP139
10.10.12
HKR arumv1dc
HKG
20-Mar-2012 07:07 EST
ˆ200FNeb!tHi@xYoQÈŠ
7*
0C
200FNeb!tHi@xYoQ
290862 TX 55
HTM
ESS
Page 1 of 1
Impairment Loss on Investment. In 2010, we recorded an impairment provision of RMB196.1 million as loss on
investment, compared to RMB22.4 million in 2009. Impairment provisions in 2010 mainly related to our equity investment in a South
Korean online game developer and operator.
Net Income (Loss) Attributable to Holders of Ordinary Shares. As a result of the cumulative effect of the above factors,
net loss attributable to our holders of ordinary shares was RMB499.6 million in 2010, compared to net income of RMB405.2 million
in 2009.
B.
Liquidity and Capital Resources
Cash Flows and Working Capital
Historically, we financed our operations primarily through the proceeds from: the sale of our Series A convertible preferred
shares in April 2000, the convertible loans received from our principal shareholders in October 2001 and October 2002, the net
proceeds from our initial public offering of our ADSs in December 2004, the equity investment received from EA in May 2007 and
the cash generated from our operating activities.
As of December 31, 2010 and 2011, we had RMB1,416.2 million and RMB1,071.7 million (US$170.3 million) in cash and
cash equivalents, respectively. The decrease of the cash and cash equivalents from 2010 to 2011 was primarily due to the cash used in
our operating activities particularly for product development, and, to a lesser extent, the equity investments we made in 2011. The
following table sets forth the summary of our cash flows for the periods indicated:
Net cash provided by (used in) operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
Effect of foreign exchange rate changes on cash
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Year Ended December 31,
2009
RMB
2010
RMB
2011
RMB
US$
(106,086)
(16,276)
(356,548)
1,405
(477,505)
2,152,586
1,675,081
(in thousands)
(247,552)
(7,114)
(507)
(3,719)
(258,892)
1,675,081
1,416,189
(270,894)
(41,291)
(21,571)
(10,707)
(344,463)
1,416,189
1,071,726
(43,041)
(6,561)
(3,427)
(1,701)
(54,730)
225,010
170,280
Operating Activities
Net cash used in operating activities was RMB270.9 million (US$43.0 million) in 2011, compared to RMB247.6 million in
2010. The increase was mainly due to the increase in operating expenses, primarily for product development, while the cash inflow
from online game operation did not increase at a comparable level. Net cash used in operating activities was RMB247.6 million in
2010, compared to RMB106.1 million in 2009. This increase was mainly due to the increase in operating losses resulting from the
non-renewal of the WoW license agreement in June 2009.
Investing Activities
Net cash used in investing activities was RMB41.3 million (US$6.6 million) in 2011, compared to RMB7.1 million in
2010. The increase in net cash used in investing activities from 2011 to 2010 mainly reflected the acquisition of the Firefall game
license from Webzen and prepayment and deposits paid for property, equipment and software, partially offset by the proceeds from
the sale of our investment in OpenFeint in 2011. Net cash used in investing activities was RMB7.1 million in 2010, compared to
RMB16.3 million in 2009. The decrease in net cash used in investing activities from 2009 to 2010 was mainly due to refund of
license fee of certain games, which was partially offset by certain equity investments we made in 2010.
55
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
LANFBU-MWE-XN11
10.10.12
HKR arumv1dc
HKG
21-Mar-2012 03:42 EST
ˆ200FNeb!tHmZBQ1QSŠ
11*
0C
200FNeb!tHmZBQ1Q
290862 TX 56
HTM
ESS
Page 1 of 1
Financing Activities
Net cash used in financing activities in 2011 was RMB21.6 million (US$3.4 million), primarily attributable to our ADS
repurchase program in 2011. Net cash used in financing activities in 2010 amounted to RMB0.5 million (US$0.1 million), which was
primarily attributed to the purchase of a subsidiary’s shares from the holders of a noncontrolling interest. Net cash used in financing
activities in 2009 amounted to RMB356.5 million, which was primarily attributed to a special and non-recurring cash dividend paid in
February 2009 and cash paid according to our share repurchase program.
As a result of the non-renewal of the WoW license in 2009, we announced a refund plan for the unactivated WoW game
point cards. According to the plan, unactivated WoW game point card holders are eligible to receive a cash refund from us. We
recorded a liability in connection with both unactivated points cards and activated but unconsumed point cards of approximately
RMB200.4 million, of which RMB4.0 million and RMB0.4 million and nil was refunded in 2009, 2010 and 2011, respectively. The
refund provision relating to these WoW game point cards will be recorded as other income after the release of legal liability to refund
under the respective laws to the extent not refunded. The legal liability relating to the unactivated WoW game point cards was
extinguished in September 2011 based on the applicable laws and the associated liability amounting to RMB26.0 million (US$4.1
million) was recognized as other operating income for the year ended December 31, 2011. The remaining legal liability relating to the
activated WoW game points of RMB170.0 million (US$27.0 million) still exist as of December 31, 2011 and, to the extent not
refunded, will be legally released within 20 years from September 2009 under applicable laws. We have engaged an agent to facilitate
the refund to the game point card holders and game point distributors. As of December 31, 2011, the balance of the advance payment
to the agent was RMB42.9 million (US$6.8 million). In February 2012, we entered into an agreement with the agent pursuant to
which the agent will ensure a refund of the remaining advance to us in five installments in five years. We received the first installment
of RMB8.6 million (US$1.4 million) in February 2012.
We have sufficient cash balances as of December 31, 2011 to meet our operating cash flow requirements and to enable our
company to meet its obligations and to pay off liabilities as and when they fall due for the coming twelve months.
Capital Expenditures
Capital Expenditures. We incurred capital expenditures of RMB44.1 million, RMB29.2 million and RMB20.7 million
(US$3.3 million) in 2009, 2010 and 2011, respectively. The capital expenditures principally consisted of purchases of servers,
computers and other items related to our network infrastructure and license fees. If we license new games or enter into strategic joint
ventures or acquisitions, we may require additional funds for necessary capital expenditures.
C. Research and Development, Patents and Licenses, etc.
Our research and development efforts are primarily focused on the development of our proprietary online games, the
localization of licensed games from foreign developers, and the maintenance of our websites. We intend to increase our game
development capabilities and license and localize more new games that are attractive to users in China. Our research and development
expenses were RMB114.4 million, RMB139.4 million and RMB212.1 million (US$33.7 million) in 2009, 2010 and 2011,
respectively.
D. Trend Information
Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands,
commitments or events for the period from January 1, 2011 to December 31, 2011 that are reasonably likely to have a material
adverse effect on our results of operations, liquidity or capital resources, or that would cause the disclosed financial information to be
not necessarily indicative of future operating results or financial conditions.
E. Off-Balance Sheet Arrangements
We do not have any outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap
transactions or foreign currency forward contracts. We do not engage in trading activities involving non-exchange traded contracts.
56
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
LANFBU-MWE-XN11
10.10.12
HKR nagag1dc
HKG
20-Mar-2012 07:02 EST
ˆ200FNeb!tHi@L59QdŠ
9*
0C
200FNeb!tHi@L59Q
290862 TX 57
HTM
ESS
Page 1 of 1
F.
Contractual Obligations
We have entered into leasing arrangements related to the use of certain office premises and Internet data centers. The
following table sets forth our commitments under operating leases as of December 31, 2011:
Operating Lease Obligations
G. Recent Accounting Pronouncements
Payment Due by Period
Total
Less than 1
year
1-2 years
3-5 years
(RMB)
More than
5 years
20,056,077 15,089,018 4,724,965
242,094
—
In May 2011, the Financial Accounting Standards Board (FASB) issued ASU 2011-04, which expands ASC 820’s existing
disclosure requirements for fair value measurements and makes other amendments. These amendments in this update generally
represent clarifications of ASC 820, but also include some instances where a particular principle or requirement for measuring fair
value or disclosing information about fair value measurements has changed. This update results in common principles and
requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP.
The amendments in this update are to be applied prospectively. The amendments are effective for us during interim and annual
periods beginning after December 15, 2011. The adoption of this ASU is not expected to have a significant effect on our consolidated
financial statements.
In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income” (Topic 220) to amend requirements relating to the
presentation of comprehensive income. The update eliminates the option to present components of other comprehensive income as
part of the statement of changes in stockholders’ equity and provides an entity with the option to present 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. This guidance, which is to be applied retrospectively, is
effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. In December 2011, the FASB
issued ASU 2011-12 to abrogate the requirement for presentation in the income statement of the effect on net income of
reclassification adjustments out of accumulated other comprehensive income as required in ASU 2011-05. The adoption of these
ASUs is not expected to have a significant effect on our consolidated financial statements.
In September 2011, the FASB issued ASU 2011-08, “Testing Goodwill for Impairment” (ASU 2011-08). Under the
revised guidance, entities testing for goodwill impairment have an option of performing a qualitative assessment before calculating
the fair value for the reporting unit, i.e., Step 1 of the goodwill impairment test. If an entity determines, on a basis of qualitative
factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, the first step of the two-step
impairment test would be required. If it is not more likely than not that the fair value of the reporting unit is less than the carrying
value, then goodwill is not considered to be impaired. ASU 2011-08 does not change how goodwill is calculated or assigned to
reporting units, nor does it revise the requirement to test goodwill at least annually for impairment. This ASU is effective for interim
and annual periods beginning after December 15, 2011 with early adoption permitted. The adoption of this ASU is not expected to
have a significant effect on our consolidated financial statements.
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
adoption of this ASU is not expected to have a significant effect on our consolidated financial statements.
57
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H.
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This annual report on Form 20-F contains statements of a forward-looking nature. These statements are made under the
“safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995. You can identify these forward-looking
statements by terminology such as “may,” “will,” “expects,” “anticipates,” “future,” “intend,” “plan,” “believe,” “estimate,” “is/are
likely to” or other and similar expressions. The accuracy of these statements may be impacted by a number of risks and uncertainties
that could cause actual results to differ materially from those projected or anticipated. Such risks and uncertainties include, but are not
limited to, the following:
•
our ability to successfully launch and operate additional online games licensed by us in China;
our ability to license, develop or acquire additional online games that are attractive to users;
the maintenance and expansion of our relationships with online game developers, including our existing licensors;
uncertainties in and the timeliness of obtaining necessary governmental approvals and licenses for operating any
new online game;
risks inherent in the online game business;
risks associated with our future acquisitions and investments;
our ability to compete successfully against our competitors;
risks associated with our corporate structure and the regulatory environment in China; and
other risks outlined in our filings with the SEC including this annual report on Form 20-F.
•
•
•
•
•
•
•
•
These risks are not exhaustive. We operate in an emerging and evolving environment. New risk factors emerge from time
to time and it is impossible for our management to predict all risk factors, nor can we assess the impact of all factors on our business
or the extent to which any specific factor, or combination of factors, may cause actual results to differ materially from those contained
in any forward-looking statements.
We would like to caution you not to place undue reliance on forward-looking statements and you should read these
statements in conjunction with the risk factors disclosed in “Item 3. Key Information — D. Risk Factors.” We do not undertake any
obligation to update forward-looking statements except as required under applicable law.
Item 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
The following table sets forth information regarding our directors and executive officers as of the date of this annual report.
(1)
Directors and Executive Officers
Jun Zhu
Cheung Kin Au-Yeung
Davin Alexander Mackenzie
Chao Y. Wang
(2)(3)
Ka Keung Yeung
George Lai
Swun Woo Park
Chris Shen
Yong Wang
(2)(3)
(2)(3)
Position/Title
Age
45 Chairman of the Board and Chief Executive Officer
63 Director
51 Independent Director
47 Independent Director
52 Independent Director
35 Chief Finance Officer
38 Vice President
43 Vice President
44 Vice President
(1) Huanxin Jiang, our former vice president, resigned on January 31, 2011.
(2) Member of Compensation Committee.
(3) Member of Audit Committee.
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Each of our officers will hold office until such officer’s successor is elected and duly qualified, or until such officer’s
death, bankruptcy, insanity, resignation or removal. There are no family relationships among any of the directors or executive officers
of our company. For the terms of our directors, see “— C. Board Practices — Terms of Directors.”
Biographical Information
Jun Zhu is one of our co-founders. He has served as the chairman of our board of directors and chief executive officer since
our inception. Prior to founding The9, Mr. Zhu co-founded Flagholder New Technology Co. Ltd., an information technology
company based in China, in 1997, and served as its director from 1997 to 1999. From 1993 to 1997, Mr. Zhu worked at QJ (U.S.A.)
Investment, Ltd., a trading company in the United States. Mr. Zhu attended an undergraduate program at Shanghai Jiaotong
University.
Cheung Kin Au-Yeung has served as our independent director since December 2007. Mr. Au-Yeung currently also serves
as a member of the board of directors and the audit committee of Xueda Education Group, a NYSE-listed company. He joined
Morningside Group in 1996 to oversee its PRC portfolio operations. While with Morningside, he served on the board of directors of
Media Partners International Holdings Inc. from June 2001 to November 2005, and was seconded to Sohu.com as chief operating
officer from July 1999 to December 1999. Mr. Au-Yeung has over twenty years of operating experience in mainland China, and prior
to joining Morningside, he ran the greater China operations of several multinational companies for more than sixteen years as general
manager. Mr. Au-Yeung holds an MBA and an MS in Physics from Indiana University.
Davin Alexander Mackenzie has served as our independent director since July 2005. Mr. Mackenzie is currently a
consultant of Spencer Stuart Beijing Office, a renowned global executive search company. Mr. Mackenzie currently also serves as a
member of the board of directors and audit committee of AsiaInfo-Linkage Inc. and Mecox Lane Limited, each a Nasdaq-listed
company. From 2009 to 2011, Mr. Mackenzie was the Beijing representative of Brocade Capital Limited, a private equity advisory
firm that he founded in 2009. From 2008 to 2009, Mr. Mackenzie was the managing director and Beijing representative of Arctic
Capital Limited, a pan-Asia private equity advisory firm. Between 2000 and 2008, Mr. Mackenzie held the same positions in Peak
Capital LLC, another private equity investment and advisory firm that focuses on the China market. Prior to co-founding Peak
Capital, Mr. Mackenzie worked with the International Finance Corporation, a private sector arm of The World Bank Group, for seven
years, including four years as the resident representative for China and Mongolia. Mr. Mackenzie has also worked at Mercer
Management Consultants in Washington, D.C, and at First National Bank of Boston in Taiwan. Mr. Mackenzie received a bachelor’s
degree in Government from Dartmouth College. He received a master’s degree in international studies and an MBA degree from the
Wharton School of Business at the University of Pennsylvania. Mr. Mackenzie has also completed the World Bank Executive
Development Program at Harvard Business School.
Chao Y. Wang has served as our independent director since December 2004. Mr. Wang is the founding partner and chief
executive officer of ChinaEquity Investment Co., a China-based independent venture capital firm which focuses on the technology,
media and telecommunications sectors in China. Before founding ChinaEquity in 1999, Mr. Wang spent twelve years in the
investment banking and financial services industry with Chase, Standard & Poors, Morgan Stanley and the China Development Bank.
During that time, he served as the head of Morgan Stanley’s Beijing operations for three years. Mr. Wang presently serves on the
board of directors of several companies including Origo Sino-India Plc, Rising Tech Co. and Infront Sport Media. Mr. Wang holds a
bachelor’s degree from Huazhong University of Science and Technology and an MBA degree from Rutgers University. Mr. Wang
has also attended the Senior Executive Program of Harvard University and Tsinghua University.
Ka Keung Yeung has served as our independent director since July 2005. Mr. Yeung is the executive vice president and
chief financial officer of Phoenix Satellite Television Holdings Limited, or Phoenix, a listed company in Hong Kong, and is in charge
of corporate finance and administration. He is also the company secretary and qualified accountant. Mr. Yeung joined Phoenix in
March 1996 and is in charge of all of Phoenix’s internal and external financial management and arrangements and also supervises
administration and personnel matters. Mr. Yeung also serves as a director of Phoenix New Media, a subsidiary of Phoenix and a
company listed on the NYSE. Mr. Yeung graduated from the University of Birmingham and is qualified as a chartered accountant.
Upon returning to Hong Kong, he worked at Hutchison Telecommunications and STAR in the fields of finance and business
development.
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George Lai has served as our chief financial officer since July 2008. Prior to joining us, Mr. Lai worked for Deloitte
Touche Tohmatsu since 2000. Mr. Lai worked in several different Deloitte offices, including Hong Kong, New York and Beijing.
During his eight years at Deloitte, Mr. Lai played key roles in the audit function in a number of IPO projects in the United States and
China. He also assisted public companies in the United States, Hong Kong and China with a wide range of accounting matters.
Mr. Lai received his bachelor of business administration, with a focus in professional accountancy, from the Chinese University of
Hong Kong. Mr. Lai holds various accounting professional qualifications, including from AICPA, FCCA and HKICPA.
Swun Woo (Tony) Park has served as our vice president since January 2007. Prior to joining us, Mr. Park served as the
president of international business at HanbitSoft, a leading game developer and publisher in South Korea. Since April 2002, he has
served in various management roles at HanbitSoft, including business development, strategic planning, marketing and brand
management, game studio management, localization & technical operations, joint venture management, as well as investor relations.
Prior to joining HanbitSoft, Mr. Park worked as a venture capitalist at ADL Partners from April 2000 to April 2002, and as a
management consultant at Arthur D. Little from December 1998 to April 2000. Mr. Park received his bachelor’s degree in business
administration from the Korea University.
Chris Shen has served as our vice president since January 2006. Mr. Shen joined The9 in August 2005 as our senior
director of marketing and is in charge of our mobile social gaming platform and marketing and public relations activities. Prior to
joining us, Mr. Shen served as the group account director and account director for several renowned advertising agencies in Shanghai
and Taipei, mainly serving multinational companies in various industries, such as consumer goods, financial services and retail.
During the past twelve years, Mr. Shen helped numerous local and international brands plan and execute various marketing
initiatives. Mr. Shen received his bachelor’s degree in management science from the National Chiao Tung University in Taiwan.
Yong Wang has served as our vice president since January 2007. From 2005 to 2007, Mr. Wang served as the senior
director of our customer service department. From December 2001 to April 2005, he served as the director of our sales department
and led our sales department by strengthening the national distribution network for our pre-paid game cards. Prior to joining us,
Mr. Wang worked as a business development manager at East Asia International Trader Company from 1999 to 2000, and as a
supervisor of the general business department at East Assets Trading Co., Ltd. from 1992 to 1999. Mr. Wang graduated from the
Shanghai Mechanical College.
B. Compensation of Directors and Executive Officers
Compensation of Directors and Executive Officers
In 2011, the aggregate cash compensation paid to our executive officers was approximately RMB9.1 million (US$1.4
million). We paid a total of RMB1.3 million (US$0.2 million) in cash to our non-executive directors for their services in 2011. No
director or executive officer is entitled to any severance benefits upon termination of his or her employment with or appointment by
our company.
In May 2011, our Board of Directors granted 30,000 ordinary shares to each of our four non-executive directors, of which
10,000 ordinary shares vest for each director on July 1 of each year from 2011 to 2013 so long as such director continues his services
as of such date. An aggregate of 40,000 ordinary shares vested in July 2011. The fair value of the shares granted was US$6.03 per
share, being the market price on the date of the grant. We recorded share-based compensation of RMB2.3 million (US$0.4 million)
for the year ended December 31, 2011.
Share Incentive Plan
Amended 2004 Stock Option Plan
Our board of directors and our shareholders have adopted and approved an Amended 2004 Stock Option Plan in order to
attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentives to employees,
directors and consultants and to promote the success of our business. As of March 16, 2012, we have reserved 6,449,614 shares under
the 2004 option plan, of which 3,806,615 ordinary shares were outstanding. The following table provides a summary of the options
granted to our directors, executive officers and other individuals as a group under our Amended 2004 Stock Option Plan as of
March 16, 2012 and which remain outstanding.
60
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Jun Zhu
Yong Wang
Chris Shen
Chao Y. Wang
Ka Keung Yeung
Davin Alexander Mackenzie
Cheung Kin Au-Yeung
Swun Woo Park
George Lai
All Directors and Senior
Executive Officers as a
Group
†
Other Individuals as a Group
(other than those listed above)
Total Number of
Ordinary Shares
Underlying Options
†
Granted
1,600,000
*
*
*
*
*
*
*
*
Exercise
Price
Range(in
US$)
5.13
5.13-6.07
5.13-7.36
5.13-7.36
5.13-7.36
5.13-7.36
5.13-7.36
5.13-6.07
5.13-7.36
Expiration date
August 27, 2015
August 27, 2015—December 11, 2015
March 6, 2012—December 11, 2015
March 6, 2012—December 11, 2015
March 6, 2012—December 11, 2015
March 6, 2012—December 11, 2015
November 17, 2013—December 11, 2015
August 27, 2015—December 11, 2015
November 17, 2013—December 11, 2015
2,685,000
5.13-7.36
March 6, 2012—December 11, 2015
1,106,350
5.13-30.90
March 6, 2012—December 11, 2015
†
*
Excluding 1,925,002 options forfeited as of the date of this annual report pursuant to the terms of our Amended 2004 Stock
Option Plan.
The options held by each of these directors and officers represent less than 1% of our total outstanding shares.
Termination of Options. Where the option agreement permits the exercise or purchase of the options granted for a certain
period of time following the recipient’s termination of service with us, or the recipient’s disability or death, the options will terminate
to the extent not exercised or purchased on the last day of the specified period or the last day of the original term of the options,
whichever occurs first.
Administration. Our stock option plan is administered by our board of directors or an option administrative committee
designated by our board of directors and constituted to comply with applicable laws. In each case, our board of directors or the
committee it designates will determine the provisions, terms and conditions of each option grant, including, but not limited to, the
option vesting schedule, repurchase provisions, forfeiture provisions, form of payment upon settlement of the award, payment
contingencies and satisfaction of any performance criteria.
Vesting Schedule. Options granted under our stock option plan vest over a two to four year period following a specified
vesting commencement date. In general, the options granted will vest over the vesting period on a monthly basis, subject to the
recipient of the options continuing to be employed by us on each vesting date.
Option Agreement. Options granted under our stock option plan are evidenced by an option agreement that contains,
among other things, provisions concerning exercisability and forfeiture upon termination of employment or consulting arrangements,
as determined by our board. In addition, the option agreement also provides that options granted under our stock option plan are
subject to a 180-day lock-up period following the effective date of a registration statement filed by us under the Securities Act, if so
requested by us or any representative of the underwriters in connection with any registration of the offering of any of our securities.
61
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Option Exercise. The term of options granted under our stock option plan may not exceed five years from the date of grant.
The consideration to be paid for our shares upon exercise of an option or purchase of shares underlying the option will be determined
by the plan administrator and may include cash, check, ordinary shares, a promissory note, consideration received by us under a
cashless exercise program implemented by us in connection with our stock option plan, or any combination of the foregoing methods
of payment.
Third-Party Acquisition. If a third party acquires us through the purchase of all or substantially all of our assets, a merger
or other business combination, all outstanding options or share purchase rights will be assumed or equivalent options or rights
substituted by the successor corporation or parent or subsidiary of the successor corporation. In the event that the successor
corporation refuses to assume or substitute for the options or share purchase rights, all options or share purchase rights will become
fully vested and exercisable immediately prior to such transaction and all unexercised awards will terminate unless, in either case, the
awards are assumed by the successor corporation or its parent.
Changes in Capitalization and Other Adjustments. If we shall at any time increase or decrease the number of outstanding
shares, or change in any way the rights and privileges of our outstanding shares, by means of a payment or a stock dividend or any
other distribution upon such ordinary shares, or through a stock split, subdivision, consolidation, combination, reclassification or
recapitalization involving such ordinary shares, then in relation to the ordinary shares that are covered by the options granted or
available under the plan and are affected by one or more of the above events, the number, rights and privileges shall be increased,
decreased or changed in like manner as if such ordinary shares had been issued and outstanding, fully paid and non-assessable at the
time of such occurrence.
Termination of Plan. Unless terminated earlier, our stock option plan will expire in 2024. Our board of directors has the
authority to amend, alter, suspend or terminate our stock option plan. However, no such action may (i) impair the rights of any
optionee unless agreed by the optionee and the stock option plan administrator, or (ii) affect the stock option plan administrator’s
ability to exercise the powers granted to it under our stock option plan.
C. Board Practices
Board of Directors
Our board of directors consists of the following five directors: Jun Zhu, Cheung Kin Au-Yeung, Chao Y. Wang, Davin
Mackenzie and Ka Keung Yeung. A director is not required to hold any shares in our company by way of qualification. A director
may vote with respect to any contract, proposed contract or arrangement in which he is materially interested so long as he has
disclosed the nature of the interest at a meeting of the directors. A director may exercise all the powers of our company to borrow
money, mortgage its undertaking, property and uncalled capital, and issue debentures or other securities whenever money is borrowed
or as security for any obligation of our company or of any third party.
Committees of the Board of Directors
Audit Committee. Our audit committee consists of Messrs. Chao Y. Wang, Davin A. Mackenzie and Ka Keung Yeung, all
of whom satisfy the “independence” definition under Rule 5605 of the Nasdaq Stock Market, Inc. Marketplace Rules, or the Nasdaq
Rules, and the audit committee independence standard under Rule 10A-3 under the Securities Exchange Act of 1934, as amended, or
the Exchange Act. All the members of our audit committee meet the “financial expert” definition of the Nasdaq Rules.
The audit committee oversees our accounting and financial reporting processes and the audits of the financial statements of
our company. The audit committee is responsible for, among other things:
•
•
selecting the independent auditors and pre-approving all auditing and non-auditing services permitted to be
performed by the independent auditors;
reviewing and approving all proposed related-party transactions;
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•
•
•
•
•
discussing the annual audited financial statements with management and the independent auditors;
annually reviewing and reassessing the adequacy of our audit committee charter;
meeting separately and periodically with management and the independent auditors;
reporting regularly to the full board of directors; and
such other matters that are specifically delegated to our audit committee by our board of directors from time to time.
Compensation Committee. Our compensation committee consists of Messrs. Chao Y. Wang, Davin A. Mackenzie and Ka
Keung Yeung, all of whom meet the “independence” definition under the Nasdaq Rules. The compensation committee assists the
board in reviewing and approving the compensation structure of our executive officers, including all forms of compensation to be
provided to our executive officers. The compensation committee will be responsible for, among other things:
•
•
•
•
•
reviewing and determining the compensation for our five most senior executives;
reviewing the compensation of our other employees and recommending any proposed changes to the management;
reviewing and approving director and officer indemnification and insurance matters;
reviewing and approving any employee loans in an amount equal to or greater than US$60,000 (or such amount as from
time to time announced by the relevant regulatory bodies as requiring the approval of the Committee); and
reviewing periodically and approving any long-term incentive compensation or equity plans, programs or similar
arrangements, annual bonuses, employee pensions and welfare benefits plans.
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 skill they actually possess and such care and diligence 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 memorandum and articles of association.
Terms of Directors
Our board of directors is currently divided into three classes with different terms. This provision would delay the replacement of
a majority of our directors and would make changes to the board of directors more difficult than if such provision were not in place.
The three independent directors were re-elected at our 2009 annual general meeting and each of them is serving a three-year term
until the 2012 annual general meeting or until his successor is duly elected and qualified. Upon expiration of the term of office of
each class, succeeding directors in each class will be elected for a term of three years. Directors may be removed from office by
ordinary resolution of shareholders at any time before the expiration of his/her term.
Pursuant to the natural expiration of the directorial terms, elections for directors would be held on the date of the annual general
meeting of shareholders. We may remove a director from office by ordinary resolution.
Voting Agreement
On November 26, 2004, Incsight and Bosma, our two largest shareholders, entered into a voting agreement with respect to the
election of our board of directors. Both parties have agreed to vote their respective shares to ensure that our board of directors consists
of: (i) one director designated by Incsight, so long as it holds 5% or more of our total outstanding shares, which is currently Jun Zhu;
(ii) one director designated by Bosma, so long as it holds 5% more of our total outstanding shares, which is currently Cheung Kin Au-
Yeung; (iii) two individuals mutually acceptable to Incsight and Bosma, but who are not otherwise affiliated with either of them, our
company or any of our shareholders; and (iv) an additional individual who is not affiliated with either Incsight, Bosma, our company
or any of our shareholders. Both parties agreed to vote to ensure that none of the directors elected pursuant to the voting agreement
shall be removed from office, except for cause or unless by the affirmative vote of both parties. In addition, each of Incsight and
Bosma agrees to elect one or two individuals designated by the other party as directors so long as each of them holds not less than
20% of the total issued shares of our company. The voting agreement shall continue until both parties mutually agree in writing to
terminate it.
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D. Employees
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As of December 31, 2011, we had 876 employees, including 93 in management and administration, 66 in our customer service
centers, 384 in game operations, sales and marketing, and 333 in product development, including supplier management personnel and
technical support personnel. We consider our relations with our employees to be good.
E.
Share Ownership
As of March 16, 2012, there are 28,783,929 ordinary shares outstanding, including 4,319,278 ordinary shares issued to The
Bank of New York Mellon, our ADS depositary, to facilitate our future issuance of ADSs upon the exercise of options under our
share incentive plan.
The following table sets forth information with respect to the beneficial ownership of our ordinary shares as of March 16, 2012
by:
•
•
each of our directors and executive officers who are also our shareholders; and
each person known to us to own beneficially more than 5% of our ordinary shares.
Directors and Executive Officers:
Jun Zhu
(3)
Cheung Kin Au-Yeung
Davin Alexander Mackenzie
Chao Y. Wang
Ka Keung Yeung
George Lai
Swun Woo Park
Chris Shen
Yong Wang
All Directors and Senior Executive Officers as a Group
Principal Shareholders:
Incsight Limited
(5)
Bosma Limited
(6)
CRCM Institutional Master Fund (BVI), Ltd.
(7)
(4)
Ordinary Shares Beneficially Owned
(2)
(1)
Number
%
6,736,934
*
*
*
*
*
*
*
*
7,414,156
5,847,334
4,612,522
3,250,000
23.3%
*
*
*
*
*
*
*
*
25.6%
20.3%
16.0%
11.3%
*
Less than 1% of our total outstanding shares.
(1) Beneficial ownership is determined in accordance with the rules of the SEC, and includes voting or investment power with
respect to the securities. In computing the number of shares beneficially owned by a person and the percentage ownership of that
person, we have included shares that the person has the right to acquire within 60 days of March 16, 2012, including through the
exercise of any option, warrant or other right or the conversion of any other security.
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(2) Percentage of beneficial ownership is based on 28,783,929 ordinary shares outstanding as of March 16, 2012, as well as the
shares underlying share options and warrants exercisable by such person or group within 60 days from March 16, 2012.
(3) Consists of (i) 5,847,334 ordinary shares held by Incsight Limited, a British Virgin Islands company 100% owned by Mr. Zhu,
as jointly reported by Incsight Limited and Jun Zhu and (ii) options to purchase 889,600 shares held by Mr. Zhu The business
address for Mr. Zhu is Building No. 3, 690 Bibo Road, Zhangjiang Hi-Tech Park, Pudong New Area, Shanghai 201203,
People’s Republic of China.
(4)
Includes ordinary shares, ordinary shares issuable upon exercise of options and restricted shares, held by all of our directors and
executive officers as a group.
(5) Ordinary shares held by Incsight Limited, a British Virgin Islands company 100% owned by Jun Zhu, our chairman and chief
executive officer, as jointly reported by Incsight Limited and Jun Zhu. The business address for Incsight Limited is Building
No. 3, 690 Bibo Road, Zhangjiang Hi-Tech Park, Pudong New Area, Shanghai 201203, People’s Republic of China.
(6) Consists of 4,145,065 ordinary shares and 467,457 ADSs held by Bosma Limited, as reported by Bosma Limited on the
Schedule 13G/A filed with the SEC on February 13, 2009. Bosma Limited, a British Virgin Islands corporation, is wholly-
owned by Morningside VC Limited, a British Virgin Islands corporation, which is in turn wholly-owned by The HCB Trust, an
Isle of Man trust, the trustee of which is Dunn Investments Limited, an Isle of Man corporation. Dunn Investments Limited
controls indirectly, through The HCB Trust, a 100% interest in Bosma Limited, and as a result has the sole power to vote and
dispose of the shares of The9 Limited held by Bosma Limited. Dunn Investments Limited is controlled by its board of directors,
consisting of Lorna Irene Cameron and Philip Alvaro Salazar, both of whom expressly disclaim beneficial ownership of the
shares held by Bosma Limited. The address for Bosma Limited is Pasea Estate, Road Town, Tortola, British Virgin Islands.
(7) Consists of 3,250,000 ADSs, each representing one ordinary share of our company, owned by CRCM Institutional Master Fund
(BVI), Ltd., or the Fund, a British Virgin Islands company, as it reported on the Schedule 13G/A filed with the SEC on
February 10, 2012. The Fund’s investment manager with respect to the ADSs held by the Fund is CRCM LP, a Delaware limited
partnership, which in turn has ChinaRock Capital Management Limited, a Hong Kong company limited by shares as its sub-
investment adviser. CRCM LP’s general partner is CRCM LLC, a Delaware limited liability company. Chun R. Ding, a United
States citizen, is the managing partner of CRCM LP, the director of ChinaRock Capital Management Limited and a member of
CRCM LLC, with respect to the ADSs held by the Fund. The address for CRCM is c/o Walkers (BVI) Limited, PO Box 92,
Road Town, Tortola, British Virgin Islands VG1110.
As of March 16, 2012, approximately 65.91% of the issued and outstanding shares were held by the record shareholders in the
United States, including 18,971,530 ADSs, representing 18,971,530 ordinary shares, held by the Bank of New York Mellon, our ADS
depositary.
None of our shareholders has different voting rights from other shareholders as of the date of this annual report. We are
currently not aware of any arrangement that may, at a subsequent date, result in a change of control of our company.
Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
Please refer to “Item 6. Directors, Senior Management and Employees—E. Share Ownership.”
B. Related Party Transactions
Arrangements with Affiliated PRC Entities
Current PRC laws and regulations impose substantial restrictions on foreign ownership of entities involved in ICP, Internet
culture operation, Internet publishing businesses and advertising in China, which include online game operations. Therefore, we
conduct part of our activities through a series of agreements with Shanghai IT. Shanghai IT holds the requisite licenses and approvals
for conducting ICP, Internet culture operation and Internet publishing businesses in China. Huopu Cloud holds certain assets and
operates certain businesses. Shanghai IT is owned by Yong Wang, our vice president, and Wei Ji, one of our employees. Shanghai
Jiucheng Advertisement, which is wholly-owned by Shanghai IT, holds the requisite business license for an advertising entity in
China. Huopu Cloud is owned by Junping Han, our senior legal director, and Wei Xiong, our finance director.
We have obtained the exclusive right to benefit from Shanghai IT’s licenses and approvals. In addition, through a series of
contractual arrangements with Shanghai IT, Shanghai Jiucheng Advertisement, Huopu Cloud and their respective shareholders, we
are able to direct and control the operation and management of Shanghai IT, Shanghai Jiucheng Advertisement and Huopu Cloud. We
believe that the individual shareholders of Shanghai IT, Shanghai Jiucheng Advertisement and Huopu Cloud will not receive material
personal benefits from these agreements except as shareholders or employees of The9 Limited.
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We do not believe we could have obtained these agreements, taken as a whole, from unrelated third parties. Because of the
uncertainty relating to the legal and regulatory environment in China, the terms of most of the agreements were not defined unless
terminated by the parties thereto. According to our PRC counsel, Fangda Partners, subject to the interpretation and implementation of
the GAPP Circular, these agreements, except those that have already been terminated, are valid, binding and enforceable under the
current laws and regulations of China. The principal provisions of these agreements are described below.
Domain Name License Agreement. We granted Shanghai IT the right to use the domain name www.the9.com for its hosting of
the9 City and its provision of Internet content in China. The relevant license agreement was terminated when we transferred the
domain name to Shanghai IT.
Exclusive Technical Service Agreement. We provide Shanghai IT and Huopu Cloud with technical services for the operation of
computer software and related businesses, including the provision of systematic solutions for the operation of Internet websites, the
rental of computer and Internet facilities, daily maintenance of Internet servers and databases, the development and update of relevant
computer software, and all other related technical and consulting services. Shanghai IT and Huopu Cloud pay service fees to us based
on their actual operating results. We are the exclusive provider of these services to Shanghai IT and Huopu Cloud.
Shareholder Voting Proxy Agreements. Each of the shareholders of Shanghai IT and Huopu Cloud has entered into a
Shareholder Voting Proxy Agreement with us, under which each shareholder of Shanghai IT and Huopu Cloud irrevocably grants us
the power to exercise all voting rights to which he/she is entitled as a shareholder of Shanghai IT and Huopu Cloud. We have also
entered into a similar agreement with the shareholder of Shanghai Jiucheng Advertisement.
Call Option Agreements. We entered into a call option agreement with each of the shareholders of Shanghai IT and Huopu
Cloud, under which the parties irrevocably agreed that, at our sole discretion, we and/or any third parties designated by us will be
entitled to acquire all or part of the equity interests in Shanghai IT and Huopu Cloud, to the extent permitted by the then-effective
PRC laws and regulations. The consideration for such acquisition will be the minimum amount permitted by applicable PRC law. The
shareholders of Shanghai IT have also agreed not to enter into any transaction, or fail to take any action, that would substantially
affect the assets, liabilities, equity or operations of Shanghai IT and Huopu Cloud without our prior written consent. We and the
shareholder of Shanghai Jiucheng Advertisement have entered into a similar call option agreement.
Loan Agreements. From 2002 to May 2005, we provided an aggregate of RMB23.0 million in loan to the then shareholders of
Shanghai IT for the purposes of capitalizing and increasing the registered capital of Shanghai IT. Such loan agreement was assumed
by the current shareholders of Shanghai IT when Jun Zhu transferred the equity interest in Shanghai IT to Wei Ji in 2011. In
December 2010, we provided an aggregate of RMB50.0 million loan to the shareholders of Huopu Cloud, for the purposes of
capitalizing the registered capital of Huopu Cloud. Such loan shall become immediately due and payable when we send a written
notice to the borrowers requesting repayment. Currently, Yong Wang and Wei Ji have pledged all of their equity interests in Shanghai
IT in favor of us under an equity pledge agreement. Junping Han and Wei Xiong have pledged all of their equity interests in Huopu
Cloud in favor of us under an equity pledge agreement. In the event of a breach of any term in the loan agreement or any other
agreement by either Shanghai IT, Huopu Cloud or its shareholders, we will be entitled to enforce our rights as a pledgee under the
agreement. We and the shareholder of Shanghai Jiucheng Advertisement have entered into a similar loan agreement.
Equity Pledge Agreements. To secure the full performance by Shanghai IT, Huopu Cloud or its shareholders of their respective
obligations under the Exclusive Technical Service Agreement, the Shareholder Voting Proxy Agreement, the Call Option Agreement
and the Loan Agreement, the shareholders of Shanghai IT and Huopu Cloud have pledged all of their equity interests in Shanghai IT
and Huopu Cloud, respectively, in favor of us under an equity pledge agreement. Each of the shareholders of Shanghai IT and Huopu
Cloud has registered the pledge of its equity interests with the relevant local administration for industry and commerce pursuant to the
new PRC Property Rights Law. In the event of a breach of any term in the above agreements by either Shanghai IT, Huopu Cloud or
its shareholders, we will be entitled to enforce our pledge rights over such pledged equity interests to compensate for any and all
losses suffered from such breach. A similar equity pledge agreement was also entered into by and between us and the individual
shareholder of Shanghai Jiucheng Advertisement.
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Investments or Agreements entered into with Affiliated Entities
In July 2006, we invested US$2 million in Infocomm Asia Holdings Pte Ltd., or IAH, which represented an 11.4% equity
interest in IAH on an “as converted” basis. The convertible and redeemable preferred shares are debt securities and are recorded as
available-for-sale investment. In April 2009, we loaned a total of US$1.0 million to IAH for the purpose of increasing IAH’s working
capital. In late 2009, IAH went into serious financial difficulty, causing a significant decline in the fair value of our investment in
IAH. We wrote off our investment in IAH accordingly. In June 2010, we sold the investment in IAH, including preferred shares and
convertible loan to a third party with total proceeds of US$1 million.
The9 Computer, Shanghai IT and 9Webzen Limited (Shanghai), or 9Webzen Shanghai, a company partially-owned by us, have
entered into a series of agreements in connection with operating a game in China and providing services to customers jointly. The9
Computer and Shanghai IT share revenue from 9Webzen Shanghai according to the jointly services agreements. The share of revenue
from 9Webzen Shanghai amounted to RMB0.5 million for the year ended December 31, 2009. The amounts due from 9Webzen
Shanghai amounted to RMB1.1 million as of December 31, 2009. In 2010, due to a prolonged uncertainty on the recoverability of the
amount due from 9Webzen Shanghai, we have stopped recognizing revenue pursuant to the agreements with 9Webzen Shanghai since
2010 and we have made full impairments on the RMB1.3 million that was due from 9Webzen Shanghai as of December 31, 2010.
In January 2012, we entered into a cooperative agreement with Shanghai Shenhua Liansheng Football Club Co., Ltd., or
Shenhua, for endorsing and promoting Firefall for a term of two years. Mr. Zhu Jun, our chairman and chief executive officer and one
of our principal shareholders, is one of the major shareholders of Shenhua. Under the agreement, Shenhua players will wear jerseys
bearing the name and logo of Firefall in all domestic and international soccer games and also make appearances at press conferences
and product promotion and sales initiatives for Firefall and participate in other activities for promoting Firefall. The9 will pay
Shenhua RMB32 million (US$5.1 million) for the promotion services. In addition, we entered into an endorsement agreement with
Nicolas Anelka, a famous soccer player newly joining Shenhua, for worldwide endorsement and promotion of Firefall for a
consideration of EUR2.7 million.
Stock Option Grants
See “Item 6. Directors, Senior Management and Employees — B. Compensation of Directors and Executive Officers — Share
Incentive Plan — Amended 2004 Stock Option Plan.”
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.
Legal Proceedings
In February 2010, Beijing Superior Court issued a judgment against us in a lawsuit filed by Beijing Founder Electronics Co.,
Ltd., which ruled that WoW client installation packages sold by us in 2007 contained fonts that infringed Beijing Founder Electronics
Co., Ltd.’s intellectual property rights. Based on the judgment, we are required to compensate Beijing Founder Electronics Co., Ltd.
an aggregate amount of RMB1.57 million (US$239,500). In February 2010, we appealed the judgment and the case is pending.
On May 11, 2011, Diego Maradona, a former Argentina soccer star, filed a lawsuit against Shanghai IT and Beijing Sina
Interactive Information Service Co. Ltd. as defendants. On July 11, 2011, the plaintiff amended his complaint to include The9
Computer Technology Consulting (Shanghai) Co., Ltd. as a defendant. The plaintiff claimed that the defendants infringed his right by
using his name and photos on our game “Winning Goal” without his authorization. Based on this allegation, the plaintiff claimed a
sum of RMB20 million in damages. The case is currently pending for trial. We expect to vigorously defend ourselves in this legal
proceeding.
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In May 2009, Shanghai IT filed a lawsuit against Blizzard Entertainment, Inc. or Blizzard, and its subsidiary, Blizzard Software
Development (Shanghai) Ltd., or Blizzard Software, in Shanghai No. 1 Intermediate People’s Court for unfair competition. In June
2009, we and certain of our affiliates and subsidiaries filed a lawsuit against Blizzard and Blizzard Software in Shanghai No. 1
Intermediate People’s Court for pre-contractual liability. In March 2010, we filed a lawsuit against Blizzard and Blizzard Software in
Shanghai No. 1 Intermediate People’s Court for business secret infringement. In May 2011, we and all other parties to the lawsuits
signed a settlement agreement, pursuant to which the parties resolved the disputes in an amicable way and all three cases were
withdrawn.
On October 21, 2009, a securities class action lawsuit, entitled Glaser v. The9 Ltd. et al., Case No. 09-Civ-8904 was filed in the
United States District Court for the Southern District of New York against us in connection with the non-renewal of the WoW license
agreement with Blizzard Entertainment, Inc. The plaintiffs in this case allege that the defendants misrepresented or failed to make
material disclosures regarding the likelihood that we would be renewing the WoW license agreement with Blizzard Entertainment,
Inc. The plaintiffs allege federal securities law violations and seek unspecified damages. On November 4, 2009, an additional
securities class action lawsuit, entitled O’Dea v. The9 Ltd. et al., Case No. 09-Civ-9166 was filed in the United States District Court
for the Southern District of New York against the same defendants with substantially the same allegations. The court consolidated
these complaints into a single action on February 2, 2010, and the consolidated complaint was filed on March 19, 2010. On May 20,
2011, the court dismissed the plaintiffs’ lawsuit with prejudice.
Other than the foregoing, we are not currently a party to any material litigation or other legal proceeding and are not aware of
any pending or threatened litigation or other legal proceeding that may have a material adverse impact on our business, financial
condition and results of operations.
Dividend Policy
We announced a special cash dividend on January 21, 2009 in an aggregate amount of US$29.4 million, or approximately of
US$1.11 per share on our ordinary shares, based on the number of shares outstanding on the date thereof. The special cash dividend
was paid on February 5, 2009 to shareholders of record as of the close of business on February 2, 2009. We currently intend to retain
most, if not all, of our available funds and any future earnings for use in the operation and expansion of our business.
We rely on dividends and other fees paid to us by our subsidiaries and affiliated entities in China. In accordance with current
PRC laws, regulations and accounting standards, our subsidiaries and affiliated entities in China are required to allocate to their
general reserves at least 10% of their respective after-tax profits. Appropriations to these reserves are not required after these reserves
have reached 50% of the registered capital of the respective companies. In addition, at the discretion of their respective board of
directors or shareholders, our subsidiaries and affiliated entities in China shall allocate a portion of their respective after-tax profits to
their staff welfare and bonus funds or discretionary surplus reserve. Staff welfare and bonus reserve funds may not be distributed to
equity owners.
Our board of directors has complete discretion as to whether we will distribute dividends in the future. Even if our board of
directors determines to distribute dividends, the form, frequency and amount of our dividends will depend upon our future operations
and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors as the board of
directors may deem relevant. Any dividend we declare will be paid to the holders of ADSs, subject to the terms of the deposit
agreement, to the same extent as holders of our ordinary shares, less the fees and expenses payable under the deposit agreement. Any
dividend we declare will be distributed by the depositary bank to the holders of our ADSs. Cash dividends on our ordinary shares, if
any, will be paid in U.S. dollars.
B.
Significant Changes
Except as otherwise disclosed in this annual report, we have not experienced any significant changes since the date of our
audited consolidated financial statements included in this annual report.
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Item 9.
THE OFFER AND LISTING
A. Offering and Listing Details
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Our ADSs, each representing one ordinary share, have been listed on the Nasdaq Global Market since December 15, 2004. Our
ADSs are traded under the symbol “NCTY.”
The following table provides the high and low trading prices for our ADSs on the Nasdaq Global Market for the periods
specified.
Annual High and Low
2007
2008
2009
2010
2011
Quarterly High and Low
First Quarter 2010
Second Quarter 2010
Third Quarter 2010
Fourth Quarter 2010
First Quarter 2011
Second Quarter 2011
Third Quarter 2011
Fourth Quarter 2011
Monthly High and Low
September 2011
October 2011
November 2011
December 2011
January 2012
February 2012
March 2012 (through March 16, 2012)
Sales Price
High
Low
52.44
28.50
16.64
8.66
8.49
8.66
7.33
5.78
7.10
8.49
7.70
6.30
8.28
4.88
5.69
6.24
8.28
7.54
7.98
7.59
19.56
9.97
6.28
3.70
2.90
6.35
3.70
3.75
5.04
6.03
4.85
3.48
2.90
3.48
2.90
4.17
5.88
6.69
6.80
6.81
B.
Plan of Distribution
Not applicable.
C. Markets
Our ADSs, each representing one ordinary share, have been listed on the Nasdaq Global Market since December 15, 2004 under
the symbol “NCTY.”
D.
Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F.
Expenses of the Issue
Not applicable.
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Item 10. ADDITIONAL INFORMATION
A.
Share Capital
Not applicable.
B. Memorandum and Articles of Association
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We are a Cayman Islands company and our affairs are governed by our memorandum and articles of association and the
Companies Law (2011 Revision) of the Cayman Islands, which is referred to as the Companies Law below.
As of the date of this annual report, our authorized share capital is US$2,500,000, consisting of 250,000,000 ordinary shares, par
value of US$0.01 each. The following are summaries of material provisions of our currently effective amended and restated
memorandum and articles of association and the Companies Law insofar as they relate to the material terms of our ordinary shares.
Ordinary Shares
General. All of our outstanding ordinary shares are fully paid and non-assessable. Certificates representing the ordinary shares
are issued in registered form. Our shareholders may freely hold and vote their shares.
Dividends. The holders of our ordinary shares are entitled to such dividends as may be declared by our board of directors subject
to the Companies Law.
Voting Rights. Each ordinary share is entitled to one vote on all matters upon which the ordinary shares are entitled to vote.
Voting at any meeting of shareholders is by show of hands unless a poll is demanded. A poll may be demanded by any shareholder or
shareholders together holding at least ten percent of the shares given a right to vote at the meeting, present in person or by proxy.
A quorum required for a meeting of shareholders consists of holders of not less than one-third of all outstanding shares entitled
to vote. Shareholders’ meetings shall, if required by the Companies Law, be held annually. Annual general meetings and
extraordinary general meetings may be convened by our board of directors on its own initiative. Extraordinary general meetings shall
be convened by our board of directors upon a request to the directors by shareholders holding in aggregate at least 33% of our voting
share capital. Advance notice of at least seven business days is required for the convening of our annual general meeting and other
shareholders meetings.
An ordinary resolution to be passed by the shareholders requires the affirmative vote of a simple majority of the votes attaching
to the ordinary shares cast in a general meeting, while a special resolution requires the affirmative vote of no less than two-thirds of
the votes attaching to the ordinary shares cast in a general meeting and includes a unanimous written resolution expressly passed as a
special resolution. A special resolution is required for important matters such as a change of name, a decrease of our share capital, or
amending the memorandum and articles of association. Holders of the ordinary shares may effect certain changes by ordinary
resolution, including an increase of our share capital, the consolidation and division of all or any of our share capital into shares of a
larger amount than our existing share capital, and the cancellation of any shares.
Transfer of Shares. Subject to the restrictions of our articles of association, as applicable, any of our shareholders may transfer
all or any of his or her ordinary shares by an instrument of transfer in the usual or common form or any other form approved by our
board. The transferor shall be deemed to remain the holder of the shares until the name of the transferee is entered in the register of
members in respect thereof.
Liquidation. On a return of capital on winding up or otherwise (other than on conversion, redemption or purchase of shares),
assets available for distribution among the holders of ordinary shares shall be distributed among the holders of the ordinary shares as
the liquidator deems fair. If our assets available for distribution are insufficient to repay all of the paid-up capital, the assets will be
distributed so that the losses are borne by our shareholders proportionately.
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Calls on Shares and Forfeiture of Shares. Our board of directors may from time to time make calls upon shareholders for any
amounts unpaid on their shares in a notice served to such shareholders at least 14 days prior to the specified time and place of
payment. The shares that have been called upon and remain unpaid on the specified time are subject to forfeiture.
Redemption of Shares. Subject to the provisions of the Companies Law and our articles of association, we may issue shares on
terms that are subject to redemption, at our option or at the option of the holders, on such terms and in such manner as may be
determined by our board of directors.
Variation of Rights of Shares. All or any of the special rights attached to any class of shares may, subject to the provisions of
the Companies Law, be varied either with the written consent of a majority of the issued shares of that class or with the sanction of an
ordinary resolution passed at a general meeting of the holders of the shares of that class.
Inspection of Books and Records. Holders of our ordinary shares will have no general right under Cayman Islands law to
inspect or obtain copies of our list of shareholders or our corporate records. However, we will provide our shareholders with annual
audited financial statements. See “— H. Documents on Display.”
Differences in Corporate Law
The Companies Law is modeled after that of English law but does not follow recent English law statutory enactments. In
addition, the Companies Law differs from laws applicable to Delaware 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
Delaware corporations and their shareholders.
Mergers and Similar Arrangements. The Companies Law permits mergers and consolidations between Cayman Islands
companies and between Cayman Islands companies and non-Cayman Islands companies. For these purposes:
•
•
a “merger” means the merging of two or more constituent companies and the vesting of their undertaking, property and
liabilities in one of such companies as the surviving company; and
a “consolidation” means the combination of two or more constituent companies into a consolidated company and the
vesting of the undertaking, property and liabilities of such companies to the consolidated company.
In order to effect such a merger or consolidation, the directors of each constituent company must approve a written plan of
merger or consolidation, which must then be authorized by either:
•
•
a special resolution of the shareholders of each constituent company; or
such other authorizations, if any, as may be specified in such constituent company’s articles of association.
The plan of merger or consolidation must be filed with the Registrar of Companies together with a declaration as to the solvency
of the consolidated or surviving company, a list of the assets and liabilities of each constituent company and an undertaking that a
copy of the certificate of merger or consolidation will be given to the members and creditors of each constituent company that
notification of the merger or consolidation will be published in the Cayman Islands Gazette. Dissenting shareholders have the right to
be paid the fair value of their shares if they follow the required procedures, subject to certain exceptions. The fair value of the shares
will be determined by the Cayman Islands court if it cannot be agreed among the parties. Court approval is not required for a merger
or consolidation which is effected in compliance with these statutory procedures.
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 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 majority vote have been met;
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•
•
•
the shareholders have been fairly represented at the meeting in question;
the arrangement is such that a businessman would reasonably approve; and
the arrangement is not one that would more properly be sanctioned under some other provision of the Companies Law.
When a take-over offer is made and accepted by holders of 90.0% of the shares affected within four months, the offerer may,
within a two 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 unless there is evidence of fraud, bad faith or
collusion.
If the 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. The Cayman Islands courts can be expected to follow English case law precedents. The Cayman Islands
courts can be expected to apply and follow common law principles (namely the rule in Foss v Harbottle and the exceptions thereto)
that permit a minority shareholder to commence a class action against the company or a derivative action in the name of the company
to challenge (1) an act that is outside the company’s corporate powers or that is illegal, (2) an act constituting a fraud against the
minority shareholders where the wrongdoers are themselves in control of the company, and (3) an action requiring a resolution passed
by a qualified or special majority that has not been obtained.
Directors’ Fiduciary Duties. Under Delaware corporate law, a director of a Delaware corporation has a fiduciary duty to the
corporation and its shareholders. This duty has two components: the duty of care and the duty of loyalty. The duty of care requires
that a director act in good faith, with the care that an ordinarily prudent person would exercise under similar circumstances. Under
this duty, a director must inform himself of, and disclose to shareholders, all material information reasonably available regarding a
significant transaction. The duty of loyalty requires that a director act in a manner he reasonably believes to be in the best interests of
the corporation, He must not use his corporate position for personal gain or advantage. This duty prohibits self-dealing by a director
and mandates that the best interest of the corporation and its shareholders take precedence over any interest possessed by a director,
officer or controlling shareholder and not shared by the shareholders generally. In general, actions of a director are presumed to have
been made on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the
corporation. However, this presumption may be rebutted by evidence of a breach of one of the fiduciary duties. Should such evidence
be presented concerning a transaction by a director, a director must prove the procedural fairness of the transaction, and that the
transaction was of fair value to the corporation.
As a matter of Cayman Islands law, a director of a Cayman Islands company is in the position of a fiduciary with respect to the
company and therefore it is considered that he owes the following duties to the company — a duty to act bona fide in the best
interests of the company, a duty not to make a profit out of his position as director (unless the company permits him to do so) and a
duty not to put himself in a position where the interests of the company conflict with his personal interest or his duty to a third party.
A director of a Cayman Islands company owes to the company a duty to act with skill and care. It was previously considered that a
director need not Exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of
his knowledge and experience. However, there are indications that the English and Commonwealth courts are moving towards an
objective standard with regard to the required skill and care and these authorities are likely to be followed in the Cayman Islands.
Shareholder Action by Written Consent. Under the Delaware General Corporation Law, a corporation may eliminate the right
of shareholders to act by written consent by amendment to its certificate of incorporation. Cayman Islands law and our articles of
association provide that shareholders may approve corporate matters by way of written resolution signed by or on behalf of each
shareholder who would have been entitled to vote on such matter at a general meeting without a meeting being held.
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Shareholder Proposals. Under the Delaware General Corporation Law, a shareholder has the right to put any proposal before
the annual meeting of shareholders, provided it complies with the notice provisions in the governing documents. A special meeting
may be called by the board of directors or any other person authorized to do so in the governing documents, but shareholders may be
precluded from calling special meetings. Cayman Islands law and our articles of association allow our shareholders holding not less
than 33 per cent of the paid up voting share capital of the company to requisition a shareholder’s meeting.
Cumulative Voting. Under the Delaware General Corporation Law, cumulative voting for elections of directors is not permitted
unless the corporation’s certificate of incorporation specifically provides for it. Cumulative voting potentially facilitates the
representation of minority shareholders on a board of directors since it permits the minority shareholder to cast all the votes to which
the shareholder is entitled on a single director, which increases the shareholder’s voting power with respect to electing such director.
As permitted under Cayman Islands law, our articles of association do not provide for cumulative voting.
Removal of Directors. Under the Delaware General Corporation Law, a director of a corporation may be removed with the
approval of a majority of the outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise. Under our
articles of association, directors can be removed with or without cause, but only by the vote of a majority of the holders of our shares
voting at a meeting or the unanimous written resolution of all shareholders.
Transactions with Interested Shareholders. The Delaware General Corporation Law contains a business combination statute
applicable to Delaware public corporations whereby, unless the corporation has specifically elected not to be governed by such statute
by amendment to its certificate of incorporation, it is prohibited from engaging in certain business combinations with an “interested
shareholder” for three years following the date that such person becomes an interested shareholder. An interested shareholder
generally is a person or group who or which owns or owned 15% or more of the target’s outstanding voting stock within the past three
years. This has the effect of limiting the ability of a potential acquiror to make a two-tiered bid for the target in which all shareholders
would not be treated equally. The statute does not apply if, among other things, prior to the date on which such shareholder becomes
an interested shareholder, the board of directors approves either the business combination or the transaction which resulted in the
person becoming an interested shareholder. This encourages any potential acquiror of a Delaware public corporation to negotiate the
terms of any acquisition transaction with the target’s board of directors.
Cayman Islands law has no comparable statute. As a result, we cannot avail ourselves of the types of protections afforded by the
Delaware business combination statute. However, although Cayman Islands law does not regulate transactions between a company
and its significant shareholders, it does provide that such transactions must be entered into bona fide in the best interests of the
company and not with the effect of constituting a fraud on the minority shareholders.
Dissolution; Winding Up. Under the Delaware General Corporation Law, unless the board of directors approves the proposal to
dissolve, dissolution must be approved by shareholders holding 100% of the total voting power of the corporation. Only if the
dissolution is initiated by the board of directors may it be approved by a simple majority of the corporation’s outstanding shares.
Delaware law allows a Delaware corporation to include in its certificate of incorporation a supermajority voting requirement in
connection with dissolutions initiated by the board. Under the Companies Law, our company may be dissolved, liquidated or wound
up only by a special resolution, or by an ordinary resolution on the basis that our company is unable to pay its debts as they fall due.
Variation of Rights of Shares. Under the Delaware General Corporation Law, a corporation may vary the rights of a class of
shares with the approval of a majority of the outstanding shares of such class, unless the certificate of incorporation provides
otherwise. Under our articles of association, if our share capital is divided into more than one class of shares, we may vary the rights
attached to any class only with the written consent of the holders of at least a majority of the shares of such class or with the sanction
of a resolution passed by at least a majority of the holders of such class present in person or by proxy at a separate general meeting of
the holders of the shares of that class.
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Amendment of Governing Documents. Under the Delaware General Corporation Law, a corporation’s governing documents
may be amended with the approval of a majority of the outstanding shares entitled to vote, unless the certificate of incorporation
provides otherwise. As permitted by Cayman Islands law, our memorandum and articles of association may be amended with the vote of
at least two-third holders of our shares at a meeting or the unanimous written resolution of all shareholders.
Anti-Takeover Provisions in Memorandum and Articles of Association. Some provisions of the memorandum and articles
of association may discourage, delay or prevent a change in control of our company or management that shareholders may consider
favorable, including provisions that:
•
•
authorize our board of directors to issue preference shares in one or more series and to designate the price, rights,
preferences, privileges and restrictions of such preference shares without any further vote or action by our
shareholders; and
create a classified board of directors pursuant to which our directors are elected for staggered terms, which means that
shareholders can only elect, or remove, a limited number of directors in any given year.
However, under Cayman Islands law, our directors may only exercise the rights and powers granted to them under our
memorandum and articles of association for a proper purpose and for what they believe in good faith to be in the best interests of our
company.
Rights of Non-Resident or Foreign Shareholders. There are no limitations imposed by foreign law or by our memorandum
and articles of association on the rights of non-resident or foreign shareholders to hold or exercise voting rights on our shares. In
addition, there are no provisions in our Memorandum and articles of association governing the ownership threshold above which
shareholder ownership must be disclosed.
Inspection of Books and Records. Under the Delaware General Corporation Law, any shareholder of a corporation may for
any proper purpose inspect or make copies of the corporation’s stock ledger, list of shareholders and other books and records. Holders of
our shares will have no general right under Cayman Islands law to inspect or obtain copies of our list of shareholders or corporate
records. However, we will provide our shareholders with annual audited financial statements.
Shareholder Rights Plan
On January 8, 2009, our board of directors declared a dividend of one ordinary share purchase right, or a Right, for each of
our ordinary shares outstanding at the close of business on January 22, 2009. See “Item 14. Material Modifications to the Rights of
Security Holders and Use of Proceeds.”
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” or elsewhere in this annual report.
D.
Exchange Controls
China’s government imposes control over the convertibility of the RMB into foreign currencies. The conversion of RMB into
foreign currencies, including U.S. dollars, has been based on rates announced by the PBOC. On July 21, 2005, the PRC government
changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi is permitted
to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in an
approximately more than 30% appreciation of the RMB against the U.S. dollar since the introduction of new policy. While the
international reaction to the RMB revaluation has generally been positive, there remains significant international pressure on the PRC
government to adopt an even more flexible currency policy, which could result in a further and more significant appreciation of the
RMB against the U.S. dollar.
Pursuant to the Foreign Exchange Control Regulations issued by the State Council on January 29, 1996, and effective as of
April 1, 1996 (and amended on January 14, 1997 and August 5, 2008) and the Administration of Settlement, Sale and Payment of
Foreign Exchange Regulations which came into effect on July 1, 1996 regarding foreign exchange control, or the Regulations,
conversion of RMB into foreign exchange by foreign investment enterprises for current account items, including the distribution of
dividends and profits to foreign investors of foreign invested enterprises, is typically permissible. Foreign investment enterprises are
permitted to remit foreign exchange from their foreign exchange bank account in China on the basis of, inter alia, the terms of the
relevant joint venture contracts, articles of association, and the board resolutions declaring the distribution of the dividend and payment
of profits. On January 14, 1997, the State Council amended the Foreign Exchange Control Regulations and added, among other things,
an important provision, as Article 5 provides that the state shall not impose restrictions on recurring international current account
payments and transfers. Conversion of RMB into foreign currencies and remittance of foreign currencies for capital account items,
including direct investment, loans and security investment, is still subject to the approval of SAFE, in each such transaction.
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Under the Regulations, foreign investment enterprises are required to open and maintain separate foreign exchange
accounts for capital account items (but not for other items). In addition, foreign investment enterprises may only buy, sell and/or remit
foreign currencies at those banks authorized to conduct foreign exchange business upon the production of valid commercial
documents and, in some cases, such as capital account item transactions, document approval from SAFE.
Currently, foreign investment enterprises are required to apply to SAFE for “foreign exchange registration certificates for
foreign investment enterprises” (which are granted to foreign investment enterprises, upon fulfilling specified conditions and which
are subject to review and renewal by SAFE on an annual basis). Usually, with such foreign exchange registration certificates and
required underlying transaction documents, or with approval documents from the SAFE if the transactions are under capital account
(which are obtained on a transaction-by-transaction basis), foreign-invested enterprises may enter into foreign exchange transactions
at banks authorized to conduct foreign exchange business to obtain foreign exchange for their needs.
E.
Taxation
The following summary of the material Cayman Islands and United States federal income tax consequences of an
investment in our ADSs or ordinary shares is based upon laws and relevant interpretations thereof in effect as of the date of this
annual report, all of which are subject to change. This summary does not deal with all possible tax consequences relating to an
investment in our ADSs or ordinary shares, such as the tax consequences under state, local and other tax laws.
Cayman Islands Taxation
In the opinion of our Cayman Islands counsel, Maples and Calder, the Cayman Islands currently levies no taxes on
individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax
or estate duty. No Cayman Islands stamp duty will be payable unless an instrument is executed in, brought to, or produced before a
court of the Cayman Islands. The Cayman Islands is not party to any double tax treaties which are applicable to payments made to or
by our company. There are no exchange control regulations or currency restrictions in the Cayman Islands.
United States Federal Income Taxation
The following discussion describes the material U.S. federal income tax consequences to U.S. Holders (as defined below)
under current law of an investment in the ADSs or ordinary shares. This discussion applies only to U.S. Holders that hold the ADSs
or ordinary shares as capital assets (generally, property held for investment) and have the U.S. dollar as their functional currency. This
discussion is based on the tax laws of the United States in effect as of the date of this annual report and on U.S. Treasury regulations
in effect or, in some cases, proposed as of the date of this annual report, as well as judicial and administrative interpretations thereof
available on or before such date. All of the foregoing authorities are subject to change, which change could apply retroactively and
could affect the tax consequences described below.
The following discussion does not deal with the tax consequences to any particular investor or to persons in special tax
situations such as:
•
•
banks and other financial institutions;
insurance companies;
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•
•
•
•
•
•
•
•
•
•
•
regulated investment companies;
real estate investment trusts;
broker-dealers;
traders that elect to use a mark-to-market method of accounting;
U.S. expatriates;
tax-exempt entities;
persons liable for alternative minimum tax;
persons holding an ADS or ordinary share as part of a straddle, hedging, conversion or integrated transaction;
persons that actually or constructively own 10% or more of the total combined voting power of all classes of our
voting stock;
partnerships or other pass-through entities, or persons holding ADSs or ordinary shares through such entities; or
persons who acquired ADSs or ordinary shares pursuant to the exercise of any employee share option or otherwise
as compensation.
INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING THE APPLICATION OF THE U.S.
FEDERAL TAX RULES TO THEIR PARTICULAR CIRCUMSTANCES AS WELL AS THE STATE, LOCAL, NON-U.S.
AND OTHER TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF ADSs OR
ORDINARY SHARES.
The discussion below of the U.S. federal income tax consequences to “U.S. Holders” will apply to you if you are a
beneficial owner of ADSs or ordinary shares and you are, for U.S. federal income tax purposes:
an individual who is a citizen or resident of the United States;
•
•
•
•
a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) organized under the
laws of the United States, any State thereof or the District of Columbia;
an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or
a trust that (1) is subject to the primary supervision of a court within the United States and the control of one or
more U.S. persons for all substantial decisions or (2) has a valid election in effect under applicable U.S. Treasury
regulations to be treated as a U.S. person.
If a partnership (or other entity taxable as a partnership for U.S. federal income tax purposes) is a beneficial owner of our
ADSs or ordinary shares, the tax treatment of a partner in such partnership will depend on the status of such partner and the activities
of such partnership.
The discussion below assumes that the representations contained in the deposit agreement are true and that the obligations
in the deposit agreement and any related agreement have been and will be complied with in accordance with their terms. If you hold
ADSs, you should be treated as the holder of the underlying ordinary shares represented by those ADSs for U.S. federal income tax
purposes.
The U.S. Treasury has expressed concerns that intermediaries in the chain of ownership between the holder of an ADS and
the issuer of the security underlying the ADS may be taking actions that are inconsistent with the beneficial ownership of the
underlying security (for example, pre-releasing ADSs to persons that do not have beneficial ownership of the securities underlying the
ADSs). Accordingly, the creditability of any foreign tax credits or the availability of the reduced tax rate for dividends received by
certain non-corporate U.S. Holders, including individual U.S. Holders (as discussed below), could be affected by actions taken by
intermediaries in the chain of ownership between the holders of ADSs and our company if as a result of such actions the holders of
ADSs are not properly treated as beneficial owners of underlying ordinary shares.
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Passive Foreign Investment Company
Based on the market price of our ADSs and the value and composition of our assets, we believe we were a passive foreign
investment company, or PFIC, for U.S. federal income tax purposes for the taxable year ended December 31, 2011. A non-U.S.
corporation will be a PFIC for any taxable year if either:
•
•
at least 75% of its gross income for such year is passive income; or
at least 50% of the value of its assets (based on an average of the quarterly values of the assets) during such year is
attributable to assets that produce passive income or are held for the production of passive income (the “asset test”).
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. In applying this rule, however, it is not
clear whether the contractual arrangements between us and our affiliated entities will be treated as ownership of stock.
We must make a separate determination after the close of each taxable year as to whether we were a PFIC for that year.
Because the value of our assets for purposes of the asset test generally will be determined by reference to the market price of our
ADSs or ordinary shares, our PFIC status will depend in large part on the market price of our ADSs or ordinary shares, which may
fluctuate significantly. Based on the market price of our ADSs and our retention of a significant amount of cash during the taxable
year ended December 31, 2011, we believe we were a PFIC for such year.
If we are a PFIC for any taxable year during which you hold ADSs or ordinary shares, we generally will continue to be
treated as a PFIC with respect to you for all succeeding years during which you hold ADSs or ordinary shares, unless we cease to be a
PFIC and you make a “deemed sale” election with respect to the ADSs or ordinary shares, as applicable. If such election is made, you
will be deemed to have sold the ADSs or ordinary shares you hold at their fair market value and any gain from such deemed sale
would be subject to the rules described in the following two paragraphs. After the deemed sale election, so long as we do not become
a PFIC in a subsequent taxable year, your ADSs or ordinary shares with respect to which such election was made will not be treated
as shares in a PFIC and you will not be subject to the rules described below with respect to any “excess distribution” you receive from
us or any gain from an actual sale or other disposition of the ADSs or ordinary shares. You are strongly urged to consult your tax
advisors as to the possibility and consequences of making a deemed sale election if we cease to be a PFIC and such election
becomes available to you.
For each taxable year that we are treated as a PFIC with respect to you, you will be subject to special tax rules with respect
to any “excess distribution” you receive and any gain you recognize from a sale or other disposition (including a pledge) of the ADSs
or ordinary shares, unless you make a “mark-to-market” election as discussed below. Distributions you receive in a taxable year that
are greater than 125% of the average annual distributions you received during the shorter of the three preceding taxable years or your
holding period for the ADSs or ordinary shares will be treated as an excess distribution. Under these special tax rules, if you receive
any excess distribution or recognize any gain from a sale or other disposition of the ADSs or ordinary shares:
•
•
the excess distribution or recognized gain will be allocated ratably over your holding period for the ADSs or
ordinary shares;
the amount allocated to the current taxable year, and any taxable years in your holding period prior to the first
taxable year in which we were a PFIC, will be treated as ordinary income; and
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•
the amount allocated to each other taxable year will be subject to tax at the highest tax rate in effect for individuals
or corporations, as applicable, for each such year and the interest charge generally applicable to underpayments of
tax will be imposed on the resulting tax attributable to each such year.
The tax liability for amounts allocated to years prior to the year of disposition or excess distribution cannot be offset by any
net operating losses for such years, and gains (but not losses) from the sale or other disposition of the ADSs or ordinary shares cannot
be treated as capital, even if you hold the ADSs or ordinary shares as capital assets.
If we are treated as a PFIC with respect to you for any taxable year, to the extent any of our subsidiaries are also PFICs or
we make direct or indirect equity investments in other entities that are PFICs, you will be deemed to own shares in such lower-tier
PFICs that are directly or indirectly owned by us in that proportion that the value of the ADSs or ordinary shares you own bears to the
value of all of our ADSs or ordinary shares, and you may be subject to the rules described in the preceding two paragraphs with
respect to the shares of such lower-tier PFICs that you would be deemed to own. It is likely that one or more of our subsidiaries were
PFICs for the taxable year ended December 31, 2011. You should consult your tax advisors regarding the application of the PFIC
rules to any of our subsidiaries.
A U.S. Holder of marketable stock (as defined below) of a PFIC may make a mark-to-market election for such stock to
elect out of the PFIC rules described above regarding excess distributions and recognized gains. If you make a valid mark-to-market
election for the ADSs or ordinary shares, you will include in income for each year that we are a PFIC an amount equal to the excess,
if any, of the fair market value of the ADSs or ordinary shares as of the close of your taxable year over your adjusted basis in such
ADSs or ordinary shares. You will be allowed a deduction for the excess, if any, of the adjusted basis of the ADSs or ordinary shares
over their fair market value as of the close of the taxable year. However, deductions will be allowable only to the extent of any net
mark-to-market gains on the ADSs or ordinary shares included in your income for prior taxable years. Amounts included in your
income under a mark-to-market election, as well as gain on the actual sale or other disposition of the ADSs or ordinary shares, will be
treated as ordinary income. Ordinary loss treatment will apply to the deductible portion of any mark-to-market loss on the ADSs or
ordinary shares, as well as to any loss from the actual sale or other disposition of the ADSs or ordinary shares, to the extent that the
amount of such loss does not exceed the net mark-to-market gains previously included for such ADSs or ordinary shares. Your basis
in the ADSs or ordinary shares will be adjusted to reflect any such income or loss amounts. If you make a mark-to-market election,
any distributions that we make would generally be subject to the tax rules discussed below under “—Taxation of Dividends and Other
Distributions on the ADSs or Ordinary Shares,” except that the lower tax rate applicable to qualified dividend income would not
apply.
The mark-to-market election is available only for “marketable stock,” which is stock that is traded in greater than de
minimis quantities on at least 15 days during each calendar quarter (“regularly traded”) on a qualified exchange or other market, as
defined in applicable U.S. Treasury regulations. The ADSs are currently listed on Nasdaq, which is a qualified exchange or other
market for these purposes. Consequently, if the ADSs remain listed on Nasdaq and are regularly traded, and you are a holder of
ADSs, we expect the mark-to-market election would be available to you if we are a PFIC (as we believe we were for 2011). Because
a mark-to-market election cannot be made for equity interests in any lower-tier PFICs that we own, a U.S. Holder may continue to be
subject to the PFIC rules described above regarding excess distributions and recognized gains with respect to its indirect interest in
any investments held by us that are treated as an equity interest in a PFIC for U.S. federal income tax purposes. You should consult
your tax advisors as to the availability and desirability of a mark-to-market election, as well as the impact of such election on interests
in any lower-tier PFICs.
Alternatively, a U.S. Holder of stock in a PFIC may make a “qualified electing fund” election with respect to such
corporation to elect out of the PFIC rules described above regarding excess distributions and recognized gains. A U.S. Holder that
makes a qualified electing fund election with respect to a PFIC will generally include in income such holder’s pro rata share of the
corporation’s income on a current basis. However, you may make a qualified electing fund election with respect to your ADSs or
ordinary shares only if we furnish you annually with certain tax information, and we currently do not intend to prepare or provide
such information.
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 a PFIC (as we believe we were for 2011), you should consult
your tax advisors regarding any reporting requirements that may apply to you.
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YOU ARE STRONGLY URGED TO CONSULT YOUR TAX ADVISORS REGARDING THE IMPACT OF OUR
BEING A PFIC FOR 2011 ON YOUR INVESTMENT IN OUR ADSs AND ORDINARY SHARES AS WELL AS THE
APPLICATION OF THE PFIC RULES AND THE POSSIBILITY OF MAKING A MARK-TO-MARKET ELECTION.
Taxation of Dividends and Other Distributions on the ADSs or Ordinary Shares
Subject to the PFIC rules discussed above, the gross amount of any distribution we make to you with respect to the ADSs
or ordinary shares generally will be includible in your gross income as dividend income on the date of receipt by the depositary, in the
case of ADSs, or by you, in the case of ordinary shares, but only to the extent that the distribution is paid out of our current or
accumulated earnings and profits (as computed under U.S. federal income tax principles). The dividends will not be eligible for the
dividends-received deduction allowed to corporations in respect of dividends received from other U.S. corporations. To the extent the
amount of the distribution exceeds our current and accumulated earnings and profits, (as computed under U.S. federal income tax
principles) such excess amount will be treated first as a tax-free return of your tax basis in your ADSs or ordinary shares, and then, to
the extent such excess amount exceeds your tax basis, as a capital gain. Because we do not intend to determine our earnings and
profits on the basis of United States federal income tax principles, any distribution paid will generally be treated as a “dividend” for
United States federal income tax purposes.
With respect to certain non-corporate U.S. Holders, including individual U.S. Holders, for taxable years beginning before
January 1, 2013, dividends will be taxed at the lower capital gains rate applicable to “qualified dividend income,” provided that
(1) the ADSs or ordinary shares, as applicable, are readily tradable on an established securities market in the United States, or we are
eligible for the benefits of a qualifying income tax treaty with the United States that includes an exchange of information program,
(2) we are neither a PFIC nor treated as such with respect to you for the taxable year in which the dividend was paid and the
preceding taxable year, and (3) certain holding period requirements are met. Under Internal Revenue Service authority, common or
ordinary shares, or ADSs representing such shares, are considered for the purpose of clause (1) above to be readily tradable on an
established securities market in the United States if they are listed on Nasdaq, as are our ADSs (but not our ordinary shares). Based on
existing guidance, it is unclear whether the ordinary shares will be considered to be readily tradable on an established securities
market in the United States, because only the ADSs, and not the underlying ordinary shares, will be listed on a securities market in the
United States. We believe, but we cannot assure you, that dividends we pay on the ordinary shares that are represented by ADSs, but
not on the ordinary shares that are not so represented, will, subject to applicable limitations, be eligible for the reduced rates of
taxation. If we are treated as a “resident enterprise” for PRC tax purposes under the CIT Law (see “Item 3. Key Information — D.
Risk Factors — Risks Related to Our Company and Our Industry — New income tax laws may increase our tax burden or the tax
burden on the holders of our shares or ADSs, and tax benefits available to us may be reduced or repealed, causing the value of your
investment in us to suffer”), we may be eligible for the benefits of the income tax treaty between the United States and the PRC. You
should consult your tax advisors regarding the availability of the lower capital gains rate applicable to qualified dividend income for
dividends paid with respect to our ADSs or ordinary shares.
Dividends will constitute foreign source income for foreign tax credit limitation purposes. If the dividends are taxed as
qualified dividend income (as discussed above), the amount of the dividend taken into account for purposes of calculating the foreign
tax credit limitation in general will be limited to the gross amount of the dividend, multiplied by the reduced tax rate applicable to
qualified dividend income and divided by the highest tax rate normally applicable to dividends. The limitation on foreign taxes
eligible for credit is calculated separately with respect to specific classes of income. For this purpose, dividends distributed by us with
respect to the ADSs or ordinary shares generally will constitute “passive category income” but could, in the case of certain U.S.
Holders, constitute “general category income.”
If PRC withholding taxes apply to dividends paid to you with respect to our ADSs or ordinary shares (see “Item 3. Key
Information — D. Risk Factors — Risks Related to Our Company and Our Industry — New income tax laws may increase our tax
burden or the tax burden on the holders of our shares or ADSs, and tax benefits available to us may be reduced or repealed, causing
the value of your investment in us to suffer”), subject to certain conditions and limitations, such PRC withholding taxes may be
treated as foreign taxes eligible for credit against your U.S. federal income tax liability. The rules relating to the determination of the
foreign tax credit are complex, and you should consult your tax advisors regarding the availability of a foreign tax credit in your
particular circumstances, including the effects of any applicable income tax treaties.
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Subject to the PFIC rules discussed above, you will recognize taxable gain or loss on any sale, exchange or other taxable
disposition of an ADS or ordinary share equal to the difference between the amount realized (in U.S. dollars) for the ADS or ordinary
share and your tax basis (in U.S. dollars) in the ADS or ordinary share. If the consideration you receive for the ADS or ordinary share
is not paid in U.S. dollars, the amount realized will be the U.S. dollar value of the payment received. In general, the U.S. dollar value
of such a payment will be determined on the date of receipt of payment if you are a cash basis taxpayer and on the date of disposition
if you are an accrual basis taxpayer. However, if the ADSs or ordinary shares, as applicable, are treated as traded on an established
securities market and you are either a cash basis taxpayer or an accrual basis taxpayer who has made a special election, you will
determine the U.S. dollar value of the amount realized in a foreign currency by translating the amount received at the spot rate of
exchange on the settlement date of the sale. The gain or loss generally will be a capital gain or loss. If you are a non-corporate U.S.
Holder, including an individual U.S. Holder, that has held the ADS or ordinary share for more than one year, you generally will be
eligible for reduced tax rates. The deductibility of capital losses is subject to limitations.
Any gain or loss that you recognize on a disposition of ADSs or ordinary shares generally will be treated as U.S. source
income or loss for foreign tax credit limitation purposes (in the case of loss, subject to certain limitations). However, if we are treated
as a “resident enterprise” for PRC tax purposes and PRC tax were to be imposed on any gain from the disposition of the ADSs or
ordinary shares (see “Item 3. Key Information — D. Risk Factors — Risks Related to Our Company and Our Industry — New
income tax laws may increase our tax burden or the tax burden on the holders of our shares or ADSs, and tax benefits available to us
may be reduced or repealed, causing the value of your investment in us to suffer”), a U.S. Holder that is eligible for the benefits of the
income tax treaty between the United States and the PRC may elect to treat the gain as PRC source income for foreign tax credit
purposes. You should consult your tax advisors regarding the proper treatment of gain or loss in your particular circumstances,
including the effect of any applicable income tax treaties.
Information Reporting and Backup Withholding
Dividend payments with respect to ADSs or ordinary shares and proceeds from the sale, exchange or redemption of ADSs
or ordinary shares will generally be subject to information reporting to the Internal Revenue Service and possible U.S. backup
withholding at a current rate of 28%. Backup withholding will not apply, however, to a U.S. Holder that furnishes a correct taxpayer
identification number and makes any other required certification on Internal Revenue Service Form W-9 or that is otherwise exempt
from backup withholding. U.S. Holders that are exempt from backup withholding should still complete Internal Revenue Service
Form W-9 to avoid possible erroneous backup withholding.
Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against your U.S.
federal income tax liability, and you may obtain a refund of any excess amounts withheld under the backup withholding rules by
filing an appropriate claim for refund with the Internal Revenue Service and furnishing any required information in a timely manner.
Under legislation enacted in 2010, U.S. Holders who are individuals generally will be required to report our name, address
and such information relating to an interest in the ADSs or ordinary shares as is necessary to identify the class or issue of which your
ADSs or ordinary shares are a part. These requirements are subject to exceptions, including an exception for ADSs or ordinary shares
held in accounts maintained by certain financial institutions and an exception applicable if the aggregate value of all “specified
foreign financial assets” (as defined in the Code) does not exceed US$50,000.
U.S. Holders should consult their tax advisors regarding the application of the information reporting and backup
withholding rules.
F. Dividends and Paying Agents
Not applicable.
80
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G.
Statement by Experts
Not applicable.
H. Documents on Display
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We are subject to the periodic reporting and other informational requirements of the Exchange Act. Under the Exchange
Act, we are required to file reports and other information with the SEC. Copies of reports and other information, when so filed, may
be inspected without charge and may be obtained at prescribed rates at the public reference facilities maintained by the SEC. The SEC
also maintains a web site at www.sec.gov that contains reports, proxy and information statements, and other information regarding
Registrants that make electronic filings with the SEC using its EDGAR system. As a foreign private issuer, we are exempt from the
rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers, directors
and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the
Exchange Act.
Our financial statements have been prepared in accordance with U.S. GAAP.
We will furnish our shareholders with annual reports, which will include a review of operations and annual audited
consolidated financial statements prepared in conformity with U.S. GAAP.
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
Interest Rate Risk. Our exposure to interest rate risk for changes in interest rates relates primarily to the interest income
generated by excess cash invested in bank deposits. We have not used any derivative financial instruments in our investment portfolio
or for cash management purposes. Interest-earning instruments carry a degree of interest rate risk. We have not been exposed nor do
we anticipate being exposed to material risks due to changes in interest rates. However, our future interest income may fall short of
expectations due to changes in interest rates.
Foreign Exchange Risk. We are exposed to foreign exchange risk arising from various currency exposures. Our payments
to overseas developers and a portion of our financial assets are denominated in U.S. dollars while almost all of our revenues are
denominated in RMB, the legal currency in China. We have not used any forward contracts or currency borrowings to hedge our
exposure to foreign currency risk. The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by,
among other things, changes in political and economic conditions. The conversion of RMB into foreign currencies, including U.S.
dollars, has been based on rates set by PBOC. On July 21, 2005, the PRC government changed its decade-old policy of pegging the
value of the Renminbi to the U.S. dollar. Under the new policy, the RMB is permitted to fluctuate within a narrow and managed band
against a basket of certain foreign currencies. This change in policy has resulted in an approximately more than 30% appreciation of
the RMB against the U.S. dollar since the introduction of new policy. While the international reaction to the RMB revaluation has
generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible
currency policy, which could result in a further and more significant appreciation of the RMB against the U.S. dollar.
Any significant revaluation of RMB may adversely affect our cash flows and financial position, and the value of, and any
dividends payable on, our ADSs in U.S. dollars. For example, an appreciation of RMB against the U.S. dollar would make any new
RMB denominated investments or expenditures more costly to us, to the extent that we need to convert U.S. dollars into RMB for
such purposes. An appreciation of RMB against the U.S. dollar would also result in foreign currency translation losses for financial
reporting purposes when we translate our U.S. dollar denominated monetary assets into RMB, as the RMB is our functional and
reporting currency.
Foreign exchange transactions under our capital account, including principal payments with respect to foreign currency-
denominated obligations, continue to be subject to significant foreign exchange controls and the approval of SAFE. These limitations
could affect our ability to obtain foreign exchange through debt or equity financing, or to obtain foreign exchange for capital
expenditures. See “Item 3. Key Information — D. Risk Factors — Risks Related to Doing Business in China — Restrictions on
currency exchange in China limit our ability to utilize our revenues effectively, make dividend payments and meet our foreign
currency denominated obligations.”
81
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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
The Bank of New York Mellon, our ADS depositary, collects its fees for delivery and surrender of ADSs directly from
investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The
depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a
portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deductions from
cash distributions, or by directly billing investors, or by charging the book-entry system accounts of participants acting for them. The
depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.
Persons depositing or withdrawing shares must pay:
$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)
$.02 (or less) per ADS
For:
• Issuance of ADSs, including issuances resulting from a
distribution of shares or rights or other property
• Cancellation of ADSs for the purpose of withdrawal,
including if the deposit agreement terminates
• Any cash distribution to ADS registered holders
A fee equivalent to the fee that would be payable if securities
distributed to you had been shares and the shares had been
deposited for issuance of ADSs
• Distribution of securities distributed to holders of
deposited securities that are distributed by the depositary
to ADS registered holders
$.02 (or less) per ADS per calendar year
• Depositary services
Registration or transfer fees
Expenses of the depositary
• Transfer and registration of shares on our share register to
or from the name of the depositary or its agent when you
deposit or withdraw shares
• Cable, telex and facsimile transmissions (when expressly
provided in the deposit agreement)
• Converting foreign currency to U.S. dollars
82
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HKGFBU-MWE-XN02
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Persons depositing or withdrawing shares must pay:
Taxes and other governmental charges the depositary or the
custodian have to pay on any ADS or share underlying an ADS, for
example, stock transfer taxes, stamp duty or withholding taxes
Any charges incurred by the depositary or its agents for servicing
the deposited securities
• As necessary
• As necessary
For:
The depositary has agreed to reimburse us for expenses we incur that are related to the administration and maintenance of
our ADS facility including, but not limited to, investor relations expenses, the annual Nasdaq Stock Market continued listing fees or
any other program related expenses every year. There are limits on the amount of expenses for which the depositary will reimburse
us, but the amount of reimbursement available to us is not related to the amounts of fees the depositary collects from investors. We
have received US$221,442 for the year 2011, after deducting withholding tax, from the depositary as reimbursement for legal fees
and administrative expenses.
Item 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
PART II
Item 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
Shareholder Rights Plan
On January 8, 2009, our board of directors declared a dividend of one ordinary share purchase right, or a Right, for each of
our ordinary shares outstanding at the close of business on January 22, 2009. As long as the Rights are attached to the ordinary shares,
we will issue one Right (subject to adjustment) with each new ordinary share so that all such ordinary shares will have attached
Rights. When exercisable, each Right will entitle the registered holder to purchase from us one ordinary share at a price of US$19.5
per ordinary share, subject to adjustment.
The Rights will expire on January 8, 2019, subject to our right to extend such date and are exercisable only if a person or
group obtains ownership of or announces a tender offer for 15% or more of our voting securities (including our company’s ADSs
representing ordinary shares). Upon exercise, all Rights holders except the potential acquirer will be entitled to acquire our shares or
the acquirer’s shares at a discount. We are entitled to redeem the Rights in whole at any time on or before the acquisition by a person
or group of 15% or more of our voting securities (which for these purposes include ADSs representing ordinary shares), or exchange
the Rights, in whole or in part, at an exchange ratio of one ordinary share, and of other securities, cash or other assets deemed to have
the same value as one ordinary share, per Right, subject to adjustment.
The Rights were not distributed in response to any specific effort to acquire control of our company.
Use of Proceeds
Not Applicable.
Item 15. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and our chief financial officer, performed an
evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2011 based on the Internal Control-
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our
assessment, management has concluded that our internal control over financial reporting was effective as of December 31, 2011 to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
reporting purposes in accordance with U.S. GAAP.
83
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Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as
defined in Rule 13a-15(f) under the Exchange Act. Our management evaluated the effectiveness of our internal control over financial
reporting, as required by Rule 13a-15(c) of the Exchange Act, 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 December 31, 2011.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect all 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 or procedures may deteriorate.
Deloitte Touche Tohmatsu CPA Ltd., our independent registered public accounting firm, has issued an attestation report on
our internal control over financial reporting as of December 31, 2011. That attestation report appears below.
Attestation Report of the Registered Public Accounting Firm
To the Board of Directors and Shareholders of The9 Limited:
We have audited the internal control over financial reporting of The9 Limited and its subsidiaries (the “Company”) as of
December 31, 2011, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s 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.
84
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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
December 31, 2011, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated financial statements as of and for the year ended December 31, 2011 of the Company and our report dated
March 22, 2012 expressed an unqualified opinion on those financial statements.
/s/ Deloitte Touche Tohmatsu CPA Ltd.
Shanghai, China
March 22, 2012
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the year ended December 31,
2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 16A. AUDIT COMMITTEE FINANCIAL EXPERT
See “Item 6. Directors, Senior Management and Employees — C. Board Practices.”
Item 16B. CODE OF ETHICS
Our board of directors has adopted a code of ethics that applies to our directors, officers, employees and agents, including
certain provisions that specifically apply to our chief executive officer, chief financial officer, senior finance officer, controller, vice
presidents and any other persons who perform similar functions for us. We hereby undertake to provide to any person, without
charge, a copy of our code of business conduct and ethics within ten working days after we receive such person’s written request.
Item 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the aggregate fees by categories specified below in connection with certain professional
services rendered by Deloitte Touche Tohmatsu CPA Ltd., our principal external auditors for the periods indicated below.
Audit fees
(1)
Audit-related fees
(2)
Tax fees
(3)
2010
RMB
3,754,970
1,078,526
230,786
2011
RMB
4,424,423
—
643,073
US$
702,970
—
102,174
(1)
(2)
“Audit fees” means the aggregate fees billed in each of the fiscal years listed for professional services rendered by our principal
auditors for the audit of our annual financial statements.
“Audit-related fees” means the aggregate fees billed in each of the fiscal years listed for assurance and related services by our
principal auditors that are reasonably related to the performance of the audit or review of our financial statements and are not
reported under “Audit fees.” Services comprising the fees disclosed under the category of “Audit-related fees” involve
principally the issue of consent letters and other audit-related services for the years ended December 31, 2010.
(3)
“Tax fees” means the fees billed for tax compliance services, including the preparation of tax returns and tax consultations.
85
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The policy of our audit committee is to pre-approve all audit and non-audit services provided by our independent registered
public accounting firm, including audit services, audit-related services, tax services and other services as described above, other than
those for de minimus services which are approved by the Audit Committee prior to the completion of the audit.
Item 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
Item 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
Period
June to November, 2011
Total number of
ADSs
repurchased
728,816
Average price
paid
per ADS
$
(2)
4.54
Total number of
ADSs purchased
as
part of publicly
announced
(1)
program
728,816
Approximate
dollar value of
ADSs that may
yet
be purchased
under the
program
$ 3,306,384
(1) On June 13, 2011, we announced that our board of directors has approved a share repurchase program to purchase up to US$25
million worth of our ADSs over the next 12 months. The repurchases will be made from time to time on the open market
pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Exchange Act. This share repurchase
plan was terminated in November 2011.
(2) Average price paid per ADS repurchased is the execution price, excluding commissions paid to brokers.
Item 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
Not applicable.
Item 16G. CORPORATE GOVERNANCE
We are incorporated in the Cayman Islands and our corporate governance practices are governed by applicable Cayman
Islands law. In addition, because our ADSs are listed on the Nasdaq Global Market, we are subject to corporate governance
requirements of the Nasdaq. However, Nasdaq Marketplace Rule 5615(a)(3) permits foreign private issuers like us to follow “home
country practice” with respect to certain corporate governance matters, and we may decide to follow the “home country practice” on a
case-by-case basis. We are committed to a high standard of corporate governance. As such, we endeavor to comply with most of the
Nasdaq corporate governance practices and believe that we are currently in compliance with the NASDAQ corporate governance
practices.
Item 16H. MINE SAFETY DISCLOSURE
Not applicable.
Item 17.
FINANCIAL STATEMENTS
We have elected to provide financial statements pursuant to Item 18.
PART III
Item 18.
FINANCIAL STATEMENTS
The consolidated financial statements for The9 Limited and its subsidiaries are included at the end of this annual report.
86
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Item 19.
EXHIBITS
Exhibit
Number
Document
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1.1
2.1
2.2
2.3
4.1
4.2
4.3
4.4
4.5
4.6
4.7
Amended and Restated Memorandum and Articles of Association of The Registrant as currently in effect (incorporated
by reference to Exhibit 1.1 from our Annual Report on Form 20-F filed with the Securities and Exchange Commission
on April 7, 2011)
Specimen American Depositary Receipt of The Registrant (incorporated by reference to Exhibit 4.1 from our
Registration Statement on Form F-1 Amendment No.2 (file No. 333-120810) filed with the Securities and Exchange
Commission on December 9, 2004)
Specimen Certificate for Ordinary Shares of The Registrant (incorporated by reference to Exhibit 4.2 from our
Registration Statement on Form F-1 (file No. 333-120810) filed with the Securities and Exchange Commission on
November 26, 2004)
Form of Deposit Agreement dated as of December 20, 2004, as amended and restated as of January 16, 2009, as
further amended and restated as of March 20, 2009, and as further amended and restated as of 2010 among The
Registrant, The Bank of New York Mellon as Depositary, and all Owners and Beneficial Owners from time to time of
American Depositary Shares issued thereunder (incorporated by reference to Exhibit 1 of our Post-Effective
Amendment No. 2 to the Registration Statement on Form F-6 (file No. 333-156635) filed with the Securities and
Exchange Commission on November 19, 2010)
Amended 2004 Stock Option Plan (incorporated by reference to Exhibit 10.1 from our Post-Effective Amendment No.
2 to our Registration Statement on Form S-8 (file No. 333-127700) filed with the Securities and Exchange
Commission on December 16, 2010)
Form of Indemnification Agreement with the Registrant’s directors and executive officers (incorporated by reference
to Exhibit 10.2 from our Registration Statement on Form F-1 Amendment No. 1 (file No. 333-120810) filed with the
Securities and Exchange Commission on November 30, 2004)
Form of Employment Agreement between the Registrant and a Senior Executive Officer of the Registrant
(incorporated by reference to Exhibit 10.3 from our Registration Statement on Form F-1 Amendment No. 1 (file No.
333-120810) filed with the Securities and Exchange Commission on November 30, 2004)
Translation of Exclusive Technical Support Service Agreement, dated January 14, 2004, between Shanghai IT and
The9 Computer (incorporated by reference to Exhibit 10.4 from our Registration Statement on Form F-1 (file No. 333-
120810) filed with the Securities and Exchange Commission on November 26, 2004)
Translation of Master Agreement, dated January 1, 2004, among 9Webzen Shanghai, The9 Computer and Shanghai IT
(incorporated by reference to Exhibit 10.5 from our Registration Statement on Form F-1 (file No. 333-120810) filed
with the Securities and Exchange Commission on November 26, 2004)
Translation of Form of Call Option Agreement among The9 Computer, Shanghai IT and other parties therein
(incorporated by reference to Exhibit 10.6 from our Registration Statement on Form F-1 Amendment No.1 (file No.
333-120810) filed with the Securities and Exchange Commission on November 30, 2004)
Translation of Form of Equity Pledge Agreement among The9 Computer, Shanghai Advertisement and the other
parties therein (incorporated by reference to Exhibit 10.7 from our Registration Statement on Form F-1 (file No. 333-
120810) filed with the Securities and Exchange Commission on November 30, 2004)
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Exhibit
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Document
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4.8
4.9
4.10
4.11
4.12
4.13
4.14
4.15
4.16
4.17
Translation of Form of Loan Agreement between The9 Computer and a shareholder of the Registrant (incorporated by
reference to Exhibit 10.8 from our Registration Statement on Form F-1 Amendment No.1 (file No. 333-120810) filed
with the Securities and Exchange Commission on November 30, 2004)
Translation of Domain Name License Agreement, dated January 1, 2004, between GameNow.net (Hong Kong) Limited
and Shanghai IT (incorporated by reference to Exhibit 10.9 from our Registration Statement on Form F-1 (file No. 333-
120810) filed with the Securities and Exchange Commission on November 26, 2004)
Joint Venture Agreement, dated September 10, 2002, between Webzen Inc. and GameNow.net (Hong Kong) Limited
(incorporated by reference to Exhibit 10.10 from our Registration Statement on Form F-1 (file No. 000-53051) filed
with the Securities and Exchange Commission on November 26, 2004)
Subscription and Purchase Agreement, dated April 2, 2004, by and among The Registrant, Object Software Limited and
other parties thereto (incorporated by reference to Exhibit 10.19 from our Registration Statement on Form F-1 (file No.
333-120810) filed with the Securities and Exchange Commission on November 26, 2004)
Shareholders’ Agreement, dated April 16, 2004, by and among The Registrant, Object Software Limited and its
shareholders party thereto (incorporated by reference to Exhibit 10.20 from our Registration Statement on Form F-1 (file
No. 333-120810) filed with the Securities and Exchange Commission on November 26, 2004)
Memorandum of Agreement, dated November 9, 2004, between The Registrant and Object Software Limited
(incorporated by reference to Exhibit 10.21 from our Registration Statement on Form F-1 (file No. 333-120810) filed
with the Securities and Exchange Commission on November 26, 2004)
Software License Agreement, dated September 20, 2004, among HanbitSoft, Inc., IMC Games, Co., Ltd. and
GameNow.net (Hong Kong) Limited (incorporated by reference to Exhibit 10.22 from our Registration Statement on
Form F-1 (file No. 333- 120810) filed with the Securities and Exchange Commission on November 26, 2004)
Translation of Mystina Online Cooperative Agreement, dated July 19, 2004, between Lager (Beijing) Information Co.,
Ltd and The Registrant (incorporated by reference to Exhibit 10.23 from our Registration Statement on Form F-1 (file
No. 333-120810) filed with the Securities and Exchange Commission on November 26, 2004)
Translation of Capital Subscription Agreement, dated October 19, 2004, among Beijing Wanwei Sky Technology Co.,
Ltd., its shareholders and Shanghai IT (incorporated by reference to Exhibit 10.24 from our Registration Statement on
Form F-1 (file No. 333-120810) filed with the Securities and Exchange Commission on November 26, 2004)
Translation of Shanghai Municipality Property Lease Commodity Housing Pre-lease Contract, dated May 17, 2005,
between The9 Computer and Shanghai Zhangjiang Port of Microelectronics Co. Ltd., with respect to the premises where
the Registrant’s principal executive offices are located (incorporated by reference to Exhibit 4.22 from our Annual
Report on Form 20-F filed with the Securities and Exchange Commission on June 30, 2006)
88
THE9 LIMITED
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Exhibit
Number
4.18
4.19
4.20
4.21
4.22
4.23
4.24
4.25
4.26
4.27
4.28
4.29
4.30
Document
Translation of Presale Agreement, dated March 17, 2005, between The9 Computer and Shanghai Zhangjiang Port of
Microelectronics Co. Ltd (incorporated by reference to Exhibit 4.23 from our Annual Report on Form 20-F filed with
the Securities and Exchange Commission on June 30, 2006)
Loan Agreement, dated December 25, 2004, between China Interactive (Singapore) Pte. Ltd. and GameNow.net (Hong
Kong) Limited (incorporated by reference to Exhibit 4.24 from our Annual Report on Form 20-F filed with the
Securities and Exchange Commission on June 30, 2006)
Share Purchase Agreement, dated December 25, 2004, between China Interactive (Singapore) Pte. Ltd. and
GameNow.net (Hong Kong) Limited (incorporated by reference to Exhibit 4.25 from our Annual Report on Form 20-F
filed with the Securities and Exchange Commission on June 30, 2006)
Loan Agreement, dated April 4, 2005, between China Interactive (Singapore) Pte. Ltd. and GameNow.net (Hong Kong)
Limited (incorporated by reference to Exhibit 4.26 from our Annual Report on Form 20-F filed with the Securities and
Exchange Commission on June 30, 2006)
Pledge of Shares, dated April 4, 2005, between China Interactive (Singapore) Pte. Ltd. and GameNow.net (Hong Kong)
Limited (incorporated by reference to Exhibit 4.27 from our Annual Report on Form 20-F filed with the Securities and
Exchange Commission on June 30, 2006)
Option, dated April 4, 2005, between China Interactive (Singapore) Pte. Ltd. and GameNow.net (Hong Kong) Limited
(incorporated by reference to Exhibit 4.28 from our Annual Report on Form 20-F filed with the Securities and Exchange
Commission on June 30, 2006)
Share Purchase Agreement, dated August 26, 2005, between China Interactive (Singapore) Pte. Ltd. and GameNow.net
(Hong Kong) Limited (incorporated by reference to Exhibit 4.29 from our Annual Report on Form 20-F filed with the
Securities and Exchange Commission on June 30, 2006)
Share Purchase Agreement, dated December 14, 2005, between GameNow.net (Hong Kong) Limited and Webzen Inc.
(incorporated by reference to Exhibit 4.30 from our Annual Report on Form 20-F filed with the Securities and Exchange
Commission on June 30, 2006)
Addendum to Joint Venture Agreement, dated December 16, 2005, between Webzen Inc. and GameNow.net (Hong
Kong) Limited (incorporated by reference to Exhibit 4.31 from our Annual Report on Form 20-F filed with the
Securities and Exchange Commission on June 30, 2006)
List of Counterparties and Translation of Form of Shanghai Municipality Commodity Property Sale Contract
(incorporated by reference to Exhibit 4.32 from our Annual Report on Form 20-F filed with the Securities and Exchange
Commission on June 30, 2006)
Translation of Share Transfer Agreement, dated August 14, 2006, between Qin Jie, Yong Wang, Zhu Jun and Shanghai
IT (incorporated by reference to Exhibit 4.33 from our Annual Report on Form 20-F filed with the Securities and
Exchange Commission on June 30, 2006)
Translation of Novation Agreement, dated August 14, 2006, between Qin Jie, Yong Wang, Zhu Jun, The9 Computer
and Shanghai IT (incorporated by reference to Exhibit 4.34 from our Annual Report on Form 20-F filed with the
Securities and Exchange Commission on June 30, 2006)
Translation of Supplementary Agreement between Yong Wang, Zhu Jun and The9 Computer (incorporated by reference
to Exhibit 4.35 from our Annual Report on Form 20-F filed with the Securities and Exchange Commission on June 30,
2006)
89
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Exhibit
Number
4.31
4.32
4.33
4.34
4.35
4.36
Document
Translation of Form of Shareholder Voting Proxy Agreement among The9 Computer, Shanghai IT and its shareholders
(incorporated by reference to Exhibit 4.31 from our Annual Report on Form 20-F filed with the Securities and Exchange
Commission on April 7, 2011)
Translation of Exclusive Technical Support Service Agreement dated December 13, 2010 between Huopu Cloud and
The9 Computer (incorporated by reference to Exhibit 4.32 from our Annual Report on Form 20-F filed with the
Securities and Exchange Commission on April 7, 2011)
Translation of Exclusive Call Option Agreement dated December 13, 2010 among Junping Han, Wei Xiong and The9
Computer with respect to Huopu Cloud (incorporated by reference to Exhibit 4.33 from our Annual Report on Form 20-F
filed with the Securities and Exchange Commission on April 7, 2011)
Translation of Equity Pledge Agreement dated January 6, 2011 among Junping Han, Wei Xiong and The9 Computer with
respect to Huopu Cloud (incorporated by reference to Exhibit 4.34 from our Annual Report on Form 20-F filed with the
Securities and Exchange Commission on April 7, 2011)
Translation of Loan Agreement dated December 13, 2010 among Junping Han, Wei Xiong and The9 Computer
(incorporated by reference to Exhibit 4.35 from our Annual Report on Form 20-F filed with the Securities and Exchange
Commission on April 7, 2011)
Translation of Shareholder Voting Proxy Agreement dated December 13, 2010 among Junping Han, Wei Xiong, Huopu
Cloud and The9 Computer (incorporated by reference to Exhibit 4.36 from our Annual Report on Form 20-F filed with
the Securities and Exchange Commission on April 7, 2011)
4.37*
Translation of Equity Transfer Agreement dated October 25, 2011 between Jun Zhu and Wei Ji
4.38*
4.39*
4.40*
Translation of Equity Pledge Agreement dated November 24, 2011 between Yong Wang and The9 Computer with
respect to Shanghai IT
Translation of Equity Pledge Agreement dated November 24, 2011 between Wei Ji and The9 Computer with respect to
Shanghai IT
Translation of Exclusive Call Option Agreement dated November 24, 2011 among Yong Wang, Wei Ji and The9
Computer with respect to Shanghai IT
4.41*
Translation of Loan Agreement dated November 24, 2011 among Yong Wang, Wei Ji and The9 Computer
4.42*
4.43*
Translation of Shareholder Voting Proxy Agreement dated November 24, 2011 among Yong Wang, Wei Ji, The9
Computer and Shanghai IT
Translation of Novation Agreement dated November 25, 2011 among Jun Zhu, Wei Ji, Yong Wang, The9 Computer and
Shanghai IT
8.1*
List of Significant and Other Principal Subsidiaries and Affiliated Entities of the Registrant
90
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Exhibit
Number
11.1
Amended Code of Business Conduct and Ethics of the Registrant (incorporated by reference to Exhibit 11.1 to our
annual report on Form 20-F filed with the Securities and Exchange Commission on June 30, 2005)
Document
12.1*
Certification by Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
12.2*
13.1**
Certification by Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification by Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
13.2**
Certification by Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
15.1*
Consent of Maples and Calder
15.2*
Consent of Fangda Partners
15.3*
Consent of Deloitte Touche Tohmatsu CPA Ltd.
101**†
Financial information of the registrant for the year ended December 31, 2011 formatted in eXtensible Business
Reporting Language (XBRL):
(i) Consolidated Statements of Operations and Comprehensive Income (Loss) for the Years ended December 31, 2009,
2010 and 2011; (ii) Consolidated Balance Sheets as of December 31, 2010 and 2011; (iii) Consolidated Statements of
Changes in Equity for the Years ended December 31, 2009, 2010 and 2011; (iv) Consolidated Statements of Cash Flows
for the Years ended December 31, 2009, 2010 and 2011; and (v) Notes to Consolidated Financial Statements for the
Years ended December 31, 2009, 2010 and 2011.
*
**
†
Filed with this Form 20-F.
Furnished with this Form 20-F.
XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or
prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the
Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.
91
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SIGNATURES
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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.
The9 Limited
By: /s/ Jun Zhu
Name: Jun Zhu
Title: Chairman and Chief Executive Officer
Date: March 22, 2012
[Signature Page to 20-F]
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
THE9 LIMITED
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Report of Independent Registered Public Accounting Firm
Consolidated Statements of Operations and Comprehensive Loss for the Years ended December 31, 2009, 2010 and 2011
Consolidated Balance Sheets as of December 31, 2010 and 2011
Consolidated Statements of Changes in Equity for the Years ended December 31, 2009, 2010 and 2011
Consolidated Statements of Cash Flows for the Years ended December 31, 2009, 2010 and 2011
Notes to Consolidated Financial Statements for the Years ended December 31, 2009, 2010 and 2011
Page
F-2
F-3
F-5
F-7
F-10
F-12
F-1
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of The9 Limited:
We have audited the accompanying consolidated balance sheets of The9 Limited and subsidiaries (the “Company”) as of
December 31, 2010 and 2011, and the related consolidated statements of operations and comprehensive loss, changes in equity, and
cash flows for each of the three years in the period ended December 31, 2011. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these 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 audit provides a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the
Company at December 31, 2010 and 2011, and the results of its operations and its cash flows for each of the three years in the period
ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
Company’s internal control over financial reporting as of December 31, 2011, 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
March 22, 2012 expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/ Deloitte Touche Tohmatsu CPA Ltd.
Shanghai, China
March 22, 2012
F-2
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
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CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE YEARS ENDED DECEMBER 31, 2009, 2010 AND 2011
THE9 LIMITED
Revenues:
Online game services
Other revenues
Sales taxes
Net revenues
Cost of services
Gross profit (loss)
Operating expenses:
Product development
Sales and marketing
General and administrative
Impairment of equipment, intangible assets and goodwill
2009
RMB
2010
RMB
2011
RMB
2011
US$
(Note 3)
795,969,183
6,660,168
106,471,474 109,046,980 17,325,820
543,164
802,629,351 108,513,582 112,465,598 17,868,984
2,042,108
3,418,618
(42,113,498)
(5,675,992)
(6,089,044)
(967,452)
760,515,853 102,837,590 106,376,554 16,901,532
(712,472,751) (103,256,343) (39,117,993) (6,215,223)
48,043,102
(418,753) 67,258,561 10,686,309
(114,443,552) (139,431,649) (212,121,930) (33,702,780)
(112,517,602)
(63,290,886) (90,496,700) (14,378,478)
(225,051,424) (112,692,772) (174,665,299) (27,751,521)
0
(37,949,452)
(78,871,643)
0
Total operating expenses
Other operating income
(530,884,221) (353,364,759) (477,283,929) (75,832,779)
0
0 25,993,004 4,129,872
Loss from operations
Interest income, net
Other income (expenses), net
Loss before income tax benefit (expense), gain on investment
(482,841,119) (353,783,512) (384,032,364) (61,016,598)
23,183,239 30,416,367 4,832,674
(103,750)
19,258,286
30,501,101
61,840,303
(652,993)
disposal, impairment loss on investments and share of loss in
equity investments
Income tax benefit (expense)
Loss before gain on investment disposal, impairment loss on
investments and share of loss in equity investments
Gain on investment disposal
Impairment loss on investments
Share of loss in equity investments, net of taxes
Net loss
Less: Net loss attributable to noncontrolling interest
Net loss attributable to holders of ordinary shares
F-3
(390,499,715) (311,341,987) (354,268,990) (56,287,674)
(26)
(7,368,020)
5,535,866
(165)
(384,963,849) (318,710,007) (354,269,155) (56,287,700)
0
(22,412,269) (196,115,321)
(10,713,295)
(2,555,515)
6,827,900 44,434,802 7,059,979
0
(530,928)
(409,931,633) (518,710,723) (313,175,960) (49,758,649)
(19,099,129) (28,846,029) (4,583,172)
(405,152,407) (499,611,594) (284,329,931) (45,175,477)
0
(3,341,607)
(4,779,226)
THE9 LIMITED
FORM 20-F
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Net loss
Other comprehensive loss:
Transfer to earnings of other- than-temporary impairment loss
on available-for-sale investments
Currency translation adjustments
Comprehensive loss
Less: Comprehensive loss attributable to noncontrolling interest
Comprehensive loss attributable to holders of ordinary shares
Net loss attributable to holders of ordinary shares per share
- Basic and diluted
Weighted average number of shares outstanding
- Basic and diluted
2009
RMB
2010
RMB
2011
RMB
2011
US$
(Note 3)
(409,931,633) (518,710,723) (313,175,960) (49,758,649)
(13,643,131)
0
0
(2,511,883)
0
(683,973)
(423,574,764) (521,222,606) (317,480,817) (50,442,622)
(19,514,314) (29,279,528) (4,652,048)
(418,795,538) (501,708,292) (288,201,289) (45,790,574)
0
(4,304,857)
(4,779,226)
(15.94)
(19.89)
(11.39)
(1.81)
25,414,620
25,121,679 24,956,197 24,956,197
The accompanying notes are an integral part of these consolidated financial statements.
F-4
THE9 LIMITED
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THE9 LIMITED
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2010 AND 2011
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts of
2010:RMB22.2 million, 2011: nil
Advances to suppliers
Prepayments and other current assets
Prepaid royalties
Deferred costs
Total current assets
Investments in equity investees
Available-for-sale investments
Property, equipment and software
Goodwill
Intangible assets
Land use right
Other long-term assets
Total assets
LIABILITIES
Current liabilities:
December 31,
2010
RMB
December 31,
2011
RMB
December 31,
2011
US$
(Note 3)
1,416,189,294 1,071,725,828 170,280,085
10,712,252
52,054,494
63,969,737
15,615,493
2,911,937
3,365,755
10,054,911 1,597,564
534,765
66,060,141 10,495,900
15,556,270 2,471,642
302,372
1,903,099
1,561,453,207 1,168,666,004 185,682,328
72,051,143 11,447,774
74,843,710
6,342,100 1,007,658
0
60,513,021 9,614,551
58,061,464
10,548,323
10,035,775 1,594,524
17,647,842 159,493,400 25,340,949
76,036,026 12,080,908
77,956,936
75,756,603 12,036,512
56,827,902
1,857,339,384 1,628,894,072 258,805,204
Accounts payable (including accounts payable of the consolidated VIEs without
recourse to the Group of 24,878,129 and 18,844,789 as of December 31,
2010, and December 31, 2011, respectively)
Other taxes payable (including other taxes payable of the consolidated VIEs
without recourse to the Group of 2,995,044 and 3,042,253 as of
December 31, 2010, and December 31, 2011, respectively)
Advances from customers (including advances from customers of the
consolidated VIEs without recourse to the Group of 6,574,768 and
16,115,067 as of December 31, 2010, and December 31, 2011, respectively)
Deferred revenue (including deferred revenue of the consolidated VIEs without
recourse to the Group of 13,757,771 and 12,011,822 as of December 31,
2010, and December 31, 2011, respectively)
Refund of game points (including refund of game points of the consolidated
VIEs without recourse to the Group of 195,993,716 and 169,998,682 as of
December 31, 2010, and December 31, 2011, respectively)
Other payables and accruals (including other payables and accruals of the
consolidated VIEs without recourse to the Group of 15,629,966 and
23,037,145 as of December 31, 2010, and December 31, 2011, respectively)
Total current liabilities
Long-term accounts payables(including long-term accounts payables of the
consolidated VIEs without recourse to the Group of nil as of both December 31,
2010 and December 31, 2011)
Deferred tax liabilities, non-current (including deferred tax liabilities, non-current of
the consolidated VIEs without recourse to the Group of nil as of both
December 31, 2010 and December 31, 2011)
Total liabilities
F-5
46,948,658
44,149,842 7,014,703
5,437,764
5,797,785
921,175
7,101,645
27,010,571 4,291,548
18,508,169
16,661,791 2,647,292
195,993,716 169,998,682 27,010,070
42,328,817
47,906,323 7,611,548
316,318,769 311,524,994 49,496,336
0
60,016,072 9,535,594
5,803,848
877,332
322,122,617 377,062,903 59,909,262
5,521,837
THE9 LIMITED
FORM 20-F
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Commitments and contingencies
EQUITY
The9 Limited shareholders’ equity
Ordinary shares (US$0.01 par value; 250,000,000 shares authorized as of
December 31, 2010 and 2011, 25,124,147 shares issued and outstanding as of
December 31, 2010, and 24,456,805 shares issued and outstanding as of
December 31, 2011)
Additional paid-in capital
Statutory reserves
Accumulated other comprehensive income
Accumulated deficit
The9 Limited shareholders’ equity
Noncontrolling interest
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1,996,367
2,051,878
317,191
2,091,113,883 2,110,986,623 335,401,996
4,460,189
(948,229)
(872,306,210) (138,595,499)
1,531,164,766 1,262,780,706 200,635,648
(1,739,706)
28,071,982
(2,096,698)
(587,976,279)
28,071,982
(5,968,056)
(10,949,537)
4,052,001
Total equity
Total liabilities and equity
1,535,216,767 1,251,831,169 198,895,942
1,857,339,384 1,628,894,072 258,805,204
The accompanying notes are an integral part of these consolidated financial statements.
F-6
THE9 LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2009, 2010 AND 2011
Ordinary shares
(US$0.01 par value)
Additional
paid-in capital
Statutory
reserves
Accumulated
other
comprehensive
income
Retained
earnings
(deficit)
Equity
attributable to
The9 limited
Noncontrolling
interest
Total Equity
The9 Limited shareholder’s equity
Number of
shares
Par value
RMB
RMB
RMB
RMB
RMB
RMB
RMB
RMB
26,817,688 2,190,645 2,128,607,581 24,836,354 13,643,131
0
0
0
0
0
549,964,327 2,719,242,038
(405,152,407) (405,152,407)
(4,779,226)
0 2,719,242,038
(409,931,633)
0
0
0
0
0
0
0
0
0
29,067
1,985
1,458,898
(1,725,110) (140,918) (127,927,178)
0
0
0
70,234,857
0
0
3,235,628
0
0
(2,757,183)
0
0 (13,643,131)
0
(13,643,131)
0
(418,795,538) (4,779,226)
(13,643,131)
(423,574,764)
0
0
0
0
0
0
0
0 (201,028,477) (201,028,477)
0 3,094,220
0
3,094,220
(201,028,477)
0
0
1,460,883
0
1,460,883
0
(28,912,500) (156,980,596)
0
(156,980,596)
0
0
0
0
70,234,857 1,001,440
71,236,297
(3,235,628)
0
0
0
(2,757,183) 2,757,183
0
0
25,121,645 2,051,712 2,069,616,975 28,071,982
0
(88,364,685) 2,011,375,984 2,073,617 2,013,449,601
F-7
Balance as of
December 31, 2008
Net loss
Transfer to earnings of
other-than-temporary
impairment loss on
available-for-sale
investment
Comprehensive loss
Issuance of
noncontrolling interest
Dividend distribution
Issuance of ordinary
shares from stock
option exercise
Repurchase and
retirement of ADSs
Employee share based
compensation
Appropriations to
statutory reserves
Conversion of a loan into
equity of a VIE
subsidiary
Balance as of
December 31, 2009
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9
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M
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S
S
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G
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1
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P
Ordinary shares
(US$0.01 par value)
Additional
paid-in capital
Statutory
reserves
Accumulated
other
comprehensive
income
Retained
earnings
(deficit)
Equity
attributable to
The9 limited
Noncontrolling
interest
Total Equity
The9 Limited shareholder’s equity
Number of
shares
Par value
RMB
RMB
RMB
RMB
RMB
RMB
RMB
RMB
Net loss
Currency translation
adjustments
Comprehensive loss
Recognition of
noncontrolling interest
from an acquisition
Issuance of ordinary
shares from stock
option exercise
Employee share based
compensation
Purchase of shares of a
subsidiary from
holders of
noncontrolling interest
Dissolution of two VIEs
Capital contribution to
subsidiaries
attributable to
noncontrolling interest
0
0
0
0
0
0
0
0
0
2,502
166
84,838
0
0
27,864,312
0
0
0
0
523,586
0
0
0
(499,611,594) (499,611,594)
(19,099,129)
(518,710,723)
0 (2,096,698)
0
0
0
0
0
0
0
0
0
0
0
(2,096,698)
(415,185)
(501,708,292) (19,514,314)
(2,511,883)
(521,222,606)
0
0 15,417,870
15,417,870
0
85,004
0
85,004
0
27,864,312
2,315,605
30,179,917
0
0
523,586
0
(1,122,325)
(2,100,946)
(598,739)
(2,100,946)
0
0
(6,981,392)
0
0
0
(6,981,392)
6,981,392
0
Issuance of shares by a
subsidiary upon
exercise of stock
options
Balance as of
December 31, 2010
0
0
5,564
0
0
0
5,564
1,102
6,666
25,124,147 2,051,878 2,091,113,883 28,071,982 (2,096,698) (587,976,279) 1,531,164,766
4,052,001 1,535,216,767
F-8
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9
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ˆ
Ordinary shares
(US$0.01 par value)
Number of
shares
Par value
RMB
The9 Limited shareholder’s equity
Additional
paid-in capital
Statutory
reserves
Accumulated
other
comprehensive
income
Retained
earnings
(deficit)
Equity
attributable to
The9 limited
Noncontrolling
interest
Total Equity
RMB
RMB
RMB
RMB
RMB
RMB
RMB
0
0
0
0
0
0
0
0
0
61,474
3,920
712,953
(728,816)
(59,431)
(21,027,722)
0
0
51,358,820
0
0
(284,329,931) (284,329,931)
(28,846,029)
(313,175,960)
0 (3,871,358)
0
0
0
0
0
0
0
0
0
(3,871,358)
(433,499)
(288,201,289) (29,279,528)
(4,304,857)
(317,480,817)
0
0
2,395,000
2,395,000
0
716,873
0
716,873
0
(21,087,153)
0
(21,087,153)
0
51,358,820
1,912,700
53,271,520
0
0
1,565,749
0
0
0
1,565,749
(2,771,389)
(1,205,640)
0
0
(12,741,104)
0
0
0
(12,741,104)
12,741,104
0
Net loss
Currency translation
adjustments
Comprehensive loss
Issuance of
noncontrolling interest
Issuance of ordinary
shares from stock
option exercise
Repurchase and
retirement of ADSs
Employee share based
compensation
Purchase of shares of a
subsidiary from
holders of
noncontrolling interest
Capital contribution to
subsidiaries
attributable to
noncontrolling interest
Issuance of shares by a
subsidiary upon
exercise of stock
options
Balance as of
December 31, 2011
Balance as of
December 31, 2011
(US$ except share
data, Note 3)
0
0
4,044
0
0
0
4,044
575
4,619
24,456,805 1,996,367 2,110,986,623 28,071,982 (5,968,056) (872,306,210) 1,262,780,706 (10,949,537) 1,251,831,169
24,456,805 317,191 335,401,996
4,460,189
(948,229) (138,595,499) 200,635,648
(1,739,706)
198,895,942
The accompanying notes are an integral part of these consolidated financial statements.
F-9
1
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o
1
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g
a
P
*
4
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0
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9
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1
0
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2
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-
0
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0
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3
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D
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T
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I
L
9
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T
F
-
0
2
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O
F
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
START PAGE
NERFBU-MWE-XN02
10.10.12
HKR rads0dc
HKG
20-Mar-2012 02:47 EST
ˆ200FNeb!tHiL@b#QOŠ
9*
0C
200FNeb!tHiL@b#Q
290862 FIN 10
HTM
ESS
Page 1 of 1
THE9 LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2009, 2010 AND 2011
Cash flows from operating activities:
Net loss
Adjustments for:
Deferred taxes
(Gain) loss on disposal of property, equipment and software
Impairment of intangible assets
Impairment of goodwill
Impairment loss on investments
Impairment on equipment
Depreciation and amortization of property, equipment and
software
Amortization of land use right
Amortization of intangible assets
Share of loss in equity investments, net of taxes
Gain on investment disposal
Allowance for doubtful accounts
Provision for upfront prepaid royalties and deferred costs
Provision for due from related party
Provision for prepayments and other current assets
Loss on deconsolidation of two VIEs
Exchange loss (gain)
Stock based compensation expense
Issuance of noncontrolling interest
Change in accounts receivable
Change in due from related party
Change in advances to suppliers
Change in prepayments and other current assets
Change in prepaid royalties
Change in deferred costs
Change in other long-term assets
Change in accounts payable
Change in due to related parties
Change in income tax payable
Change in other taxes payable
Change in advances from customers
Change in deferred revenue
Change in refund of game points
Change in other payables and accruals
2009
RMB
2010
RMB
2011
RMB
2011
US$
(Note 3)
(409,931,633) (518,710,723) (313,175,960) (49,758,649)
7,407,081
(7,407,081)
(984,264)
(490,369)
33,020,462
27,507,199
30,199,751
0
22,412,269 196,115,321
4,928,990
21,164,693
0
2,334,725
0
0
0
0
0
370,950
0
0
0
0
123,028,739
1,920,908
49,481,516
2,555,515
0
855,130
160,069,079
0
0
0
(1,405,166)
71,236,297
3,094,220
6,547,740
(472,716)
(42,696,308)
32,128,649
17,227,594
15,778,691
(603,910)
5,529,144
0
(26,733)
(93,146,297)
(104,601,759)
(41,111,862)
0
1,920,910
1,958,630
3,341,607
0
0
0
523,968
0
23,856,884 14,914,744 2,369,714
305,202
1,920,911
311,195
10,012,288
10,713,295
530,928
(6,827,900) (44,434,802) (7,059,979)
0
0
0
83,250
0
5,518,917
1,285,845
200,000
1,082,591
4,527,477 10,574,954 1,680,191
30,179,917 53,271,520 8,463,992
380,527
104,441
0
(10,086,545) 11,455,907 1,820,160
(832,739)
11,804,104
(5,241,174)
(111,146)
(21,134,410)
(699,541)
1,008,838
(1,395,336)
160,288
6,999,964 1,112,182
(18,016,107)
4,163,941 (18,019,185) (2,862,960)
0
0
0
(29,947)
(2,044,225)
265,808
(2,052,793) 19,908,926 3,163,210
(293,360)
7,574,705
0 (25,993,004) (4,129,872)
0
(9,792,038)
(175,421)
2,395,000
657,341
0
0
0
1,672,970
(1,846,378)
5,071,097
(10,614,609)
5,575,476
885,854
Net cash provided by (used in) operating activities
(106,085,603) (247,551,589) (270,894,564) (43,040,813)
F-10
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
LANFBU-MWE-XN11
10.10.12
HKR arumv1dc
HKG
21-Mar-2012 04:57 EST
ˆ200FNeb!tHmgQ6bw<Š
13*
0C
200FNeb!tHmgQ6bw
290862 FIN 11
HTM
ESS
Page 1 of 1
Cash flows from investing activities:
Acquisition, net of cash acquired
Cash disposed of upon deconsolidation of two VIEs
Proceeds from disposal of cost method investee
Cash paid to acquire equity investees and available-for-sale
investments
Lending of loans receivable
Collection of loans receivable
Proceeds from disposal of available-for-sale investments
Proceeds from maturities of short-term investments
Proceeds from disposal of property, equipment and software
Proceeds from refund of Investment
Proceeds from refund of upfront license fees
Prepayment and deposits paid for property, equipment and
software
Purchase of property, equipment and software
Purchase of intangible assets
2009
RMB
2010
RMB
2011
RMB
2011
US$
0
0
0
(7,512,404)
(2,207,437)
0
0
0
71,528,002 11,364,655
0
0
(26,837,000)
(13,660,000)
0
0
68,039,221
532,644
0
0
(39,093,200)
(2,000,000)
13,660,000
6,827,900
0
1,500,000
0
41,873,102
(3,000,000)
2,025,000
0
0
81,171
(33,984,340) (5,399,568)
(476,652)
321,740
0
0
12,897
28,019,115 4,451,789
13,245,400 2,104,482
0
(20,452,845)
(23,897,622)
0
(7,856,721)
(12,305,541)
(28,565,286) (4,538,567)
(17,566,350) (2,791,012)
(73,073,785) (11,610,255)
Net cash used in investing activities
(16,275,602)
(7,114,301)
(41,291,073) (6,560,491)
Cash flows from financing activities:
Purchase of additional equity interest in subsidiary
Proceeds from stock option exercise
Proceeds from exercise of stock options of a subsidiary
Dividend paid
Repurchase of ADSs
0
1,460,883
0
(201,028,477)
(156,980,596)
(598,739)
85,004
6,666
0
0
(1,205,640)
716,873
4,619
0
(191,557)
113,900
734
0
(21,087,153) (3,350,411)
Net cash provided by (used in) financing activities
(356,548,190)
(507,069)
(21,571,301) (3,427,334)
Effect of foreign exchange rate changes on cash
1,405,166
(3,719,092)
(10,706,528) (1,701,095)
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of year
(477,504,229)
(258,892,051) (344,463,466) (54,729,733)
2,152,585,574 1,675,081,345 1,416,189,294 225,009,818
Cash and cash equivalents, end of year
1,675,081,345 1,416,189,294 1,071,725,828 170,280,085
Supplemental disclosure of cash flow information:
Cash paid for income taxes
Supplemental disclosure of non-cash investing and financing
activities:
Accrual related to purchase of property, equipment and software
Accrual related to purchase of intangible assets and related
withholding taxes
Conversion of a loan into equity of a VIE subsidiary
Receivable on refund of investment in an equity investee
Receivable on refund of upfront licensing fees
6,454,702
1,839
165
26
736,608
886,319
3,102,167
492,885
0
2,757,183
0
31,410,422
8,609,510
0
66,227,000
13,245,400
80,021,430 12,714,125
0
0
0
0
0
0
The accompanying notes are an integral part of these consolidated financial statements.
F-11
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
START PAGE
HKRPRFRS15
10.10.12
HKR pf_rend
HKG
19-Mar-2012 03:25 EST
ˆ200FNeb!tHfQY4xw}Š
2*
0C
200FNeb!tHfQY4xw
290862 FIN 12
HTM
ESS
Page 1 of 1
THE9 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009, 2010 AND 2011
1. ORGANIZATION AND NATURE OF OPERATIONS
The accompanying consolidated financial statements include the financial statements of The9 Limited (the “Company”), which was
incorporated on December 22, 1999 in the Cayman Islands, its subsidiaries and variable interest entities (“VIE subsidiaries” or
“VIEs”). The Company’s principal subsidiaries and VIE subsidiaries are as follows as of December 31, 2011:
Name of entity
GameNow.net (Hong Kong) Limited (“GameNow Hong Kong”)
The9 Computer Technology Consulting (Shanghai) Co., Ltd.
(“The9 Computer”)
China The9 Interactive Limited (“C9I”)
China The9 Interactive (Shanghai) Limited (“C9I Shanghai”)
9Dream Limited (“9Dream”)
China The9 Interactive (Beijing) Limited (“C9I Beijing”)
Jiu Jing Era Information Technology (Beijing) Limited (“Jiu
Jing”)
Date of
incorporation
Place of
incorporation
Relationship
Interest held
Direct Indirect
January-00
Hong Kong
Subsidiary 100% —
June-00
PRC
Subsidiary
—
100%
October-03
February-05
July-05
March-07
Hong Kong
PRC
Hong Kong
PRC
Subsidiary — 100%
Subsidiary — 100%
Subsidiary 100% —
Subsidiary — 100%
April-07
PRC
Subsidiary
—
100%
Jiu Tuo (Shanghai) Information Technology Limited (“Jiu Tuo”)
China Crown Technology Limited (“China Crown Technology”) November-07
Asian Way Development Limited (“Asian Way”)
November-07
New Star International Development Limited (“New Star”)
January-08
The9 Development Center Limited (“TDC”)
June-08
TDC (Asia) Limited (“TDC Asia”)
April-09
July-07
PRC
Hong Kong
Hong Kong
Hong Kong
Hong Kong
Subsidiary —
100%
Subsidiary 100% —
Subsidiary 100% —
Subsidiary 100% —
Subsidiary 100% —
British Virgin Islands Subsidiary — 100%
F-12
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
SERFBU-MWE-XN02
10.10.12
HKR arumv1dc
HKG
21-Mar-2012 04:39 EST
ˆ200FNeb!tHmcb$bwTŠ
4*
0C
200FNeb!tHmcb$bw
290862 FIN 13
HTM
ESS
Page 1 of 1
Red 5 Studios, Inc. (“Red 5”)
Red 5 Singapore Pte. Ltd. (“Red 5 Singapore”)*
The9 Interactive, Inc. (“The9 Interactive”)
The9 Korea Co., Ltd. (“The9 Korea”)
Red 5 Korea, LLC (“Red 5 Korea”)
Shanghai The9 Information Technology Co., Ltd. (“Shanghai IT”)
Shanghai Jiucheng Advertisement Co., Ltd. (“Shanghai Jiucheng
Advertisement”)
Hangzhou Fire Rain Network Technology Co., Ltd. (“Fire Rain”)
Shenzhen Wanyouyinli Technology Co., Ltd. (“Wanyouyl”)
Shanghai Huopu Cloud Computing Terminal Technology Co., Ltd.
(“Huopu Cloud”)
Shanghai Jiushi Interactive Network Technology Co., Ltd. (“Jiushi”)
Shanghai Mengxiang Hulian Digital Technology Co., Ltd.
(“Mengxiang Hulian”)
* Previously named as The9 Singapore Pte. Ltd.
June-05
April-10
June-10
USA Subsidiary — 88% (Note 5)
Singapore Subsidiary 100% —
USA Subsidiary 100% —
Subsidiary 100% —
Subsidiary 100% —
February-11 Korea
Novermber-10 Korea
September-00 PRC VIE subsidiary None (Note 4)
April-07
Wholly-owned
subsidiary of
Shanghai IT
December-08 PRC VIE subsidiary
PRC VIE subsidiary
June-09
PRC
None (Note 4)
25% (Note 4)
20% (Note 4)
December-10
PRC
VIE subsidiary
None (Note 4)
July-11
PRC
Wholly-owned
subsidiary of
Huopu Cloud
None
December-11
PRC
VIE subsidiary
20% (Note 4)
The Company, its subsidiaries and VIE subsidiaries are collectively referred to as “the Group”. The Group is principally engaged in
the development and operation of online games and internet related businesses.
In February 2004, the Group obtained an exclusive license to localize and operate World of Warcraft (“WoW”), a 3D fantasy
massively multiplayer online role-playing game (“MMORPG”) in China and commercially launched the localized WoW in June
2005. The license term continued for four years following the commercial launch of the localized WoW. The WoW license was not
renewed upon expiration on June 7, 2009. Refer to Note 29 for impairment and certain other charges recorded relating to the
expiration and non-renewal of the WoW license for the year ended December 31, 2009.
After the expiration of WoW license, the Group continues to operate and develop online games including MMORPGs, web games,
social games, mobile games and TV games. From 2009 onwards, the Group has launched different licensed MMORPGs including
Atlantica and Kingdom Heroes 2 Online, as well as proprietary MMORPGs and web and social games including World of Fighter,
Winning Goal and Q Jiang San Guo, in mainland China. The Group is also developing various proprietary games, including Shen
Xian Zhuan, FireFall, Era Zero and other MMORPGs and web and social games. In 2011, the Group launched The9 Game Zone,
which is a mobile game platform in mainland China.
F-13
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN05
10.10.12
HKR manil0dc
HKG
20-Mar-2012 11:45 EST
ˆ200FNeb!tHjMC0nQ3Š
5*
0C
200FNeb!tHjMC0nQ
290862 FIN 14
HTM
ESS
Page 1 of 1
2. PRINCIPAL ACCOUNTING POLICIES
<1> Basis of presentation
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles
in the United States of America (“US GAAP”). Significant accounting policies followed by the Group in the preparation of the
accompanying consolidated financial statements are summarized below.
<2> Reclassification
The Group recorded Internet Protocol TV games (“TV games”) service revenue and overseas licensing revenue amounted to
RMB0.5 million and RMB4.7 million for the years ended December 31, 2009 and 2010, respectively. Beginning from January 1,
2011, the Group presents TV games service revenue and overseas licensing revenue, which was previously presented under other
revenues, as applicable, under “online game services revenue”. The year-over-year comparison of online game services revenue and
other revenues have been reclassified to conform to this presentation.
<3> Consolidation
The consolidated financial statements include the financial statements of the Company, its subsidiaries and VIEs in which it has a
controlling financial interest. The results of its subsidiaries are consolidated from the date on which the Company obtained control
and continue to be consolidated until the date that such control ceases. A controlling financial interest is typically determined when a
company holds a majority of the voting equity interest in an entity. However, if the company demonstrates its ability to control the
VIEs through its rights to all the residual benefits of the VIEs and its obligation to fund losses of the VIEs then the entity is
consolidated. All significant intercompany balances and transactions between the Company, its subsidiaries and VIEs have been
eliminated in consolidation.
PRC laws and regulations currently prohibit or restrict foreign ownership of Internet-related business. In September 2009, the General
Administration of Press and Publication (“GAPP”) further promulgated the Circular Regarding the Implementation of the Department
Reorganization Regulation by State Council and Relevant Interpretation by State Commission Office for Public Sector Reform and
the Further Strengthening of the Administration of Pre-approval on Online Games and Approval on Import Online Games (the
“GAPP Circular”). It is not clear that the regulatory authority of the GAPP applies to the regulation of ownership structures of online
game companies based in the PRC. While the GAPP Circular is applicable to the Group and its business in terms of publication and
pre-approval of online games, to date, GAPP has not issued any interpretation of Section 4 of the GAPP Circular to specifically
invalidate VIE agreements and, to the Group’s knowledge, has not taken any enforcement action under Section 4 of the GAPP
Circular against any of the companies that rely on contractual arrangements with VIEs to operate online games in the PRC. Therefore,
the Group believes that its ability to direct the activities of VIEs that most significantly impact their economic performance is not
affected by the GAPP Circular.
F-14
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
HKRPRFRS15
10.10.12
HKR pf_rend
HKG
19-Mar-2012 03:25 EST
ˆ200FNeb!tHfQbjvw)Š
2*
0C
200FNeb!tHfQbjvw
290862 FIN 15
HTM
ESS
Page 1 of 1
<4> Use of estimates
The preparation of the consolidated financial statements in conformity with US GAAP requires management to make estimates and
assumptions that affected the reported amount of the assets and liabilities, the disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported revenues and expenses during the reported periods. Significant accounting estimates
reflected in the Group’s consolidated financial statements include allowance for doubtful accounts, the valuation of non-marketable
equity investments and determination of other-than temporary impairment, revenue recognition, assessment of recoverability of long-
lived assets and goodwill impairment, estimated useful life of property, equipment and software and intangible assets, share-based
compensation expense, consolidation of VIEs, valuation allowances for deferred tax assets, refund of WoW game points,
contingencies and fair value measurements related to business combinations including acquired intangible assets. Such accounting
policies are impacted significantly by judgments, assumptions and estimates used in the preparation of our consolidated financial
statements, and actual results could differ materially from these estimates.
<5> Foreign currency translation
The Group’s reporting currency is Renminbi (“RMB”). The Group’s functional currency with the exception of its subsidiaries, Red 5,
Red 5 Singapore and The9 Korea, is the RMB. The functional currency of Red 5, Red 5 Singapore and The9 Korea is United States
Dollar (“US$”, or “US dollars”), Singapore Dollar and Korean Won, respectively. Assets and liabilities of Red 5, Red 5 Singapore
and The9 Korea are translated at the current exchange rates quoted by the People’s Bank of China (the “PBOC”) in effect at the
balance sheet dates. Equity accounts are translated at historical exchange rates and revenues and expenses are translated at the average
exchange rates in effect during the reporting period to RMB. Gains and losses resulting from foreign currency translation to reporting
currency are recorded in accumulated other comprehensive income (loss) in the consolidated statements of changes in equity for the
years presented.
Transactions denominated in currencies other than functional currencies, are translated into functional currencies at the exchange rates
prevailing at the dates of the transactions. Gains and losses resulting from foreign currency transactions are included in the
consolidated statements of operations and comprehensive income (loss). The aggregate foreign exchange net gain (loss) was RMB1.4
million, RMB(4.5) million and RMB(10.6) million (US$1.7million) for the years ended December 31, 2009, 2010 and 2011,
respectively. Monetary assets and liabilities denominated in foreign currencies are translated into functional currencies using the
applicable exchange rates at the balance sheet dates. All such exchange gains and losses are included in other income (expense) in the
consolidated statements of operations and comprehensive income (loss).
F-15
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
HKRPRFRS15
10.10.12
HKR pf_rend
HKG
19-Mar-2012 03:25 EST
ˆ200FNeb!tHfQdC=wlŠ
2*
0C
200FNeb!tHfQdC=w
290862 FIN 16
HTM
ESS
Page 1 of 1
<6> Cash and cash equivalents
Cash and cash equivalents represent cash on hand and highly-liquid investments with an original maturity date of three months or
less. At December 31, 2010 and 2011, cash equivalents were comprised primarily of bank deposits. Included in cash and cash
equivalents as of December 31, 2010 and 2011 are amounts denominated in US Dollars totaling US$9.2 million and US$16.1 million,
respectively.
The RMB is not a freely convertible currency. The PRC 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 the RMB is subject to changes in
central government policies and to international economic and political developments affecting supply and demand in China’s foreign
exchange trading system market. The Company’s aggregate amount of cash and cash equivalents denominated in RMB amounted to
RMB1,354.5 million and RMB959.9 million (US$152.5 million) as of December 31, 2010 and 2011, respectively.
<7> Allowance for doubtful accounts
Accounts receivable mainly consist of receivables from prepaid card distributors and third party game platforms, and are recorded net
of allowance for doubtful accounts. The Group determines the allowances for doubtful accounts when facts and circumstances
indicate that the receivable is unlikely to be collected. Allowances for doubtful accounts are charged to general and administrative
expenses. If the financial condition of the Group’s customers were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required. The Company provided allowance for doubtful accounts of RMB22.2 million in
2009 and there is no change in 2010. In 2011, the Company has written off uncollectable accounts receivable and respective provision
of RMB22.2 million and there is no additional provision made.
<8> Prepaid royalties and deferred costs
Royalties paid to the licensors of games are initially recognized as prepaid royalties when paid and subsequently recognized as
deferred costs upon the customers’ online registration and activation of their cards or online points. Royalties payable to the licensors
or receivable from collection agents upon customers’ charging their accounts are initially recorded as deferred costs upon the
customers’ online registration and activation of their cards or online points. Deferred costs are then ultimately recognized as cost of
services in the consolidated statements of operations and comprehensive income (loss) based upon the actual consumption of game
premium features or usage of the game playing time by the customers or when the likelihood that the Group would provide further
services to those customers becomes remote.
F-16
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
RRWIN-XENP143
10.10.12
HKR rads0dc
HKG
20-Mar-2012 06:38 EST
ˆ200FNeb!tHiuqqBQÈŠ
4*
0C
200FNeb!tHiuqqBQ
290862 FIN 17
HTM
ESS
Page 1 of 1
<9> Investments in equity investees
Equity investments are comprised of investments in privately held companies. The Group uses the equity method to account for an
equity investment over which it has the ability to exert significant influence but does not otherwise control. The Group records equity
method investments at the cost of acquisition, plus the Group’s share in undistributed earnings and losses since acquisition. For equity
investments over which the Group does not have significant influence or control, the cost method of accounting is used.
The Group assesses its equity investments for impairment on a periodic basis by considering factors including, but not limited to,
current economic and market conditions, the operating performance of the investees including current earnings trends, the
technological feasibility of the investee’s products and technologies, the general market conditions in the investee’s industry or
geographic area, factors related to the investee’s ability to remain in business, such as the investee’s liquidity, debt ratios, and cash
burn rate and other company-specific information including recent financing rounds. If it has been determined that the equity
investment is less than its related fair value and that this decline is other-than-temporary, the carrying value of the investment is
adjusted downward to reflect these declines in value.
<10> Available-for-sale investments
Investments in debt and equity securities are, on initial recognition, classified into the three categories: held-to-maturity securities,
trading securities and available-for-sale securities. Debt securities that the Company has the positive intent and ability to hold to
maturity are classified as held-to-maturity securities and reported at amortized cost. Debt and equity securities that are bought and
held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with
unrealized gains and losses included in earnings. Debt and equity securities not classified as either held-to-maturity securities or
trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses recognized
in accumulated other comprehensive income. As of December 31, 2010 and 2011, the Group did not hold trading securities or held-
to-maturity securities.
When there is objective evidence that an available-for-sale investment is impaired, the cumulative losses from declines in fair value
that had been recognized directly in other comprehensive income (loss) are removed from equity and recognized in earnings. When
the available-for-sale investment is sold, the cumulative fair value adjustments previously recognized in accumulated other
comprehensive income are recognized in the current period operating results. When the Group determines that the impairment of an
available-for-sale equity security is other-than-temporary, the Group recognizes an impairment loss in earnings equal to the difference
between the investment’s cost and its fair value at the balance sheet date of the reporting period for which the assessment is made.
When other-than-temporary impairment has occurred for an available-for-sale debt security and the Group intends to sell the security
or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit
loss, an impairment loss is recognized in earnings equal to the difference between the investment’s amortized cost basis and its fair
value at the balance sheet date. The new cost basis will not be changed for subsequent recoveries in fair value. To determine whether
a loss is other-than-temporary, the Group reviews the cause and duration of the impairment, the extent to which fair value is less than
cost, the financial condition and near-term prospects of the issuer, and the Group’s intent and ability to hold the security for a period
of time sufficient to allow for any anticipated recovery of its amortized cost.
F-17
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
HKRPRFRS15
10.10.12
HKR pf_rend
HKG
19-Mar-2012 03:25 EST
ˆ200FNeb!tHfQfY%wRŠ
2*
0C
200FNeb!tHfQfY%w
290862 FIN 18
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ESS
Page 1 of 1
<11> Property, equipment and software
Property, equipment and software are stated at cost less accumulated depreciation and amortization. Depreciation and amortization
are computed using the straight-line method over the following estimated useful lives:
Leasehold improvements
Computer and equipment
Software
Office furniture and fixtures
Motor vehicles
Office buildings
Respective term of the leases or the estimated useful lives of the leasehold improvements
3 to 4 years
5 years
3 years
5 years
10 to 20 years
<12> Goodwill
Goodwill represents the excess of the purchase price over the fair value of the identifiable assets and liabilities acquired as a result of
the Group’s business acquisition. Goodwill is tested for impairment annually or more frequently if events or changes in circumstances
indicate that it might be impaired. The Group completes a two-step goodwill impairment test in December of each year. The first step
compares the fair value of each reporting unit to its carrying amount, including goodwill. If the fair value of a reporting unit exceeds
its carrying amount, goodwill is not considered to be impaired and the second step will not be required. If the carrying amount of a
reporting unit exceeds its fair value, the second step compares the implied fair value of goodwill to the carrying value of a reporting
unit’s goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business combination with
the allocation of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the
fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. This
allocation process is only performed for purposes of evaluating goodwill impairment and does not result in an entry to adjust the
value of any assets or liabilities. An impairment loss is recognized for any excess in the carrying value of goodwill over the implied
fair value of goodwill.
F-18
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
RRWIN-XENP143
10.10.12
HKR jayab0dc
HKG
20-Mar-2012 06:27 EST
ˆ200FNeb!tHinwiJw|Š
3*
0C
200FNeb!tHinwiJw
290862 FIN 19
HTM
ESS
Page 1 of 1
<13> Intangible assets
Intangible assets consist primarily of acquired game licenses and in-process research and development and backlog acquired from
business combinations.
Acquired game licenses are amortized on a straight-line basis over the shorter of the useful economic life of the relevant online game
or license period, which range from two to seven years. Amortization of acquired game licenses commences upon the commercial
launch of the related online game.
The Group recognizes intangible assets acquired through business acquisitions as assets separate from goodwill if they satisfy either
the “contractual-legal” or “separability” criterion. In-process research and development is indefinite lived until completion or
abandonment of the associated research and development efforts.
<14> Land use right
Land use right represents operating lease prepayments to the PRC’s land bureau for usage of the parcel of land where the Group’s
office building is located. Amortization is calculated using the straight-line method over the estimated land use right period of 44
years.
<15> Impairment of long-lived assets
The Group evaluates its long-lived assets, including finite-lived intangible assets, for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable or that the useful life is shorter than the Group had
originally estimated. The Group assesses the recoverability of the long-lived assets by comparing the carrying amount to the
estimated future undiscounted cash flow expected to result from the use of the assets and their eventual disposition. If the sum of the
expected undiscounted cash flows is less than the carrying amount of the assets, the Group would recognize an impairment loss based
on the fair value of the assets.
Indefinite-lived intangible assets are tested for impairment annually or more frequently if events or changes in circumstances indicate
that the asset might be impaired. The impairment test consists of a comparison of the fair value of the intangible asset to its carrying
amount. If the carrying amount exceeds the fair value, an impairment loss is recognized equal in amount to that excess.
F-19
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
RRWIN-XENP137
10.10.12
HKR kalar0dc
HKG
20-Mar-2012 06:29 EST
ˆ200FNeb!tHio5yuw,Š
3*
0C
200FNeb!tHio5yuw
290862 FIN 20
HTM
ESS
Page 1 of 1
<16>Revenue recognition
Online game services
The Group earns revenue from provision of online game operation services to players on the Group’s game servers and third party
platform and overseas licensing of the online game to other operators. The Group recognizes revenues when persuasive evidence of
an arrangement exists, services are delivered or performed, our price is fixed or determinable and collectability is reasonably assured.
Online game services to players on the Group’s game servers
The Group sells its prepaid game cards and prepaid online points for its online game products to distributors who in turn ultimately
sell them to players. There are two consumption models for the online game services.
1) Virtual item / service consumption model – online game services except WoW services
Players can access certain games free of charge, but may purchase game points to acquire in-game premium features. The distribution
of points to players is typically made by sales of prepaid game cards and prepaid online points. Fees for prepaid game cards and
prepaid online points are deferred when received. Revenue is recognized over the estimated life of the premium features or as the
premium features are consumed.
For in-game premium features that are immediately consumed, revenue is recognized upon consumption. For premium features with a
stated expiration time, which range from one to 90 days, revenue is recognized ratably over the period starting from when the feature
is first used to the expiration time. For perpetual features with no predetermined expiration, revenue is recognized ratably over the
estimated average lives of the perpetual features, which are typically less than one year. When estimating the average lives of the in-
game perpetual features, the Group considers the average period that players typically play the game, other player behavior patterns,
and factors including the acceptance and popularity of expansion packs, promotional events launched, and market conditions. Future
usage patterns of players may differ from the historical usage patterns on which the virtual item / service consumption revenue
recognition model is based. The Group continually monitors the operational statistics and usage patterns.
2)
Time consumption model – WoW services
Both prepaid cards and prepaid online points provide players with a pre-specified length of game playing time within a specified
period of time. All prepaid fees received from distributors are initially recognized as advances from customers. Prepaid fees are
recognized as deferred revenue upon the players’ online registration and activation of their cards or online points, and then recognized
as revenue based upon the actual usage of the game playing time by players or when the likelihood that it would provide further
online game service to those players is remote.
F-20
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
RRWIN-XENP137
10.10.12
HKR kalar0dc
HKG
20-Mar-2012 06:25 EST
ˆ200FNeb!tHincVNQPŠ
3*
0C
200FNeb!tHincVNQ
290862 FIN 21
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ESS
Page 1 of 1
First-time game players are required to purchase CD-Key in order to register a unique code for future game playing. The Group
determines whether an arrangement with multiple deliverables consists of more than one unit of accounting and whether such
arrangement should be allocated among the separate units of accounting. Determining whether an arrangement consists of more than
one unit of accounting and how consideration should be allocated among the separate units of accounting require significant
judgment, including judgment with regard to whether the delivered item(s) has value to the customer on a stand-alone basis and the
fair value of the undelivered item. Different judgments may result in different amounts and timing of revenue recognized. Such CD-
Key fees received from distributors are initially recognized as advances from customers. They are amortized over the shorter of one
year or WoW’s remaining license period ended on June 7, 2009, starting from the time when the game players activate the CD-Key.
CD-Key fees are also recognized as revenues when the likelihood that it would provide further online game service to those
customers is remote.
Online game operation services over third party platform
For social games, TV games and certain web games, while they are also adopting the virtual item / service consumption model, these
games are launched on the third party game platforms and mobile carriers. Revenue from social and web games operated through
third party game platforms are recognized upon consumption of the in-game premium features with the amount net of remittance to
the third party game platforms as the Group does not set the pricing of the in-game currency of the third party game platforms.
Revenue from TV games operated through telecom carrier is recognized upon consumption of the in-game premium features with the
gross amount received by telecom carrier as the Group is the primary obligor of the game operation. The remittance to telecom carrier
is recognized as costs of services when incurred.
Overseas licensing revenue
The Group licenses proprietary online games to operators in overseas market and receives license fees and royalty income in
connection with their operation of the games. License fee is recognized over the license period upon the commercialization of the
game in the overseas market. Royalty income is recognized when earned, provided that collectability is reasonably assured.
Other revenues
Other revenues include those generated from game operating support, website solutions and advertisement and short message
services.
F-21
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
RRWIN-XENP143
10.10.12
HKR jayab0dc
HKG
20-Mar-2012 06:32 EST
ˆ200FNeb!tHip5FdwuŠ
4*
0C
200FNeb!tHip5Fdw
290862 FIN 22
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ESS
Page 1 of 1
Game operating support, website solutions and advertisement
Game operating support, website solutions and advertisement revenue include revenues generated from providing technical support
services, including website development and construction, hardware and software support, training, maintenance and advertisements
to other customers. These revenues are recognized when delivery of the advertisement has occurred or when services have been
rendered and the collection of the related fees is reasonably assured.
Short message services
The Group contracts with various Chinese mobile carriers for the transmission of wireless short messaging services. Revenue is
recognized in the period in which services are performed, provided that no significant obligation remains, collection of receivables is
reasonably assured and the amount can be accurately estimated.
Sales tax
The Group is subject to sales tax at a rate of 5% and related surcharges on revenues earned for online game, TV games services, short
message services, game operating support, website solutions and advertisement. Sales tax and related charges for revenues earned
from the sale of online points are recognized as sales tax in the consolidated statements of operations and comprehensive income
(loss) and are deducted from gross revenues to arrive at net revenues.
<17>Advances from customers, deferred revenue, and deferred costs
Online points that have been sold but not activated are recognized as advances from customers. Online points that have been activated
but for which online game services will be rendered in the future are recognized as deferred revenue. Deferred revenue is recognized
as income based upon the actual consumption of in-game premium features or usage of the playing time by players or when the
likelihood that the Group would provide further online game service to those customers is remote. Direct service costs, primarily,
prepaid royalties, related to deferred revenue and advances from customers are also deferred. Deferred service costs are recognized in
the consolidated statements of operations and comprehensive income (loss) in the period in which the related online game’s prepaid
fees are recognized as revenue.
The Group licenses proprietary games to operators in other countries and receives license fees and royalty income. License fee
received in advance of the commercialization of the game is recorded in advances from operators.
<18>Cost of services
Cost of services consists primarily of online game royalties, payroll, depreciation, maintenance and rental of operation sites,
depreciation and amortization of computer equipment and software, production costs for prepaid game cards, intangible assets
amortization and other overhead expenses directly attributable to the services provided.
F-22
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
HKRPRFRS15
10.10.12
HKR pf_rend
HKG
19-Mar-2012 03:25 EST
ˆ200FNeb!tHfQmnwQ;Š
2*
0C
200FNeb!tHfQmnwQ
290862 FIN 23
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ESS
Page 1 of 1
<19>Product development costs
For software development costs, including online games, to be sold or marketed to customers, the Group expenses software
development costs incurred prior to reaching technological feasibility. Once a software product has reached technological feasibility,
all subsequent software costs for that product are capitalized until that product is released for marketing. After an online game is
released, the capitalized product development costs are amortized over the estimated product life. To date, the Group has essentially
completed its software development concurrently with the establishment of technological feasibility, and, accordingly, no costs have
been capitalized.
For website and internally used software development costs, the Group expenses all costs that are incurred in connection with the
planning and implementation phases of development and costs that are associated with repair or maintenance of the existing websites
and software. Costs incurred in the application and infrastructure development phase are capitalized and amortized over the estimated
product life. Since the inception of the Group, the amount of costs qualifying for capitalization has been immaterial and, as a result,
all website and internally used software development costs have been expensed as incurred.
Product development costs consist primarily of outsourced research and development expenses, payroll, depreciation charge and other
overhead expenses for the development of the Group’s proprietary games. Other overhead product development costs include costs
incurred by the Group to develop, maintain, monitor, and manage its websites.
<20>Sales and marketing expenses
Sales and marketing expenses consist primarily of advertising and promotional expenses, payroll and other overhead expenses
incurred by the Group’s sales and marketing personnel. Advertising expenses in the amount of RMB33.1 million, RMB23.5 million
and RMB32.8 million (US$5.2 million) for the years ended December 31, 2009, 2010 and 2011, respectively, were expensed as
incurred.
<21>Government grants
Unrestricted government subsidies from local government agencies allowing the Group full discretion to utilize the funds were RMB
57.0 million, RMB23.5 million and RMB1.2 million (US$0.2 million) for the years ended December 31, 2009, 2010 and 2011,
respectively, which were recorded in other income in the consolidated statements of operations and comprehensive income (loss).
<22>Share-based compensation
The Group measures the cost of employee services received in exchange for stock-based compensation at the grant date fair value of
the share-based awards. The fair value of the share awards were measured using the fair value of shares, while the fair value of the
options or equity warrants were measured using the Black-Scholes option pricing model with assumptions made regarding expected
term, volatility, risk-free interest rate, and dividend yield.
F-23
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
HKRPRFRS15
10.10.12
HKR pf_rend
HKG
19-Mar-2012 03:25 EST
ˆ200FNeb!tHfQnx5w$Š
2*
0C
200FNeb!tHfQnx5w
290862 FIN 24
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ESS
Page 1 of 1
The expected term represents the period of time that stock-based awards granted are expected to be outstanding. The expected term of
stock-based awards granted is determined based on historical data on employee exercise and post-vesting employment termination
behavior. Expected volatilities are based on historical volatilities of the Company’s ordinary shares and with consideration of
historical volatilities of comparable companies. Risk-free interest rate is based on United States (“US”) government bonds issued with
maturity terms similar to the expected term of the stock-based awards.
The Group recognizes compensation expense, net of estimated forfeitures, on all share-based awards on a straight-line basis over the
requisite service period, which is generally a one-to-four year vesting period. Forfeiture rate is estimated based on historical forfeiture
patterns and adjusted to reflect future changes in circumstances and facts, if any. If actual forfeitures differ from those estimates, the
estimates may need to be revised in subsequent periods. The Group uses historical data to estimate pre-vesting option forfeitures and
record stock-based compensation expense only for those awards that are expected to vest.
<23>Leases
Leases for which substantially all of the risks and rewards of ownership of assets remain with the leasing company are accounted for
as operating leases. Payments made under operating leases net of any incentives received by the Group from the leasing company are
charged to the consolidated statements of operations and comprehensive income (loss) on a straight-line basis over the lease periods.
<24>Income taxes
Current income taxes are provided for in accordance with the laws and regulations applicable to the Group as enacted by the relevant
tax authorities. Income taxes are accounted for under the asset and liability method. Deferred taxes are determined based upon
differences between the financial reporting and tax bases of assets and liabilities at currently enacted statutory tax rates for the years
in which the differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized as income in the
period of change. A valuation allowance is provided on deferred tax assets to the extent that it is more likely than not that such
deferred tax assets will not be realized. The total income tax provision includes current tax expenses under applicable tax regulations
and the change in the balance of deferred tax assets and liabilities.
The Group recognizes the impact of an uncertain income tax position at the largest amount that is more-likely-than not to be sustained
upon audit by the relevant tax authority. Income tax related interest is classified as interest expenses and penalties as income tax
expense.
F-24
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
HKRPRFRS15
10.10.12
HKR pf_rend
HKG
19-Mar-2012 03:25 EST
ˆ200FNeb!tHfQp0PQWŠ
2*
0C
200FNeb!tHfQp0PQ
290862 FIN 25
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ESS
Page 1 of 1
<25>Noncontrolling interest
A noncontrolling interest in a subsidiary or VIE of the Group represents the portion of the equity (net assets) in the subsidiary or VIE
not directly or indirectly attributable to the Group. Noncontrolling interests is presented as a separate component of equity in the
consolidated balance sheet and modifies the presentation of net income by requiring earnings and other comprehensive income to be
attributed to controlling and noncontrolling interest.
<26>Earnings (loss) per share
Basic earnings (loss) per share is computed by dividing net income (loss) attributable to the holders of ordinary shares by the
weighted average number of ordinary shares outstanding during the year. Diluted earnings (loss) per share is calculated by dividing
net income attributable to the holders of ordinary shares as adjusted for the effect of dilutive ordinary share equivalents, if any, by the
weighted average number of ordinary shares and dilutive ordinary share equivalents outstanding during the period. Ordinary share
equivalents of stock options and warrants are calculated using the treasury stock method. However, ordinary share equivalents are not
included in the denominator of the diluted earnings per share calculation when inclusion of such shares would be anti-dilutive, such as
in a period in which a net loss is recorded.
<27>Segment reporting
The Group has one operating segment whose business is developing and operating online games and related services. The Group’s
chief operating decision maker is the chief executive officer, who reviews consolidated results when making decisions about
allocating resources and assessing performance of the Group. As the Group primarily generates all its revenues from customers in the
PRC and almost all the Group’s long lived assets are located in the PRC, no geographical segments are presented.
<28>Comprehensive income (loss)
Comprehensive income (loss) is defined as the change in equity of the Group during a period from transactions and other events and
circumstances excluding those resulting from investments by owners and distributions to owners. Comprehensive income (loss)
includes such items as net income (loss), foreign currency translation adjustments and unrealized gain (loss) on available-for-sale
investments.
<29> Certain risks and concentration
Financial instruments that potentially subject the Group to significant concentrations of credit risk consist primarily of cash and cash
equivalents, accounts receivable and prepayments and other current assets. As of December 31, 2010 and 2011, substantially all of the
Group’s cash and cash equivalents were held by major financial institutions, which management believes are of high credit
worthiness.
F-25
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN05
10.10.12
HKR manil0dc
HKG
20-Mar-2012 11:47 EST
ˆ200FNeb!tHjMQvcwoŠ
4*
0C
200FNeb!tHjMQvcw
290862 FIN 26
HTM
ESS
Page 1 of 1
For the year ended December 31, 2009, total revenue contributed by WoW was RMB710.3 million, including online game services
and WoW-related produce sales, which represented approximately 88% of the Group’s total revenues.
Due to the limited availability of online payment systems in China, a substantial portion of the Group’s sales are carried out via a
distribution network composed of third-party distributors. The Group sells in-game items and game playing time primarily through
sales of prepaid cards and prepaid online points to its players via Beijing Huiyuan Net Technology Co., Ltd., a national online
distributor. Accounts receivable from this national online distributor represent 56% and 9% of the Group’s total accounts receivable
as of December 31, 2010 and 2011, respectively.
<30>Acquisitions
The Group measures the consideration it transfers at fair value, which is calculated as the sum of the acquisition-date fair values of
the assets transferred, liabilities incurred to former owners of the acquiree, and equity instruments issued. The costs directly
attributable to the acquisition are expensed as incurred. Identifiable assets acquired and liabilities assumed are measured separately at
their fair value as of the acquisition date, irrespective of the extent of any noncontrolling interest. Contingent consideration is
measured at fair value and recorded as a liability. The excess of (i) the total cost of acquisition, fair value of the noncontrolling
interests and acquisition-date fair value of any previously held equity interest in the acquiree over (ii) the fair value of the identifiable
net assets of the acquiree is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary
acquired, the difference is recognized directly in the consolidated statement of operations.
<31>Fair value measurements
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 Company considers the principal or most advantageous market in which it would transact
and it considers assumptions that market participants would use when pricing the asset or liability. The fair value measurement
guidance provides a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon
the lowest level of input that is significant to the fair value measurement as follows:
Level 1 inputs are unadjusted quoted prices in active markets for identical assets that the management has the ability to access at the
measurement date.
Level 2 inputs include quoted prices for similar assets in active markets, quoted prices for identical or similar assets in markets that
are not active, inputs other than quoted prices that are observable for the asset (i.e., interest rates, yield curves, etc.), and inputs that
are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
F-26
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
HKRPRFRS15
10.10.12
HKR pf_rend
HKG
19-Mar-2012 03:25 EST
ˆ200FNeb!tHfQrLuQÉŠ
2*
0C
200FNeb!tHfQrLuQ
290862 FIN 27
HTM
ESS
Page 1 of 1
Level 3 inputs include unobservable inputs to the valuation methodology that reflect management’s assumptions about the
assumptions that market participants would use in pricing the asset. The management develops these inputs based on the best
information available, including their own data.
<32>Financial instruments
Financial instruments consist of cash and cash equivalents, accounts receivable, advances to suppliers, prepayments and other current
assets, prepaid royalties, accounts payable, advances from customers and long-term accounts payable. The carrying value of the
Group’s cash and cash equivalents, accounts receivable, accounts payable, and other short term financial instruments approximate
their market values due to the short-term nature of these instruments. The carrying value of long term accounts payable approximates
its fair value as the impact to discount the long term payable with interest rate is insignificant. The Group does not use derivative
instruments to manage risks.
<33>Recent accounting pronouncements
In May, 2011, the Financial Accounting Standards Board (FASB) issued ASU 2011-04, which expands ASC 820’s existing disclosure
requirements for fair value measurements and makes other amendments. These amendments in this update generally represent
clarifications of ASC 820, but also include some instances where a particular principle or requirement for measuring fair value or
disclosing information about fair value measurements has changed. This update results in common principles and requirements for
measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP. The amendments
in this update are to be applied prospectively. The amendments are effective for the Group during interim and annual periods
beginning after December 15, 2011. The adoption of this ASU is not expected to have a significant effect on the Group’s consolidated
financial statements.
In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income” (Topic 220) to amend requirements relating to the
presentation of comprehensive income. The update eliminates the option to present components of other comprehensive income as
part of the statement of changes in stockholders’ equity and provides an entity with the option to present 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. This guidance, which is to be applied retrospectively, is
effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Also, in December 2011, the
FASB issued ASU 2011-12 to abrogate the requirement for presentation in the income statement of the effect on net income of
reclassification adjustments out of accumulated other comprehensive income as required in ASU 2011-05. The adoption of these
ASUs are not expected to have a significant effect on the Group’s consolidated financial statements.
F-27
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN05
10.10.12
HKR manil0dc
HKG
20-Mar-2012 11:48 EST
ˆ200FNeb!tHjMYNfQzŠ
3*
0C
200FNeb!tHjMYNfQ
290862 FIN 28
HTM
ESS
Page 1 of 1
In September 2011, the FASB issued ASU 2011-08, “Testing Goodwill for Impairment” (ASU 2011-08). Under the revised guidance,
entities testing for goodwill impairment have an option of performing a qualitative assessment before calculating the fair value for the
reporting unit, i.e., Step 1 of the goodwill impairment test. If an entity determines, on a basis of qualitative factors, that the fair value
of the reporting unit is more likely than not less than the carrying amount, the first step of the two-step impairment test would be
required. If it is not more likely than not that the fair value of the reporting unit is less than the carrying value, then goodwill is not
considered to be impaired. ASU 2011-08 does not change how goodwill is calculated or assigned to reporting units, nor does it revise
the requirement to test goodwill at least annually for impairment. This ASU is effective for interim and annual periods beginning after
December 15, 2011 with early adoption permitted. The adoption of this ASU is not expected to have a significant effect on the
Group’s consolidated financial statements.
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
adoption of this ASU is not expected to have a significant effect on the Group’s consolidated financial statements.
3. CONVENIENCE TRANSLATION
The Group, with the exception of its subsidiaries, Red 5, Red 5 Singapore and The9 Korea, maintains its accounting records and
prepares its financial statements in RMB. The United States dollar (“US dollar” or “US$”) amounts disclosed in the accompanying
financial statements are presented solely for the convenience of the readers at the rate of US$1.00 = RMB6.2939, representing the
noon buying rate in the City of New York for cable transfers of RMB, as certified for customs purposes by the Federal Reserve Bank
of New York, on December 30, 2011. Such translations should not be construed as representations that the RMB amounts represent,
or have been or could be converted into, United States dollars at that or any other rate.
4. VARIABLE INTEREST ENTITIES
The Group is the primary beneficiary of certain VIEs, including i) Shanghai IT and Huopu Cloud which were designed by the Group
to comply with PRC regulations that prohibit direct foreign ownership of businesses that operate online games in the PRC, and ii) Fire
Rain, Wanyouyl and Mengxiang Hulian, which are start-up research and development companies (“R&D VIEs”) developing games
funded by the Group.
F-28
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN01
10.10.12
HKR kriss2dc
HKG
22-Mar-2012 01:48 EST
ˆ200FNeb!tHpa=s7QSŠ
3*
0C
200FNeb!tHpa=s7Q
290862 FIN 29
HTM
ESS
Page 1 of 1
Shanghai IT and Huopu Cloud
Shanghai IT is a VIE whose shares were previously held by the Company’s chief executive officer and a vice president, and its shares
are now held by the vice president and another employee of the Company. Shanghai IT holds an Internet Content Provider (“ICP”)
license and other licenses for online game provision and collects revenue on behalf of the Group for its online games. Shanghai IT
also provides other game operating support services and website solutions. Shanghai Jiucheng Advertisement was established by
Shanghai IT in April 2007. The Company does not have any direct ownership interest in Shanghai IT, or Shanghai Jiucheng
Advertisement (collectively “Shanghai IT”). For the operation of WoW, subsidiaries of the Company entered into master agreements
with Shanghai IT, who merely acted as the provider of domain name granted by the Company and Internet content provider. The
Group’s games other than WoW are operated by Shanghai IT. The9 Computer, a wholly-owned subsidiary of the Company, entered
into an exclusive technical service agreement to provide technical service to Shanghai IT. In addition, The9 Computer entered into a
series of agreements with the equity owners including equity pledge agreements and call option agreements which effectively
assigned virtually all of the equity owners’ rights to the Company, including the right to declare dividends and an option to acquire all
of the equity shares of Shanghai IT. In November 2011, the Company’s chief executive officer transferred his equity interest and
assigned all his respective rights and obligations with respect to the loans to another employee of the Group.
In December 2010, Huopu Cloud was established in the PRC by two of the Company’s employees at the direction of the Company.
As foreign-invested companies are prohibited or restricted from providing online game services in the PRC, the Group planned to
perform certain online game operations and provide website solutions through Huopu Cloud. Since the Group did not have any equity
interest in Huopu Cloud, the Group, through The9 Computer, entered into a series of agreements with Huopu Cloud and its equity
owners, pursuant to which the Group is entitled to receive effectively all economic benefits generated from the equity interests in
Huopu Cloud. The series of agreements included (i) equity pledge agreements under which the equity owners pledged all of their
equity interests in Huopu Cloud as guarantee of their obligations under the loan agreement, (ii) call option agreements under which
the equity owners granted The9 Computer an option to transfer all or part of the equity interests in Huopu Cloud to The9 Computer or
its designee to the extent permitted by the PRC law, (iii) shareholder voting proxy agreements which effectively assigned virtually all
of the equity owners’ rights to the Company, including all voting rights and the right to declare dividends, (iv) an exclusive technical
service agreement under which The9 Computer shall provide technical services to Huopu Cloud exclusively for a service fee, and
(v) loan agreements under which The9 Computer extended interest-free loans of a total of RMB50 million to the equity owners for
their respective capital contributions in Huopu Cloud. The equity owners effectively acted on behalf of the Company to fund the
required capital contributions from the Company into Huopu Cloud. For operation of certain games, Huopu Cloud acted as the
provider of domain name granted by the Company and it may perform part of operating work.
F-29
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
RRWIN-XENP139
10.10.12
HKR arumv1dc
HKG
20-Mar-2012 11:49 EST
ˆ200FNeb!tHjMw=!Q?Š
3*
0C
200FNeb!tHjMw=!Q
290862 FIN 30
HTM
ESS
Page 1 of 1
As a result of the afore-mentioned contractual arrangements, the Group has the power to direct the activities that most significantly
impact the economic success of Shanghai IT and Huopu Cloud and effectively assumes the obligation to absorb losses and has
exclusive rights to receive benefits that are significant to Shanghai IT and Huopu Cloud. Accordingly, the Group is the primary
beneficiary of Shanghai IT and Huopu Cloud and has included these entities in its consolidated financial statements since their
establishment.
PRC laws and regulations currently limit foreign ownership of companies that provide Internet content services, which include
operating online games. In addition, foreign invested enterprises are currently not eligible to apply for the required licenses for
operating online games in the PRC. The Company is incorporated in the Cayman Islands and is considered a foreign entity under the
PRC laws. Due to restrictions on foreign ownership of the provision of online games, the Company is dependent on the licenses held
by Shanghai IT to conduct its online games business through its subsidiary in the PRC. Shanghai IT holds the necessary licenses and
approvals that are essential for the online game business. The9 Computer has entered into contractual arrangements with Shanghai IT
for use of its relevant licenses and websites. Shanghai IT is principally owned by certain shareholder and employee of the Company.
Pursuant to certain other agreements and undertakings, the Company in substance controls Shanghai IT. In the opinion of the
Company’s directors, the Company’s current ownership structures and its contractual arrangements with Shanghai IT, and its equity
owners as well as its operations, are in compliance with all existing PRC laws and regulations. However, there may be changes and
other developments in the PRC laws and regulations or their interpretation. Specifically following the recent promulgation of the
GAPP Circular, it is unclear whether the authorities will deem our VIE structure and contractual arrangements with Shanghai IT as an
“indirect or disguised” way by foreign investors to gain control over or participate in domestic online game operators, and challenge
our VIE structure accordingly. Accordingly, the Company cannot be assured that the PRC government authorities will not take a view
in the future contrary to the opinion of the Company’s directors. If the current ownership structures of the Group and its contractual
arrangements with Shanghai IT are found to be in violation of any existing or future PRC laws or regulations, the Group may be
required to restructure its ownership structure and operations in the PRC to comply with changing or new PRC laws and regulations.
The Group has concluded that the aforementioned contractual arrangements are legally enforceable and provide the Group with full
control of the VIEs. However, the aforementioned contractual arrangements with the VIEs and their respective shareholders are
subject to risks and uncertainties:
•
•
The VIEs and their respective shareholders may have or develop interests that conflict with the Group’s interests, which
may lead them to pursue opportunities in violation of the aforementioned contractual arrangements.
The VIEs or their shareholders could fail to obtain the proper operating licenses or fail to comply with other regulatory
requirements. As a result, the PRC government could impose fines, new requirements or other penalties on the VIEs or the
Group, mandate a change in ownership structure or operations for the VIEs or the Group, restrict the VIEs or the Group’s
use of financing sources or otherwise restrict the VIEs or the Group’s ability to conduct business.
F-30
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
RRWIN-XENP139
10.10.12
HKR arumv1dc
HKG
20-Mar-2012 11:48 EST
ˆ200FNeb!tHjMZYuw\Š
3*
0C
200FNeb!tHjMZYuw
290862 FIN 31
HTM
ESS
Page 1 of 1
•
•
•
The aforementioned contractual agreements may be unenforceable or difficult to enforce. The equity pledge agreements
may not be properly registered or may be deemed improperly registered or the VIEs or the Group may fail to meet other
requirements. Even if the agreements are enforceable, they may be difficult to enforce given the uncertainties in the PRC
legal system.
The PRC government may declare the aforementioned contractual arrangements invalid. They may modify the relevant
regulations, have a different interpretation of such regulations, or otherwise determine that the Group or the VIEs have
failed to comply with the legal obligations required to effectuate such contractual arrangements.
It may be difficult to finance the VIEs by means of loans or capital contributions. Loans from our offshore parent company
to the VIEs must be approved by the relevant PRC government body and such approval may be difficult or impossible to
obtain. Because the VIEs are domestic PRC enterprises owned by our nominee shareholders, we are not likely to finance
their activities by means of direct capital contributions as well.
R&D VIEs
Fire Rain, Wanyouyl and Mengxiang Hulian are game studios located in different cities in the PRC. Fire Rain and Wanyouyl have
been primarily engaged in the development of MMORPGs since 2009 and Mengxiang Hulian has started the development of web and
mobile game since 2011. The Group had arrangements with each of Fire Rain, Wanyouyl and Mengxiang Hulian whereby the Group
provided substantial financial support and obtained equity interests in these entities. These entities are primarily involved in
developing online games which the Group has acquired or has an option to acquire exclusive licenses in Mainland China or
worldwide for the game under development. As of December 31, 2010 and 2011, the Group held equity interest of 25% of Fire Rain
and 20% of Wanyouyl, respectively. As of December 31, 2011, the Group effectively held 20% of Mengxiang Hulian.
Under the above arrangements with the R&D VIEs, the Group has the power to make decisions that significantly affect the entities’
operations and effectively assumed a majority of economic risks associated with these entities, and has the obligation to absorb losses
and the right to receive returns that are significant to these entities. As such, the Group is the primary beneficiary of these entities and
has included them in its consolidated financial statements since their respective dates of incorporation.
F-31
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
RRWIN-XENP139
10.10.12
HKR arumv1dc
HKG
20-Mar-2012 11:51 EST
ˆ200FNeb!tHjNPTXwWŠ
3*
0C
200FNeb!tHjNPTXw
290862 FIN 32
HTM
ESS
Page 1 of 1
Summary financial information of the VIE subsidiaries included in the accompanying consolidated financial statements before
elimination of intercompany balances and transactions are as follows:
Total assets
Total liabilities
Revenue
Net loss
December 31,
2010
RMB
December 31,
2011
RMB
141,428,028
265,829,394
55,783,086
248,540,735
December 31,
2011
US$
(Note 3)
8,863,040
39,489,146
December 31,
2009
RMB
December 31,
2010
RMB
December 31,
2011
RMB
December 31,
2011
US$
(Note 3)
802,074,406
(79,376,759)
107,447,650
(72,685,391)
104,859,164
(54,324,661)
16,660,443
(8,631,319)
5. ACQUISITION
On April 6, 2010, the Group, through New Star, closed the acquisition of 39,766,589 shares of Series A convertible preferred stock of
Red 5, an online game developer based in the US. The purchase price consisted of US$1.84 million paid in January 2010 to purchase
16,229,470 shares of outstanding series A convertible preferred stock from existing shareholders and US$15 million to purchase
23,537,119 shares of newly issued Series A convertible preferred stock, of which U$8 million was paid in 2010 and US$7 million
was paid in 2011. As a result, the Company owned approximately 82% of the equity interest of Red 5 on an as-converted basis and
became the controlling shareholder of Red 5 as of April 6, 2010. The acquisition has been accounted for as a purchase business
combination and the results of operations from the acquisition date have been included in the Group’s consolidated financial
statements subsequent to the acquisition date. The allocation of the purchase price of US$16.84 million (RMB114.9 million) is as
follows:
Cash
Subscription receivable
Fixed assets
Identifiable intangible assets:
In-process research and development
Backlog
Goodwill
Other assets
Liabilities assumed
Deferred tax liability
Noncontrolling interest at fair value
Total
F-32
RMB
11,876,274
95,549,799
3,650,947
12,285,000
2,730,000
10,870,537
1,968,347
(2,599,092)
(5,981,135)
(15,417,870)
114,932,807
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
RRWIN-XENP141
10.10.12
HKR radhd0dc
HKG
20-Mar-2012 12:21 EST
ˆ200FNeb!tHjSVn5QJŠ
6*
0C
200FNeb!tHjSVn5Q
290862 FIN 33
HTM
ESS
Page 1 of 1
The excess of purchase price over tangible assets and identifiable intangible assets acquired and liabilities assumed was recorded as
goodwill. The acquired goodwill is not deductible for tax purposes.
In addition, the Group is contingently liable to pay up to US$3.65 million (RMB24.9 million) if certain former Red 5 employees
fulfill employment contracts with the Company ranging from two to four years. Such amounts are being recorded as compensation
expense on a straight line basis over the requisite service period.
Subsequent to April 6, 2010, the Group acquired 777,723 and 2,020,601 shares of common stock of Red 5 from the noncontrolling
interest holders for US$0.1 million (RMB0.6 million) and US$0.2 million (RMB1.4 million) cash in 2010 and 2011, respectively. The
equity interest increased to approximately 88% on an as-converted basis as of December 31, 2011.
As of the date of acquisition, Red 5 was in the process of fulfilling its obligations under a game development and license agreement
executed in 2006 and amended in 2009 between Red 5 and a third party game publisher to develop an online game (Firefall) in
exchange for cash consideration from the third party game publisher. The Group has settled the game development and license
agreement with the third party game publisher. Please refer to Note 12.
The Group measured the fair value of in-process research and development of the game based on multi-period excess earnings
method, which is the present value of the projected cash flows that are expected to be generated by the existing intangible asset after
reduction by an estimated fair rate of return on contributory assets necessary to realize the projected earnings attributable to the
intangible asset. Backlog was valued using the multi-period excess earnings method based on the discounted cash flows to be
generated from the rights and obligations under the agreement with the third party game publisher. The discounted cash flow model
requires the use of significant unobservable inputs, including estimated costs to complete the game development, estimated game
launch schedule, projected revenues, expenses, capital expenditures and other costs, and discount rates calculated based on the
weighted average cost of capital, which includes various factors, such as risk-free rate, equity risk premium, size premium, and other
risk factors.
Acquisition-related costs amounted to RMB0.2 million and were included in general and administrative expenses in the year ended
December 31, 2010.
The following unaudited pro forma information summarizes the results of operations of the combined entity for the years ended
December 31, 2009 and 2010, as if the acquisition of Red 5 has occurred on January 1, 2009 and 2010, respectively. The following
pro forma financial information is not necessarily indicative of the results that would have occurred had the acquisition of Red 5 been
completed at the beginning of the periods indicated, nor is it indicative of future operating results:
Pro forma for 2009
Pro forma for 2010
F-33
Revenue
RMB
Net Loss
RMB
802,629,351
108,513,582
(491,679,970)
(532,673,479)
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
RRWIN-XENP141
10.10.12
HKR radhd0dc
HKG
20-Mar-2012 11:58 EST
ˆ200FNeb!tHjQNWPQÈŠ
5*
0C
200FNeb!tHjQNWPQ
290862 FIN 34
HTM
ESS
Page 1 of 1
Revenue and net loss from Red 5 since the acquisition date included in the consolidated statement of operations and comprehensive
loss for the year ended December 31, 2010 was nil and RMB46.2 million, respectively.
6. PREPAYMENTS AND OTHER CURRENT ASSETS
Prepayments and other current assets are as follows:
Receivable from cost method investee (Note 8 (1))
Accrued interest income
Prepayments and deposits
Others
December 31,
2010
RMB
December 31,
2011
RMB
December 31,
2011
US$
(Note 3)
28,019,115
2,602,939
19,305,985
14,041,698
29,081,174
2,689,359
17,511,127
16,778,481
4,620,533
427,296
2,782,238
2,665,833
63,969,737
66,060,141
10,495,900
7. PREPAID ROYALTIES AND DEFERRED COSTS
Other than impairment related to WoW operation disclosed in Note 29, due to weaker than expected operating performance of certain
games other than WoW, the Group also recognized an impairment loss for prepaid royalties and deferred costs of RMB60.9 million
and RMB0.4 million, respectively, for the year ended December 31, 2009, RMB5.5 million and nil, respectively, for the year ended
December 31, 2010, and nil and nil, respectively, for the year ended December 31, 2011. The impairment charges of prepaid royalties
and deferred cost were included in cost of services in the consolidated statements of operations and comprehensive income (loss).
8. INVESTMENTS IN EQUITY INVESTEES
The Group’s investments in equity investees comprise the following:
December 31,
2010
RMB
December 31,
2011
RMB
December 31,
2011
US$
(Note 3)
Share
ownership
as of
December 31,
2011
%
894,361
0
0
18.6%
Investments accounted for under equity method:
Object Software Limited (“Object Software”)
Beijing Zhongqing Shenglian Internet
Technology Co., Ltd. (“BZSIT”)
Beijing Linkage Technology Co., Ltd. (“BLT”)
Shanghai Jichuang Network Technology Co.,
Beijing Boran Lexiang Technology Co., Ltd.
Ltd. (“Jichuang”)
(“Boran Lexiang”)
Investments accounted for under cost method:
Shanghai Institute of Visual Art of Fudan
University (“SIVA”)
0
11,963,228
0
9,706,069
0
1,542,139
0
0
2,816,574
447,508
2,018,339
320,682
10,000,000
10,000,000
1,588,840
G10 Entertainment Corporation (“G10”)
24,892,921
24,892,921
3,955,087
OpenFeint Inc. (“OpenFeint”)
27,093,200
0
0
“CrowdStar Inc. (“Crowdstar”)”
Total
0
74,843,710
22,617,240
72,051,143
3,593,518
11,447,774
F-34
49%
45%
30%
15%
1.2%
13.7%
0%
2.3%
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
HKRPRFRS15
10.10.12
HKR pf_rend
HKG
19-Mar-2012 03:26 EST
ˆ200FNeb!tHfQ&V8woŠ
2*
0C
200FNeb!tHfQ&V8w
290862 FIN 35
HTM
ESS
Page 1 of 1
<1> G10
In April 2008, the Group, through China Crown Technology, invested US$38.3 million in cash to subscribe 3,031,232 preferred
shares issued by G10, an established Korean online game developer and operator, which accounted for less than 20% of the equity
interest in G10 on an as converted basis. The preferred shares are convertible, non-redeemable and with a liquidation preference.
Considering the liquidation preference is substantive and not available to common shares, the preferred shares are not in substance
common shares and equity accounting is not applicable. On the other hand, considering the preferred shares are non-redeemable, they
are not debt securities. Accordingly, the Group accounted for the investment in G10 under cost method, with an amount of US$39.5
million, including US$1.2 million transaction cost. Pursuant to the Series B Preferred Share Subscription Agreement entered into
between G10 and the Group, the purchase price would be reduced by up to US$25.0 million if G10’s consolidated net income does
not reach the predetermined target for the period from July 1, 2009 to June 30, 2010. The target was not met in the predetermined
period, which would result in a purchase price reduction of US$25.0 million under the Share Subscription Agreement. After further
negotiations, both parties reached a settlement agreement in November 2010 whereby the purchase price was reduced by US$10.0
million, payable in 26 equal monthly installments beginning in February 2011. A Korean bank issued an irrevocable guarantee to the
Group, guaranteeing payment of up to US$10.0 million of G10’s obligation under the settlement agreement. The adjustment to the
purchase price was accounted for as a reduction in the carrying value of the underlying investment at the time of the settlement. As of
December 31, 2011, RMB29.1 million (US$4.6 million) receivable due in 2012 was recorded in prepayments and other current assets
and RMB7.3 million (US$1.2 million) receivable due in and after 2013 was recorded in other long-term assets.
As G10’s performance was less than satisfactory, which indicates that a decrease in value of the Group’s investment may be other
than temporary, the Group performed an impairment assessment and recognized an impairment loss of RMB184.9 million for the year
ended December 31, 2010. The Group measured the fair value of the investment based on a combination of discounted cash flow
approach and market approach. Discounted cash flow approach is used for G10 and its non-public subsidiaries. Market approach is
used for its public subsidiary based on the market capitalization of the subsidiary. Key assumptions included the probabilities of
liquidation and conversion, discounted cash flow and the lack of marketability discount rate. The discounted cash flow analysis
requires the use of significant unobservable inputs, including estimated costs to complete game development, estimated game launch
schedule, projected revenue, expenses, capital expenditures and other costs, and discount rates calculated based on the weighted
average cost of capital, which including various factors, such as risk-free rate, equity risk premium, size premium, and other risk
factors. The Group performed an impairment assessment and determined that there is no impairment in the investment as of
December 31, 2011.
F-35
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
HKRPRFRS12
10.10.12
HKR pf_rend
HKG
19-Mar-2012 03:38 EST
ˆ200FNeb!tHfT#&@QQŠ
4*
0C
200FNeb!tHfT#&@Q
290862 FIN 36
HTM
ESS
Page 1 of 1
In December 2011, pursuant to the agreements between the shareholders of G10 and T3 Entertainment Co., Ltd. (“T3”), a wholly-
owned subsidiary of G10, G10 was spun off and the shareholders of G10 became shareholders of T3 at the same shareholding
percentage. In February 2012, the changes in shareholding structures of G10 and T3 was completed and the Group owned 32,290
ordinary shares of T3, which reflects the same percentage of equity the Group owned in G10 on an as converted basis.
<2> OpenFeint
In July 2010, the Group, through Asian Way, invested US$4.0 million in the form of cash to subscribe 987,654 Series 3 preferred
stocks issued by OpenFeint, a San Francisco-based company that develops mobile games and operates OpenFeint, a leading mobile
social platform for smart phones. The investment accounted for less than 20% of OpenFeint on an as converted basis.
In April 2011, together with all the then existing shareholders of OpenFeint, the Group sold all of its Series 3 preferred stocks of
OpenFeint to a third party for US$10.9 million (RMB68.7million) cash consideration and recognized a gain on investment disposal of
RMB44.4million (US$7.1 million) for the year ended December 31, 2011 accordingly.
In December 2010, the Group entered into a software license agreement with OpenFeint for the Group to launch and operate
OpenFeint and its related software for five years after commercial launch in PRC. The Group launched The9 Game Zone powered by
OpenFeint in April 2011.
<3> CrowdStar
In May and November 2011, the Group invested US$2.5 million and US$1 million cash, respectively, to subscribe 118,030 and
47,212 Series 2 preferred stocks issued by CrowdStar, a San Francisco-based social and mobile game company, which accounted for
less than 20% of its total outstanding equity on an as converted basis. The preferred stocks are convertible, non-redeemable, have a
liquidation preference and do not have a readily determinable fair value.
F-36
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
HKRPRFRS15
10.10.12
HKR pf_rend
HKG
19-Mar-2012 03:26 EST
ˆ200FNeb!tHfR1mhwHŠ
2*
0C
200FNeb!tHfR1mhw
290862 FIN 37
HTM
ESS
Page 1 of 1
9. AVAILABLE-FOR-SALE INVESTMENTS
<1>Investment in Youjia Group Limited. (“Youjia”)
In November 2011, the Group acquired 925,926 redeemable and convertible preferred shares of Youjia, a mobile social application
developer based in the PRC, for a consideration of US$1.0 million. The Group’s investment represented 6.67% of Youjia’s equity
interest on an as converted basis. The Group recorded the investment in Youjia as an available-for-sale investment as the redeemable
convertible preference share are in substance a debt security. As of December 31, 2011, the Group determined that the fair value of
the investment in Youjia approximated the carrying value of RMB 6.3 million.
<2>Investment in Infocomm Asia Holdings Pte Ltd. (“IAH”)
In July 2006, the Group acquired 2,000,000 redeemable and convertible preferred shares of Infocomm Asia Holdings Pte. Ltd.
(“IAH”), a Singapore online game operator, for a consideration of US$2.0 million.
In April 2009, the Group entered into a convertible loan agreement with IAH. Under the agreement, IAH issued a US$1.0 million
convertible loan to the Group, which bears an interest of 3% per annum.
IAH went into serious financial difficulty in 2009, causing a significant decline in fair value of the Group’s investment in IAH. In late
2009, the Group assessed the recoverability of its investments in IAH and did not expect to recover the cost of preferred shares and
convertible loan and recognized full impairment loss of RMB36.0 million on the investments. The Group recognized RMB22.4
million as an impairment loss in earnings and reversed RMB13.6 million unrealized gain that was previously recognized in other
comprehensive income for the year ended December 31, 2009.
In June 2010, the Group sold the investments in IAH, to a third party with total proceeds of approximately RMB6.8 million (US$1.0
million) and recognized a gain on disposal of the investment at the same amount for the year ended December 31, 2010.
F-37
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
SERFBU-MWE-XN04
10.10.12
HKR jayav1dc
HKG
20-Mar-2012 11:49 EST
ˆ200FNeb!tHjMq0xwDŠ
5*
0C
200FNeb!tHjMq0xw
290862 FIN 38
HTM
ESS
Page 1 of 1
10. PROPERTY, EQUIPMENT AND SOFTWARE
Property, equipment and software and related accumulated depreciation and amortization are as follows:
Office buildings
Computer and equipment
Leasehold improvements
Office furniture and fixtures
Motor vehicles
Software
Construction in progress
Less: accumulated depreciation and amortization
Net book value
December 31,
2010
RMB
December 31,
2011
RMB
59,911,552
197,475,113
8,860,119
13,822,926
10,251,896
16,366,922
0
(248,627,064)
64,488,993
193,354,191
7,903,060
9,558,048
13,012,578
16,957,721
1,150,000
(245,911,570)
December 31,
2011
US$
(Note 3)
10,246,269
30,720,887
1,255,670
1,518,621
2,067,490
2,694,311
182,717
(39,071,414)
58,061,464
60,513,021
9,614,551
Depreciation and amortization charges for the years ended December 31, 2009, 2010 and 2011 amounted to RMB123.0 million,
RMB23.9 million and RMB14.9 million (US$2.4 million), respectively.
The Group recorded impairment of RMB21.1 million, RMB4.9 million and nil on equipment in 2009, 2010 and 2011, respectively, as
detailed at Note 15.
11. GOODWILL
The changes in the carrying amount of goodwill for the years ended December 31, 2010 and 2011 are as follows:
Balance at January 1, 2010
Acquisition
Translation difference
Balance at December 31, 2010
Translation difference
Balance at December 31, 2011
Balance at December 31, 2011 US$ (Note 3)
Gross
Amount
RMB
30,199,751
10,870,537
(322,214)
40,748,074
(512,548)
40,235,526
6,392,781
Accumulated
Impairment
Loss
RMB
(30,199,751)
0
0
(30,199,751)
0
(30,199,751)
(4,798,257)
Net
Amount
RMB
0
10,870,537
(322,214)
10,548,323
(512,548)
10,035,775
1,594,524
In 2005, the Group recognized goodwill of RMB30.2 million and intangible assets of RMB283.7 million in connection with the
acquisition of equity interest in C9I. There was no change in the carrying amount of goodwill from the initial recognition date to
December 31, 2008. Due to the expiration of WoW license, related goodwill was fully impaired during the year ended December 31,
2009.
In 2010, the Group recognized goodwill of RMB10.9 million in connection with the business combination of Red 5 (Note 5).
F-38
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
SERFBU-MWE-XN04
10.10.12
HKR jayav1dc
HKG
20-Mar-2012 11:56 EST
ˆ200FNeb!tHjQDViw,Š
5*
0C
200FNeb!tHjQDViw
290862 FIN 39
HTM
ESS
Page 1 of 1
12. INTANGIBLE ASSETS
Gross carrying amount, accumulated amortization and net book value of the intangible assets as of December 31 are as follows:
<1> Intangible assets subject to amortization
December 31,
2010
RMB
December 31,
2011
RMB
December 31,
2011
US$
(Note 3)
Backlog
Acquired game licenses
Less: Accumulated amortization
Translation difference
Net book value of intangible assets subject to amortization
2,730,000
79,869,672
(76,791,769)
(80,920)
5,726,983
0
227,111,818
(78,750,399)
(209,639)
148,151,780
0
36,084,434
(12,512,179)
(33,308)
23,538,947
The Group and the licensors agreed to unwind certain game license agreements in 2010. The Group reclassified prepaid license fees
of RMB26.7 million from intangible assets to prepayments and other current assets in 2010, for the amount that would be refunded
according to the payment schedule.
Since its acquisition by the Group on April 6, 2010, Red 5 has been substantially devoting its operating activities to fulfill its
obligations under a game development and license agreement executed in 2006 and amended in 2009 between Red 5 and a third party
game publisher to develop Firefall in exchange for cash consideration from the third party game publisher. Prior to the acquisition,
Red 5 received a total of US$24.7 million cash consideration as an advance recoupable against future royalties payable to Red 5. Red
5 retained the ownership of the game and granted the third party game publisher an exclusive, non-transferable term license to market
and distribute the game and host the game to customers in specified regions after Red 5 completes the game development. Red 5
continues to perform its obligations under the agreement post-acquisition, including the provision of post-contract customer support
for the hosted version of the game to the third party game publisher during the term of the license. The initial term of the agreement is
from February 2006 through the fifth anniversary of the first commercial release of the initial game. Thereafter, the agreement can be
renewed in two-year terms.
In September 2011, Red 5 Korea, Red 5 Singapore and Red 5 entered into a series of agreements with the third party game publisher.
Pursuant to the agreement, Red 5 Singapore were substituted in full for the third party game publisher as a party under the game
development and license agreement between Red 5 and the third party game publisher, including the exclusive, non-transferable term
license to market and distribute the game and host the game to customers in specified regions. Under the agreements, the Group paid
US$10.0 million (RMB 62.9 million) and guaranteed an additional payment of US$12.7 million (RMB 79.9 million) to the third party
game publisher due within four years. In addition, the Group is subject to additional contingent payments to be calculated based on
certain percentages of the proceeds received from future game licensing and royalties, if any. The total consideration paid, including
the US$10 million (RMB62.9 million) and the guaranteed amount of US$12.7 million (RMB79.9 million), was recorded as acquired
game license and the contingent payments will be recorded as cost of services when incurred. The amount payable which is expected
to due on or before December 31, 2012 amounted to US$ 3.2 million (RMB 20.0 million) was recorded in accounts payable under
current liabilities. The remaining unpaid amount was recorded in long-term accounts payable.
F-39
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
SERFBU-MWE-XN04
10.10.12
HKR jayav1dc
HKG
20-Mar-2012 11:50 EST
ˆ200FNeb!tHjN5S3w^Š
4*
0C
200FNeb!tHjN5S3w
290862 FIN 40
HTM
ESS
Page 1 of 1
The Group pledged the intellectual property in relation to the game to secure the guaranteed amount. Following this license
acquisition, the previously recognized backlog of US$ 0.4 million in relation to the Red 5 acquisition was reclassified to acquired
game licenses as it was considered to be additional cost to acquire the game license paid in prior year.
Amortization expense related to intangible assets was RMB49.5 million, RMB10.0 million and RMB2.0 million (US$0.3 million) for
the years ended December 31, 2009, 2010 and 2011, respectively. As of December 31, 2011, the estimated aggregate amortization
expense from existing intangible assets for each of the five succeeding fiscal years is as follows:
2012
2013
2014
2015
2016
Total
RMB
17,974,753
20,608,033
20,608,033
20,608,033
20,608,033
100,406,885
US$
(Note 3)
2,855,901
3,274,287
3,274,287
3,274,287
3,274,287
15,953,049
<2> Intangible assets not subject to amortization
In-process research and development
Translation difference
Net book value of intangible assets not subject to
amortization
December 31,
2010
RMB
December 31,
2011
RMB
December 31,
2011
US$
(Note 3)
12,285,000
(364,141)
12,285,000
(943,380)
1,951,890
(149,888)
11,920,859
11,341,620
1,802,002
The Group recorded impairment on intangible assets of RMB27.5 million, RMB33.0 million and nil in 2009, 2010 and 2011,
respectively, which was recorded in the impairment of equipment, intangible assets and goodwill line item in the consolidated
statements of operations and comprehensive loss, as detailed in Note 15.
F-40
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
RRWIN-XENP136
10.10.12
HKR kalar0dc
HKG
20-Mar-2012 11:49 EST
ˆ200FNeb!tHjMlWzw@Š
3*
0C
200FNeb!tHjMlWzw
290862 FIN 41
HTM
ESS
Page 1 of 1
13. LAND USE RIGHT
Gross carrying amount, accumulated amortization and net book value of land use right are as follows:
Land use right
Less: accumulated amortization
Net book value
December 31,
2010
RMB
December 31,
2011
RMB
85,160,349
(7,203,413)
85,160,349
(9,124,323)
December 31,
2011
US$
(Note 3)
13,530,617
(1,449,709)
77,956,936
76,036,026
12,080,908
Amortization charge for the years ended December 31, 2009, 2010 and 2011 amounted to RMB1.9 million, RMB1.9 million and
RMB1.9 million (US$0.3 million), respectively.
14. Other long-term assets
Other long-term assets are as follows:
December 31,
2010
RMB
December 31,
2011
RMB
Deferred employee compensation
Prepayment and deposits for property, equipment and software
Receivable from cost method investee (Note 8(1))
Receivable from WoW game points refund agent (Note 19)
Others
18,462,866
0
38,207,885
0
157,151
10,708,214
28,565,286
7,270,199
28,651,292
561,612
December 31,
2011
US$
(Note 3)
1,701,364
4,538,567
1,155,118
4,552,232
89,231
Total
56,827,902
75,756,603
12,036,512
15. IMPAIRMENT OF LONG-LIVED ASSETS
The expiration of the WoW license on June 7, 2009 and operating loss of certain other games were trigger events for long-lived assets
impairment analyses. The Group determined its long-lived asset groups, which the Group considers to be “held and used” in its
operations, based upon certain factors including assessing the lowest level for which identifiable cash flows are largely independent
of the cash flows of other groups of assets and liabilities. The asset groups consist of the Group’s operating assets for respective
games and entity-wide assets such as the Group’s office building and land use right.
F-41
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN07
10.10.12
HKR balub0dc
HKG
20-Mar-2012 11:50 EST
ˆ200FNeb!tHjM#G7w1Š
3*
0C
200FNeb!tHjM#G7w
290862 FIN 42
HTM
ESS
Page 1 of 1
The impairment assessment related to WoW asset group was detailed in Note 29. For asset groups related to games other than WoW,
estimates of future cash flows developed during the revision of the original budgets by taking into consideration of lower than
expected projected operating performance as well as market acceptance of games that have not been commercially launched and
expected future game operations, indicated certain asset groups of the Company may not recover their carrying value. As a result of
the Company’s impairment tests, impairments were identified on the asset groups of certain games, licensing fees paid for certain
games that the Group has not commercially launched and certain idle computer equipment. The impairment provision was recognized
equal to the excess of the carrying value over the fair value of the associated assets. The Group determined the fair value of the assets
group using the income approach. The income approach included the use of a discounted cash flow model, which required
assumptions of projected revenue expenses, capital expenditures and other costs, as well as a discount rate calculated based on the
risk profile of the online game industry. The impairment charges were recognized as follows:
(i) Due to weaker than expected operating performance of certain games, the Group recognized impairment provisions on computer
equipment and acquired game licenses of RMB7.6 million and RMB26.7 million, respectively, in 2009. Impairment provisions
on computer equipment and acquired game licenses of RMB4.9 million and RMB21.5 million, respectively, were recognized in
2010. No such impairment provision was made in 2011. A significant factor for the internally developed income approach is
forecasting performance and revenue from the games. The Group continued to monitor the actual revenue performance versus
forecast revenue. Due to the lower than expected market acceptance of the games and the following the content updates, certain
games experienced significantly lower than expected user levels and revenue.
(ii) The Group has been monitoring its licensed games that have not commercially launched, including but not limited to their
market acceptance and operational performance in other regions where they are commercially launched and operated by other
operators. The Group incorporates these factors into its continuous evaluation of the forecasted results of the respective games
and taking into account the Group’s expected commercial launch and cash flows in the evaluation of potential impairment of the
carrying value of upfront licensing fees. Based on the Group’s impairment tests, impairment provisions on acquired game
licenses of RMB0.8 million and RMB11.5 million and nil were recognized in 2009, 2010 and 2011, respectively.
(iii) During the year ended December 31, 2009, impairment provisions on idle computer equipment of RMB13.6 million was
recognized in view of the low possibility to reuse the idle computer equipment in the foreseeable future.
16. FAIR VALUE MEASUREMENTS
Assets and Liabilities Measured at Fair Value on a Recurring Basis
As of December 31, 2009 and 2010, the Group did not have any assets or liabilities measured at fair value on a recurring basis after
initial recognition.
The Group’s assets measured at fair value on a recurring basis consisted of the following as of December 31, 2011:
Available-for- sale investment- Youjia
(Note 9)
Fair Value Measurements at Reporting Date Using
Quoted Price in
Active Markets
for Identified
assets (Level 1)
RMB
Significant
Other
Observable
Inputs (Level 2)
RMB
Significant
Unobservable
Inputs (Level 3)
RMB
0
F-42
0
6,342,100
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN07
10.10.12
HKR balub0dc
HKG
20-Mar-2012 11:52 EST
ˆ200FNeb!tHjP0yjwGŠ
3*
0C
200FNeb!tHjP0yjw
290862 FIN 43
HTM
ESS
Page 1 of 1
The Group measured the fair value of its investment in Youjia as of December 31, 2011 using the income approach based on a
weighted average of multiple discounted cash flow scenarios, which required the use of unobservable inputs including assumptions of
projected revenue, expenses, capital spending, and other costs, as well as a discount rate calculated based on the risk profile of the
online game industry and company-specific risk adjustments.
For recurring fair value measurements using significant unobservable inputs (Level 3), the following table presents the changes in the
Group’s available-for-sale investment that was measured at fair value on a recurring basis using significant Level 3 inputs for the year
ended December 31, 2009, 2010 and 2011. The Group did not have other assets or liabilities measured at fair value on a recurring
basis using significant Level 3 inputs during the years ended December 31, 2009, 2010, and 2011.
Balance at the beginning of the year
Purchases
Reversal of unrealized gain previously
recognized in other comprehensive income
Impairment losses included in earnings
Balance at the end of the year
Fair Value Measurements Using Significant Unobservable Inputs
(Level 3)
2009
RMB
29,218,400
6,837,000
(13,643,131)
(22,412,269)
0
2010
RMB
0
0
0
0
0
2011
RMB
0
6,342,100
0
0
6,342,100
Assets and Liabilities Measured at Fair Value on a Non-recurring Basis
The following table displays assets and liabilities measured at fair value on a non-recurring basis as of December 31, 2010:
Investments in equity investees
Computers and equipment
Upfront licensing fees
Total
Fair Value Measurements at Reporting Date Using
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
RMB
Significant
Other
Observable
Inputs
(Level 2)
RMB
Significant
Unobservable
Inputs
(Level 3)
RMB
Total Losses
0
0
0
0
0
0
0
0
24,892,921
0
0
24,892,921
196,115,321
4,928,991
33,020,462
234,064,774
Year Ended
December 31,
2010
24,892,921
0
0
0
F-43
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN07
10.10.12
HKR balub0dc
HKG
20-Mar-2012 11:59 EST
ˆ200FNeb!tHjQPeew)Š
3*
0C
200FNeb!tHjQPeew
290862 FIN 44
HTM
ESS
Page 1 of 1
Significant unobservable inputs (Level 3) were used in measuring the fair value of the Group’s investments in equity investees based
on which the other-than-temporary impairment losses were calculated. The Group measured the fair value of its investment in BZSIT
as of December 31, 2010 using the income approach based on a weighted average of multiple discounted cash flow scenarios, which
required the use of unobservable inputs including assumptions of projected revenue, expenses, capital spending, and other costs, as
well as a discount rate calculated based on the risk profile of the online game industry and company-specific risk adjustments. As a
result of the impairment test, the investment in BZSIT with a carrying amount of RMB11.2 million was fully impaired. Using the
valuation technique described in 8<1>, the Group measured the fair value of its investment in G10 at RMB24.9 million as of
December 31, 2010. The investment in G10 with a carrying amount of RMB276.0 million, after reduction of RMB66.2 million
receivable, was impaired by the amount of RMB184.9 million. The above impairment charges were included in impairment loss on
investments on the consolidated statement of operations and comprehensive income (loss) for the year ended December 31, 2010.
The less than satisfactory performance of certain games indicated that the carrying amounts of intangible assets and property and
equipment may not be recoverable. As a result of the long-lived asset impairment tests, computers and equipment and acquired game
licenses held and used with a carrying amount of RMB4.9 million and RMB33.0 million, respectively, were fully impaired, with the
resulting impairment charges included in earnings for the year ended December 31, 2010.
17. TAXATION
Cayman Islands and British Virgin Islands
Under the current tax laws of the Cayman Islands and British Virgin Islands, the Company and its subsidiaries are not subject to tax
on their income or capital gains. In addition, upon payment of dividends by the Company to its shareholders, no Cayman Islands
withholding tax will be imposed.
Hong Kong
The Group’s subsidiaries in Hong Kong did not have assessable profits that were derived in Hong Kong during the years ended
December 31, 2009, 2010 and 2011. Therefore, no Hong Kong profit tax has been provided for in the years presented.
F-44
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
RRWIN-XENP139
10.10.12
HKR arumv1dc
HKG
20-Mar-2012 06:31 EST
ˆ200FNeb!tHioyHZw+Š
3*
0C
200FNeb!tHioyHZw
290862 FIN 45
HTM
ESS
Page 1 of 1
The PRC
The Group’s subsidiaries and VIE subsidiaries in the PRC are subject to Enterprise Income Tax (“EIT”) on the taxable income as
reported in their respective statutory financial statements adjusted in accordance with the PRC Enterprise Income Tax Law(“EIT
Law”), which went into effect as of January 1, 2008. The Group’s subsidiaries and VIE subsidiaries in the PRC are generally subject
to EIT at a statutory rate of 25%. However, the subsidiaries that are located in the Pudong New District of Shanghai enjoy five-year
transitional EIT rates, which refer to the phase-in rates of 18%, 20%, 22%, 24% and 25% for the 5 years from 2008 to 2012 and the
subsidiaries that hold a “High and New Technology Enterprise” (“HNTE”) qualification are subject to a 15% preferential EIT rate.
In April 2007, C9I Beijing received approval from certain government authorities to be classified as a HNTE. This classification,
subject to annual inspection, entitles C9I Beijing to enjoy an EIT exemption for 2007, 2008 and 2009, and a 50% reduction of the
statutory rate in the three years thereafter, for which the Beijing tax authorities have granted approval. In April 2008, certain
government authorities announced the new implementation rules for application and assessment of HNTE. Every qualified HNTE
company is required to re-apply for this qualification according to the new implementation rules. The HNTE qualification is valid for
three years and every qualified HNTE company is required to re-apply for it in the three years after receiving approval. In October
2008, C9I Beijing re-applied for the HNTE qualification and received approval for the HNTE qualification and related preferential
tax rates during the period of 2008-2010 from the government authorities. Total tax savings of C9I Beijing from the EIT exemption
were RMB 35,865,045, nil and nil for the years ended December 31, 2009, 2010 and 2011, respectively.
In November 2008, Shanghai IT received approval from certain government authorities to be qualified as a HNTE. This approval
entitles Shanghai IT to enjoy a 15% preferential EIT rate during the period from 2008 to 2010. The HNTE qualification is valid for
three years and every qualified HNTE company is required to re-apply for it in the three years after receiving approval. In October
2011, Shanghai IT re-applied for its HNTE qualification and obtained approval. This approval entitles Shanghai IT to enjoy a 15%
preferential EIT rate during the period from 2011 to 2013. Total tax savings of Shanghai IT were nil for the years ended
December 31, 2009, 2010 and 2011, respectively.
United States
The Group’s subsidiaries in the U.S. are registered in the state of California and are subject to U.S. federal corporate marginal income
tax rate of 34% and state income tax rate of 8.84%, respectively.
Composition of income tax benefit (expense)
The current and deferred portions of income tax expense included in the consolidated statements of operations and comprehensive
income (loss) are as follows:
Current income tax (expense) benefit
China
Other jurisdictions
Deferred taxation
China
Other jurisdictions
Change in valuation allowance
China
Other jurisdictions
Income tax (expense) benefit
For the year ended December 31,
2009
RMB
2010
RMB
2011
RMB
(1,871,215)
(1,871,215)
0
69,182,452
69,182,452
0
(61,775,371)
(61,775,371)
0
5,535,866
39,061
39,061
0
131,458,011
56,671,847
74,786,164
(138,865,092)
(64,078,928)
(74,786,164)
(7,368,020)
(165)
(165)
0
56,216,109
20,125,336
36,090,773
(56,216,109)
(20,125,336)
(36,090,773)
(165)
2011
US$
(Note 3)
(26)
(26)
0
8,931,839
3,197,594
5,734,245
(8,931,839)
(3,197,594)
(5,734,245)
(26)
F-45
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
WCRFBU-MWE-XN04
10.10.12
HKR thanm0dc
HKG
21-Mar-2012 04:38 EST
ˆ200FNeb!tHmcYq%Q%Š
7*
0C
200FNeb!tHmcYq%Q
290862 FIN 46
HTM
ESS
Page 1 of 1
Reconciliation of the differences between statutory tax rate and the effective tax rate
Reconciliation between the statutory EIT rate and the Group’s effective tax rate is as follows:
For the year ended
December 31, 2009
For the year ended
December 31, 2010
For the year ended
December 31, 2011
PRC Statutory EIT rate
Effect of different tax rates in other jurisdictions
Change of prior year deferred tax assets
Change of valuation allowance
(Income) not subject to tax and non-deductible
expenses, net
Effect of tax holidays
Effect of future tax rate change
Effect of expired net operating loss carry forwards
Effective EIT rate
25%
(15%)
0%
(15%)
(8%)
3%
11%
0%
1%
25%
(4%)
0%
(15%)
(9%)
(1%)
3%
0%
(1%)
25%
1%
(5%)
(19%)
1%
0%
0%
(3%)
0%
Significant components of deferred tax assets
Temporary differences related to expenses and accruals
Temporary differences related to provision for advances
to suppliers
Temporary differences related to provision for doubtful
accounts
Temporary differences related to prepaid royalties
Other
Total current deferred tax assets
Less: Valuation allowance
Net current deferred tax assets
Temporary differences related to depreciation,
amortization, and impairment of equipment and
intangible assets
Startup expenses and advertising fee
Temporary differences related to research and
development credits
Temporary differences related to equity investment
Foreign tax credits
Temporary differences related to provision for
prepayment for equipment
Tax loss carry forwards
Total non-current deferred tax assets
Less: Valuation allowance
Net non-current deferred tax assets
Total deferred tax assets
F-46
December 31,
2010
RMB
December 31,
2011
RMB
December 31,
2011
US$
(Note 3)
4,719,640
4,719,622
749,873
2,085,908
0
0
6,080,201
7,795,758
939,162
21,620,669
(21,620,669)
0
0
4,495,406
1,721,596
10,936,624
(10,936,624)
0
0
714,248
273,534
1,737,655
(1,737,655)
0
19,516,778
5,929,990
13,139,782
9,818,616
2,087,701
1,560,021
2,916,809
0
16,358,069
5,368,367
5,619,339
15,563,223
852,948
892,823
2,472,747
11,625,000
179,160,426
235,507,072
(235,507,072)
0
5,000,000
247,897,899
302,407,226
(302,407,226)
0
794,420
39,387,009
48,047,669
(48,047,669)
0
0
0
0
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
LANFBU-MWE-XN11
10.10.12
HKR nagag1dc
HKG
Significant components of deferred tax liabilities
Temporary differences related to amortization of intangible
assets
Movement of valuation allowance on deferred tax assets
20-Mar-2012 11:51 EST
ˆ200FNeb!tHjNCZlwŠ
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200FNeb!tHjNCZlw
290862 FIN 47
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ESS
Page 1 of 1
December 31,
2010
RMB
December 31,
2011
RMB
December 31,
2011
US$
(Note 3)
5,803,848
5,521,837
877,331
Balance at January 1
Increase in valuation allowance
Balance at December 31
For the year ended
December 31, 2010
For the year ended
December 31, 2011
RMB
RMB
118,262,649
138,865,092
257,127,741
56,216,109
For the year ended
December 31, 2011
US$
(Note 3)
40,853,484
8,931,840
257,127,741
313,343,850
49,785,324
For the years ended December 31, 2010 and 2011, additional valuation allowance of approximately RMB138.9 million and RMB56.2
million was provided respectively. The Group considers positive and negative evidence to determine whether some portion or all of
the deferred tax assets will more likely than not be realized. This assessment considers, among other matters, the nature, frequency
and severity of recent losses, forecasts of future profitability, the duration of statutory carry forward periods, the Group’s experience
with tax attributes expiring unused and tax planning alternatives. Valuation allowances have been established for deferred tax assets
based on a more-likely-than-not threshold. The Group’s ability to realize deferred tax assets depends on its ability to generate
sufficient taxable income within the carry forward periods provided for in the tax law.
As of December 31, 2011, the Group’s PRC subsidiaries had net operating loss carry forwards of RMB638.0 million, of which
RMB2.8 million, RMB16.5 million, RMB133.9 million, RMB246.7 million and RMB238.2 million will expire in 2012, 2013, 2014,
2015 and 2016, respectively. The Group has provided a full valuation allowance as it is not more likely than not that the net operation
losses can be utilized before expiry.
F-47
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
LANFBU-MWE-XN11
10.10.12
HKR nagag1dc
HKG
20-Mar-2012 11:53 EST
ˆ200FNeb!tHjP@iVw@Š
3*
0C
200FNeb!tHjP@iVw
290862 FIN 48
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ESS
Page 1 of 1
As of December 31, 2011, Red 5 had net operating loss carry forwards for federal and state income tax purposes of approximately
$35.2 million and $35.2 million, respectively, which will begin to expire in 2026 and 2020, respectively. Red 5 also had credits for
increasing research activities available to offset future federal and state taxes payable of approximately US$0.7 million and US $0.7
million, respectively, that will begin to expire in 2026 for federal purposes and which have no expiration for state purposes. Red 5 had
foreign tax credits for federal purposes of approximately US$2.5 million, which begin to expire in 2016. Pursuant to US tax laws and
regulations, the utilization of an acquired entity’s net operation losses and credits are subject to annual limitation computed based on
the fair value of the acquired entity. As a result of the limitation, the Group provided a full valuation allowance as it is not more likely
than not that the net operation losses and credits carry forward can be utilized before expiry.
In accordance with the EIT Law, dividends, which arise from profits of foreign invested enterprises (“FIEs”) earned after January 1,
2008, are subject to a 10% withholding income tax. In addition, under certain tax treaties between the PRC and Hong Kong, if the
foreign investor is incorporated in Hong Kong and qualifies as the beneficial owner, the applicable withholding tax rate is reduced to
5%, if the investor holds at least 25% in the FIE, or 10%, if the investor holds less than 25% in the FIE. A deferred tax liability should
be recognized for the undistributed profits of PRC companies unless the Company has sufficient evidence to demonstrate that the
undistributed dividends will be reinvested and the remittance of the dividends will be postponed indefinitely. The Group plans to
indefinitely reinvest undistributed profits earned after December 31, 2007 from its China subsidiaries in its operations in the PRC.
Therefore, no withholding income taxes for undistributed profits of the Company’s subsidiaries have been provided as of
December 31, 2009, 2010 and 2011.
Under applicable accounting principles, a deferred tax liability should be recorded for taxable temporary differences attributable to
the excess of financial reporting basis over tax basis in a domestic subsidiary. However, recognition is not required in situations
where the tax law provides a means by which the reported amount of that investment can be recovered tax-free and the enterprise
expects that it will ultimately use that means. The Group has not recorded any such deferred tax liability attributable to the
undistributed earnings of its financial interests in VIEs because these entities do not have any accumulated earnings as of
December 31, 2009, 2010 and 2011.
The Group made its assessment of the level of authority for each tax position (including the potential application of interests and
penalties) based on the tax positions’ technical merits, and measured the unrecognized benefits associated with the tax positions. The
Group did not have any unrecognized tax benefits as of December 31, 2009, 2010 and 2011. The Group does not anticipate that
unrecognized tax benefits will significantly increase or decrease within the next twelve months. For the years ended December 31,
2009, 2010 and 2011, the Group did not have any material interest and penalties associated with its tax positions.
F-48
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN09
10.10.12
HKR kandb0dc
HKG
20-Mar-2012 11:48 EST
ˆ200FNeb!tHjMaRzQCŠ
3*
0C
200FNeb!tHjMaRzQ
290862 FIN 49
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ESS
Page 1 of 1
According to PRC Tax Administration and Collection Law, the statute of limitations is three years if the underpayment of taxes is due
to computational errors made by the taxpayer or withholding agent. The statute of limitations will be extended five years under
special circumstances, which are not clearly defined (but an underpayment of tax liability exceeding RMB0.1 million is specifically
listed as a special circumstance). In the case of a related party transaction, the statute of limitations is ten years. There is no statute of
limitations in the case of tax evasion. From inception to 2011, the Group is subject to examination of the PRC tax authorities. Red 5’s
federal income tax returns and state income tax returns for 2005 through 2011 are open tax years, subject to examination by the
relevant tax authorities.
18. OTHER PAYABLES AND ACCRUALS
Other payables and accruals are as follows:
Staff cost related payables
Professional services
Product development services
Marketing and promotion
Others
December 31,
2010
RMB
December 31,
2011
RMB
20,037,102
12,761,093
2,665,366
1,034,855
5,830,401
27,419,504
10,613,150
3,090,913
1,692,630
5,090,126
December 31,
2011
US$
(Note 3)
4,356,520
1,686,260
491,097
268,932
808,739
42,328,817
47,906,323
7,611,548
19. Refund of WoW game points
As a result of the loss of the WoW license on June 7, 2009, the Group announced a refund plan in connection with unactivated WoW
game point cards. According to the plan, unactivated WoW game point card holders are eligible to receive a cash refund from the
Group. The Group recorded a liability in connection with both unactivated points cards and activated but unconsumed point cards of
approximately RMB200.4 million, of which RMB4.0 million was refunded in 2009. The difference between the face value of the
point cards and the net proceeds the Group received in the sales of the respective point cards was recorded as additional cost of
services, amounting to RMB22.1 million for the year ended December 31, 2009.
The refund provision related to these WoW game points will be recorded as other operating income after the release of liability to
refund under the respective laws. The legal liability relating to the unactivated WoW game point cards was extinguished in September
2011 based on the applicable laws and the associated liability amounting to RMB26.0 million (US$4.1 million) was recognized as
other operating income for the year ended December 31, 2011. The remaining legal liability relating to the activated WoW game
points of RMB170.0 million (US$27.0 million) still exist as of December 31, 2011 and, to the extent not refunded, will be legally
released within 20 years from September 2009 under current laws.
F-49
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN09
10.10.12
HKR kandb0dc
HKG
20-Mar-2012 11:49 EST
ˆ200FNeb!tHjMm$dw?Š
3*
0C
200FNeb!tHjMm$dw
290862 FIN 50
HTM
ESS
Page 1 of 1
In 2009, the Group engaged an agent to facilitate the refund to game players and provided an advance payment to the agent
amounting to RMB43.3 million for this purpose. In 2010 and 2011, RMB0.4 million and nil were refunded to game point card holders
through the agent, respectively. As of December 31, 2011, the balance of the advance payment to the agent was RMB42.9 million
(US$6.8 million). In February 2012, the Group entered into an agreement with the agent pursuant to which the agent will refund the
advance to the Group in installments over a five year period after deducting any further refund to game point holders. As of
December 31, 2011, the current portion of RMB8.6 million (US$1.4 million) was recorded in prepayments and other current assets
and the present value of the long-term portion amounting to RMB28.7 million (US$4.6 million) was recorded in other long-term
assets, respectively.
20. SHARE REPURCHASE PROGRAM
In June 2011, the Company’s Board approved share buyback of up to US$25 million of its ADSs, This share repurchase program has
been terminated in November 2011. Under this share repurchase program, the Company spent an aggregate purchase consideration of
approximately US$3.4 million and repurchased approximately 0.7 million shares of its ADSs as of December 31, 2011, which were
retired by the Company.
21. SHAREHOLDER RIGHTS PLAN
On January 8, 2009, the Company adopted a shareholder rights plan. The shareholder rights plan is designed to protect the best
interests of the Company and its shareholders by discouraging third parties from seeking to obtain control of the Company in a tender
offer or similar hostile transaction. The shareholder rights plan was amended on March 9, 2009.
Pursuant to the terms of the shareholder rights plan, as amended, one right was distributed with respect to each ordinary share of the
Company outstanding at the close of business on January 22, 2009. The rights will become exercisable only if a person or group (the
“Acquiring Person”) obtains ownership of 15% or more of the Company’s voting securities (including by acquisition of the
Company’s ADSs representing ordinary shares) (a “Triggering Event”), subject to certain exceptions. In the case of a Triggering
Event, the rights plan entitles shareholders other than the Acquiring Person to purchase, for an exercise price of US$19.50, a number
of shares with a value twice that of the exercise price. The number of shares each such shareholder will be entitled to purchase is
equal to the product of (i) the number of shares then owned by such shareholder and (ii) two times the exercise price divided by the
then current market price per share. The rights plan will continue in effect until January 8, 2019, unless the plan is terminated by the
Company or the rights are redeemed by the Company before the plan expires.
F-50
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN09
10.10.12
HKR kandb0dc
HKG
20-Mar-2012 11:50 EST
ˆ200FNeb!tHjN2nBQ2Š
3*
0C
200FNeb!tHjN2nBQ
290862 FIN 51
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ESS
Page 1 of 1
22. EMPLOYEE BENEFITS
The full-time employees of the Company’s subsidiaries and VIE subsidiaries that are incorporated in the PRC are entitled to staff
welfare benefits, including medical care, welfare subsidies, unemployment insurance and pension benefits through a PRC
government-mandated multi-employer defined contribution plan. These companies are required to accrue for these benefits based on
certain percentages of the employees’ salaries in accordance with the relevant regulations, and to make contributions to the state-
sponsored pension and medical plans out of the amounts accrued for medical and pension benefits. The total amounts charged to the
consolidated statements of operations and comprehensive loss for such employee benefits amounted to RMB30.5 million RMB24.8
million and RMB 24.3 million (US$3.9 million) for the years ended December 31, 2009, 2010 and 2011, respectively. The PRC
government is responsible for the medical benefits and ultimate pension liability to these employees.
23. SHARE-BASED COMPENSATION
23.1 Stock options granted by the Company
On December 15, 2004, in connection with its initial public offering, the Company adopted a share option plan (“2004 Option Plan”)
that provides for the issuance of up to 1,345,430 ordinary shares. The share option plan has a term of five years unless terminated
earlier by shareholders and the Board of Directors. Under the share option plan, the directors may, at their discretion, grant any senior
executives (including directors) and employees of the Company, its subsidiaries and affiliated companies share options to subscribe
for shares. In December 2006, the Company increased the number of ordinary shares reserved under the 2004 Option Plan to
2,449,614 shares and extended the term of plan to ten years. In November 2008, the Company increased the number of ordinary
shares reserved to 4,449,614 shares. In August 2010, the Company further increased the number of ordinary shares reserved in the
2004 Option Plan to 6,449,614 shares. The maximum contractual term of the awards under this plan shall be no more than five years
from the date of grant. The options granted under this plan shall be at the money on the date of grant and typically vest over a three-
year period, with one third of the options to vest on the each of the anniversary after the grant date.
On September 1, 2009, the Company modified the exercise prices of certain options granted to directors and employees to US$7.36
per share, the market price on the date of modification. The original exercise price of the modified options ranged from US$12.04 to
US$38.54. The Company determined the incremental cost as the excess of the fair value of the modified award over the fair value of
the original award immediately before its terms are modified, measured based on the share price and other pertinent factors at that
date. As the options have a graded vesting schedule, RMB12.2 million incremental compensation cost was recorded immediately
upon modification for the vested portion and the remaining RMB3.4 million was amortized over the remaining vesting period of 2010
to 2011.
F-51
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
RRWIN-XENP141
10.10.12
HKR radhd0dc
HKG
20-Mar-2012 11:51 EST
ˆ200FNeb!tHjNQcmQxŠ
3*
0C
200FNeb!tHjNQcmQ
290862 FIN 52
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ESS
Page 1 of 1
As of December 31, 2011, options to purchase 3,806,615 ordinary shares were outstanding and options to purchase 1,565,624
ordinary shares were available for future grant under the 2004 Option Plan. The following table summarizes the Company’s share
option activities with its employees and directors:
Outstanding at January 1, 2011
Granted
Exercised
Forfeited
Outstanding at December 31, 2011
Vested and expected to vest at
December 31, 2011
Exercisable at December 31, 2011
Number of
Options
3,995,882
92,000
(21,474)
(259,793)
3,806,615
3,580,109
1,682,536
Weighted-Average
Exercise Price
Weighted-Average
Remaining
Contractual Term
(years)
Aggregate
Intrinsic Value
US$
US$
US$
US$
US$
US$
US$
5.65
4.78
5.20
5.43
5.64
5.65
5.98
4.57
US$6,061,473
3.60
US$6,351,833
3.58
3.38
US$5,994,648
US$2,649,147
The options expected to vest are estimated by applying the pre-vesting forfeiture rate assumptions to total unvested options. The total
intrinsic value of options exercised during the year was nil, US$4,579 and US$41,165 for year ended December 31, 2009, 2010 and
2011 respectively.
The weighted-average grant-date fair value of options granted during the years 2010 and 2011 was US$2.23 and US$1.92,
respectively. The fair value of the share options were measured on the respective grant dates based on the Black-Scholes option
pricing model, with assumptions made regarding expected term and volatility, risk-free interest rate and dividend yield. No options
were granted during year 2009.
Risk-free interest rate
Expected life (years)
Expected dividend yield
Volatility
Fair value of options at grant date
For the year
ended December 31,
2010
0.77%-1.03%
3.25
0
59.24%-60.71%
US$2.13-US$2.58
For the year
ended December 31,
2011
0.33%
3.25
0
57.90%
1.92
US$
The fair value of certain options, of which exercise prices were modified in September 2009, were measured on the modification date
based on the Black-Scholes option pricing model with the following assumptions:
Risk-free interest rate
Expected remaining life (years)
Expected dividend yield
Volatility
Fair value of incremental cost
F-52
For the year
ended December 31,
2009
0.08%-1.44%
0.13-3.14
0
49%-67%
US$0.06-US$2.03
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
HKRPRFRS15
10.10.12
HKR pf_rend
HKG
19-Mar-2012 03:26 EST
ˆ200FNeb!tHfRP!eQaŠ
2*
0C
200FNeb!tHfRP!eQ
290862 FIN 53
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ESS
Page 1 of 1
For the years ended December 31, 2009, 2010 and 2011, the Company recorded share-based compensation of RMB58.8 million,
RMB24.0 million and RMB17.9 million (US$2.8 million), respectively, for options granted to the Company’s employees and
directors, including incremental compensation cost of RMB13.4 million due to modification of option exercise price in September
2009.
As of December 31, 2011, there was approximately RMB26.7 million (US$4.2 million) unrecognized compensation cost, adjusted for
estimated forfeitures, related to non-vested options. This cost is expected to be recognized over a weighted-average period of 1.75
years. Total unrecognized compensation cost may be adjusted for future changes in estimated forfeitures.
23.2 Equity warrants granted to Incsight Limited (“Incsight”)
Incsight is a company incorporated in the British Virgin Islands and wholly owned by Mr. Jun Zhu, the Chairman of the Board and
Chief Executive Officer of the Company. On November 17, 2008, as approved by the Board of Directors, the Company granted
equity warrants to Incsight to purchase 552,196 ordinary shares. The Board considered the grant of equity warrants as an incentive to
retain Mr. Zhu’s services with the Group, and the Board further noted that Mr. Zhu and the Group agreed that the equity warrants
would be forfeited in the event that Mr. Zhu’s services with the Group is terminated voluntarily or involuntarily any time after grant
and before vesting. The exercise price of the equity warrants is US$12.04 per share, the market price on the date of grant. The equity
warrants would vest over one year with 25% vested at the end of each quarter, commencing from November 17, 2008 and are
exercisable no later than November 16, 2011. As of November 16, 2011, none of such warrants were exercised and therefore all such
warrants were expired.
The fair value of the equity warrants granted was US$3.68, which was measured on the grant date based on the Black-Scholes pricing
model with the following assumptions:
Risk-free interest rate
Expected life (years)
Expected dividend yield
Volatility
1.22%
1.81
0
57%
The Group recorded share-based compensation of RMB12.0 million, nil and nil for equity warrants granted for the years ended
December 31, 2009, 2010 and 2011, respectively.
F-53
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
HKRPRFRS11
10.10.12
HKR pf_rend
HKG
19-Mar-2012 04:01 EST
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0C
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Page 1 of 1
23.3 Ordinary shares granted to Incsight Limited (“Incsight”)
On December 8, 2010, as approved by the Board of Directors, the Company granted 1,500,000 ordinary shares to Incsight which are
subject to performance conditions, 500,000 shares granted will vest when the Group achieves breakeven and 1,000,000 shares will
vest when the Group’s cumulative profit reaches US$5 million in a quarter subsequent to the quarter in which the Group breaks even.
The ordinary shares granted are not entitled to receive dividends until vested. The Board considered the grant of ordinary shares as an
incentive to retain Mr. Zhu’s services with the Group. The awarded nonvested shares would be valid for five years from December 8,
2010. It is considered probable the performance targets will be met. The fair value of the granted nonvested shares was US$6.48 per
share, the market price on the date of grant. The Group recorded share-based compensation of RMB3.9 million and RMB30.8 million
(US$4.9 million) for the years ended December 31, 2010 and 2011, respectively.
23.4 Ordinary shares granted to non-executive directors
In May 2011, the Board of Directors granted 30,000 ordinary shares to each of the Group’s four non-executive directors, which
10,000 ordinary shares vest for each director on July 1 of each year from 2011 to 2013 so long as such directors continue their
services during the period. An aggregate of 40,000 ordinary shares vested in July 2011. The fair value of the shares granted was
US$6.03 per share, being the market price on the date of the grant. The Group recorded share-based compensation of RMB2.3 million
(US$0.4 million) for the year ended December 31, 2011.
23.5 Stock options granted by TDC
In September 2008, TDC, a wholly-owned subsidiary of the Group, approved its 2008 Stock Option Plan (“TDC Option Plan”) that
provides for the issuance of up to 30,000 ordinary shares. The share option plan has a term of eight years unless terminated earlier by
its shareholders and Board of Directors. On October 1, 2008, TDC granted 18,961,000 options to Mr. Zhu and certain employees of
TDC to purchase 18,961 ordinary shares of TDC. Those options will vest over four years commencing from January 1, 2008. The
exercise price of the options is HK$0.1 per option. The options will expire on December 31, 2015.
The following table summarizes the TDC’s share option activities with Mr. Zhu and TDC employees:
Outstanding at January 1, 2011
Forfeited
Outstanding at December 31, 2011
Vested and expected to vest at
December 31, 2011
Exercisable at December 31, 2011
Weighted-Average
Exercise Price
per Option
Weighted-Average
Remaining
Contractual Term
(years)
Aggregate
Intrinsic Value
HK$
HK$
HK$
HK$
HK$
0.10
0.10
0.10
0.10
0.10
5.0
4.0
4.0
4.0
Nil
Nil
Nil
Nil
Nil
Number of
Options
16,875,000
(264,000)
16,611,000
16,611,000
16,611,000
F-54
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
RRWIN-XENP141
10.10.12
HKR radhd0dc
HKG
20-Mar-2012 11:54 EST
ˆ200FNeb!tHjP&XdwnŠ
3*
0C
200FNeb!tHjP&Xdw
290862 FIN 55
HTM
ESS
Page 1 of 1
The options expected to vest are estimated by applying the pre-vesting forfeiture rate assumptions to total unvested options. The
intrinsic value as of December 31, 2011 is calculated as the difference between the estimated fair value at December 31, 2011 and the
exercise price of the shares.
The fair value of options granted was RMB0.11, measured on the grant date based on the Black-Scholes option pricing model with
the following assumptions:
Risk-free interest rate
Expected life (years)
Expected dividend yield
Volatility
3.75%
5.00
0
53%
TDC recorded share-based compensation of RMB0.5 million, RMB0.5 million and RMB0.4 million (US$0.1 million) for options
granted for the years ended December 31, 2009, 2010 and 2011, respectively. The share-based compensation was recorded as a
component of noncontrolling interest in the consolidated financial statements.
23.6 Stock options granted by Red 5
In February 2006, Red 5 adopted a Stock Incentive Plan (“Red 5 Stock Incentive Plan”) under which Red 5 may grant to its
employees, director and consultants stock option to purchase common stock or restricted stock. As of April 6, 2010 and December 31,
2010, 13,626,955 shares were reserved under Red 5 Stock Incentive Plan. In September, 2011, Red 5 further increased the number of
common stocks reserved to 22,855,591 shares. If an option shall expire or terminate for any reason without having been exercised in
full, the reserved shares subject to such option shall again be available for subsequent option grants under the plan. From the
inception of this plan to December 31, 2011, Red 5 granted a total of 27,041,836 options to its employees and directors at the exercise
price ranging from US$0.0001 to US$0.2450 per share, which vest over four years commencing from grant date. Options expire
within a period of not more than ten years from the grant date. An option granted to a person who is a greater than 10% shareholder
on the date of grant may not be exercisable more than five years after the grant date. As of December 31, 2011, option to purchase
19,684,602 share of common stock were outstanding and options to purchase 2,105,703 shares of common stock were available for
future grant.
The following table summarizes the Red 5’s share option activities with its employees and directors:
Outstanding at January 1, 2011
Granted
Exercised
Forfeited
Outstanding at December 31, 2011
Vested and expected to vest at
December 31, 2011
Exercisable at December 31, 2011
Number of
Options
8,389,872
11,340,283
(30,553)
(15,000)
19,684,602
19,545,029
6,583,539
Weighted-Average
Exercise Price
per Option
Weighted-Average
Remaining
Contractual Term
(years)
Aggregate
Intrinsic Value
US$
US$
US$
US$
US$
US$
US$
0.136
0.124
0.024
0.245
0.129
0.129
0.132
F-55
4.86
US$ 78,375
4.95
US$ 74,867
4.95
4.31
US$ 74,867
US$ 67,659
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
HKRPRFRS15
10.10.12
HKR pf_rend
HKG
19-Mar-2012 03:26 EST
ˆ200FNeb!tHfRWJRQAŠ
2*
0C
200FNeb!tHfRWJRQ
290862 FIN 56
HTM
ESS
Page 1 of 1
The options expected to vest are estimated by applying the pre-vesting forfeiture rate assumptions to total unvested options. The total
intrinsic value of options exercised for the period from April 6, 2010 to December 31, 2010 and for the year ended December 31,
2011 were US$14,141 and $3,507, respectively.
The fair value of options granted ranged from US$0.012 to US$0.149, measured on the grant date based on the Black-Scholes option
pricing model with assumptions made regarding expected term and volatility, risk-free interest rate and dividend yield:
Risk-free interest rate
Expected life (years)
Expected dividend yield
Volatility
1.70%-5.00%
5.00-6.00
0
38.89%-69.36%
Red 5 recorded share-based compensation of RMB1.8 million and RMB1.5 million (US$0.2 million) for options granted for the
period from April 6, 2010 to December 31, 2010 and for the year ended December 31, 2011, respectively. The share-based
compensation was recorded as a component of noncontrolling interest in the consolidated financial statements.
As of December 31, 2011, there was approximately RMB8.8 million (US$1.4 million) of unrecognized compensation cost, adjusted
for estimated forfeitures, related to non-vested share-based awards granted to Red 5 employees. This cost is expected to be recognized
over three and a half years. Total unrecognized compensation cost may be adjusted for future changes in estimated forfeitures.
23.7 Nonvested equity interest of Jiushi granted to employees
In July 2011, the Group granted 20% equity interest of the newly established Jiushi to two employees as an incentive to retain these
two employees’ services, which they will earn over three-year period. The fair value of the granted equity interest was estimated to be
RMB2.2 million. The Group recorded share-based compensation of RMB0.4 million (US$0.06 million) for the years ended
December 31, 2011.
F-56
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
RRWIN-XENP139
10.10.12
HKR arumv1dc
HKG
20-Mar-2012 12:02 EST
ˆ200FNeb!tHjQV!RwvŠ
4*
0C
200FNeb!tHjQV!Rw
290862 FIN 57
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Page 1 of 1
24. RELATED PARTY TRANSACTIONS AND BALANCES
The9 Computer, Shanghai IT and 9Webzen Limited (Shanghai) (“9Webzen Shanghai”), a subsidiary of a 30% equity investment of
the Group which were fully impaired in 2008, had entered into a series of agreements in connection with operating a game in China
and providing services to customers jointly. The9 computer and Shanghai IT share revenue from 9Webzen Shanghai according to the
jointly services agreements. The share revenue from 9Webzen Shanghai amounted to RMB0.5 million, nil and nil for the years ended
December 31, 2009, 2010 and 2011, respectively.
The amounts due from 9Webzen Shanghai amounted to RMB1.3 million as of December 31, 2010. Due to long outstanding and
uncertainty on the recoverability for the amount due from 9Webzen Shanghai, the Group has stopped to recognize revenue pursuant
to the agreements with 9Webzen Shanghai in 2010. The amount due from 9Webzen Shanghai of RMB1.3 million was fully provided
for as of December 31, 2010.
25. LOSS PER SHARE
Loss per share is calculated as follows:
Numerator:
Net loss attributable to ordinary shareholders
Denominator:
Denominator for basic and diluted loss per share –
weighted-average shares outstanding
Loss per share
- Basic and diluted
For the year
ended
December 31,
2009
RMB
For the year
ended
December 31,
2010
RMB
For the year
ended
December 31,
2011
RMB
For the year
ended
December 31,
2011
US$
(Note 3)
(405,152,407)
(499,611,594)
(284,329,931)
(45,175,477)
25,414,620
25,121,679
24,956,197
24,956,197
(15.94)
(19.89)
(11.39)
(1.81)
The Company had 1,856,296, 6,048,078 and 5,865,811 stock options, warrants and nonvested shares outstanding as of December 31,
2009, 2010 and 2011, respectively, which could have potentially diluted loss per share in the future, but were excluded in the
computation of diluted loss per share in those periods, as their effect would have been anti-dilutive due to the net loss reported in such
periods.
26. RESTRICTED NET ASSETS
In accordance with the regulations in the PRC and their respective articles of association, The9 Computer, C9I Shanghai, C9I Beijing,
Jiu Tuo, Jiu Jing (as foreign invested enterprises) and the Group’s domestic VIE subsidiaries incorporated in the PRC are required to
make an appropriation of statutory reserve from retained earnings equal to at least 10% of their respective after-tax profits, calculated
in accordance with the PRC accounting standards and regulations. Appropriations are classified in the consolidated balance sheet as
statutory reserves and are recorded upon board resolution on the appropriations. Appropriations to these reserves are not required
after these reserves have reached 50% of the registered capital of the respective companies.
F-57
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
WCRFBU-MWE-XN04
10.10.12
HKR thanm0dc
HKG
21-Mar-2012 04:39 EST
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4*
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In addition, at the discretion of the respective boards of directors: (1) The9 Computer, C9I Shanghai, C9I Beijing, Jiu Tuo and Jiu
Jing may allocate a portion of their after-tax profit to the enterprise expansion fund or staff welfare and bonus reserve, and (2) the
above VIE subsidiaries may allocate a portion of their respective after-tax profits to discretionary surplus reserve. The use of staff
welfare and bonus reserve is restricted to employee welfare benefits and is not available for distribution to equity owners except in
liquidation. Appropriations to the staff welfare and bonus reserve are charged to income as general and administrative expense, and
any unutilized balance is included in current liabilities.
These statutory reserves are not transferable to the Company in the form of dividends, advances, or loans. There are no legal
requirements in the PRC to fund these reserves by transfer of cash to any restricted accounts, and the Group does not do so. PRC
regulations currently permit payment of dividends only out of accumulated profits as determined in accordance with PRC accounting
standards and regulations. The9 Computer, C9I Shanghai, C9I Beijing, Jiu Tuo and Jiu Jing and the Company’s VIE subsidiaries can
only distribute dividends after they have met the PRC requirements for appropriation to statutory reserves. Additionally, as the
Company does not have any direct ownership in the VIE subsidiaries, the VIE subsidiaries cannot directly distribute dividends to the
Company.
In March 2009, the Board of Directors of Shanghai IT approved the appropriation of statutory reserves of RMB3.2 million. In 2010
and 2011, there was no appropriation of statutory reserves.
27. Noncontrolling interest
As of December 31, 2011, the Group’s noncontrolling interest mainly included equity interests in Red 5, Fire Rain, Wanyouyl and
Mengxiang Hulian and equity awards granted as compensation by the Group’s subsidiaries. The following schedule shows the effects
of changes in the ownership interest of The9 Limited in its subsidiaries on equity attributed to The9 Limited for the years ended
December 31, 2009, 2010 and 2011.
Net loss attributable to The9 Limited
Transfers (to) from the noncontrolling interest
Increase in The9 Limited’s additional paid-in
capital for issuance of shares by Red 5 upon
stock option exercise
Increase in The9 Limited’s additional paid-in
capital for purchase of common shares of Red 5
from holders of noncontrolling interest
Decrease in The9 Limited’s additional paid-in
capital for conversion of a loan into equity of
Fire Rain
Decrease in The9 Limited’s additional paid-in
capital for capital contribution to Red 5, Fire
Rain, Wanyouyl and Mengxiang Hulian
December 31,
2009
RMB
December 31,
2010
RMB
(405,152,407)
(499,611,594)
December 31,
2011
RMB
(284,329,931)
0
0
5,564
4,044
523,586
1,565,749
(2,757,183)
0
0
0
(6,981,392)
(12,741,104)
Change from net loss attributable to The9 Limited and
transfers (to) from noncontrolling interests
(407,909,590)
(506,063,836)
(295,501,242)
F-58
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
RRWIN-XENP136
10.10.12
HKR kalar0dc
HKG
20-Mar-2012 11:51 EST
ˆ200FNeb!tHjNMxswÉŠ
3*
0C
200FNeb!tHjNMxsw
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Page 1 of 1
28. COMMITMENTS AND CONTINGENCIES
28.1 Operating lease commitments
The Group has entered into operating lease arrangements relating to the use of certain premises and internet data centers. Future
minimum lease payments for non-cancellable operating leases as of December 31, 2011 are as follows:
2012
2013
2014
RMB
US$
(Note 3)
15,089,018
4,724,965
242,094
2,397,404
750,721
38,465
20,056,077
3,186,590
Total rental expenses amounted to RMB62.1 million, RMB18.4 million and RMB21.2 million (US$3.4 million) for the years ended
December 31, 2009, 2010 and 2011, respectively.
28.2 Other contractual obligations
As of December 31, 2011, the license fee the Group has committed to pay upon the commercial launches of the licensed games was
US$0.7 million.
28.3 Contingencies
On June 18, 2007, Beijing Beida Founder Electronics Company filed a lawsuit in the Beijing High Court against two other companies
and two wholly-owned subsidiaries of the Group, alleging that the defendants had, through a game that the two subsidiaries licensed
and are operating, infringed its intellectual property rights with respect to certain of its copyrighted fonts. The plaintiff in the case
demanded, among others, that the defendants cease such alleged infringing use and pay RMB100 million for its alleged losses. The
Group intends to assert its rights in the court of law. Based on the on-going assessment by the Group’s management and external legal
counsel, the management believes that the likelihood for the Group to pay compensation is probable and the amount of compensation
and legal fees estimated by management and external legal counsel is measurable. The lawsuit was heard on November 26, 2009 by
the Beijing Superior Court. The Group asserted its rights in the court. On February 3, 2010, the court issued a judgment against the
Group and other defendants in the lawsuits for infringing certain intellectual property rights of the plaintiff. Based on the court’s
judgment, the Group shall pay a total of RMB1.6 million compensation to the plaintiff. Subsequently, the plaintiff filed an appeal
challenging the judgment. Based on advice from external legal counsel, the Group’s management believes that it is most probable that
the appellate court will uphold the judgment. As of December 31, 2009, the Group had accrued RMB6.1 million for this litigation,
including legal fees, based on the latest development. The Group has paid RMB4.5 million and RMB1.2 million in 2010 and 2011,
respectively, and further accrued RMB2.8 million and RMB0.3 million for compensation and legal fees relating to this litigation
during the years ended December 31, 2010 and 2011, respectively. The amount of compensation and legal fees is subject to the final
result of the appeal, which is still in process.
F-59
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN01
10.10.12
HKR kriss2dc
HKG
22-Mar-2012 01:58 EST
ˆ200FNeb!tHpbKR#QÉŠ
6*
0C
200FNeb!tHpbKR#Q
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On October 21, 2009, a securities class action lawsuit, entitled Glaser v. The9 Ltd. et al., Case No. 09-Civ-8904 was filed in the
United States District Court for the Southern District of New York against the Group in connection with the non-renewal of the WoW
license agreement with Blizzard Entertainment, Inc. The plaintiffs in this case allege that the defendants misrepresented or failed to
make material disclosures regarding the likelihood that we would be renewing the WoW license agreement with Blizzard
Entertainment, Inc. The plaintiffs allege federal securities law violations and seek unspecified damages. On November 4, 2009, an
additional securities class action lawsuit, entitled O’Dea v. The9 Ltd. et al., Case No. 09-Civ-9166 was filed in the United States
District Court for the Southern District of New York against the same defendants with substantially the same allegations. The court
consolidated these complaints into a single action on February 2, 2010, and the consolidated complaint was filed on March 19, 2010.
The Group filed a motion to dismiss the consolidated complaint on May 28, 2010. The plaintiffs filed their opposition to the motion to
dismiss on July 12, 2010, to which the Group filed a reply on August 11, 2010. In March 2011, the court granted the Company’s
motion to dismiss. In May 2011 the plaintiffs filed a stipulation of voluntary dismissal and accordingly, no accruals had been
provided.
In May 2011, Diego Maradona filed a lawsuit in the Beijing No. 1 Intermediate People’s Court against Shanghai IT and a third party
company in China, alleging that the defendants used his name and image in a web and social game operated by the Group without his
authorization. In July 2011, the plaintiff amended his compliant to include The9 Computer as a defendant. The plaintiff in the case
demanded, among others, that the defendants to pay RMB20 million for its alleged losses. Based on the Group’s estimation, which
was based on the advice from external legal counsel, it is probable the Group may lose the lawsuit and the estimated contingent loss is
approximately RMB2 million based on historical record of such civil lawsuit. Accordingly, the Group accrued the RMB2 million
(US$0.3 million) contingent loss for the year ended December 31, 2011.
F-60
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
SERFBU-MWE-XN04
10.10.12
HKR gunaj0dc
HKG
21-Mar-2012 04:39 EST
ˆ200FNeb!tHmcauLQ=Š
4*
0C
200FNeb!tHmcauLQ
290862 FIN 61
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Page 1 of 1
29. IMPAIRMENT AND CHARGES RELATED TO EXPIRATION OF WOW LICENSE
The Group obtained an exclusive license to localize and promote WoW in China in 2004 and commercially launched the localized
WoW in 2005. Through end of March 2009, the Company and Blizzard were conducting ongoing negotiations, which formally
commenced in April 2008 with respect to the Company continuing to operate WoW in mainland China. On April 16, 2009, the
Company learned that the WoW license would be licensed to another China-based online game company. The Company had believed
that an agreement by which the Company would continue to operate WoW beyond the expiration of the then existing license was
imminent. The WoW license was not renewed upon expiration on June 7, 2009.
For the year ended December 31, 2009, the Group recorded the following impairment and certain other charges:
•
The Group continued to make prepayment of royalties for WoW until the expiration of the WoW license. As a result of the non-
renewal of the WoW license, the Group recognized an impairment loss for prepaid royalties, deferred costs and related prepaid
withholding taxes of RMB60.7 million, RMB38.1 million and RMB4.4 million, respectively, for the year ended December 31,
2009;
As a result of change in accounting estimate on the useful life of computer equipment through the end of the WoW license, the
Group recorded additional depreciation expense as a component of cost of service in the amount of RMB40.0 million in 2009.
Depreciation expense relating to this change is to increase both loss from operations and net loss by RMB40.0 million, and to
increase both basic and diluted net loss per share by RMB1.57 in 2009.
•
•
A RMB30.2 million impairment of goodwill following the expiration of the WoW license on June 7, 2009. The Group
determined the fair value of the reporting unit related to WoW using the income approach. The income approach included the
use of a discounted cash flow model, which required assumptions of projected revenue expenses, capital expenditures and other
costs, as well as a discount rate calculated based on the risk profile of the online game industry. The Group does not expect any
revenue from WoW reporting unit after expiration of the WoW license and assessed the fair value of the WoW reporting unit to
be zero. Accordingly, the assigned value for goodwill related to WoW was zero and a full impairment was recognized.
•
As of December 31, 2009, the WoW related computer and equipment and intangible assets have been fully depreciated and no
additional impairment was recognized in 2009.
For the years ended December 31, 2010 and 2011, there were no additional impairment charges recorded related to the expiration of
WoW license.
F-61
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN05
10.10.12
HKR manil0dc
HKG
20-Mar-2012 11:51 EST
ˆ200FNeb!tHjNHlHQYŠ
3*
0C
200FNeb!tHjNHlHQ
290862 FIN 62
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Page 1 of 1
30. Subsequent Events
In January 2012, the Group entered into a cooperative agreement with Shanghai Shenhua Liansheng Football Club Co., Ltd.
(“Shenhua”), for endorsing and promoting Firefall for a term of two years. Under the agreement, Shenhua players will wear jerseys
bearing the name and logo of Firefall in all domestic and international soccer games as well as make appearances at press
conferences, product promotion, sales initiatives for Firefall, and participate in other activities for promoting Firefall. The Group will
pay Shenhua RMB32 million for the promotion services. In addition, the Group entered into an endorsement agreement with Nicolas
Anelka (“Anelka”), a famous soccer player newly joining Shenhua, for worldwide endorsement and promotion of Firefall for a
consideration of EUR2.7 million (RMB21.9 million). As Mr. Zhu, the Chairman and chief executive officer of the Company and one
of the principal shareholders of the Company, is also one of the major shareholders of Shenhua, the endorsement and promotion
transactions with Shenhua and Anelka constituted related party transactions.
F-62
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN10
10.10.12
HKR balub0dc
HKG
21-Mar-2012 06:55 EST
ˆ200FNeb!tHmqYYDQÄŠ
4*
0C
290862 EX4_37 1
HTM
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Page 1 of 1
200FNeb!tHmqYYDQ
Exhibit 4.37
This is an English Translation
Equity Transfer Agreement
Transferor: ZHU JUN (hereinafter “Party A”); Identity Card Number: ; Passport Number: ; Domicile
Address: No.1, Lane 1264, Fuxingzhong Road, Xuhui District, Shanghai
Transferee: JI WEI (hereinafter “Party B”); Identity Card Number: ; Passport Number: ; Domicile
Address: Back Building, 2F, No. 12, Lane 424, Huimin Road, Yangpu District, Shanghai
Shanghai The9 Information Technology Co., Ltd. (the “Target Company”) has a registered capital of RMB23 million, to which
Party A has contributed RMB14.72 million, accounting for 64% thereof. According to the relevant laws and regulations, Party A and
Party B have reached the following agreement after friendly consultation:
ARTICLE ONE TRANSFER TARGET AND TRANSFER PRICE
1. Party A shall transfer its 64% equity interest in the Target Company to Party B with a consideration of RMB14.72 million.
2. Other rights affiliated to the equity interests shall be transferred together with the transfer of such equity interests.
3. The Transferee shall pay the equity transfer consideration in full to the Transferor within three days following the date of this
Agreement.
ARTICLE TWO UNDERTAKING AND WARRANTY
Party A warrants that the equity interests to be transferred to Party B under Article One hereof are legally owned by Party A.
Party A has the full and effective right to dispose of such equity interests. Party A warrants that the equity interests to be transferred
are free from any pledge or other security right and from any recourse by a third party.
ARTICLE THREE DEFAULT LIABILITY
In case either party breaches this Agreement, the non-breaching party shall be entitled to release this Agreement and require the
breaching party to pay RMB1 million as liquidated damages.
ARTICLE FOUR DISPUTE RESOLUTION
This Agreement shall be governed by and construed in accordance with the relevant PRC laws. Any dispute arising from or in
connection with this Agreement shall be resolved through friendly consultation between both parties. If such dispute can not be
resolved through consultation, it shall be referred to the People’s Court for litigation directly.
ARTICLE FIVE MISCELLANEOUS
1. This Agreement shall have three original sets, with each party hereto holding one set and the Target Company holding one set
for the purpose of handling relevant formalities.
2. This Agreement shall take effect upon the execution of both parties.
[No Text Below]
/s/ Wong Lup Soon and Chop of Notary Public is affixed
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
LANFBU-MWE-XN12
10.10.12
HKR nagag1dc
HKG
[Signature Page of “Equity Transfer Agreement”]
21-Mar-2012 06:42 EST
ˆ200FNeb!tHmpDD&wwŠ
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200FNeb!tHmpDD&w
Party A
/s/ ZHU JUN
ZHU JUN
Party B
/s/ JI WEI
JI WEI
25.10. 2011
Witnessed by
/s/ WONG LUP SOON
Notary Public
Chop of Notary Public is affixed
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
HKRPRFRS13
10.10.12
HKR pf_rend
HKG
08-Mar-2012 05:37 EST
ˆ200FNeb!tH2CNQewTŠ
2*
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290862 EX4_38 1
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200FNeb!tH2CNQew
Exhibit 4.38
This is an English Translation
November 24, 2011
Equity Pledge Agreement
by and between
Wang Yong
and
The9 Computer Technology Consulting (Shanghai) Co., Ltd.
Regarding
Shanghai The9 Information Technology Co., Ltd.
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
RRWIN-XENP139
10.10.12
HKR arumv1dc
HKG
20-Mar-2012 07:13 EST
ˆ200FNeb!tHi#c#@QnŠ
3*
0C
290862 EX4_38 2
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Page 1 of 1
200FNeb!tHi#c#@Q
Equity Pledge Agreement
This Equity Pledge Agreement (hereinafter this “Agreement”) is entered into in Shanghai, the People’s Republic of China
(hereinafter “PRC”) as of November 24, 2011 by and between the following Parties:
(1)
Wang Yong, a PRC citizen with his identity card number: and his domicile address at Room 502, No. 33, Lane
100, Qishan Road, Pudong New District, Shanghai (hereinafter the “Pledgor”);
(2)
The9 Computer Technology Consulting (Shanghai) Co., Ltd., a company with limited liability incorporated in Shanghai,
the PRC with its registered address at Room 103, Building 3, No. 690 Bibo Road, Zhangjiang Hi-Tech Park, Shanghai, PRC
(hereinafter the “Pledgee”).
(In this Agreement, both parties mentioned above are referred to individually as a “Party” and collectively as the “Parties”)
WHEREAS:
(1)
The Pledgor is the shareholder of Shanghai The9 Information Technology Co., Ltd. (a company with limited liability
established and validly existing under the PRC Laws, hereinafter the “Company”) whose name appears on the register of
members of the Company, legally holding 36% equity interests of the Company (hereinafter the “Company’s Equity”), and
the capital contribution and equity ratio of the Pledgor in the registered capital of the Company as of the date of this
Agreement is set out in Appendix I hereto.
(2)
(3)
(4)
(5)
The Parties hereto entered into the Exclusive Call Option Agreement dated November 24, 2011 (hereinafter the “Call Option
Agreement”), pursuant to which the Pledgor shall, to the extent permitted by the PRC Laws, transfer at the request of the
Pledgee all or part of its equity interests in the Company to the Pledgee and/or any other entities or persons designated by it.
The Parties hereto entered into the Shareholder Voting Proxy Agreement dated November 24, 2011 (hereinafter the “Voting
Proxy Agreement”), pursuant to which the Pledgor shall irrevocably entrust any person then designated by the Pledgee with
full power to exercise on its behalf all of its shareholder’s voting rights in the Company.
Pursuant to the Loan Agreement dated November 24, 2011 between the Pledgee and the Pledgor (hereinafter the “Loan
Agreement”), the Pledgee has already provided the Pledgor with a loan totaling Eight Million Two Hundred and Eighty
Thousand Renminbi (RMB8,280,000), which shall be repaid, in the sole discretion of the Pledgee, by the Pledgor
immediately when the Pledgee makes a repayment request to the Pledgor in written.
As the guarantee by the Pledgor for the performance of its Contractual Obligations (as defined below) and repayment of its
Guaranteed Liabilities (as defined below), the Pledgor agrees to pledge all the 36% Company’s Equity owned by it to the
Pledgee, and grants herewith to the Pledgee the right of first priority in the pledge.
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
HKRPRFRS13
10.10.12
HKR pf_rend
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08-Mar-2012 05:37 EST
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200FNeb!tH2CV4sQ
Therefore, the Parties have reached the following agreement upon mutual consultations:
Article 1 — Definition
1.1
Except as otherwise construed in the context, the following terms in this Agreement shall be interpreted to have the following
meanings:
“Contractual Obligations” shall mean all contractual obligations of the Pledgor under this Agreement, the Loan Agreement,
Call Option Agreement and Voting Proxy Agreement; all contractual obligations of the Company under Voting Proxy
Agreement.
“Guaranteed Liabilities” shall mean all direct, indirect and derivative losses and loss of foreseeable profits suffered by the
Pledgee due to any Event of Default (as defined below) of the Pledgor and/or the Company, the amount of which shall be
determined by the Pledgee in its absolute sole discretion and by which the Pledgor shall be fully bound; and all costs incurred
by the Pledgee for its enforcement of the Contractual Obligations of the Pledgor.
“Transaction Agreements” shall mean the Loan Agreement, Call Option Agreement and Voting Proxy Agreement.
“Event of Default” shall mean any breach by the Pledgor of its Contractual Obligations under the Loan Agreement, Call
Option Agreement, Voting Proxy Agreement and/or this Agreement, and any breach by the Company of its Contractual
Obligations under the Voting Proxy Agreement.
“Pledged Property” shall mean all of the Company’s Equity legally owned by the Pledgor when this Agreement becomes
effective and which will be pledged to the Pledgee according to the provisions hereof as the guarantee for the performance by
the Pledgor and the Company of their Contractual Obligations (please see Appendix I hereto for the specific equity pledged
by the Pledgor), and the increased capital contributions and dividends described under Articles 2.6 and 2.7 hereof.
“PRC Laws” shall mean the laws, administrative regulations, administrative rules, local regulations, judicial interpretations
and other binding regulatory documents of the People’s Republic of China then in effect.
Any reference to the PRC Laws herein shall be deemed (1) to include the references to the amendments, changes,
supplements and reenactments of such law, irrespective of whether they take effect before or after the formation of this
Agreement; and (2) to include the references to other decisions, notices and regulations enacted in accordance therewith or
effective as a result thereof.
Except as otherwise stated in the context herein, all references to an article, clause, item or paragraph shall refer to the
relevant part of this Agreement.
Article 2 — Equity Pledge
The Pledgor hereby agrees to pledge the Pledged Property which it legally owns and has the right to dispose of to the Pledgee
according to the provisions hereof as the guarantee for the performance of its Contractual Obligations and repayment of its
Guaranteed Liabilities.
1.2
1.3
2.1
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
HKRPRFRS13
10.10.12
HKR pf_rend
HKG
08-Mar-2012 05:38 EST
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200FNeb!tH2CZjqQ
2.2
2.3
2.4
2.5
2.6
2.7
2.8
3.1
4.1
The Pledgor hereby undertakes that it will be responsible for, on the date hereof, recording the arrangement of the equity
pledge hereunder (hereinafter the “Equity Pledge”) on the register of members of the Company. The Parties shall,
immediately after the execution hereof, make their best efforts to complete all formalities in relation to the Equity Pledge with
the industrial and commercial registration authority to which the Company relates as soon as possible.
During the term of this Agreement, except for the willful material negligence of the Pledgee or that such negligence is
directly related as cause/result to the consequence, the Pledgee shall not be liable in any way to, nor shall the Pledgor have
any right to claim in any way or propose any demands on the Pledgee, in respect of the reduction in value of the Pledged
Property.
Subject to compliance with Article 2.3 above, in case of any possibility of obvious reduction in value of the Pledged Property
which is sufficient to jeopardize the Pledgee’s rights, the Pledgee may demand the Pledgor to provide corresponding
guarantee as supplements. Where the Pledgor fails to do so, the Pledgee may at any time auction or sell off the Pledged
Property on behalf of the Pledgor, and discuss with the Pledgor to use the proceeds from such auction or sale-off as pre-
repayment of the Guaranteed Liabilities, or may submit such proceeds to the local notary institution where the Pledgee is
domiciled (any costs incurred in relation thereto shall be borne by the Pledgor).
In case of any Event of Default, the Pledgee shall have the right to dispose of the Pledged Property in the manner as set out in
Article 4 hereof.
The Pledgor shall not increase the capital of the Company unless with the prior consent of the Pledgee. The increased capital
contribution of the Pledgor in the registered capital of the Company due to the capital increase made by it shall also be
deemed as part of the Pledged Property.
The Pledgor shall not receive dividends or bonus from the Pledged Property unless with the prior consent of the Pledgee. Any
dividends received by the Pledgor in connection with the Pledged Property shall be deposited by the Company into the bank
account designated by the Pledgee, subject to the supervision of the Pledgee and used as the Pledged Property to first repay
the Guaranteed Liabilities.
The Pledgor agrees that they will be jointly and severally liable to the Pledgee for any Event of Default of the other Pledgor.
Upon the occurrence of the Event of Default, the Pledgee shall have the right to dispose of any Pledged Property of any of the
Pledgor pursuant to this Agreement.
Article 3 — Release of Pledge
After the Pledgor and the Company have fully and completely performed all Contractual Obligations and repaid all
Guaranteed Liabilities, the Pledgee shall, at the request of the Pledgor, release the Equity Pledge hereunder, and shall
cooperate with the Pledgor to cancel the record of the Equity Pledge in the register of members of the Company and the
registration thereof with the industrial and commercial registration authority to which the Company relates. All reasonable
costs incurred by the release of the pledge shall be borne by the Pledgor.
Article 4 — Disposal of the Pledged Property
The Parties hereby agree that, in case of any Event of Default, the Pledgee shall have the right to exercise, upon giving
written notice to the Pledgor, all remedies, rights and powers for breach available to it under the PRC Laws, Transaction
Agreements and the terms hereof, including (but not limited to) repayment in priority with proceeds from auctions or sale-offs
of the Pledged Property. The Pledgee shall not be liable for any loss arising from its reasonable exercise of such rights and
powers.
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4.2
4.3
The Pledgee shall have the right to designate in written its legal counsel or other agents to exercise on its behalf any and all
rights and powers set out above, and the Pledgor shall not oppose thereto.
With regard to the reasonable costs incurred by the Pledgee in connection with its exercise of any or all of the rights and
powers set out above, the Pledgee shall have the right to deduct such costs in exact amount from the proceeds it acquires from
the exercise of such rights and powers.
4.4
The proceeds the Pledgee acquires from the exercise of its rights and powers shall be used in the following order:
First, to pay any reasonable costs incurred in connection with the disposal of the Pledged Property and the exercise by the
Pledgee of its rights and powers (including remuneration paid to its legal counsel and agents);
Second, to pay any taxes payable for the disposal of the Pledged Property; and
Third, to repay the Guaranteed Liabilities to the Pledgee.
In case of any balance after payment of the above amounts, the Pledgee shall return the same to the Pledgor or other persons
entitled thereto according to the relevant laws and regulations, or submit the same to the local notary institution where the
Pledgee is domiciled (any costs incurred in relation thereto shall be borne by the Pledgor).
The Pledgee shall have the option to exercise, simultaneously or in certain sequence, any of the remedies for breach to which
it is entitled; the Pledgee shall not be required to exercise other remedies for breach before its exercise of the right to the
auctions or sale-offs of the Pledged Property hereunder.
4.5
5.1
All actual expenses in connection with the creation of the Equity Pledge hereunder, including (but not limited to) stamp
duties, any other taxes and all legal fees, etc shall be borne by the Pledgor and the Pledgee on their own.
Article 5 — Costs and Expenses
Article 6 — Continuity and No Waiver
6.1
The Equity Pledge hereunder is a continuous guarantee, the validity of which shall continue until the full performance of the
Contractual Obligations or the full repayment of the Guaranteed Liabilities. Any exemption or grace period granted by the
Pledgee in respect of any breach of the Pledgor, or delay by the Pledgee in exercising any of its rights under the Transaction
Agreements and this Agreement shall not affect the rights of the Pledgee under this Agreement, the relevant PRC Laws and
the Transaction Agreements to demand, at any time thereafter, the strict performance of the Transaction Agreements and this
Agreement by the Pledgor or the rights to which the Pledgee may be entitled due to any subsequent breach by the Pledgor of
the Transaction Agreements and/or this Agreement.
Article 7 — Representations and Warranties
The Pledgor jointly and severally represents and warrants to the Pledgee as follows:
7.1
The Pledgor is a PRC citizen with full capacity, and has the legal right and capacity to execute this Agreement and to bear
legal obligations hereunder.
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7.2
7.3
7.4
7.5
7.6
7.7
7.8
7.9
7.10
7.11
7.12
All reports, documents and information concerning all issues of the Pledgor and as required by this Agreement that are
provided by the Pledgor to the Pledgee prior to the effective date of this Agreement are true and correct in all material aspects
as of the effective date hereof.
All reports, documents and information concerning all issues of the Pledgor and as required by this Agreement that are
provided by the Pledgor to the Pledgee after the effective date of this Agreement are true and valid in all material aspects at
the time of their provisions.
At the time of the effectiveness of this Agreement, the Pledgor are the sole legal owner of the Pledged Property, with no
existing dispute whatever concerning the ownership of the Pledged Property. The Pledgor has the right to dispose of the
Pledged Property or any part thereof.
Except for the encumbrance set on the Pledged Property hereunder and the rights set under the Transaction Agreements, there
is no other encumbrance or third party interest set on the Pledged Property.
The Pledged Property is capable of being pledged or transferred according to the laws, and the Pledgor has the full right and
power to pledge the Pledged Property to the Pledgee according to this Agreement.
This Agreement constitutes the legal, valid and binding obligations on the Pledgor when it is duly executed by the Pledgor.
Any consent, permission, waiver or authorization by any third person, or any approval, permission or exemption by any
government authority, or any registration or filing formalities (if required by laws) with any government authority to be
handled or obtained in respect of the execution and performance hereof and the Equity Pledge hereunder have already been
handled or obtained (subject to Article 2.2), and will be fully effective during the term of this Agreement.
The execution and performance by the Pledgor of this Agreement are not in violation of or conflict with any laws applicable
to it, or any agreement to which it is a party or which has binding effect on its assets, any court judgment, any arbitration
award, or any administration authority decision.
The pledge hereunder constitutes the encumbrance of first order in priority on the Pledged Property.
All taxes and costs payable in connection with acquisition of the Pledged Property have already been paid in full by the
Pledgor.
There is no pending or, to the knowledge of the Pledgor, threatened litigation, legal proceeding or demand by any court or any
arbitral tribunal against the Pledgor, or its property, or the Pledged Property, nor is there any pending or, to the knowledge of
the Pledgor, threatened litigation, legal proceeding or demand by any government authority or any administration authority
against the Pledgor, or its property, or the Pledged Property, which is of material or detrimental effect on the economic status
of the Pledgor or its capability to perform the guarantee obligations and the obligations hereunder.
7.13
The Pledgor hereby warrants to the Pledgee that the above representations and warranties will be true and correct and fully
performed in all circumstances at any time before the Contractual Obligations are fully performed or the Guaranteed
Liabilities are fully repaid.
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Article 8 — Undertakings by Pledgor
The Pledgor hereby severally and jointly undertakes to the Pledgee as follows:
8.1
In case that the value of the Pledged Property is detrimentally affected due to any cause not attributable to the Pledgee, the
Pledgor shall, at the request of the Pledgee, provide the Pledgee with further guarantee in the way and on the terms acceptable
to the Pledgee so as to supplement or replace the Pledged Property fully.
8.2
8.3
8.4
8.5
8.6
8.7
8.8
8.9
9.1
Without the prior written consent of the Pledgee, the Pledgor shall not further create or permit the creation of any new pledge
or any other encumbrance on the Pledged Property; any pledge or other encumbrance on the whole or part of the Pledged
Property created without the prior written consent by the Pledgee shall be null and void.
Without first giving written notice to the Pledgee and having the Pledgee’s prior written consent, the Pledgor shall not transfer
the Pledged Property, and any attempt by the Pledgor to transfer the Pledged Property shall be null and void. The proceeds
from any transfer of the Pledged Property by the Pledgor shall be used to repay to the Pledgee in advance the Guaranteed
Liabilities or submit the same to the third party as agreed with the Pledgee.
In case of any litigation, arbitration or other demand which may affect detrimentally the interest of the Pledgor or the Pledgee
under the Transaction Agreements and hereunder or the Pledged Property, the Pledgor undertakes to notify the Pledgee
thereof in written as soon as possible and promptly and shall take, at the reasonable request of the Pledgee, all necessary
measures to ensure the pledged interest of the Pledgee in the Pledged Property.
The Pledgor shall not carry on or permit any act or action which may affect detrimentally the interest of the Pledgee under the
Transaction Agreements and hereunder or the Pledged Property. The Pledgor shall give up the preemptive right to which they
may be entitled when the Pledgee realizes its right to the pledge.
The Pledgor shall, during the first month of each calendar quarter, provide the Pledgee with the financial statement of the
Company for the preceding calendar quarter, including (but not limited to) its balance sheet, profit and loss statement and
cash flow statement.
The Pledgor shall, after the execution hereof, make their best effort and take all necessary means to complete the registration
of the Equity Pledge hereunder with the relevant industrial and commercial administration departments as soon as possible.
Moreover, the Pledgor guarantees that it shall, at the reasonable request of the Pledgee, take all necessary measures and
execute all necessary documents (including but not limited to supplementary agreement hereof) so as to ensure the pledged
interest of Pledgee in the Pledged Property and the exercise and realization of the rights thereof.
In case of assignment of any Pledged Property as a result of the exercise of the right to the pledge hereunder, the Pledgor
guarantees that it will take all necessary measures to realize such assignment.
The Pledgor shall ensure that the procedures for convening shareholders’ meetings and board meetings of the Company for
the purposes of executing this Agreement, creating the pledge and exercising the right of pledge thereto, as well as the method
of voting and matters put for voting shall not be in violation of laws, administrative regulations or the articles of association
of the Company.
Article 9 — Change of Circumstances
As supplement and without conflicting with other terms of the Transaction Agreements and this Agreement, in case that at
any time the promulgation or change of any PRC Laws, regulations or rules, or change in interpretation or application of such
laws, regulations and rules, or the change of the relevant registration procedures enables the Pledgee to believe that it will be
illegal or in conflict with such laws, regulations or rules to further maintain the effectiveness of this Agreement and/or dispose
of the Pledged Property in the way provided herein, the Pledgor shall, at the written direction of the Pledgee and in
accordance with its reasonable request, promptly take any action and/or execute any agreement or other document, in order
to:
(1)
keep this Agreement and the right to the pledge hereunder remain in effect;
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(2)
(3)
facilitate the disposal of the Pledged Property in the way as provided herein; and/or
maintain or realize the guarantee established or intended to establish hereunder.
Article 10 — Effectiveness and Term of This Agreement
10.1
This Agreement shall become effective upon the satisfaction of all of the following conditions:
(1)
(2)
this Agreement is duly executed by each of the Parties;
the Equity Pledge hereunder has been legally recorded in the register of members of the Company.
After this Agreement becomes effective, the Pledgor shall, at the request of the Pledgee, provide the registration certificate of
the pledge issued by the industrial and commercial administration departments to the Pledgee in a way that is satisfactory to
the Pledgee.
This Agreement shall remain effective until the full performance of the Contractual Obligations or the full repayment of the
Guaranteed Liabilities.
Article 11 — Notice
Any notice, request, demand and other correspondences required by this Agreement or made in accordance with this
Agreement shall be delivered in written to the relevant Party.
Any such notice or other correspondences shall be deemed to have been delivered when it is sent if delivery by facsimile or
telex, when it is delivered if delivery in person, and five (5) days after it was posted if delivery by post.
10.2
11.1
11.2
Article 12 — Miscellaneous
12.1 Without the need to get Pledgor’s consent, the Pledgee may assign its rights and/or obligations hereunder to any third party
after giving notice to the Pledgor; however, the Pledgor shall not, without the Pledgee’s prior written consent, assign their
respective rights, obligations and/or liabilities hereunder to any third party. Any successors or permitted assignees (if any) of
the Pledgor shall continue to perform the obligations of the Pledgor under this Agreement.
12.2
The amount of the Guaranteed Liabilities determined by the Pledgee in its sole discretion at the time when it exercises the
right of pledge to the Pledged Property according to this Agreement shall be the conclusive evidence of the Guaranteed
Liabilities hereunder.
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12.3
12.4
12.5
12.6
12.7
12.8
12.9
This Agreement is executed in Chinese in four (4) original sets, with one (1) original to be retained by each party hereto, and
one original shall be used for the application for registration of the Equity Pledge hereunder with the industrial and
commercial registration authority to which the Company relates.
The formation, validity, execution, amendment, interpretation and termination of this Agreement shall be governed by the
PRC Laws.
Any disputes arising out of and in connection with this Agreement shall be resolved through consultations between the
Parties. If the Parties cannot reach an agreement regarding such disputes within thirty (30) days of their occurrence, such
disputes shall be submitted to China International Economic and Trade Arbitration Commission, Shanghai Branch, for
arbitration in Shanghai in accordance with the arbitration rules of such Commission, and the arbitration award shall be final
and binding on the Parties.
None of the rights, powers and remedies granted to the Parties by any provisions herein shall preclude any other rights,
powers and remedies available to such Parties at law and under the other provisions of this Agreement, nor shall the exercise
by a party of its rights, powers and remedies preclude any exercise by such party of its other rights, powers and remedies.
No failure or delay by a Party in exercising any of its rights, powers and remedies hereunder or in accordance with laws
(hereinafter the “Party’s Rights”) shall result in a waiver thereof, nor shall the waiver of any single or partial exercise of the
Party’s Rights shall preclude such Party from exercising such rights in any other way and exercising the other Party’s Rights.
The headings of the provisions herein are for reference only, and in no circumstances shall such headings be used for or affect
the interpretation of the provisions hereof.
Each provision contained herein shall be severable and independent from each of other provisions, and if at any time any one
or more provisions herein become(s) invalid, illegal or unenforceable, the validity, legality or enforceability of the remaining
provisions herein shall not be affected as a result thereof.
12.10 Any amendments or supplements to this Agreement shall be made in written. Except for assignment by the Pledgee of its
rights hereunder according to Article 12.1 of this Agreement, the amendments or supplements to this Agreement shall become
effective only when duly signed by the Parties to this Agreement. The Parties shall obtain permission from and/or complete
registration or filing formalities with any government authority according to laws if any amendment or supplement to this
Agreement so requires.
12.11 This Agreement shall be binding on the legal successors of the Parties.
12.12 At the time of execution hereof, the Pledgor shall sign a power of attorney (hereinafter the “Power of Attorney”), the format
of which is shown in Appendix II, to authorize any person designated by the Pledgee to sign on its behalf according to this
Agreement any and all legal documents necessary for the exercise by the Pledgee of its rights hereunder. Such Power of
Attorney shall be delivered to the Pledgee for custody and, when necessary, the Pledgee may at any time submit the Power of
Attorney to the relevant government authority.
[The remainder of this page intentionally left blank]
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IN WITNESS HEREOF, the Parties have caused this Equity Pledge Agreement to be executed as of the date and in the place first
above written.
Wang Yong
Signature: /s/ Wang Yong
The9 Computer Technology Consulting (Shanghai) Co., Ltd.
(Company chop)
Company chop is affixed
THE9 LIMITED
FORM 20-F
Appendix I:
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Basic Information of Company
Company Name:
Registered Address:
Registered Capital:
Legal Representative:
Shareholding Structure:
Shanghai The9 Information Technology Co., Ltd.
Room 201, Building 3, No. 690 Bibo Road, Zhangjiang Hi-Tech Park, Shanghai, PRC
RMB23 million
[Wang Yong]
Shareholder’s Name
Ji Wei
Wang Yong
Total
Contributed Capital (in RMB)
14,720,000
8,280,000
23,000,000
Proportion of Equity Interests
64%
36%
100%
Financial Year: January 1 to December 31
Appendix I
THE9 LIMITED
FORM 20-F
Appendix II:
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Form of the Power of Attorney
I, Wang Yong, hereby irrevocably appoint , ID no. as my attorney-in-fact to sign all the requisite
orancillary legal documents required for The9 Computer Technology Consulting (Shanghai) Co., Ltd. to exercise its rights under the
“Equity Pledge Agreement in relation to Shanghai The9 Information Technology Co., Ltd.” entered into between The9 Computer
Technology Consulting (Shanghai) Co., Ltd. and myself.
Signature:
Date:
Appendix II
THE9 LIMITED
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Exhibit 4.39
This is an English Translation
November 24, 2011
Equity Pledge Agreement
by and between
Ji Wei
and
The9 Computer Technology Consulting (Shanghai) Co., Ltd.
Regarding
Shanghai The9 Information Technology Co., Ltd.
THE9 LIMITED
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Equity Pledge Agreement
This Equity Pledge Agreement (hereinafter this “Agreement”) is entered into in Shanghai, the People’s Republic of China
(hereinafter “PRC”) as of November 24, 2011 by and between the following Parties:
(1)
Ji Wei, a PRC citizen with his identity card number: and his domicile address at Back Building, 2F, No. 12,
Lane 424, Huimin Road, Yangpu District, Shanghai (hereinafter the “Pledgor”);
(2)
The9 Computer Technology Consulting (Shanghai) Co., Ltd., a company with limited liability incorporated in Shanghai,
the PRC with its registered address at Room 103, Building 3, No. 690 Bibo Road, Zhangjiang Hi-Tech Park, Shanghai, PRC
(hereinafter the “Pledgee”).
(In this Agreement, both parties mentioned above are referred to individually as a “Party” and collectively as the “Parties”)
WHEREAS:
(1)
The Pledgor is the shareholder of Shanghai The9 Information Technology Co., Ltd. (a company with limited liability
established and validly existing under the PRC Laws, hereinafter the “Company”) whose name appears on the register of
members of the Company, legally holding 64% equity interests of the Company (hereinafter the “Company’s Equity”), and
the capital contribution and equity ratio of the Pledgor in the registered capital of the Company as of the date of this
Agreement is set out in Appendix I hereto.
(2)
(3)
(4)
(5)
The Parties hereto entered into the Exclusive Call Option Agreement dated November 24, 2011 (hereinafter the “Call Option
Agreement”), pursuant to which the Pledgor shall, to the extent permitted by the PRC Laws, transfer at the request of the
Pledgee all or part of its equity interests in the Company to the Pledgee and/or any other entities or persons designated by it.
The Parties hereto entered into the Shareholder Voting Proxy Agreement dated November 24, 2011 (hereinafter the “Voting
Proxy Agreement”), pursuant to which the Pledgor shall irrevocably entrust any person then designated by the Pledgee with
full power to exercise on its behalf all of its shareholder’s voting rights in the Company.
Pursuant to the Loan Agreement dated November 24, 2011 between the Pledgee and the Pledgor (hereinafter the “Loan
Agreement”), the Pledgee has already provided the Pledgor with a loan totaling Fourteen Million Seven Hundred and Twenty
Thousand Renminbi (RMB14,720,000), which shall be repaid, in the sole discretion of the Pledgee, by the Pledgor
immediately when the Pledgee makes a repayment request to the Pledgor in written.
As the guarantee by the Pledgor for the performance of its Contractual Obligations (as defined below) and repayment of its
Guaranteed Liabilities (as defined below), the Pledgor agrees to pledge all the 64% Company’s Equity owned by it to the
Pledgee, and grants herewith to the Pledgee the right of first priority in the pledge.
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Therefore, the Parties have reached the following agreement upon mutual consultations:
Article 1 — Definition
1.1
Except as otherwise construed in the context, the following terms in this Agreement shall be interpreted to have the following
meanings:
“Contractual Obligations” shall mean all contractual obligations of the Pledgor under this Agreement, the Loan Agreement,
Call Option Agreement and Voting Proxy Agreement; all contractual obligations of the Company under Voting Proxy
Agreement.
“Guaranteed Liabilities” shall mean all direct, indirect and derivative losses and loss of foreseeable profits suffered by the
Pledgee due to any Event of Default (as defined below) of the Pledgor and/or the Company, the amount of which shall be
determined by the Pledgee in its absolute sole discretion and by which the Pledgor shall be fully bound; and all costs incurred
by the Pledgee for its enforcement of the Contractual Obligations of the Pledgor.
“Transaction Agreements” shall mean the Loan Agreement, Call Option Agreement and Voting Proxy Agreement.
“Event of Default” shall mean any breach by the Pledgor of its Contractual Obligations under the Loan Agreement, Call
Option Agreement, Voting Proxy Agreement and/or this Agreement, and any breach by the Company of its Contractual
Obligations under the Voting Proxy Agreement.
“Pledged Property” shall mean all of the Company’s Equity legally owned by the Pledgor when this Agreement becomes
effective and which will be pledged to the Pledgee according to the provisions hereof as the guarantee for the performance by
the Pledgor and the Company of their Contractual Obligations (please see Appendix I hereto for the specific equity pledged
by the Pledgor), and the increased capital contributions and dividends described under Articles 2.6 and 2.7 hereof.
“PRC Laws” shall mean the laws, administrative regulations, administrative rules, local regulations, judicial interpretations
and other binding regulatory documents of the People’s Republic of China then in effect.
Any reference to the PRC Laws herein shall be deemed (1) to include the references to the amendments, changes,
supplements and reenactments of such law, irrespective of whether they take effect before or after the formation of this
Agreement; and (2) to include the references to other decisions, notices and regulations enacted in accordance therewith or
effective as a result thereof.
Except as otherwise stated in the context herein, all references to an article, clause, item or paragraph shall refer to the
relevant part of this Agreement.
Article 2 — Equity Pledge
The Pledgor hereby agrees to pledge the Pledged Property which it legally owns and has the right to dispose of to the Pledgee
according to the provisions hereof as the guarantee for the performance of its Contractual Obligations and repayment of its
Guaranteed Liabilities.
1.2
1.3
2.1
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2.2
2.3
2.4
2.5
2.6
2.7
2.8
3.1
4.1
The Pledgor hereby undertakes that it will be responsible for, on the date hereof, recording the arrangement of the equity
pledge hereunder (hereinafter the “Equity Pledge”) on the register of members of the Company. The Parties shall,
immediately after the execution hereof, make their best efforts to complete all formalities in relation to the Equity Pledge with
the industrial and commercial registration authority to which the Company relates as soon as possible.
During the term of this Agreement, except for the willful material negligence of the Pledgee or that such negligence is
directly related as cause/result to the consequence, the Pledgee shall not be liable in any way to, nor shall the Pledgor have
any right to claim in any way or propose any demands on the Pledgee, in respect of the reduction in value of the Pledged
Property.
Subject to compliance with Article 2.3 above, in case of any possibility of obvious reduction in value of the Pledged Property
which is sufficient to jeopardize the Pledgee’s rights, the Pledgee may demand the Pledgor to provide corresponding
guarantee as supplements. Where the Pledgor fails to do so, the Pledgee may at any time auction or sell off the Pledged
Property on behalf of the Pledgor, and discuss with the Pledgor to use the proceeds from such auction or sale-off as pre-
repayment of the Guaranteed Liabilities, or may submit such proceeds to the local notary institution where the Pledgee is
domiciled (any costs incurred in relation thereto shall be borne by the Pledgor).
In case of any Event of Default, the Pledgee shall have the right to dispose of the Pledged Property in the manner as set out in
Article 4 hereof.
The Pledgor shall not increase the capital of the Company unless with the prior consent of the Pledgee. The increased capital
contribution of the Pledgor in the registered capital of the Company due to the capital increase made by it shall also be
deemed as part of the Pledged Property.
The Pledgor shall not receive dividends or bonus from the Pledged Property unless with the prior consent of the Pledgee. Any
dividends received by the Pledgor in connection with the Pledged Property shall be deposited by the Company into the bank
account designated by the Pledgee, subject to the supervision of the Pledgee and used as the Pledged Property to first repay
the Guaranteed Liabilities.
The Pledgor agrees that they will be jointly and severally liable to the Pledgee for any Event of Default of the other Pledgor.
Upon the occurrence of the Event of Default, the Pledgee shall have the right to dispose of any Pledged Property of any of the
Pledgor pursuant to this Agreement.
Article 3 — Release of Pledge
After the Pledgor and the Company have fully and completely performed all Contractual Obligations and repaid all
Guaranteed Liabilities, the Pledgee shall, at the request of the Pledgor, release the Equity Pledge hereunder, and shall
cooperate with the Pledgor to cancel the record of the Equity Pledge in the register of members of the Company and the
registration thereof with the industrial and commercial registration authority to which the Company relates. All reasonable
costs incurred by the release of the pledge shall be borne by the Pledgor.
Article 4 — Disposal of the Pledged Property
The Parties hereby agree that, in case of any Event of Default, the Pledgee shall have the right to exercise, upon giving
written notice to the Pledgor, all remedies, rights and powers for breach available to it under the PRC Laws, Transaction
Agreements and the terms hereof, including (but not limited to) repayment in priority with proceeds from auctions or sale-offs
of the Pledged Property. The Pledgee shall not be liable for any loss arising from its reasonable exercise of such rights and
powers.
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4.2
4.3
The Pledgee shall have the right to designate in written its legal counsel or other agents to exercise on its behalf any and all
rights and powers set out above, and the Pledgor shall not oppose thereto.
With regard to the reasonable costs incurred by the Pledgee in connection with its exercise of any or all of the rights and
powers set out above, the Pledgee shall have the right to deduct such costs in exact amount from the proceeds it acquires from
the exercise of such rights and powers.
4.4
The proceeds the Pledgee acquires from the exercise of its rights and powers shall be used in the following order:
First, to pay any reasonable costs incurred in connection with the disposal of the Pledged Property and the exercise by the
Pledgee of its rights and powers (including remuneration paid to its legal counsel and agents);
Second, to pay any taxes payable for the disposal of the Pledged Property; and
Third, to repay the Guaranteed Liabilities to the Pledgee.
In case of any balance after payment of the above amounts, the Pledgee shall return the same to the Pledgor or other persons
entitled thereto according to the relevant laws and regulations, or submit the same to the local notary institution where the
Pledgee is domiciled (any costs incurred in relation thereto shall be borne by the Pledgor).
The Pledgee shall have the option to exercise, simultaneously or in certain sequence, any of the remedies for breach to which
it is entitled; the Pledgee shall not be required to exercise other remedies for breach before its exercise of the right to the
auctions or sale-offs of the Pledged Property hereunder.
4.5
5.1
All actual expenses in connection with the creation of the Equity Pledge hereunder, including (but not limited to) stamp
duties, any other taxes and all legal fees, etc shall be borne by the Pledgor and the Pledgee on their own.
Article 5 — Costs and Expenses
Article 6 — Continuity and No Waiver
6.1
The Equity Pledge hereunder is a continuous guarantee, the validity of which shall continue until the full performance of the
Contractual Obligations or the full repayment of the Guaranteed Liabilities. Any exemption or grace period granted by the
Pledgee in respect of any breach of the Pledgor, or delay by the Pledgee in exercising any of its rights under the Transaction
Agreements and this Agreement shall not affect the rights of the Pledgee under this Agreement, the relevant PRC Laws and
the Transaction Agreements to demand, at any time thereafter, the strict performance of the Transaction Agreements and this
Agreement by the Pledgor or the rights to which the Pledgee may be entitled due to any subsequent breach by the Pledgor of
the Transaction Agreements and/or this Agreement.
Article 7 — Representations and Warranties
The Pledgor jointly and severally represents and warrants to the Pledgee as follows:
7.1
The Pledgor is a PRC citizen with full capacity, and has the legal right and capacity to execute this Agreement and to bear
legal obligations hereunder.
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7.2
7.3
7.4
7.5
7.6
7.7
7.8
7.9
7.10
7.11
7.12
All reports, documents and information concerning all issues of the Pledgor and as required by this Agreement that are
provided by the Pledgor to the Pledgee prior to the effective date of this Agreement are true and correct in all material aspects
as of the effective date hereof.
All reports, documents and information concerning all issues of the Pledgor and as required by this Agreement that are
provided by the Pledgor to the Pledgee after the effective date of this Agreement are true and valid in all material aspects at
the time of their provisions.
At the time of the effectiveness of this Agreement, the Pledgor are the sole legal owner of the Pledged Property, with no
existing dispute whatever concerning the ownership of the Pledged Property. The Pledgor has the right to dispose of the
Pledged Property or any part thereof.
Except for the encumbrance set on the Pledged Property hereunder and the rights set under the Transaction Agreements, there
is no other encumbrance or third party interest set on the Pledged Property.
The Pledged Property is capable of being pledged or transferred according to the laws, and the Pledgor has the full right and
power to pledge the Pledged Property to the Pledgee according to this Agreement.
This Agreement constitutes the legal, valid and binding obligations on the Pledgor when it is duly executed by the Pledgor.
Any consent, permission, waiver or authorization by any third person, or any approval, permission or exemption by any
government authority, or any registration or filing formalities (if required by laws) with any government authority to be
handled or obtained in respect of the execution and performance hereof and the Equity Pledge hereunder have already been
handled or obtained (subject to Article 2.2), and will be fully effective during the term of this Agreement.
The execution and performance by the Pledgor of this Agreement are not in violation of or conflict with any laws applicable
to it, or any agreement to which it is a party or which has binding effect on its assets, any court judgment, any arbitration
award, or any administration authority decision.
The pledge hereunder constitutes the encumbrance of first order in priority on the Pledged Property.
All taxes and costs payable in connection with acquisition of the Pledged Property have already been paid in full by the
Pledgor.
There is no pending or, to the knowledge of the Pledgor, threatened litigation, legal proceeding or demand by any court or any
arbitral tribunal against the Pledgor, or its property, or the Pledged Property, nor is there any pending or, to the knowledge of
the Pledgor, threatened litigation, legal proceeding or demand by any government authority or any administration authority
against the Pledgor, or its property, or the Pledged Property, which is of material or detrimental effect on the economic status
of the Pledgor or its capability to perform the guarantee obligations and the obligations hereunder.
7.13
The Pledgor hereby warrants to the Pledgee that the above representations and warranties will be true and correct and fully
performed in all circumstances at any time before the Contractual Obligations are fully performed or the Guaranteed
Liabilities are fully repaid.
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Article 8 — Undertakings by Pledgor
The Pledgor hereby severally and jointly undertakes to the Pledgee as follows:
8.1
In case that the value of the Pledged Property is detrimentally affected due to any cause not attributable to the Pledgee, the
Pledgor shall, at the request of the Pledgee, provide the Pledgee with further guarantee in the way and on the terms acceptable
to the Pledgee so as to supplement or replace the Pledged Property fully.
8.2
8.3
8.4
8.5
8.6
8.7
8.8
8.9
9.1
Without the prior written consent of the Pledgee, the Pledgor shall not further create or permit the creation of any new pledge
or any other encumbrance on the Pledged Property; any pledge or other encumbrance on the whole or part of the Pledged
Property created without the prior written consent by the Pledgee shall be null and void.
Without first giving written notice to the Pledgee and having the Pledgee’s prior written consent, the Pledgor shall not transfer
the Pledged Property, and any attempt by the Pledgor to transfer the Pledged Property shall be null and void. The proceeds
from any transfer of the Pledged Property by the Pledgor shall be used to repay to the Pledgee in advance the Guaranteed
Liabilities or submit the same to the third party as agreed with the Pledgee.
In case of any litigation, arbitration or other demand which may affect detrimentally the interest of the Pledgor or the Pledgee
under the Transaction Agreements and hereunder or the Pledged Property, the Pledgor undertakes to notify the Pledgee
thereof in written as soon as possible and promptly and shall take, at the reasonable request of the Pledgee, all necessary
measures to ensure the pledged interest of the Pledgee in the Pledged Property.
The Pledgor shall not carry on or permit any act or action which may affect detrimentally the interest of the Pledgee under the
Transaction Agreements and hereunder or the Pledged Property. The Pledgor shall give up the preemptive right to which they
may be entitled when the Pledgee realizes its right to the pledge.
The Pledgor shall, during the first month of each calendar quarter, provide the Pledgee with the financial statement of the
Company for the preceding calendar quarter, including (but not limited to) its balance sheet, profit and loss statement and
cash flow statement.
The Pledgor shall, after the execution hereof, make their best effort and take all necessary means to complete the registration
of the Equity Pledge hereunder with the relevant industrial and commercial administration departments as soon as possible.
Moreover, the Pledgor guarantees that it shall, at the reasonable request of the Pledgee, take all necessary measures and
execute all necessary documents (including but not limited to supplementary agreement hereof) so as to ensure the pledged
interest of Pledgee in the Pledged Property and the exercise and realization of the rights thereof.
In case of assignment of any Pledged Property as a result of the exercise of the right to the pledge hereunder, the Pledgor
guarantees that it will take all necessary measures to realize such assignment.
The Pledgor shall ensure that the procedures for convening shareholders’ meetings and board meetings of the Company for
the purposes of executing this Agreement, creating the pledge and exercising the right of pledge thereto, as well as the method
of voting and matters put for voting shall not be in violation of laws, administrative regulations or the articles of association
of the Company.
Article 9 — Change of Circumstances
As supplement and without conflicting with other terms of the Transaction Agreements and this Agreement, in case that at
any time the promulgation or change of any PRC Laws, regulations or rules, or change in interpretation or application of such
laws, regulations and rules, or the change of the relevant registration procedures enables the Pledgee to believe that it will be
illegal or in conflict with such laws, regulations or rules to further maintain the effectiveness of this Agreement and/or dispose
of the Pledged Property in the way provided herein, the Pledgor shall, at the written direction of the Pledgee and in
accordance with its reasonable request, promptly take any action and/or execute any agreement or other document, in order
to:
(1)
keep this Agreement and the right to the pledge hereunder remain in effect;
THE9 LIMITED
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(2)
(3)
facilitate the disposal of the Pledged Property in the way as provided herein; and/or
maintain or realize the guarantee established or intended to establish hereunder.
Article 10 — Effectiveness and Term of This Agreement
10.1
This Agreement shall become effective upon the satisfaction of all of the following conditions:
(1)
(2)
this Agreement is duly executed by each of the Parties;
the Equity Pledge hereunder has been legally recorded in the register of members of the Company.
After this Agreement becomes effective, the Pledgor shall, at the request of the Pledgee, provide the registration certificate of
the pledge issued by the industrial and commercial administration departments to the Pledgee in a way that is satisfactory to
the Pledgee.
This Agreement shall remain effective until the full performance of the Contractual Obligations or the full repayment of the
Guaranteed Liabilities.
Article 11 — Notice
Any notice, request, demand and other correspondences required by this Agreement or made in accordance with this
Agreement shall be delivered in written to the relevant Party.
Any such notice or other correspondences shall be deemed to have been delivered when it is sent if delivery by facsimile or
telex, when it is delivered if delivery in person, and five (5) days after it was posted if delivery by post.
10.2
11.1
11.2
Article 12 — Miscellaneous
12.1 Without the need to get Pledgor’s consent, the Pledgee may assign its rights and/or obligations hereunder to any third party
after giving notice to the Pledgor; however, the Pledgor shall not, without the Pledgee’s prior written consent, assign their
respective rights, obligations and/or liabilities hereunder to any third party. Any successors or permitted assignees (if any) of
the Pledgor shall continue to perform the obligations of the Pledgor under this Agreement.
12.2
The amount of the Guaranteed Liabilities determined by the Pledgee in its sole discretion at the time when it exercises the
right of pledge to the Pledged Property according to this Agreement shall be the conclusive evidence of the Guaranteed
Liabilities hereunder.
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12.3
12.4
12.5
12.6
12.7
12.8
12.9
This Agreement is executed in Chinese in four (4) original sets, with one (1) original to be retained by each party hereto, and
one original shall be used for the application for registration of the Equity Pledge hereunder with the industrial and
commercial registration authority to which the Company relates.
The formation, validity, execution, amendment, interpretation and termination of this Agreement shall be governed by the
PRC Laws.
Any disputes arising out of and in connection with this Agreement shall be resolved through consultations between the
Parties. If the Parties cannot reach an agreement regarding such disputes within thirty (30) days of their occurrence, such
disputes shall be submitted to China International Economic and Trade Arbitration Commission, Shanghai Branch, for
arbitration in Shanghai in accordance with the arbitration rules of such Commission, and the arbitration award shall be final
and binding on the Parties.
None of the rights, powers and remedies granted to the Parties by any provisions herein shall preclude any other rights,
powers and remedies available to such Parties at law and under the other provisions of this Agreement, nor shall the exercise
by a party of its rights, powers and remedies preclude any exercise by such party of its other rights, powers and remedies.
No failure or delay by a Party in exercising any of its rights, powers and remedies hereunder or in accordance with laws
(hereinafter the “Party’s Rights”) shall result in a waiver thereof, nor shall the waiver of any single or partial exercise of the
Party’s Rights shall preclude such Party from exercising such rights in any other way and exercising the other Party’s Rights.
The headings of the provisions herein are for reference only, and in no circumstances shall such headings be used for or affect
the interpretation of the provisions hereof.
Each provision contained herein shall be severable and independent from each of other provisions, and if at any time any one
or more provisions herein become(s) invalid, illegal or unenforceable, the validity, legality or enforceability of the remaining
provisions herein shall not be affected as a result thereof.
12.10 Any amendments or supplements to this Agreement shall be made in written. Except for assignment by the Pledgee of its
rights hereunder according to Article 12.1 of this Agreement, the amendments or supplements to this Agreement shall become
effective only when duly signed by the Parties to this Agreement. The Parties shall obtain permission from and/or complete
registration or filing formalities with any government authority according to laws if any amendment or supplement to this
Agreement so requires.
12.11 This Agreement shall be binding on the legal successors of the Parties.
12.12 At the time of execution hereof, the Pledgor shall sign a power of attorney (hereinafter the “Power of Attorney”), the format
of which is shown in Appendix II, to authorize any person designated by the Pledgee to sign on its behalf according to this
Agreement any and all legal documents necessary for the exercise by the Pledgee of its rights hereunder. Such Power of
Attorney shall be delivered to the Pledgee for custody and, when necessary, the Pledgee may at any time submit the Power of
Attorney to the relevant government authority.
[The remainder of this page intentionally left blank]
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IN WITNESS HEREOF, the Parties have caused this Equity Pledge Agreement to be executed as of the date and in the place first
above written.
Ji Wei
Signature: /s/ Ji Wei
The9 Computer Technology Consulting (Shanghai) Co., Ltd.
(Company chop)
Company chop is affixed
THE9 LIMITED
FORM 20-F
Appendix I:
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Basic Information of Company
Company Name:
Registered Address:
Registered Capital:
Legal Representative:
Shareholding Structure:
Shanghai The9 Information Technology Co., Ltd.
Room 201, Building 3, No. 690 Bibo Road, Zhangjiang Hi-Tech Park, Shanghai, PRC
RMB23 million
[Wang Yong]
Shareholder’s Name
Ji Wei
Wang Yong
Total
Contributed Capital (in RMB)
14,720,000
8,280,000
23,000,000
Proportion of Equity Interests
64%
36%
100%
Financial Year: January 1 to December 31
Appendix I
THE9 LIMITED
FORM 20-F
Appendix II:
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Form of the Power of Attorney
I, Ji Wei, hereby irrevocably appoint , ID no. , as my attorney-in-fact to sign all the requisite or ancillary
legal documents required for The9 Computer Technology Consulting (Shanghai) Co., Ltd. to exercise its rights under the “Equity
Pledge Agreement in relation to Shanghai The9 Information Technology Co., Ltd.” entered into between The9 Computer Technology
Consulting (Shanghai) Co., Ltd. and myself.
Signature:
Date:
Appendix II
THE9 LIMITED
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Exhibit 4.40
This is an English Translation
November 24, 2011
Exclusive Call Option Agreement
By and Among
Wang Yong
Ji Wei
and
The9 Computer Technology Consulting (Shanghai) Co., Ltd.
Regarding
Shanghai The9 Information Technology Co., Ltd.
THE9 LIMITED
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Exclusive Call Option Agreement
This Exclusive Call Option Agreement (hereinafter this “Agreement”) is entered into in Shanghai, the People’s Republic of China
(hereinafter “PRC”) as of November 24, 2011 by and among the following Parties:
(1)
Wang Yong, a PRC citizen with his identity card number: and his domicile address at Room 502, No. 33, Lane
100, Qishan Road, Pudong New District, Shanghai
(2)
Ji Wei, a PRC citizen with his identity card number: and his domicile address at Back Building, 2F, No. 12, Lane
424, Huimin Road, Yangpu District, Shanghai
(Wang Yong and Ji Wei are hereinafter referred to individually or collectively as the “Existing Shareholder(s)”)
(3)
The9 Computer Technology Consulting (Shanghai) Co., Ltd., a limited liability company established and validly existing
under the PRC Laws with its registered address at Room 103, Building 3, No. 690 Bibo Road, Zhangjiang Hi-Tech Park,
Shanghai (hereinafter “The9 Computer”);
(In this Agreement, all parties mentioned above are referred to individually as a “Party” and collectively as the “Parties”)
WHEREAS:
(1)
The Existing Shareholders are the shareholders of Shanghai The9 Information Technology Co., Ltd., a limited liability
company established and validly existing under the PRC Laws, hereinafter the “Company”) whose name appear on the
register of members of the Company, legally holding all equity interests of the Company, and the capital contribution and
equity ratio of the Existing Shareholders in the registered capital of the Company as of the date of this Agreement are set out
in Appendix I hereto.
(2)
(3)
The Existing Shareholders intend to transfer to The9 Computer and/or any other entity or individual designated by it, and
The9 Computer intends to accept the transfer of, all of their respective equity interests in the Company, subject to the PRC
Laws.
In order to realize the equity transfer described above, the Existing Shareholders agree to grant to The9 Computer an
exclusive and irrevocable equity transfer option, respectively. Pursuant to the equity transfer option, the Existing Shareholders
shall, at the request of The9 Computer and to the extent permitted by the PRC Laws, transfer the Option Equity (as defined
below) to The9 Computer and/or any other entity or individual designated by it in accordance with the provisions of this
Agreement.
Therefore, the Parties have reached the following agreement upon mutual consultations:
Article 1 — Definition
1.1
Except as otherwise construed in the context, the following terms in this Agreement shall be interpreted to have the following
meanings:
“PRC Laws” shall mean the laws, administrative regulations, administrative rules, local regulations, judicial interpretations and other
binding regulatory documents of the People’s Republic of China (for the purpose of this Agreement, excluding Hong Kong Special
Administrative Region, Macao Special Administrative Region and Taiwan) then in effect.
2
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“Transfer Option” shall mean the option to request for the purchase of equity interests in the Company as granted by the Existing
Shareholders to The9 Computer pursuant to the terms and conditions of this Agreement.
“Option Equity” shall mean, in respect of each of the Existing Shareholders, all the equity interests held by him in the Company
Registered Capital (as defined below); and in respect of all the Existing Shareholders, the equity interests accounting for 100% of the
Company Registered Capital.
“Company Registered Capital” shall mean the registered capital of the Company on the date of this Agreement, i.e.,
RMB23,000,000, and shall include any expanded registered capital as a result of any capital increase within the term of this
Agreement.
“Transferred Equity” shall mean the equity interests of the Company which The9 Computer has the right to require any of the
Existing Shareholders to transfer to it or its designated entity or individual in accordance with Article 3.2 hereof when The9
Computer exercises its Transfer Option, the quantity of which may be all or part of the Option Equity and the specific amount of
which shall be determined by The9 Computer in its sole discretion in accordance with the PRC Laws then in effect and based on its
own commercial consideration.
“Exercise of Option” shall mean any exercise by The9 Computer of its Transfer Option.
“Transfer Price” shall mean all the considerations which The9 Computer or its designated entity or individual is required to pay to
the Existing Shareholders in order to obtain the Transferred Equity upon each Exercise of Option.
“Business Permits” shall mean any approvals, permits, filings and registrations etc. which the Company is required to have for
legally and validly operating all of its businesses, including but not limited to the Business License of the Corporate Legal Person, the
Tax Registration Certificate, the Permit for Operations of Value-added Telecommunication Businesses with respect to the business
operation of internet information services, the Network Cultural Business Permit for operating internet cultural products containing
online games, the approval document number required to obtain from internet publication institutions for operating online games, the
filings required to be made with the producers of electronic publications for producing electronic publications, and such other relevant
licenses and permits as required by the PRC Laws then in effect.
3
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“Company Assets” shall mean all the tangible and intangible assets which the Company owns or has the right to dispose of during
the term of this Agreement, including but not limited to any immoveable and moveable assets, and such intellectual property rights as
trademarks, copyrights, patents, proprietary know-how, domain name, software use right, and any investment interest.
“Material Asset” shall mean any asset which has a book value of RMB100,000 or more or has a material impact on the businesses
operation of any Party.
“Material Agreement” shall mean any agreement to which the Company is a party and which has a material impact on the business
or assets of the Company, including but not limited to the important agreements regarding the profit distribution of online games, its
technical services, information release/business of the Company.
“Exercise Notice” shall have the meaning ascribed to it in Article 3.5 of this Agreement.
“Confidential Information” shall have the meaning ascribed to it in Article 6.1 of this Agreement.
“Defaulting Party” shall have the meaning ascribed to it in Article 9.1 of this Agreement.
“Default” shall have the meaning ascribed to it in Article 9.1 of this Agreement.
“Party’s Rights” shall have the meaning ascribed to it in Article 10.5 of this Agreement.
1.2
Any reference to the PRC Laws herein shall be deemed (1) to include the references to the amendments, changes,
supplements and reenactments of such law, irrespective of whether they take effect before or after the formation of this
Agreement; and (2) to include the references to other decisions, notices and regulations enacted in accordance therewith or
effective as a result thereof.
1.3
Except as otherwise stated in the context herein, all references to an article, clause, item or paragraph shall refer to the
relevant part of this Agreement.
Article 2 Grant of Transfer Option
2.1
The Existing Shareholders hereby severally and jointly agree to grant to The9 Computer an irrevocable, unconditional and
exclusive Transfer Option. Pursuant to the Transfer Option, The9 Computer shall have the right to, to the extent permitted by
the PRC Laws, require the Existing Shareholders to transfer the Option Equity to The9 Computer or its designated entity or
individual according to the terms and conditions of this Agreement. The9 Computer also agrees to accept such Transfer
Option.
4
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3.1
3.2
3.3
3.4
3.5
3.6
Article 3 Method for Exercise of Option
Subject to the terms and conditions of this Agreement, The9 Computer shall have the absolute sole discretion to determine the
specific time, method and times of its Exercise of Option to the extent permitted by the PRC Laws.
If The9 Computer and/or any other entity or individual designated by it is/are permitted by the PRC Laws then in effect to
hold all the equity interests of the Company, The9 Computer shall have the right to elect to exercise all of its Transfer Option
on a one-off basis, and The9 Computer and/or any other entity or individual designated by it shall accept the one-off transfer
of all the Option Equity from the Existing Shareholders; if The9 Computer and/or any other entity or individual designated by
it is/are permitted by the PRC Laws then in effect to hold only part of the equity interests of the Company, The9 Computer
shall have the right to determine the amount of the Transferred Equity within the extent of not exceeding the upper limit of
shareholding ratio as specified by the PRC Laws then in force (hereinafter the “Shareholding Limit”), and shall also have the
right to designate at its own will the amount of the Transferred Equity that the Existing Shareholders shall transfer to The9
Computer and/or any entity or individual designated by it in such Exercise of Option. In the latter case, The9 Computer shall
have the right to exercise its Transfer Option at multiple times in line with the gradual release of the PRC Laws on the
permitted Shareholding Limit, with a view to ultimately acquiring all the Option Equity.
At each Exercise of Option by The9 Computer, each of the Existing Shareholders shall transfer the Transferred Equity to
The9 Computer and/or any other entity or individual designated by it in the amount requested by The9 Computer. The9
Computer and any other entity or individual designated by it shall pay the Transfer Price in respect of the Transferred Equity
accepted in each Exercise of Option to the Existing Shareholders transferring such Transferred Equity.
Subject to the terms and conditions of this Agreement and without violating the PRC Laws then in effect, The9 Computer
may accept the transfer of the Transferred Equity by itself or designate any third party to accept the transfer of all or part of
the Transferred Equity in each Exercise of Option.
Having decided each Exercise of Option, The9 Computer shall issue to the Existing Shareholders a notice for exercising the
Transfer Option (hereinafter the “Exercise Notice”, the form of which is set out in Appendix II hereto). The Existing
Shareholders shall, upon receipt of the Exercise Notice, forthwith transfer the Transferred Equity to The9 Computer and/or
any other entity or individual designated by it in such method as described in Article 3.3 hereof.
Each of the Existing Shareholders hereby jointly and severally undertake and guarantee that once The9 Computer issues the
Exercise Notice:
(1)
(2)
(3)
he shall immediately convene a shareholders’ meeting, pass shareholders’ resolution and take all other necessary
actions to approve the transfer by any Existing Shareholder of all the Transfer Option at the Transfer Price to The9
Computer and/or any other entity or individual designated by it, and give up any pre-emptive right owned by him (if
any);
he shall immediately enter into an equity transfer agreement with The9 Computer and/or any other entity or
individual designated by it for the transfer of all the Transferred Equity at the Transfer Price to The9 Computer
and/or any other entity or individual designated by it;
he shall provide The9 Computer with necessary support (including providing and executing all relevant legal
documents, performing all government approval and registration procedures and assuming all relevant obligations)
as per its request and in accordance with the requirements of the laws and regulations, so that The9 Computer and/or
any other entity or individual designated by it can acquire all the Transferred Equity, free from and clear of any legal
defect and any encumbrance, third party right or any other restriction on equity interests.
5
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3.7
In respect of the Transfer Option, at each Exercise of Option by The9 Computer, all the Transfer Price that shall be paid by
The9 Computer or its designated entity or individual to each of the Existing Shareholders shall be the book value of the
Company Registered Capital that is corresponding to the Transferred Equity. If, however, the lowest price permitted by the
PRC Laws then in force is higher than the book value of the Company Registered Capital, the Transfer Price shall be the
lowest price permitted by the PRC Laws.
4.1
Each of the Existing Shareholders hereby jointly and severally represents and warrants as follows:
Article 4 Representations and Warranties
4.1.1
4.1.2
4.1.3
4.1.4
He is a PRC citizen with full capacity, has full and independent legal status and legal capacity to execute, deliver
and perform this Agreement, and may act independently as a party to lawsuit.
He has full power to execute, deliver and perform this Agreement and all the other documents to be signed by him in
relation to the transaction referred to herein, and he has the full power to complete the transaction referred to herein.
This Agreement shall be executed and delivered by him legally and properly. This Agreement constitutes the legal
and binding obligations on him and is enforceable against him in accordance with its terms and conditions.
He is the legal owner of the Option Equity whose name appears on the register of members of the Company as of
the effective date of this Agreement, and except the pledge right created by the Equity Pledge Agreement dated
November 24, 2011 between The9 Computer and the Existing Shareholders, the delegated power created by the
Shareholders’ Voting Proxy Agreement dated November 24, 2011 among the Company, The9 Computer and the
Existing Shareholders, and the rights created by this Agreement, there is no lien, pledge, claim and other
encumbrances and third party rights on the Option Equity. In accordance with this Agreement, The9 Computer
and/or any other entity or individual designated by it may, upon the Exercise of Option, obtain a good title to the
Transferred Equity, free from and clear of any lien, pledge, claim and other encumbrances or third party rights.
4.1.5
The execution, delivery and performance by the Existing Shareholders of this Agreement and the consummation by
the Existing Shareholders of the transactions contemplated hereby do not violate any provisions of the PRC Laws,
and any of its agreements, contracts and other arrangements with any third party by which he is bound.
4.2
The9 Computer hereby represents and warrants as follows:
4.2.1
4.2.2
The9 Computer is a wholly foreign-owned company with limited liability duly incorporated and legally existing
under the PRC Laws and possesses an independent legal person qualification. The9 Computer has full and
independent legal status and legal capacity to execute, deliver and perform this Agreement and may act
independently as a party to lawsuit.
The9 Computer has the full corporate power and authority to execute, deliver and perform this Agreement and all
the other documents to be signed by it in relation to the transaction referred to herein, and it has the full power and
authority to complete the transaction referred to herein.
6
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Article 5 Undertakings by Existing Shareholders
Each of the Existing Shareholders hereby severally and jointly undertakes as follows:
5.1
He shall take all necessary measures during the term of this Agreement to ensure that the Company is able to obtain all the
Business Permits timely and all the Business Permits remain to be valid at any time.
5.2
Without the prior written consent by The9 Computer during the term of this Agreement,
5.2.1
5.2.2
5.2.3
5.2.4
5.2.5
5.2.6
5.2.7
5.2.8
5.2.9
5.2.10
none of the Existing Shareholders shall transfer or otherwise dispose of any Option Equity or create any
encumbrance or other third party rights on any Option Equity;
he shall not increase or decrease the Company Registered Capital, or cause/approve the Company to be divided or
merged with any other entity;
he shall not dispose of or cause the management of the Company to dispose of any Material Asset (other than in the
ordinary course of business), or create any encumbrance or other third party rights on any Material Asset;
he shall not terminate or cause the management of the Company to terminate any Material Agreements entered into
by the Company, or enter into any other agreements in conflict with the existing Material Agreements;
he shall not appoint or replace any executive directors or members of the board (if any) or supervisors of the
Company or any other management personnel of the Company who shall be appointed or dismissed by the Existing
Shareholders;
he shall not procure the Company to declare the distribution of or in practice release any distributable profit, bonus,
share profit or dividend;
he shall ensure that the Company validly exists and is not terminated, liquidated or dissolved;
he shall not amend the articles of association of the Company;
he shall ensure that the Company shall not lend or borrow any money, or provide guarantee or engage in security
activities in any other forms, or bear any substantial obligations other than in the ordinary course of business;
he shall not in any way make or authorize others (including but not limited to the Company’s directors nominated by
him) to make any resolution, instruction, consent or order to procure the Company to carry out any transaction that
would or might substantially affect any asset, right, obligation or business of the Company (including its branches,
subsidiaries or affiliates) (hereinafter “Prohibited Transaction”), nor sign any agreement, contract, memorandum
or transaction document of any other form in respect of the Prohibited Transaction (hereinafter “Prohibited
Document”), nor shall he allow any Prohibited Transaction to be carried out nor any Prohibited Documents to be
signed through omission to act; and
5.2.11
he shall not cause the Company or the management of Company to approve any of the following acts of the
Company’s subsidiaries or affiliates (collectively referred to the “Subsidiaries”):
(a)
to increase or decrease any Subsidiary’s registered capital, or cause/approve any Subsidiary to be divided or
merged with any other entity;
7
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(b)
(c)
(d)
(e)
(f)
(g)
to dispose of or cause the management of the Subsidiaries to dispose of any Material Assets of any
Subsidiary (other than in the ordinary course of business), or create any encumbrance or other third party
rights on the Material Asset;
to terminate or cause the management of the Subsidiaries to terminate any Material Agreements entered into
by any Subsidiary, or enter into any other agreements in conflict with the existing Material Agreements;
to appoint or replace any directors or supervisors of any Subsidiary or any other management personnel of
such Subsidiary who shall be appointed or dismissed by the Company;
to terminate, liquidate or dissolve any Subsidiary or act in any way that damages or is likely to damage the
valid existence of any Subsidiary;
to amend the articles of association of any Subsidiary; and
to lend or borrow any money, or provide guarantee or engage in security activities in any other forms, or
bear any substantial obligations other than in the ordinary course of business.
Within the term of this Agreement, he shall make his best effort to develop the business of the Company and ensure that the
operation of the Company is legal and in compliance with the regulations, and he will not engage in any act or omission to act
which may damage the Company’s (including the Subsidiaries’) assets, goodwill or affect the validity of the Business Permits
of the Company.
Within the term of this Agreement, he shall timely notify The9 Computer of any situation that may have a material adverse
effect on the existence, business operation, financial condition, assets or goodwill of the Company (including the
Subsidiaries), and shall timely take all the measures approved by The9 Computer to remove such adverse situation or take
effective remedial measures with respect thereto.
He will procure any director of the Company nominated by him or any management personnel of the Company recommended
by him (if any) to strictly observe the above undertakings when performing their duties as director or management personnel
of the Company, and shall not in any way engage in any act or omission to act that is in conflict with any such undertaking.
If the total amount of the Transfer Price obtained by any Existing Shareholder with respect to the Transferred Equity held by
him is higher than his capital contribution to the Company, or he receives any form of profit distribution, share profit,
dividend or bonus from the Company, then the Existing Shareholder agrees that he will, subject to the provisions of the PRC
Laws, give up the premium earnings and any profit distribution, share profit, dividend or bonus (after the deduction of
relevant taxes), and The9 Computer shall be entitled thereto. Otherwise, such Existing Shareholder shall compensate The9
Computer and/or any other entity or individual designated by it for any loss incurred as a result thereof.
Article 6 Confidentiality
Regardless of whether this Agreement has terminated or not, the Parties shall keep in strict confidence all the trade secrets,
proprietary information and customer information and all other information of a confidential nature about the other Parties
known by them during the execution and performance of this Agreement (hereinafter collectively the “Confidential
Information”). Unless a prior written consent is obtained from the Party disclosing the Confidential Information or unless it
is required to be disclosed to third parties according to the relevant laws and regulations or the requirement of the country on
which any affiliate of a Party is listed, the Party receiving the Confidential Information shall not disclose to any third party
any Confidential Information. The receiving Party shall not use or indirectly use any Confidential Information other than for
the purpose of performing this Agreement.
8
5.3
5.4
5.5
5.6
6.1
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6.2
The following information shall not deemed as the Confidential Information:
6.3
6.4
7.1
8.1
8.2
8.3
9.1
(a)
(b)
(c)
any information that has been legally known by receiving Party before as evidenced by written documents;
any information entering into the public domain not attributable to the fault of the receiving Party; or
any information lawfully acquired by the receiving Party through other sources after his/its receipt of such
information.
The receiving Party may disclose the Confidential information to his/its relevant employees, agents or professionals retained
by him/it. However, the receiving Party shall ensure that the aforesaid personnel shall comply with the relevant terms and
conditions of this Agreement and be responsible for any liability incurred in connection with any breach by such personnel of
the relevant terms and conditions hereof.
Notwithstanding any other provisions herein, the effect of this Article shall not be affected by the suspension or termination
of this Agreement.
Article 7 Term of Agreement
This Agreement shall become effective once it is duly signed by the Parties, and shall terminate after all the Option Equity is
legally transferred to The9 Computer and/or any other entity or individual designated by it in accordance with the provisions
of this Agreement.
Article 8 Notice
Any notice, request, demand and other correspondences required by this Agreement or made in accordance with this
Agreement shall be delivered in writing to the relevant Party.
Any such notice or other correspondences shall be deemed to have been delivered when it is sent if delivery by facsimile or
telex, when it is delivered if delivery in person, and five (5) days after it was posted if delivery by post.
Any notice, request, demand and other correspondences made to The9 Computer shall be delivered to the address of the
Company as first above written.
Article 9 Liabilities for Breach of Contract
The Parties agree and confirm that, if any Party (hereinafter the “Defaulting Party”) substantially violates any of the
provisions herein or substantially fails to perform any of the obligations hereunder, such violation or failure shall constitute a
default under this Agreement (hereinafter a “Default”), and the non-defaulting Party shall have the right to require the
Defaulting Party to rectify such Default or take remedial measures within a reasonable period. If the Defaulting Party fails to
rectify such Default or take remedial measures within such a reasonable period or within ten (10) days after the non-
defaulting Party notifies the Defaulting Party in writing and require it to rectify the Default, then the non-defaulting Party
shall have the right at its own discretion to decide the following:
9.1.1
if any Existing Shareholder or the Company is the Defaulting Party, The9 Computer shall be entitled to terminate
this Agreement and require the Defaulting Party to make compensation for damages;
9
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9.1.2
if The9 Computer is the Defaulting Party, the non-defaulting Party shall be entitled to require the Defaulting Party to
make compensation for damages, but unless otherwise provided by law, the non-defaulting Party shall have no right
to terminate or discharge this Agreement in any circumstances.
The rights and remedies set out herein shall be cumulative, and shall not preclude any other rights or remedies provided by
law.
Notwithstanding any other provisions herein, the effect of this Article shall not be affected by the suspension or termination
of this Agreement.
Article 10 Miscellaneous
This Agreement is executed in Chinese in three (3) originals, with one (1) original to be retained by each Party hereto.
The formation, effectiveness, performance, amendment, interpretation and termination of this Agreement shall be governed
by the PRC Laws.
Any disputes arising out of and in connection with this Agreement shall be resolved through consultations among the Parties.
If the Parties cannot reach an agreement regarding such disputes within thirty (30) days of their occurrence, such disputes
shall be submitted to China International Economic and Trade Arbitration Commission, Shanghai Branch, for arbitration in
Shanghai in accordance with the arbitration rules of such Commission, and the arbitral award shall be final and binding on the
Parties.
None of the rights, powers and remedies granted to any Party by any provisions herein shall preclude any other rights, powers
and remedies available to such Party at law and under the other provisions of this Agreement, nor shall the exercise by a Party
of its rights, powers and remedies preclude any exercise by such Party of its other rights, powers and remedies.
Any failure or delay by a Party in exercising any of its rights, powers and remedies hereunder or in accordance with laws
(hereinafter the “Party’s Rights”) shall not result in a waiver thereof, nor shall the waiver of any single or partial exercise of
the Party’s Rights preclude such Party from exercising such rights in any other way and exercising the other Party’s Rights.
The headings of the provisions herein are for reference only, and in no circumstances shall such headings be used for or affect
the interpretation of the provisions hereof.
Each provision contained herein shall be severable and independent from each of other provisions, and if at any time any one
or more provisions herein become(s) invalid, illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions herein shall not be affected as a result thereof.
This Agreement, once executed, shall supersede any other previous legal documents executed by the Parties with respect to
the subject matter hereof. Any amendments or supplements to this Agreement shall be made in writing and shall become
effective only when duly signed by the Parties to this Agreement.
9.2
9.3
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9 Without the prior written consent of The9 Computer, neither the Existing Shareholders nor the Company shall transfer any of
their/its rights and/or obligations hereunder to any third parties. The Existing Shareholders and the Company hereby agree
that The9 Computer shall be entitled to transfer any of its rights and/or obligations hereunder to any third party after serving
written notice to the Existing Shareholders.
10
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10.10 This Agreement shall be binding on the legal successors of the Parties.
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IN WITNESS HEREOF, the Parties have caused this Exclusive Call Option Agreement to be executed as of the date and in the
place first above written.
Wang Yong
Signature: /s/ Wang Yong
Ji Wei
Signature: /s/ Ji Wei
The9 Computer Technology Consulting (Shanghai) Co., Ltd.
(Company chop)
Company chop is affixed
12
THE9 LIMITED
FORM 20-F
Appendix I:
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Basic Information of Company
Shanghai The9 Information Technology Co., Ltd.
Shanghai, PRC
Company Name:
Registered Address:
Registered Capital:
Legal Representative:
RMB23 million
[Wang Yong]
Shareholding Structure:
Shareholder’s Name
Wang Yong
Ji Wei
Total
Financial Year:
January 1 to December 31
13
Contributed
Capital
(in RMB)
8,280,000
14,720,000
23,000,000
Proportion
of Equity
Interests
36%
64%
100%
THE9 LIMITED
FORM 20-F
Appendix II
To: :
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Form of the Option Exercise Notice
WHEREAS this Company and you signed an Exclusive Call Option Agreement as of November 24, 2011 (“Option Agreement”), and
agreed that you shall transfer the equity you hold in Shanghai The9 Information Technology Co., Ltd. (hereinafter “Company”) to this
Company or any third parties designated by this Company on demand of this Company to the extent as permitted by the PRC Laws
and regulations.
This Company hereby gives this Notice to you as follows:
This Company hereby requires to exercise the Transfer Option under the Option Agreement and [this Company]/[name of
company/individual] designated by this Company shall accept the equity you hold accounting for % of the Company’s
Registered Capital (hereinafter the “Proposed Equity to be Transferred”). You are required to forthwith transfer all the Proposed
Equity to be Transferred to [this Company]/[name of designated company/individual] upon receipt of this Notice in accordance with
the agreed terms in the Option Agreement.
The9 Computer Technology Consulting (Shanghai) Co., Ltd.
(Company Chop)
Authorized Representative:
Date:
14
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Exhibit 4.41
This is an English Translation
November 24, 2011
Loan Agreement
by and among
Wang Yong
Ji Wei
and
The9 Computer Technology Consulting (Shanghai) Co., Ltd.
THE9 LIMITED
FORM 20-F
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This Loan Agreement (hereinafter this “Agreement”) is entered into in Shanghai, the People’s Republic of China (hereinafter
“PRC”) as of November 24, 2011 by and among the following Parties:
1.
The9 Computer Technology Consulting (Shanghai) Co., Ltd. (hereinafter “The9 Computer”)
Registered address: Room 103, Building 3, No. 690 Bibo Road, Zhangjiang Hi-Tech Park, Shanghai
Wang Yong, identity card number:
Domicile address: Room 502, No. 33, Lane 100, Qishan Road, Pudong New District, Shanghai
Ji Wei, identity card number:
Domicile address: Back Building, 2F, No. 12, Lane 424, Huimin Road, Yangpu District, Shanghai
2.
3.
(Wang Young and Ji Wei are hereinafter referred to collectively as the “Borrowers” and individually as the “Borrower”).
WHEREAS Zhu Jun, Qin Jie and The9 Computer entered into three Loan Agreements respectively on January 1, 2004, July 19, 2004,
and May 1, 2005 (collectively “Loan Agreements”) and according to such agreements, The9 Computer has provided a loan in a total
amount of RMB14,720,000 to Zhu Jun and a loan in a total amount of RMB8,280,000 to Qin Jie.
WHEREAS Wang Yong entered into a novation agreement with Zhu Jun and Qin Jie on August 14, 2006 and according to such
agreement, Wang Yong succeeded to all the rights and obligations of Qin Jie under the Loan Agreements.
WHEREAS The9 Computer, the Borrowers, Zhu Jun and Shanghai The9 Information Technology Co., Ltd. (“Company”) will enter
into a Novation Agreement (see Appendix I). According to such agreement, Ji Wei succeeded to all of the rights and obligations of
Zhu Jun under the Loan Agreements.
Article 1 Amount and Interest Rate of Loan
1.1
1.2
1.3
The sum of the loans under this Agreement shall amount to Twenty Three Million Renminbi (RMB23,000,000) (“Loan”), of
which:
Wang Yong’s loan is Eight Million and Two Hundred and Eighty Thousand Renminbi (RMB8,280,000)
Ji Wei’s loan is Fourteen Million and Seven Hundred and Twenty Thousand Renminbi (RMB14,720,000)
The interest rate of the Loan under this Agreement shall be zero, which means that no interest will be charged.
Each of the Borrowers shall sign an equity pledge agreement with The9 Computer at the request of The9 Computer to pledge
all of his equity interests in the Company to The9 Computer as an guarantee for the Loan.
2
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2.1
2.2
3.1
3.2
3.3
3.4
Article 2 Use and Withdrawal of Loan
Each party confirms that The9 Computer has provided the Loan to Qin Jie and Zhu Jun pursuant tot he Loan Agreements. The
Borrowers assumed the Loan hereinmentioned pursuant to the relevant novation agreements. The9 Computer is not required
to give any amount of the Loan to the Borrowers separately.
Each party confirms that the Loan hereunder has been used for the investment in or the operation of the Company. The
Borrowers shall not use any part of the Loan for any other purpose without the prior written consent of The9 Computer.
Article 3 Term of Loan
The term of the Loan under this Agreement shall expire on the date when The9 Computer requests the Borrowers to repay the
Loan in accordance with Article 3.2 of this Agreement. However, the maximum term shall not exceed the business term of
The9 Computer (including the business term as extended from time to time) or the business term of the Company (including
the business term as extended from time to time), whichever is earlier (hereinafter “Loan Term”). Upon expiry of the Loan
Term, the Borrowers shall repay all outstanding amounts under the Loan (hereinafter “Amounts”) in a lump sum on the
expiry date of the Term.
Upon execution hereof, The9 Computer shall, at any time within the Term and in its absolute discretion, be entitled to deliver
to the Borrowers or any of the Borrowers a repayment notice as set forth in Article 4.1 of this Agreement, requesting the
Borrowers to repay all or part of their respective Amounts under this Agreement.
Any Borrower required to make repayment shall repay the relevant Amounts in cash, or in any other forms as decided by the
board of directors of The9 Computer by way of resolution duly passed by it. If the repayment is made in cash, the Borrowers
shall credit the entire Amounts required by The9 Computer for repayment to the bank account designated by The9 Computer
within five (5) business days upon the receipt of a repayment notice as set forth in Article 4.1 of this Agreement.
If The9 Computer serves the repayment notice as set forth in Article 4.1 of this Agreement to the Borrowers, it shall, without
violating any applicable laws and regulations, have the right to acquire on its own or designate any third party to acquire all of
the equity interests owned by the Borrowers in the Company at the transfer price that is equivalent to the Amounts at the time
when such notice is given.
The9 Computer shall, in its absolute discretion, also have the right to demand to offset its creditor’s right to the Borrowers
under this Agreement against all or part of the transfer price required to be paid by it to the Borrowers in connection with its
exercise of the relevant call option (hereinafter “Call Option”) when it exercises the Call Option in accordance with the
provisions of the Exclusive Call Option Agreement entered into between The9 Computer and the Borrowers on November 24,
2011 (hereinafter “Option Agreement”).
3.5
The Borrower shall not be jointly liable for the repayment by the other Borrower of his Loan under this Agreement.
Article 4 Repayment Notice
4.1
The repayment notice given by The9 Computer to the Borrower or any or several of the Borrowers shall at least contain the
following items: name of Borrower, amount of Loan, amount of repayment, time of repayment and bank account for
repayment.
3
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5.1
Each Borrower hereby represents and warrants as follows:
Article 5 Representations and Warranties
5.1.1
5.1.2
5.1.3
he is a PRC citizen with full capacity, has full and independent legal status and legal capacity to execute, deliver and
perform this Agreement, and may act independently as a party to lawsuit.
he has full power to execute and deliver this Agreement and all the other documents to be signed by him in relation
to the transaction referred to herein, and he has full power to complete the transaction referred to herein. This
Agreement shall be executed and delivered by him legally and properly. This Agreement constitutes the legal and
binding obligations on him and is enforceable against him in accordance with its terms and conditions.
he has fully disclosed his financial conditions to The9 Computer before the execution of this Agreement. As of the
execution of this Agreement, there exist no circumstances that may render him in insolvency, nor are there any
material liabilities that affects his ability to repay debts. The9 Computer may demand him to perform his obligations
hereunder in accordance with this Agreement.
5.2
The9 Computer hereby represents and warrants as follows:
5.2.1
5.2.2
it is a limited liability company duly incorporated and legally existing under the PRC laws and possesses an
independent legal person qualification. It has full and independent legal status and legal capacity to execute, deliver
and perform this Agreement and may act independently as a party to lawsuit.
it has the full corporate power and authority to execute and deliver this Agreement and all the other documents to be
signed by it in relation to the transaction referred to herein, and it has the full power and authority to complete the
transaction referred to herein.
Article 6 Term of Agreement
6.1
6.2
This Agreement shall become effective once it is duly signed by the parties. This Agreement confirms all matters with regard
to the Loan between the parties and shall terminate when the Borrowers repay in full the Loan under this Agreement.
If any of the Borrowers transfers his liabilities under this Agreement with the prior consent of The9 Computer, then the
successor of such liabilities shall continue to perform such Borrower’s obligations under this Agreement, and the obligations
and undertakings of the other Borrower under this Agreement shall not be adversely affected as a result thereof.
7.1
All taxes in connection with the Loan shall be borne by The9 Computer.
Article 7 Taxes
Article 8 Confidentiality
8.1
Regardless of whether this Agreement has terminated or not, the Borrowers shall be under an obligation to keep in confidence
any trade secret, proprietary information and customer information (hereinafter “Confidential Information”) in connection
with The9 Computer that are known to or received by them due to the execution and performance of this Agreement. The
Borrowers shall use the Confidential Information only for the purpose of performing their obligations under this Agreement.
Without the written permission of The9 Computer, the Borrowers shall not disclose the above Confidential Information to any
third party. Otherwise, they shall be liable for the breach of this Agreement and make compensation for all losses arising
therefrom.
4
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8.2
The following information shall not be deemed as the Confidential Information:
8.3
8.4
9.1
(a)
(b)
(c)
any information that has been legally known by the receiving party before as evidenced by written documents;
any information entering into the public domain not attributable to the fault of the receiving party; or
any information lawfully acquired by the receiving party through other sources after his/its receipt of such
information.
Following the termination of this Agreement, the Borrowers shall, upon request by The9 Computer, return, destroy or
otherwise dispose of all files, materials or software containing the Confidential Information, and shall cease to use such
Confidential Information.
Notwithstanding any other provisions herein, the effect of this Article 8 shall not be affected by the suspension or termination
of this Agreement.
Article 9 Undertakings and Warranties
The Borrowers hereby irrevocably guarantee and warrant that they will not in any way make or authorize others (including
but not limited to the Company’s directors nominated by them) to make any resolution, instruction, consent or order to
procure the Company to carry out any transaction that would or might substantially affect any asset, right, obligation or
business of the Company and/or its subsidiaries (hereinafter “Prohibited Transaction”), including but not limited to:
(1)
(2)
(3)
(4)
(5)
(6)
borrowing money from any third party or assuming any debts (except for any single debt whose amount does not
exceed One Hundred Thousand Renminbi incurred in the usual and normal business activities or any debt whose
total amount does not exceed One Hundred Thousand Renminbi in a consecutive of six months);
providing guarantees to any third party for its own debts, or providing any guarantee to any third party;
transferring any businesses, material assets, actual or potential business opportunities to any third party;
transferring or giving license to any third party any domain names, trademarks or other intellectual property in
which the Company has legal right;
transferring all or part of their equity interests in the Company to any third party;
any other material transactions;
nor sign any agreement, contract, memorandum or transaction document of any other form in respect of the Prohibited
Transaction (hereinafter “Prohibited Document”), nor will they allow any Prohibited Transaction to be carried out nor any
Prohibited Document to be signed through omission to act.
5
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9.2
The Borrowers shall procure any directors and management personnel of the Company to strictly observe the provisions of
this Agreement when performing their duties as directors and management directors of the Company, and shall not in any
way engage in any act or omission to act that is in conflict with any such undertaking.
Article 10 Notices
10.1
10.2
11.1
11.2
11.3
12.1
12.2
12.3
Any notice, request, demand and other correspondences required by this Agreement or made in accordance with this
Agreement shall be delivered in writing to the relevant party.
Any such notice or other correspondences shall be deemed to have been delivered when it is sent if delivery by facsimile or
telex, when it is delivered if delivery in person, and five (5) days after it was posted if delivery by post.
Article 11 Liabilities for Breach of Contract
Each party agrees and confirms that, if any of the parties (hereinafter the “Defaulting Party”) substantially violates any of the
provisions herein or substantially fails to perform any of the obligations hereunder, such violation or failure shall constitute a
default under this Agreement (hereinafter a “Default”), and any of the other non-defaulting parties (hereinafter a “Non-
defaulting Party”) shall have the right to require the Defaulting Party to rectify such Default or take remedial measures
within a reasonable period. If the Defaulting Party fails to rectify such Default or take remedial measures within such a
reasonable period or within ten (10) days after the other party notifies the Defaulting Party in writing and requires it to rectify
the Default, then the Non-defaulting Party shall have the right to terminate this Agreement and/or to demand the Defaulting
Party to make compensation for any loss.
The rights and remedies set out herein shall be cumulative, and shall not preclude any other rights or remedies provided by
law.
Notwithstanding any other provisions herein, the effect of this Article shall not be affected by the suspension or termination
of this Agreement.
Article 12 Miscellaneous
This Agreement is executed in Chinese in three (3) originals, with one (1) original to be retained by each party hereto.
The formation, effectiveness, performance, amendment, interpretation and termination of this Agreement shall be governed
by the PRC laws.
Any disputes arising out of and in connection with this Agreement shall be resolved through consultations among the parties.
If the parties cannot reach an agreement regarding such disputes within thirty (30) days upon their occurrence, such disputes
shall be submitted to China International Economic and Trade Arbitration Commission, Shanghai Branch, for arbitration in
Shanghai in accordance with the arbitration rules of such Commission, and the arbitral award shall be final and binding on the
parties.
12.4
None of the rights, powers and remedies granted to the parties by any provisions herein shall preclude any other rights,
powers and remedies available to such parties at law and under the other provisions of this Agreement, nor shall the exercise
by a party of its rights, powers and remedies preclude any exercise by such party of its other rights, powers and remedies.
6
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12.5
12.6
12.7
12.8
Any failure or delay by a party in exercising any of its rights, powers and remedies hereunder or in accordance with laws
(hereinafter the “Party’s Rights”) shall not result in a waiver thereof, nor shall the waiver of any single or partial exercise of
the Party’s Rights preclude such party from exercising such rights in any other way and exercising the other Party’s Rights.
The headings of the provisions herein are for reference only, and in no circumstances shall such headings be used for or affect
the interpretation of the provisions hereof.
Each provision contained herein shall be severable and independent from each of other provisions, and if at any time any one
or more provisions herein become(s) invalid, illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions herein shall not be affected as a result thereof.
Any amendments or supplements to this Agreement shall be made in writing and shall become effective only when duly
signed by the parties to this Agreement.
12.9 Without the prior written consent of the lender, the Borrowers shall not transfer any of their respective rights and/or
obligations hereunder to any third parties. The lender shall be entitled to transfer any of its rights hereunder to any third party
designated by it after serving notice to the other parties.
12.10 This Agreement shall be binding on the legal successors of the parties.
7
THE9 LIMITED
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IN WITNESS HEREOF, the parties hereto have caused this Loan Agreement to be executed as of the date and in the place first
above written.
The9 Computer Technology Consulting (Shanghai) Co., Ltd.
(Company chop)
Company chop is affixed
Wang Yong
Signature: /s/ Wang Yong
Ji Wei
Signature: /s/ Ji Wei
8
THE9 LIMITED
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Exhibit 4.42
This is an English Translation
November 24, 2011
Shareholder Voting Proxy Agreement
by and among
Wang Yong
Ji Wei
and
Shanghai The9 Information Technology Co., Ltd.
The9 Computer Technology Consulting (Shanghai) Co., Ltd.
Regarding
Shanghai The9 Information Technology Co., Ltd.
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
LANFBU-MWE-XN11
10.10.12
HKR nagag1dc
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20-Mar-2012 07:15 EST
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Shareholder Voting Proxy Agreement
This Shareholder Voting Proxy Agreement (hereinafter this “Agreement”) is entered into in Shanghai as of November 24, 2011 by
and among the following Parties:
1.
The9 Computer Technology Consulting (Shanghai) Co., Ltd. (hereinafter “The9 Computer”)
2.
3.
4.
Registered address: Room 103, Building 3, No. 690 Bibo Road, Zhangjiang Hi-Tech Park, Shanghai
Shanghai The9 Information Technology Co., Ltd. (hereinafter the “Company”)
Registered address: Room 201, Building 3, No. 690 Bibo Road, Zhangjiang Hi-Tech Park, Shanghai
Wang Yong, identity card number:
Domicile address: Room 502, No. 33, Lane 100, Qishan Road, Pudong New District, Shanghai
Ji Wei, identity card number:
Domicile address: Back Building, 2F, No. 12, Lane 424, Huimin Road, Yangpu District, Shanghai
(Wang Yong and Ji Wei are hereinafter referred to individually and collectively as the “Shareholder(s)”)
(In this Agreement, all parties mentioned above are referred to individually as a “Party” and collectively as the “Parties”.)
WHEREAS:
1.
The Shareholders are all existing shareholders of the Company, who own 100% equity interests in the Company;
2.
Each of the Shareholders intends to entrust any individual designated by The9 Computer to exercise his voting rights in the
Company, and The9 Computer intends to designate such individuals to accept the entrustment.
Therefore, the Parties have reached the following agreement upon friendly consultations:
Article 1 Entrustment of Voting Right
1.1
The Shareholders hereby irrevocably undertake that they will, upon execution hereof, sign a power of attorney in substance
and form as set out in Appendix I hereto, respectively, to entrust any individuals then designated by The9 Computer
(hereinafter the “Entrusted Persons”) to exercise, on behalf of each of the Shareholders, the following rights to which the
Shareholders are entitled in their capacity of the Company’s shareholders under the articles of association of the Company
then in effect (collectively the “Entrusted Rights”):
(1)
(2)
(3)
to propose to convene and attend Shareholders’ meetings of the Company as the proxy of each of the Shareholders
according to the articles of association of the Company;
to exercise, on behalf of each of the Shareholders, his voting rights on all matters requiring discussion or resolutions
of the Shareholders’ meeting of the Company, including without limitation, the designation and election of the
Company’s directors and general manager, and other senior management that shall be appointed and removed by the
Shareholders;
to exercise other voting rights to which the Shareholders are entitled under the laws and regulations of the PRC
(including any amendment, change, addition and supplement and reenactment thereof, irrespective of whether they
take effect before or after the formation of this Agreement);
2
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(4)
to exercise other voting rights of the Shareholders as specified in the articles of association of the Company
(including any other shareholders’ voting rights as specified in the amended articles of association).
The above authorization and entrustment shall be conditional upon The9 Computer approving such authorization and
entrustment. If and only if The9 Computer gives a written notice for removal and replacement of the Entrusted Person(s) to
each of the Shareholders, the Shareholders shall immediately designate the other PRC citizen then designated by The9
Computer to exercise the above Entrusted Rights, and the new power of attorney shall, once made, supersede the original
power of attorney. Save as aforesaid, no Shareholders shall revoke the authorization and entrustment given to the Entrusted
Person(s).
The Entrusted Person(s) shall perform their obligations in respect of the entrustment hereunder to the extent authorized
hereunder with due care and diligence and in compliance with laws. The Shareholders shall acknowledge and assume
liabilities for any legal consequences resulting from the exercise by the Entrusted Persons of the Entrusted Rights described
above.
The Shareholders hereby confirm that the Entrusted Persons shall not be required to seek opinions from the Shareholders
prior to their exercise of the above Entrusted Rights. However, the Entrusted Persons shall notify the Shareholders in a timely
manner of any resolution or proposal for convening an interim shareholders’ meeting after such resolution or proposal is
made.
Article 2 Right to Information
For the purpose of exercising the Entrusted Rights hereunder, the Entrusted Persons shall be entitled to know all information
of the Company relating to its operation, business, customers, finance and employees, and shall have access to the relevant
documents and materials of the Company. The Company shall fully cooperate with the Entrusted Persons in this regard.
Article 3 Exercise of Entrusted Rights
The Shareholders will provide sufficient assistances to the Entrusted Persons with regard to their exercise of the Entrusted
Rights, including the execution of resolutions of shareholders’ meetings made by the Entrusted Persons or other relevant legal
documents in a timely manner when necessary (e.g., where the same is required in order to submit documents for the
purposes of government approvals, registrations or filings).
If, at any time within the term of this Agreement, the grant or exercise of the Entrusted Rights hereunder cannot be realized
due to any reason (except for the default of any Shareholder or the Company), the Parties shall immediately seek the
alternative proposal that is most similar to the one that cannot be realized and, if necessary, enter into a supplementary
agreement to amend or adjust the provisions herein, in order to ensure that the purpose of this Agreement can continue to
realize.
Article 4 Exemption and Compensation
The Parties acknowledge that in no case shall The9 Computer be required to be liable to or compensate (economic or
otherwise) the other Parties or any third party in connection with any exercise of the Entrusted Rights hereunder by the
individuals designated by it.
The Shareholders and the Company agree to indemnify and hold The9 Computer harmless against all losses suffered or likely
to be suffered by it due to any exercise of the Entrusted Rights by the Entrusted Persons designated by The9 Computer,
including without limitation, any loss resulting from any litigation, demand, arbitration or claim by any third party against it
or from administrative investigation or penalty by government authorities, provided however that no indemnification is
available for any losses caused by a willful default or gross negligence of the Entrusted Persons.
3
1.2
1.3
2.1
3.1
3.2
4.1
4.2
THE9 LIMITED
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5.1
Each of the Shareholders hereby jointly and severally represents and warrants as follows:
Article 5 Representations and Warranties
5.1.1
5.1.2
5.1.3
He is a PRC citizen with full capacity, has full and independent legal status and legal capacity to execute, deliver
and perform this Agreement, and may act independently as a party to lawsuit.
He has full power to execute and deliver this Agreement and all the other documents to be signed by him in relation
to the transaction referred to herein, and has the full power to complete the transaction referred to herein. This
Agreement shall be executed and delivered by him legally and properly. This Agreement constitutes the legal and
binding obligations on him and is enforceable against him in accordance with its terms and conditions
He is the legitimate shareholder of the Company whose name appears on its register of members as of the effective
date of this Agreement, and except for the rights created by this Agreement, the Equity Pledge Agreement and the
Exclusive Call Option Agreement entered into by the Shareholders, the Company and The9 Computer, there is no
third party right on the Entrusted Rights. In accordance with this Agreement, the Entrusted Persons may exercise the
Entrusted Rights fully and completely pursuant to the articles of association of the Company then in effect.
5.2
Each of The9 Computer and the Company hereby severally represents and warrants as follows:
5.2.1
5.2.2
It is a limited liability company duly incorporated and legally existing under the laws of the place of its
incorporation and possesses an independent legal person status. It has full and independent legal status and legal
capacity to execute, deliver and perform this Agreement and may act independently as a party to lawsuit.
It has the full corporate power and authority to execute and deliver this Agreement and all the other documents to be
signed by it in relation to the transaction referred to herein, and it has the full power and authority to complete the
transaction referred to herein.
5.3
The Company further represents and warrants as follows:
5.3.1
The Shareholders are all legitimate shareholders of the Company whose names appear on its register of members as
of the effective date of this Agreement, and except for the rights created by this Agreement, the Equity Pledge
Agreement and the Exclusive Call Option Agreement entered into by the Shareholders, the Company and The9
Computer, there is no third party right on the Entrusted Rights. In accordance with this Agreement, the Entrusted
Persons may exercise the Entrusted Rights fully and completely pursuant to the articles of association of the
Company then in effect.
Article 6 Term of Agreement
6.1
Subject to Articles 6.2 and 6.3 hereof, this Agreement shall become effective once it is duly signed by the Parties, and shall
remain effective until the date on which the business term of the Company or The9 Computer expires (whichever is earlier),
unless it is early terminated by the Parties in writing or pursuant to Article 9.1 hereof. This Agreement will be automatically
extended for one (1) year upon the expiration except where The9 Computer gives the other Parties a prior notice of thirty
(30) days not to extend the term of this Agreement upon its expiration, and the same mechanism will apply subsequently upon
the expiration of each extended term.
4
THE9 LIMITED
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6.2
6.3
7.1
7.2
9.1
9.2
9.3
10.1
10.2
10.3
This Agreement shall terminate if the Company or The9 Computer, upon expiry of its business term, fails to complete the
formalities in relation to the approval and registration for the extension thereof.
If any of the Shareholders transfers all of his equity interests in the Company with the prior consent of The9 Computer, such
Shareholder will no longer be a Party hereto and the obligations and undertakings of any other Parties hereunder will not be
adversely affected.
Article 7 Notice
Any notice, request, demand and other correspondences required by this Agreement or made in accordance with this
Agreement shall be delivered in writing to the relevant Party.
Any such notice or other correspondences shall be deemed to have been delivered when it is sent if delivery by facsimile or
telex, when it is delivered if delivery in person, and five (5) days after it was posted if delivery by post.
Article 9 Liabilities for Breach of Contract
The Parties agree and confirm that, if any Party (hereinafter the “Defaulting Party”) substantially violates any of the
provisions herein or substantially fails to perform any of the obligations hereunder, such violation or failure shall constitute a
default under this Agreement (hereinafter a “Default”), and any of the other non-defaulting Parties (hereinafter the “Non-
defaulting Party”) shall have the right to require the Defaulting Party to rectify such Default or take remedial measures
within a reasonable period. If the Defaulting Party fails to rectify such Default or take remedial measures within such a
reasonable period or within ten (10) days after the Non-defaulting Party notifies the Defaulting Party in writing and require it
to rectify the Default, then: (1) if any Shareholder or the Company is the Defaulting Party, The9 Computer shall be entitled to
terminate this Agreement and require the Defaulting Party to make compensation for damages; (2) if The9 Computer is the
Defaulting Party, the Non-defaulting Party shall be entitled to require the Defaulting Party to make compensation for
damages, but unless otherwise provided by law, the Non-defaulting Party shall have no right to terminate or discharge this
Agreement or the entrustment hereunder in any circumstances.
The rights and remedies set out herein shall be cumulative, and shall not preclude any other rights or remedies provided by
law.
Notwithstanding any other provisions herein, the effect of this Article shall not be affected by the suspension or termination
of this Agreement.
Article 10 Miscellaneous
This Agreement is executed in Chinese in [four (4)] originals, with one (1) original to be retained by each Party hereto.
The formation, effectiveness, performance, amendment, interpretation and termination of this Agreement shall be governed
by the laws of the PRC.
Any disputes arising out of and in connection with this Agreement shall be resolved through consultations among the Parties.
If the Parties cannot reach an agreement regarding such disputes within thirty (30) days of their occurrence, such disputes
shall be submitted to China International Economic and Trade Arbitration Commission, Shanghai Branch, for arbitration in
Shanghai in accordance with the arbitration rules of such Commission, and the arbitral award shall be final and binding on the
Parties.
5
THE9 LIMITED
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10.4
10.5
10.6
10.7
10.8
None of the rights, powers and remedies granted to any Party by any provisions herein shall preclude any other rights, powers
and remedies available to such Party at law and under the other provisions of this Agreement, nor shall the exercise by a Party
of its rights, powers and remedies preclude any exercise by such Party of its other rights, powers and remedies.
Any failure or delay by a Party in exercising any of its rights, powers and remedies hereunder or in accordance with laws
(hereinafter the “Party’s Rights”) shall not result in a waiver thereof, nor shall the waiver of any single or partial exercise of
the Party’s Rights preclude such Party from exercising such rights in any other way and exercising the other Party’s Rights.
The headings of the provisions herein are for reference only, and in no circumstances shall such headings be used for or affect
the interpretation of the provisions hereof.
Each provision contained herein shall be severable and independent from each of other provisions, and if at any time any one
or more provisions herein become(s) invalid, illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions herein shall not be affected as a result thereof.
Any amendments or supplements to this Agreement shall be made in writing, and shall become effective only when duly
signed by the Parties to this Agreement.
10.9 Without the prior written consent of The9 Computer, the other Parties shall not transfer any of their rights and/or obligations
hereunder to any third parties. The Shareholders and the Company hereby agree that The9 Computer shall be entitled to
transfer any of its rights and/or obligations hereunder to any third party after serving written notice to the Shareholders and
the Company.
10.10 This Agreement shall be binding on the legal successors of the Parties.
6
THE9 LIMITED
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IN WITNESS HEREOF, the Parties have caused this Shareholder Voting Proxy Agreement to be executed as of the date and in the
place first above written.
The9 Computer Technology Consulting (Shanghai) Co., Ltd.
(Company chop)
Company chop is affixed
Shanghai The9 Information Technology Co., Ltd.
(Company chop)
Company chop is affixed
Wang Yong
Signature: /s/ Wang Yong
Ji Wei
Signature: /s/ Ji Wei
7
THE9 LIMITED
FORM 20-F
Appendix I:
RR Donnelley ProFile
SERFBU-MWE-XN03
10.10.12
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Power of Attorney
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This Power of Attorney (hereinafter “this Power of Attorney”) is executed by (with domicile address at
and ID no. ) on and issued to (with domicile address at and ID no.
) (hereinafter the “Attorney-in-Fact”).
I, , hereby grant the Attorney-in-Fact a general power of attorney to authorize the Attorney-in-Fact to act as my agent
and in my name to exercise my following rights as a shareholder of Shanghai The9 Information Technology Co., Ltd. (hereinafter the
“Company”):
(1)
(2)
(3)
To act as my agent to propose to convene and attend the shareholders’ meeting in accordance with the Company’s
Articles of Association;
To act as my agent to exercise the voting right in respect of all the matters being discussed and resolved in the
shareholders’ meeting, including but not limited to the designation and election of the Company’s directors and
other senior management personnel to be appointed and removed by the board of shareholders;
To act as my agent to exercise other shareholder’s voting right under the Company’s Articles of Association
(including but not limited to any other shareholder’s voting rights under the amended Articles of Association).
I hereby irrevocably acknowledge that unless The9 Computer Technology Consulting (Shanghai) Co., Ltd. (“The9 Computer”)
directs me to replace the Attorney-in-Fact, this Power of Attorney shall remain effective until the expiration or the early termination
of the Shareholder Voting Proxy Agreement executed by The9 Computer, the Company and all the shareholders of the Company on
[Date].
IN WITNESS WHEREOF, the power of attorney is hereby granted.
Name:
Signature:
Date:
8
THE9 LIMITED
FORM 20-F
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Novation Agreement
Exhibit 4.43
This is an English Translation
This Agreement is entered into by the following parties on November 25, 2011 in Shanghai:
(1) Zhu Jun (“Transferor”)
(2)
ID Number:
Ji Wei (“Transferee”)
ID Number:
(3) Wang Yong
ID Number:
(4) The9 Computer Technology Consulting (Shanghai) Co., Ltd. (“The9 Computer”)
(5) Shanghai The9 Information Technology Co., Ltd. (“Company”)
RECITAL
WHEREAS Transferor and The9 Computer entered into three Loan Agreements respectively on January 1, 2004, July 19, 2004, and
May 1, 2005 (collectively “Loan Agreements”) and according to these agreements, The9 Computer has provided loans in a total
amount of RMB14,720,000 to the Transferor;
WHEREAS Transferor and The9 Computer entered into a Call Option Agreement on February 6, 2004 (“Call Option Agreement”)
and according to such agreement, the Transferor shall at request of The9 Computer transfer all or part of its equity interests in the
Company to The9 Computer and/or any other entity or individual designated by The9 Computer to the extent permitted by laws of
China;
WHEREAS Transferor and The9 Computer entered into a Shareholder Voting Proxy Agreement on February 6, 2004 (“Shareholder
Voting Proxy Agreement”) and according to such agreement, the Transferor has irrevocably authorized The9 Computer to act on its
behalf to exercise all its shareholder voting rights in the Company.
WHEREAS Transferor and The9 Computer entered into an Equity Pledge Agreement in respect of the Company on June 2, 2005
(“Equity Pledge Agreement”) and according to such agreement, the Transferor pledged its 64% equity interests in the Company fully
to The9 Computer as the guarantee for its performance of obligations under the Loan Agreements, Call Option Agreement, and
Shareholders Voting Proxy Agreement. Such pledge granted The9 Computer a first priority right on the pledged equity.
WHEREAS Transferor and Transferee entered into a Equity Transfer Agreement on October 25, 2011 (“Equity Transfer Agreement”)
and according to such agreement, the Transferee has acquired 64% of equity interests in the Company from the Transferor (“Equity
Transfer”).
WHEREAS After the Equity Transfer, the Transferee will hold 64% of equity interests in the Company (with the remaining 36%
equity interests held by Wang Yong), and the Transferor will no longer hold any equity interests in the Company. Simultaneously,
Transferor will transfer all his rights and obligations under the Loan Agreements, Call Option Agreement, Shareholders Voting Proxy
Agreement, and Equity Pledge Agreement (collectively the “Original Agreements”) to the Transferee (“Novation”). The9 Computer
as a contractual party to the Original Agreements hereby agrees to such Novation, and Wang Yong and the Company as the
contractual related parties also accept the Novation (if the context is applicable).
1
THE9 LIMITED
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THEREFORE, in consideration of the mutual covenants, representations, warranties and agreements herein, the parties agree as
follows:
1. Novation under the Original Agreements:
1.1 Pursuant to the terms and conditions of this Agreement, Transferor shall transfer to Transferee all his rights and obligations
under the Loan Agreements, and shall within three (3) days after the effective date of equity transfer under Equity Transfer
Agreement (“Effective Equity Transfer Date”) remit RMB 14,720,000 to the bank account designated by Transferee.
Transferor and Transferee agree that such fund shall set off the share purchase price payable by Transferee to Transferor
under the Equity Transfer Agreement. Since the Effective Equity Transfer Date, Transferee will succeed all rights and
obligations of Transferor under the Loan Agreements. The9 Computer agrees that the transfer of rights and obligations
under the Loan Agreements and the offset of purchase price shall be deemed as the full repayment of loans under the Loan
Agreements by Transferor to The9 Company on the Effective Equity Transfer Date.
1.2 In accordance with the terms and conditions of this Agreement, Transferor shall transfer to Transferee all his rights and
obligations under the Call Option Agreement. Since the Effective Equity Transfer Date, Transferee will succeed all rights
and obligations of Transferor under the Call Option Agreement.
1.3 In accordance with the terms and conditions of this Agreement, Transferor shall transfer to Transferee all his rights and
obligations under the Shareholder Voting Proxy Agreement. Since the Effective Equity Transfer Date, Transferee will
succeed all rights and obligations of Transferor under the Shareholder Voting Proxy Agreement.
1.4 In accordance with the terms and conditions of this Agreement, Transferor shall transfer to Transferee all his rights and
obligations under the Equity Pledge Agreement, and since the Effective Equity Transfer Date, Transferee will succeed all
rights and obligations of Transferor under the Equity Pledge Agreement. Meanwhile, in order to register the equity pledge
of Transferee, Transferee shall enter into a new equity pledge agreement with The9 Computer on the Effective Equity
Transfer Date to pledge its 64% equity interests in the Company to The9 Computer as the guarantee for its performance of
obligations under the loan agreements, call option agreement and shareholder voting proxy agreement newly made by it.
The Company agrees to promptly record the pledge in the Company’s register of shareholders on the Effective Equity
Transfer Date.
2.
3.
4.
In consideration that the Transferee will fully assume all the obligations and liabilities of the Transferor under the Original
Agreements, The9 Computer, Wang Yong and the Company, as the contractual parties of the Original Agreements, hereby agree
to and accept this Novation.
The Transferee agrees that since the Effective Equity Transfer Date, the Transferee will replace the Transferor as a party to each
of the Original Agreements, enjoy all rights and perform all obligations of the Transferor under the Original Agreements and be
bound by terms thereof in all aspects.
If the Transferor has committed breaches of his obligations or any terms of the Original Agreements before the Effective Equity
Transfer Date (regardless whether such breaches have been discovered or claimed on or before the execution of this Agreement),
the resulting liabilities or any other consequences from such breaches of Transferor shall remain the obligations of the
Transferor and shall not be transferred to the Transferee, notwithstanding the execution of this Agreement.
2
THE9 LIMITED
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5.
6.
7.
If the Transferee breaches this Agreement or his obligations or any terms of any agreement mentioned in this Agreement after
the Effective Equity Transfer Date, the Transferee shall be responsible for all liabilities or any other consequences from such
breaches in accordance with each relevant agreement, and the Transferor shall not be held responsible for such liabilities or
consequences.
The Transferor agrees that he will not require The9 Computer or the Company or the Transferee to pay him any fees for any
obligations he has fulfilled for The9 Computer under the Original Agreements, and the Transferor shall not since the execution
date of this Agreement claim for any right, benefit or interest in respect of the Original Agreements against The9 Computer or
any other parties of the Original Agreements. The Transferor hereby irrevocably waives his right of claim, defense and/or any
other rights or interests under the Original Agreements against any other parties, and warrants that his performance of the
Original Agreements will not cause any requests, claims, demands, defenses, litigation, administrative punishment or any other
legal proceedings against the Transferee or any other parties to the Original Agreements by any third party; otherwise the
Transferor shall be liable for indemnification for all losses suffered by the Transferee and/or other parties to the Original
Agreements.
The Transferor and Transferee jointly covenant to The9 Computer that, they will not, for reason of novation of the Original
Agreements or execution and performance of this Agreement (i.e. the Novation), create any new obligation to or increase the
obligations of The9 Computer or any other parties to the Original Agreements (including but not limited to increasing any
expenses), or reduce any rights of The9 Computer or any other parties to the Original Agreements, or create any original rights
against The9 Computer or the other parties to the Original Agreements, or create any requests, claims, litigation, administrative
punishment or any other legal proceedings against The9 Computer or the other parties to the Original Agreements; otherwise
The9 Computer or any other parties to the Original Agreements shall have the right to request the Transferor and/or Transferee
to be responsible for the relevant liabilities. The Transferor and/or Transferee shall fully indemnify The9 Computer or any other
parties to the Original Agreements for any losses or expenses suffered by reason of such Novation.
8.
Except for the parties to the Original Agreements as expressly altered in this Agreement, all other terms and conditions
contained in the Original Agreements shall remain in full force and effect.
9. Any dispute arising from or in connection this Agreement shall be settled through negotiation. If the parties are unable to settle
such dispute within thirty (30) days, the dispute shall be submitted to the China International Economic and Trade Arbitration
Commission, Shanghai Commission, and settled by arbitration in accordance with its arbitration rules in Shanghai. The arbitral
award shall be final and binding on all parties.
10. Each provision of this Agreement is severable and independent from the other provisions. Where any provision or provisions of
this Agreement becomes invalid, illegal or unenforceable, the other provisions of this Agreement shall nevertheless remain
valid, legal and enforceable and not be affected.
11. Upon execution by all the parties, this Agreement shall have its retrospective effect from the Effective Equity Transfer Date.
12. This Agreement has been written in Chinese and executed in six (6) original copies. Each original copy shall be deemed as an
original and have the same legal effect. All the copies shall together constitute one and the same document.
[No Text Below]
3
THE9 LIMITED
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IN WITNESS WHEREOF, the parties have caused this Agreement to be executed for their respective benefits on the date first above
written.
Zhu Jun
Signature:
/s/ Zhu Jun
Ji Wei
Signature:
/s/ Ji Wei
Wang Yong
Signature:
/s/ Wang Yong
The9 Computer Technology Consulting (Shanghai) Co., Ltd. (Company Chop)
Signature: Company Chop is affixed
Name:
Title: Authorized Representative
Shanghai The9 Information Technology Co., Ltd. (Company Chop)
Signature: Company Chop is affixed
Name:
Title: Authorized Representative
4
THE9 LIMITED
FORM 20-F
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Significant and Other Principal Subsidiaries and Affiliated Entities of The Registrant
Exhibit 8.1
Wholly-owned subsidiaries
Name of Subsidiary
GameNow.net (Hong Kong) Limited
China The9 Interactive Limited
9Dream Limited
China Crown Technology Limited
The9 Development Center Limited
Asian Way Development Limited
New Star International Development Limited
TDC (Asia) Limited
Red5 Singapore Pte. Ltd. (formerly known as The9 Singapore Pte. Ltd.)
The9 Interactive, Inc.
The9 Korea Co., Ltd.
Red5 Korea, LLC
The9 Computer Technology Consulting (Shanghai) Co., Ltd.
China The9 Interactive (Shanghai) Limited
China The9 Interactive (Beijing) Limited
Jiu Jing Era Information Technology (Beijing) Limited
Jiu Tuo (Shanghai) Information Technology Limited
Majority-owned subsidiaries
Name of Subsidiary
Red 5 Studios, Inc.
Affiliated entities
Name of Subsidiary
Shanghai Huopu Cloud Computing Terminal Technology Co., Ltd.
Shanghai The9 Information Technology Co., Ltd.
Shanghai Jiucheng Advertisement Co., Ltd.
Hangzhou Fire Rain Network Technology Co., Ltd.
Shenzhen Wanyouyinli Technology Co., Ltd.
Shanghai Jiushi Interactive Network Technology Co., Ltd.
Shanghai Mengxiang Hulian Digital Technology Co., Ltd.
Jurisdiction of Incorporation
Hong Kong
Hong Kong
Hong Kong
Hong Kong
Hong Kong
Hong Kong
Hong Kong
British Virgin Islands
Singapore
Delaware, USA
Korea
Korea
China
China
China
China
China
Jurisdiction of Incorporation
Delaware, USA
Jurisdiction of Incorporation
China
China
China
China
China
China
China
THE9 LIMITED
FORM 20-F
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EXHIBIT 12.1
Certification by the Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Jun Zhu, certify that:
1. I have reviewed this annual report on Form 20-F of The9 Limited. (the “Company”);
2. 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;
3. 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;
4. 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 function):
(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: March 22, 2012
By: /s/ Jun Zhu
Name: Jun Zhu
Title: Chief Executive Officer
THE9 LIMITED
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EXHIBIT 12.2
Certification by the Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, George Lai, certify that:
1. I have reviewed this annual report on Form 20-F of The9 Limited (the “Company”);
2. 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;
3. 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;
4. 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 function):
(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: March 22, 2012
By: /s/ George Lai
Name: George Lai
Title: Chief Financial Officer
THE9 LIMITED
FORM 20-F
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Certification by the Chief Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EXHIBIT 13.1
In connection with the Annual Report of The9 Limited (the “Company”) on Form 20-F for the year ended December 31,
2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jun Zhu, Chief Executive Officer of
the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: March 22, 2012
By: /s/ Jun Zhu
Name: Jun Zhu
Title: Chief Executive Officer
THE9 LIMITED
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Certification by the Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EXHIBIT 13.2
In connection with the Annual Report of The9 Limited (the “Company”) on Form 20-F for the year ended December 31,
2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, George Lai, Chief Financial Officer
of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: March 22, 2012
By: /s/ George Lai
Name: George Lai
Title: Chief Financial Officer
THE9 LIMITED
FORM 20-F
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[Letterhead of Maples and Calder ]
EXHIBIT 15.1
Our ref: CGW\604835\5135220v1
Direct
+852 3690 7477
Email
carrie.wong@maplesandcalder.com
The9 Limited
Building No. 3, 690 Bibo Road
Zhang Jiang Hi-Tech Park
Pudong New Area, Pudong
Shanghai 201203
People’s Republic of China
22 March 2012
Dear Sirs,
The9 Limited (the “Company”)
We consent to the reference to our firm under the heading “Cayman Islands Taxation” in the Company’s Annual Report on
Form 20-F for the year ended December 31, 2011, which will be filed with the Securities and Exchange Commission in the
month of March 2012.
Yours faithfully
/s/ Maples and Calder
Maples and Calder
THE9 LIMITED
FORM 20-F
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[Letterhead of Fangda Partners]
Exhibit 15.2
March 22, 2012
The9 Limited
Building No. 3, 690 Bibo Road
Zhangjiang Hi-tech Park
Pudong New Area, Pudong
Shanghai 201203
People’s Republic of China
Dear Sirs,
We consent to the reference to our firm under the headings of “Government Regulations” and “Arrangements with Affiliated PRC
Entities” in The9 Limited’s Annual Report on Form 20-F for year ended December 31, 2011, which will be filed with the Securities
and Exchange Commission in the month of March 2012.
Yours faithfully,
/s/ Fangda Partners
Fangda Partners
THE9 LIMITED
FORM 20-F
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[Letterhead of Deloitte Touche Tohmatsu CPA Ltd.]
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in this Registration Statement on Form S-8 (No. 333-127700,
No. 333-156306 and No. 333-168780) of The9 Limited of our reports dated March 22, 2012 relating to the consolidated financial
statements of The9 Limited and the effectiveness of The9 Limited’s internal control over financial reporting, appearing in this Annual
Report on Form 20-F of The9 Limited for the year ended December 31, 2011.
EXHIBIT 15.3
/s/ Deloitte Touche Tohmatsu CPA Ltd.
Shanghai China
March 22, 2012