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TABLE OF CONTENTS
TABLE OF CONTENTS 2
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
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(Mark One) |
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o |
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REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR |
ý |
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2014. |
OR |
o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period
from to |
OR |
o |
|
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: 001-33587
|
PERFECT WORLD CO., LTD. (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) |
Perfect World Plaza, Tower 306, 86 Beiyuan Road, Chaoyang District
Beijing 100101, People's Republic of China (Address of principal executive offices) |
Kelvin Wing Kee Lau, Chief Financial Officer
Perfect World Plaza, Tower 306, 86 Beiyuan Road, Chaoyang District
Beijing 100101, People's Republic of China
Phone: (86 10) 5780-5700
Facsimile: (86 10) 5780-5713 (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:
|
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|
Title of each class |
|
Name of each exchange on which registered |
American Depositary Shares, each
representing five Class B ordinary shares,
par value US$0.0001 per share |
|
The NASDAQ Stock Market LLC
(The NASDAQ Global Select Market) |
Class B ordinary shares,
par value US$0.0001 per share |
|
The NASDAQ Stock Market LLC
(The NASDAQ Global Select Market)* |
- *
- Not
for trading, but only in connection with the listing on The NASDAQ Global Select Market of American depositary shares, each representing five
Class B ordinary share.
Securities
registered or to be registered pursuant to Section 12(g) of the Act:
Securities
for which there is a reporting obligation pursuant to Section 15(d) of the Act:
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.
29,671,195 Class A ordinary shares, par value US$0.0001 per share, and 219,078,955 Class B ordinary shares, par value US$0.0001 per share, as of
December 31, 2014.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
o Yes ý 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 Section 13 or
15(d)
of the Securities Exchange Act of 1934.
o Yes ý 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.
ý Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
ý Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer
and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o |
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Accelerated filer ý |
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Non-accelerated filer o |
Indicate
by check mark which basis of accounting the registrant has been to prepare the financial statements included in this filing:
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U.S. GAAP ý |
|
International Financial Reporting Standards as issued
by the International Accounting Standards Board o |
|
Other o |
If
"other" has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
o Item 17 o Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes ý 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) of the Securities Exchange Act of 1934
subsequent to the distribution of securities under a plan confirmed by a court.
o Yes o No
Table of Contents
TABLE OF CONTENTS
i
Table of Contents
INTRODUCTION
In this annual report, except where the context otherwise requires and for purposes of this annual report
only:
-
- "we," "us," "our company," "our" and "Perfect World" refer to Perfect World Co., Ltd., a Cayman Islands company, and its
subsidiaries, and, in the context of describing our operations, risk factors and financial results, also include our variable interest entities;
-
- "MMORPGs" refers to massively multiplayer online role playing games, which are interactive online games that may be played
simultaneously by hundreds of thousands of game players;
-
- "China" or "PRC" refers to the People's Republic of China, excluding, for the purpose of this annual report only, Taiwan, Hong Kong
and Macau;
-
- "shares" or "ordinary shares" refers to our ordinary shares, par value US$0.0001 per share, which include both Class A ordinary
shares and Class B ordinary shares;
-
- "outstanding Class B ordinary shares" and "Class B ordinary shares outstanding" refer to our Class B outstanding
ordinary shares, excluding 5,509,780 Class B ordinary shares that have been issued to Deutsche Bank Trust Company Americas, the depositary of our ADS program, but are reserved in anticipation
of the exercise of options under our share incentive plans;
-
- "ADSs" refers to our American depositary shares, each of which represents five Class B ordinary shares; the ADSs are evidenced
by American depositary receipts, or "ADRs";
-
- all references to "RMB" or "Renminbi" refer to the legal currency of China; all references to "US$," "dollars" and "U.S. dollars"
refer to the legal currency of the United States; all references to "MYR" refer to the legal currency of Malaysia; all references to "TWD" refer to the legal currency of Taiwan; all references to
"EUR" refer to the legal currency of the Eurozone; all references to "SGD" refer to the legal currency of Singapore; and
-
- all share and per share data have been adjusted to reflect a 10-for-1 share split that became effective on June 19, 2007.
1
Table of Contents
FORWARD-LOOKING INFORMATION
This annual report on Form 20-F contains statements of a forward-looking nature. These statements involve known and unknown
risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements.
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 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 maintain and strengthen our position as a leading online game developer and operator in China;
-
- our expected development and launch of additional online games;
-
- our various initiatives to implement our business strategies;
-
- our future business development, results of operations and financial condition; and
-
- the regulatory environment in China and other countries relating to the internet and internet content providers, including online game
developers and operators.
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 factor, or combination of factors, may cause actual results of this annual report to differ materially
from those contained in any forward-looking statement.
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 InformationD. Risk Factors" of this annual report. We do not undertake any obligation to update or revise the forward-looking statements except as required under
applicable law.
2
Table of Contents
PART I.
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not Applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable.
ITEM 3. KEY INFORMATION
A. Selected Financial Data
The following table presents our selected consolidated financial information. The selected consolidated statements of income and comprehensive income data for the
three years ended December 31, 2012, 2013 and 2014 and the consolidated balance sheet data as of December 31, 2013 and 2014 have been derived from our audited consolidated financial
statements, which are included in this annual report beginning on page F-1. Our selected consolidated statements of income and comprehensive income data for the years ended December 31,
2010 and 2011 and our consolidated balance sheet data as of December 31, 2010, 2011 and 2012 have been derived from our audited consolidated financial statements not included in this annual
report. Our historical results do not necessarily indicate results expected for any future periods. The selected consolidated financial data should be read in conjunction with, and are qualified in
their entirety by reference to, our audited consolidated financial statements and related notes and "Item 5. Operating and Financial Review and
3
Table of Contents
Prospects"
below. Our audited consolidated financial statements are prepared and presented in accordance with generally accepted accounting principles in the United States, or U.S. GAAP.
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For the Year Ended December 31, |
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2010 |
|
2011 |
|
2012 |
|
2013 |
|
2014 |
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|
RMB |
|
RMB |
|
RMB |
|
RMB |
|
RMB |
|
US$ |
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(in thousands, except for share, per share and per ADS data)
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Consolidated Statements of Income and Comprehensive Income Data: |
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Revenues: |
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Online game operation revenues |
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2,156,258 |
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2,708,507 |
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2,499,419 |
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2,800,321 |
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3,597,595 |
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579,827 |
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Licensing revenues |
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214,981 |
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246,823 |
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171,564 |
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149,318 |
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168,956 |
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27,231 |
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Other revenues |
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12,402 |
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28,107 |
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99,604 |
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103,024 |
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76,673 |
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12,357 |
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Total revenues |
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2,383,641 |
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2,983,437 |
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2,770,587 |
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3,052,663 |
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3,843,224 |
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619,415 |
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Cost of revenues |
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(379,417 |
) |
|
(479,878 |
) |
|
(539,936 |
) |
|
(711,648 |
) |
|
(1,115,831 |
) |
|
(179,839 |
) |
Gross profit |
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2,004,224 |
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2,503,559 |
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2,230,651 |
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2,341,015 |
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2,727,393 |
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439,576 |
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Operating expenses |
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(1,109,197 |
) |
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(1,449,290 |
) |
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(1,664,713 |
) |
|
(2,003,075 |
) |
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(2,386,461 |
) |
|
(384,628 |
) |
Operating profit |
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895,027 |
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1,054,269 |
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565,938 |
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337,940 |
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340,932 |
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54,948 |
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Total other income |
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35,529 |
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109,840 |
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127,641 |
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154,021 |
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236,288 |
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|
38,083 |
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Income before tax |
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930,556 |
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1,164,109 |
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693,579 |
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491,961 |
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577,220 |
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93,031 |
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Income from continuing operations, net of tax |
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841,560 |
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1,002,405 |
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577,460 |
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421,963 |
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455,726 |
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73,450 |
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Discontinued operations:(1) |
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Loss from discontinued operations, net of tax |
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(14,997 |
) |
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(22,343 |
) |
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(30,215 |
) |
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(44,322 |
) |
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Gain from disposal of discontinued operations, net of tax |
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166,288 |
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(Loss)/income from discontinued operations, net of tax |
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(14,997 |
) |
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(22,343 |
) |
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(30,215 |
) |
|
121,966 |
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Net Income |
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826,563 |
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980,062 |
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547,245 |
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543,929 |
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455,726 |
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73,450 |
|
Net loss/(income) attributable to non-controlling interests |
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14,138 |
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3,924 |
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(6,594 |
) |
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(1,515 |
) |
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15,664 |
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|
2,524 |
|
Net income attributable to the Company's shareholders |
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840,701 |
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983,986 |
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540,651 |
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542,414 |
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471,390 |
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75,974 |
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Net Income |
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826,563 |
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980,062 |
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547,245 |
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543,929 |
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455,726 |
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73,450 |
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Other comprehensive income: |
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Foreign currency translation adjustment |
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(503 |
) |
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5,526 |
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(20,112 |
) |
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(45,994 |
) |
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(30,513 |
) |
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(4,918 |
) |
Comprehensive income |
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826,060 |
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985,588 |
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527,133 |
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497,935 |
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425,213 |
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68,532 |
|
Comprehensive loss/(income) attributable to non-controlling interests |
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14,138 |
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3,924 |
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(6,594 |
) |
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(1,515 |
) |
|
15,664 |
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|
2,524 |
|
Comprehensive income attributable to the Company's shareholders |
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840,198 |
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989,512 |
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520,539 |
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496,420 |
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440,877 |
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71,056 |
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Cash dividend per ordinary share |
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2.49 |
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0.54 |
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0.60 |
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0.096 |
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Net earnings per ordinary share, basic |
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Continuing operations |
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3.37 |
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4.13 |
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2.39 |
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1.72 |
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1.90 |
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0.31 |
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Discontinued operations |
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(0.01 |
) |
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(0.09 |
) |
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(0.13 |
) |
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0.50 |
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Total earnings per share, basic |
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3.36 |
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4.04 |
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2.26 |
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2.22 |
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1.90 |
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0.31 |
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Net earnings per ordinary share, diluted |
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Continuing operations |
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3.18 |
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3.94 |
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2.35 |
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1.70 |
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1.86 |
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0.30 |
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Discontinued operations |
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(0.01 |
) |
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(0.09 |
) |
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(0.12 |
) |
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0.49 |
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Total earnings per share, diluted |
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3.17 |
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3.85 |
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2.23 |
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2.19 |
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1.86 |
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0.30 |
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Net earnings per ADS, basic |
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Continuing operations |
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16.87 |
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20.63 |
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11.94 |
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8.62 |
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9.51 |
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1.53 |
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Discontinued operations |
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(0.07 |
) |
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(0.45 |
) |
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(0.63 |
) |
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2.50 |
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Total earnings per ADS, basic |
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16.80 |
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20.18 |
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11.31 |
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11.12 |
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9.51 |
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1.53 |
|
Net earnings per ADS, diluted |
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Continuing operations |
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15.94 |
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19.70 |
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11.77 |
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8.49 |
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9.32 |
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1.50 |
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Discontinued operations |
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(0.07 |
) |
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(0.43 |
) |
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(0.62 |
) |
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2.46 |
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Total earnings per ADS, diluted |
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15.87 |
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19.27 |
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11.15 |
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10.95 |
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9.32 |
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1.50 |
|
Weighted average number of ordinary shares used in per share calculations: |
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Basic |
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250,232,543 |
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243,765,093 |
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239,119,233 |
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243,958,465 |
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247,943,431 |
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247,943,431 |
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Diluted |
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264,818,376 |
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255,380,327 |
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242,495,660 |
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247,712,898 |
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252,939,407 |
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252,939,407 |
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Amount attributable to the Company's shareholders: |
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Income from continuing operations, net of tax |
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844,291 |
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1,005,977 |
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570,866 |
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420,448 |
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471,390 |
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75,974 |
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(Loss)/income from discontinued operations, net of tax |
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|
(3,590 |
) |
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(21,991 |
) |
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(30,215 |
) |
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121,966 |
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|
Net income |
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|
840,701 |
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983,986 |
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|
540,651 |
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542,414 |
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471,390 |
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|
75,974 |
|
Share-based compensation cost included in: |
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Cost of revenues |
|
|
(6,938 |
) |
|
(6,362 |
) |
|
(4,570 |
) |
|
(3,671 |
) |
|
(1,456 |
) |
|
(235 |
) |
Research and development expenses |
|
|
(37,481 |
) |
|
(47,533 |
) |
|
(34,819 |
) |
|
(34,243 |
) |
|
(17,389 |
) |
|
(2,803 |
) |
Sales and marketing expenses |
|
|
(13,079 |
) |
|
(15,228 |
) |
|
(10,112 |
) |
|
(12,351 |
) |
|
(8,211 |
) |
|
(1,323 |
) |
General and administrative expenses |
|
|
(39,287 |
) |
|
(35,613 |
) |
|
(21,644 |
) |
|
(25,627 |
) |
|
(24,439 |
) |
|
(3,939 |
) |
Loss from discontinued operations, net of tax |
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|
|
|
|
|
|
|
|
|
|
(21,450 |
) |
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|
- (1)
- To
sharpen our focus on our core online game development and operation business, we sold the film and television business to a related party in August 2011
and the online reading business to an unrelated party in December 2013. As a result, the film and
4
Table of Contents
television
business and the online reading business are accounted for as discontinued operations and our consolidated statements of income and comprehensive income in this annual report separates the
discontinued operations from our remaining business operations for all years presented.
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For the Year Ended December 31, |
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|
2010 |
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2011 |
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2012 |
|
2013 |
|
2014 |
|
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|
RMB |
|
RMB |
|
RMB |
|
RMB |
|
RMB |
|
US$ |
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(in thousands)
|
|
Consolidated Balance Sheet Data: |
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Cash and cash equivalents |
|
|
1,387,621 |
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2,150,213 |
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799,633 |
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1,212,157 |
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933,826 |
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|
150,505 |
|
Total assets |
|
|
4,405,329 |
|
|
5,651,989 |
|
|
5,797,006 |
|
|
6,345,027 |
|
|
7,129,535 |
|
|
1,149,072 |
|
Total liabilities |
|
|
1,045,741 |
|
|
1,666,580 |
|
|
1,785,206 |
|
|
1,836,822 |
|
|
2,260,781 |
|
|
364,372 |
|
Total shareholders' equity |
|
|
3,359,588 |
|
|
3,985,409 |
|
|
4,011,800 |
|
|
4,508,205 |
|
|
4,868,754 |
|
|
784,700 |
|
Total liabilities and shareholders' equity |
|
|
4,405,329 |
|
|
5,651,989 |
|
|
5,797,006 |
|
|
6,345,027 |
|
|
7,129,535 |
|
|
1,149,072 |
|
Exchange Rate Information
Our business is primarily conducted in China and most of our revenues are denominated in RMB. Unless otherwise noted, all translations
from RMB to U.S. dollars and from U.S. dollars to RMB in this annual report were made at a rate of RMB6.2046 to US$1.00, the exchange rate on December 31, 2014 as set forth in the H.10
statistical release published by the Federal Reserve Board. We make no representation that any RMB or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or RMB, as the case
may be, at any particular rate or at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of RMB into foreign currency and
through restrictions on foreign exchange activities. On April 24, 2015, the exchange rate, as set forth in the H.10 statistical release of the Federal Reserve Board, was RMB6.1930 to US$1.00.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noon Buying Rate |
|
|
|
Period End |
|
Average(1) |
|
Low |
|
High |
|
|
|
(RMB per US$1.00)
|
|
Period |
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
6.6000 |
|
|
6.7696 |
|
|
6.8330 |
|
|
6.6000 |
|
2011 |
|
|
6.2939 |
|
|
6.3849 |
|
|
6.6364 |
|
|
6.2939 |
|
2012 |
|
|
6.2301 |
|
|
6.2990 |
|
|
6.3879 |
|
|
6.2221 |
|
2013 |
|
|
6.0537 |
|
|
6.1412 |
|
|
6.2438 |
|
|
6.0537 |
|
2014 |
|
|
6.2046 |
|
|
6.1704 |
|
|
6.2591 |
|
|
6.0402 |
|
October |
|
|
6.1124 |
|
|
6.1251 |
|
|
6.1385 |
|
|
6.1107 |
|
November |
|
|
6.1429 |
|
|
6.1249 |
|
|
6.1429 |
|
|
6.1117 |
|
December |
|
|
6.2046 |
|
|
6.1886 |
|
|
6.2256 |
|
|
6.1490 |
|
2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
January |
|
|
6.2495 |
|
|
6.2181 |
|
|
6.2535 |
|
|
6.1870 |
|
February |
|
|
6.2695 |
|
|
6.2518 |
|
|
6.2695 |
|
|
6.2399 |
|
March |
|
|
6.2145 |
|
|
6.2422 |
|
|
6.2741 |
|
|
6.1955 |
|
April (through April 24), 2015 |
|
|
6.1930 |
|
|
6.2000 |
|
|
6.2152 |
|
|
6.1927 |
|
Source:
Federal Reserve Statistical Release
- (1)
- Annual
averages are calculated from month-end rates. Monthly averages are calculated using the average of the daily rates during the relevant period.
5
Table of Contents
B. Capitalization and Indebtedness
Not Applicable.
C. Reasons for the Offer and Use of Proceeds
Not Applicable.
D. Risk Factors
Risks Related to Our Business
We have adopted an item-based revenue model for all but one of our self-developed online games and
intend to apply this revenue model to most of our new online games. This revenue model may have a negative impact on our financial condition and results of operations.
We have adopted an item-based revenue model for all of our self-developed online games except for our first MMORPG, Perfect World, for
which we use a time-based model whereby players are charged for their playing time. Going forward, we intend to continue applying the item-based model to most of the new online games that we operate.
Under
the item-based revenue model, players are able to play the online game free of charge for an unlimited amount of time, but are charged for purchases of in-game items, such as
performance-enhancing items, clothing, accessories and pets. The item-based model requires us to design games that not only attract players to spend more time playing, but also encourage them to
purchase in-game items. The sale of in-game items requires us to track closely consumer tastes and preferences, especially in-game spending trends. In addition, the item-based model may cause
additional concerns with the PRC regulators, who have been trying to implement ways to reduce the amount of time that Chinese youths spend on online games. A model that does not charge for time may be
viewed by the PRC regulators as inconsistent with this goal. We cannot assure you that the item-based revenue model will continue to be successful, or that it will not have a negative impact on
our future financial condition and results of operations.
Our
revenue recognition policy for the item-based online games entails our best estimates of the lives of various items associated with each of our item-based games. We adopted the
item-based revenue model beginning in September 2006. With respect to permanent ownership items that we sell to players, we recognize revenues over the estimated lives of such items. We consider the
average period that paying players typically play our games and other player behavior patterns to arrive at our best estimates for the lives of these permanent ownership items, which, in some cases,
may be as long as the estimated life of the related game. However, given the fast-evolving nature of the game industry and various types of online games we offer to players with different tastes and
preferences, our estimate of the period that players typically play our games may not accurately reflect the actual lives of the items. We have been revising our estimates as we continue to gain
operating data and refine our estimation process and results accordingly. Any future revisions to these estimates could adversely affect the time period during which we recognize revenues from these
items. For example, an increase in the estimated lives of these items would increase the period over which revenues from these items are recognized. See "Item 5. Operating and Financial Review
and ProspectsA. Operating ResultsCritical Accounting PoliciesRevenue Recognition."
If we are unable to successfully develop, launch and/or operate additional online games that grow
our player base and increase our revenues, our future results of operations will be adversely affected.
In order for our business strategy to succeed over time, we will need to continually develop, launch and operate new online games or
license or acquire new games that are commercially successful. We
6
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will
need to do this to both replace our existing online games as they reach the end of their useful economic lives and to meet our growth strategy of operating a larger number of online games that
grow our overall player base and increase our revenues.
We
plan to invest a significant amount of financial and personnel resources in developing, launching and operating new online games. The success of our new online games will largely
depend on our ability to anticipate and effectively respond to changing consumer tastes and preferences and technological advances in a timely manner. We cannot assure you that the games we develop
will be launched as scheduled, viewed by the regulatory authorities as complying with content restrictions, attractive to players, able to compete with games operated by our competitors or
commercially successful. In addition, as we introduce new games, some of our existing customers may switch to the new games. If this transfer of players from our existing games does not grow our
overall player base and revenues, our growth and profitability may be materially and adversely affected.
We
may license or acquire new games from other game developers from time to time. However, we have limited track record in operating games licensed or acquired from other developers, and
we may not be able to identify appropriate games or enter into arrangements with those developers to offer these games in China or elsewhere, on terms acceptable to us. If we are not able to develop,
license or acquire additional online games that are commercially successful and have continuing appeal to players, our future profitability and growth prospects will decline.
We face risks and uncertainties regarding the growth of the online game industry and market
acceptance of our online games and in-game items.
The online game industry, from which we derive all of our revenues, is an evolving industry and concept. The growth of the online game
industry and the level of demand and market acceptance of our online games are subject to a high degree of uncertainty. Our future operating results will depend on numerous factors, many of which are
beyond our control. These factors include:
-
- the growth of personal computer, internet and broadband users and their penetration in China and other markets in which we offer our
games, the size of population within our targeted age group, and the rate of any such growth;
-
- whether the online game industry, particularly in China, the rest of the Asia-Pacific region, North America and Europe, continues to
grow and the rate of any such growth;
-
- general economic conditions, particularly economic conditions adversely affecting discretionary consumer spending;
-
- changes in consumer demographics and consumer tastes and preferences;
-
- the popularity and price of new online games and in-game items that we and our competitors launch and distribute; and
-
- our ability to timely upgrade and improve our existing games to extend their life spans and to maintain their competitive positions in
the online game market.
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. However, there is no assurance that online games will continue to be popular in China or elsewhere. A decline in the popularity of online games in general, or the
online games that we operate, will likely adversely affect our business and prospects. We must be able to track and respond to changes in consumer preferences in a timely and effective manner,
especially changes in game preferences and consumer spending trends relating to in-game item purchases.
7
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A severe and prolonged global economic recession and the related slowdown in the Chinese economy may
adversely affect our business, results of operations and financial condition.
The global financial markets experienced significant disruptions in 2008 and the United States, Europe and other economies went into
recession. The recovery from the lows of 2008 and 2009 was uneven and it is facing new challenges, including the escalation of the European sovereign debt crisis since 2011 and the slowdown of the
Chinese economy since 2012. It is unclear whether the European sovereign debt crisis will be continued and whether the Chinese economy will resume its high growth rate. There is considerable
uncertainty over the long-term effects of the expansionary monetary and fiscal policies that have been adopted by the central banks and financial authorities of some of the world's leading economies,
including China's. There have been concerns over unrest in the Middle East and Africa, which have resulted in volatility in oil and other markets. There have also been concerns about the economic
effect of the earthquake, tsunami and nuclear crisis in Japan and tensions in the relationship between China and Japan. Economic conditions in China are sensitive to global economic conditions. Since
we derive a majority of our revenues from China, any slowdown in the Chinese economy may have a negative impact on our business, operating results and financial condition in a number of ways. For
example, our game players may decrease or delay
spending with us, while we may have difficulty expanding our customer base fast enough, or at all, to offset the impact of decreased spending by our existing game players. Furthermore, the economic
recession in other countries where our games are operated may reduce game players' level of disposable income, perceived future earnings capacities and willingness to spend, and may thus result in a
decline in their spending on our games and a corresponding decrease in our revenues and profit.
Our business could suffer if we do not successfully manage our business expansion.
We have experienced a period of significant business expansion that has placed, and continues to place, strain on our management
personnel, systems and resources. To accommodate our business expansion pursuant to our strategies, we anticipate that we may need to implement and maintain a variety of new and upgraded operational
and financial systems, including online payment systems and related security systems, procedures and controls, and improve our accounting and other internal management systems, all of which require
substantial management efforts. We also will need to continue to expand, train, manage and motivate our workforce, and manage our relationships with our distributors, customers, overseas licensees and
third-party service providers. All of these endeavors will require substantial management effort and skill and the incurrence of additional expenditures. We cannot assure you that we will be able to
efficiently or effectively implement our business expansion strategies and manage the growth of our operations, and any failure to do so may limit our future growth and hamper our business strategy.
Our recent acquisitions and strategic investments and any future acquisitions, investments or
alliances may have an adverse effect on our ability to manage our business and may subject us to unforeseen liabilities.
Selective acquisitions of and investments in online game development and operating companies and alliances with key players in the
online game industry and other related industry sectors form part of our strategy to further expand our business. However, our ability to grow through future acquisitions, investments or alliances,
such as joint ventures, will depend on the availability of suitable acquisition or investment targets or joint venture partners at reasonable terms, our ability to compete effectively to attract these
targets or partners, the availability of financing to complete large acquisitions, investments or joint ventures, and our ability to obtain any required governmental approvals.
We
only have limited experience in identifying, financing and completing large acquisitions, investments or joint venture transactions. These acquisitions and investments and our future
similar
8
Table of Contents
transactions
could expose us to potential risks, including risks associated with the assimilation of new operations, technologies and personnel, unforeseen or hidden liabilities, the inability to
generate sufficient revenue to offset the costs and expenses of acquisitions, significant loss of investments, and potential loss of, or harm to, our relationships with employees, customers, licensors
and other suppliers as a result of integration of new businesses. Furthermore, we may not be able to maintain a satisfactory relationship with our joint venture or other partners or handle other risks
associated with our future alliances, which could adversely affect our business and results of operations. Such transactions and the subsequent integration processes would require significant
attention from our management. The diversion of our management's attention and any difficulties encountered with respect to the acquisitions or alliances or in the process of integration could have an
adverse effect on our ability to manage our business.
We may suffer material loss on our venture capital investments if the fund we invested does not
achieve the performance we expected.
In 2011, we entered into a limited partnership agreement to invest up to RMB643.5 million as a limited partner in a venture
capital fund over a nine-year period. This venture capital fund is expected to invest in high growth companies in the technology, media and telecommunication, or TMT, industries. In early 2013, we
increased our committed capital for an additional RMB396.0 million and the investment term has been changed to 12 years. The venture capital fund intends to invest the additional capital
received as a limited partner into another private equity fund, which focuses on investment into mature companies in the consumer and retail, financial services, health care, TMT, energy and natural
resources, and high value-added manufacturing industries in China. The venture capital fund is managed by a general partner unrelated to us. Because various regulations in China currently restrict or
prevent foreign-invested entities from engaging in certain TMT industries which are the targeted industries of the venture capital fund, we use Tianjin Trendsters Investment Co., Ltd.,
or Trendsters Investment, a variable interest entity we established in November 2011, as an investment vehicle to hold our investment in the fund. Trendsters Investment does not itself make investment
decisions for the fund and is not involved in the management of the fund. These investments have inherent risks. We may suffer material loss in our venture capital investments if the fund we invested
does not achieve the performance we expected.
We operate in a highly competitive industry and compete against many companies.
We believe that there are over 100 online game operators in China. Given the relatively low entry barriers to operating online games,
we expect more companies to enter the online game industry in China and a wider range of online games to be introduced to the China
market. Our principal competitors in China include Tencent Holdings Limited, or Tencent, NetEase.com, Inc., or NetEase, Shanda Games Limited, or Shanda Games, Changyou.com Limited, or Changyou,
Giant Interactive Group Inc., or Giant Interactive, Kingsoft Corporation Limited, or Kingsoft, Shanghai Posts & Telecommunications Technology Co., Ltd., or Tiancity,
Beijing Guangyu Huaxia Sci-Tech Co., Ltd., or Guangyu Huaxia, KongZhong Corporation, or KongZhong, and NetDragon Websoft Inc., or NetDragon. Our potential competitors also include
major internet portal operators, other domestic and foreign game developers and publishers, and alliances between our existing and new competitors. Some of our competitors have significantly greater
financial and marketing resources, name recognition and game development resources than we have. In addition, many of our competitors have developed and operated games that have proven commercially
successful for a longer period of time than our games and have a larger portfolio of online game offerings than we do. As a result, they may be able to take greater risks and endure lower than
expected performances from some of their games than we are able to do.
9
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Our competitors may introduce new business models, and if these new business models are more attractive to customers than the business models we currently use,
our customers may switch to our competitors' games. We believe that competition in the online game market in China may become more intense as increasing numbers of online games are introduced in the
market. We cannot assure you that we will be able to compete successfully against any new or existing competitors, or against any new business models implemented by them. In addition, mobile games
have gained increasing popularity and user base along with the online games and other online platforms. The increased competition we have experienced and anticipate in the online game industry may
reduce the number of our players or growth rate of our player base, or cause us to reduce usage fees or the prices of certain in-game items. All of these competitive factors could have a material
adverse effect on our revenue growth and profitability.
As we currently depend on a limited number of online games for substantially all of our revenues,
any adverse developments relating to these games may adversely affect our future results of operations.
We anticipate that our existing client-based online PC games and mobile games in operation will continue to account for a substantial
majority of our revenues in 2015. In 2014,
our top three online games operated in China, namely Zhu Xian, Return of the Condor Heroes Mobile and Perfect World II, in aggregate contributed 34% of our total revenues. Although we currently
have a number of new games in pipeline, and will target to develop and launch more games in the future, we cannot guarantee you that we will be able to successfully develop, launch and operate any of
these new games. Neither can we guarantee you that we will be able to maintain the popularity of our top games or that our new games would generate sufficient revenues to replace these top games
should they approach the end of their respective life cycles.
Accordingly,
any of the following could materially and adversely affect our business, financial condition and results of operations:
-
- failure by us to make quality upgrades, expansion packs, enhancements or improvements to the existing games in a timely manner;
-
- any reduction in or failure to grow the player base of these existing games, any decrease in their popularity in the market due to
intensifying competition or other factors;
-
- any decrease in or failure to grow the amount of revenues generated from the existing games; or
-
- any breach of game-related software security, prolonged server interruption due to network failures, hacking activities or other
factors or any other adverse developments relating to our existing games.
We are dependent on relationships with app stores and web platforms.
We distribute our mobile games through a number of app stores and web platforms, including Apple's App Store, 91.com, Baidu, Qihoo 360
and UCWEB. These app stores and
web platforms also serve as payment collection channels. App stores and web platforms have strong bargaining power in dealing with mobile game developers and operators like us. We are subject to the
standard service terms and conditions of these app stores and web platforms with regard to the promotion, distribution, operation and payment methods for our mobile games. If any of these app stores
and web platforms (i) goes out of business, (ii) discontinues its relationship with us due to any reason, such as our failure to comply with any laws or regulations in any jurisdiction
where our games are offered, (iii) limits our access to its platforms, (iv) modifies its terms of services or other policies, (v) changes its fee structure, (vi) provides
more favorable terms to our competitors or develops its own games, or (vii) is forced to cease the business relationship with us due to its lack of required licenses or permits or other
regulatory compliance issues, our business could be adversely affected.
10
Table of Contents
In
addition, we have benefited from these platforms' widely recognized brand names and large player bases. If any of these app stores and web platforms loses its market position or
otherwise falls out of favor among players or other factors cause its player base to stop growing or shrink, or if any of them fails to perform its contractual obligations to us, we would need to
identify alternative platforms for marketing, promoting and distributing our mobile games, which would consume substantial resources and may not be effective or available.
Our failure to anticipate or successfully implement new technologies could render our game engines,
game development platforms or games uncompetitive or obsolete, and reduce our revenues and market share.
Our proprietary game engines, game development platforms and anti-cheating expertise are critical to our success. The online game
industry is subject to rapid technological change. We need to anticipate the emergence of new technologies and assess their market acceptance. We also need to invest significant resources in research
and development to keep pace with technological advances in order to make our development capabilities and our games competitive in the market. However, development activities are inherently
uncertain, and we might encounter practical difficulties in commercializing our development results. Our significant expenditures on research and development may not generate corresponding benefits.
Given the fast pace with which online game technology has been and will continue to be developed, we may not be able to timely upgrade our game engines or our game development platforms in an
efficient and cost-effective manner, or at all. New technologies in online game programming or operations could render our technologies, our existing online games or the games that we are developing
or expect to develop in the future obsolete or uncompetitive, thereby potentially resulting in a decline in our revenues and market share.
We face risks associated with the licensing and operation of our games overseas, and if we are
unable to effectively manage these risks, they could impair our ability to expand our business internationally.
As of the date of this annual report, we have licensed a number of our games to game operators overseas and have been operating a
number of games in overseas markets by ourselves. We plan to further license and operate our existing and new games in more countries and regions. The offering of our games in the international
markets through self-operation exposes us to a number of risks, including:
-
- difficulties and costs in protecting our intellectual property rights overseas;
-
- difficulties and costs relating to compliance with the different commercial and legal requirements of the overseas markets in which we
offer our games, such as game import regulatory procedures, taxes and other restrictions and expenses;
-
- fluctuations in currency exchange rates; and
-
- interruptions in cross-border internet connections or other system failures.
The
offering of our games in the international markets through licensing exposes us to a number of additional risks, including:
-
- difficulties in identifying and maintaining good relationships with licensees who are knowledgeable about, and can effectively
distribute and operate our games in, overseas markets;
-
- difficulties in developing games and expansion packs catering to overseas markets and in renewing our license agreements with
licensees upon their expiration; and
-
- difficulties in maintaining the reputation of our company and our games, given that our games are operated by licensees in the
overseas markets pursuant to their own standards.
The
countries and regions where we license our games impose various restrictions on online games. For example, Korea requires online game companies to obtain a rating classification for
online games and implement procedures to restrict the distribution of online games to minors. In particular,
11
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online
game operators in Korea are required to screen minors from accessing the online games between midnight and 6 a.m. In Vietnam, all internet cafés must be shut down between
10 p.m. and 8 a.m., no online game advertisement is permitted and no internet café can be operated within 200 meters of a school. If we are unable to effectively
manage these and other risks associated with the licensing of our games overseas, our ability to expand our business internationally and our growth prospect could be impaired.
Unauthorized character enhancements and other hacking or cheating activities could harm our business
and reputation and materially and adversely affect our results of operations.
With the increase in the number of online game players in China, online game operators have increasingly encountered problems arising
from the use of unauthorized character enhancements and other hacking or cheating activities. We have from time to time detected a number
of players who have gained an unfair in-game advantage by installing hacking or cheating tools to facilitate character progression. In response to these activities, we have installed built-in
detection mechanisms in our games to identify various hacking and cheating activities, and have expanded our technical team dedicated to detecting unauthorized character enhancements and resolving
other hacking issues. Continued occurrences of unauthorized character enhancements and other manipulations may negatively impact the image of our online games and players' perception of their
reliability, decrease the number of players, reduce the players' interest in purchasing in-game items, shorten the life span of the games and adversely affect our results of operations. Furthermore,
once we detect the players who have engaged in hacking or cheating activities, we generally suspend their access to their respective accounts, which may result in significant user dissatisfaction and
cause some of these players to cease to play the game altogether.
In
addition, our games may be affected by other hacking or cheating activities in China and other countries and regions. We cannot assure you that we or our overseas licensees will be
able to defend against these attacks promptly and effectively in the future. Furthermore, we cannot assure you that we will be able to identify and eliminate new unauthorized character enhancements or
other hacking or cheating activities in a timely manner, or at all. Unauthorized character enhancements and other hacking or cheating activities could harm our business and reputation and adversely
affect our results of operations. Furthermore, a constant recurrence of these activities may require us to shift our management's and personnel's attention from research and development and other
operations to focus instead primarily on anti-hacking programs and activities, which could hurt our ability to develop and launch new games and grow our business.
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, copyrights, trademarks, trade secrets and similar intellectual
properties as critical to our success. In particular, we have spent significant amount of time and resources in developing our game engines and must continue to protect the technology. We do not hold
any patents in China or elsewhere and intellectual property rights and confidentiality protection in China may not be as effective as in the United States or other countries. Policing unauthorized use
of proprietary technology is difficult and expensive. We have taken steps to prevent the misappropriation of our proprietary technology, including registration of our online games that are currently
in operation and a number of our game engines for copyright protection, registration of our domain names and entering into non-competition and confidentiality agreements with our key employees.
However, these steps may be inadequate. Any misappropriation by our employees, licensees or other third parties of intellectual property used in our business, whether licensed to us or owned by us,
could have an adverse effect on our business and operating results. The validity, enforceability and scope of protection of intellectual property in internet-related industries are uncertain and still
evolving. In particular, the laws and enforcement procedures of the PRC and certain other countries are
12
Table of Contents
uncertain
or do not protect intellectual property rights in this area to the same extent as do the laws and enforcement procedures of the United States. We mainly rely on our licensees for copyright,
domain names and trademark protection outside China, although very limited protection has been secured to date. 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 ChinaUncertainties with respect to the PRC legal system could adversely affect us."
We may be subject to intellectual property infringement claims which could be time-consuming and
costly to defend and may result in diversion of our financial and management resources and our inability to continue providing certain of our existing games.
We cannot assure you that our online games or other content posted on our websites, such as the information posted on our in-game
bulletin boards, 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 the ordinary course of our business. For example, on February 1, 2013, a Delaware company sued Perfect World Entertainment Inc.,
or PW USA (Parallel Networks, LLC v. Perfect World Entertainment, Inc., Case No. 13-cv-00182) and ten other companies in related actions for patent infringement in the United
States District Court for the District of Delaware. The plaintiff alleged that PW USA's installers, downloaders and/or launchers, which are downloaded by users from our websites in connection with the
distribution of our games, infringed two of its patents. Although we settled this case in June 2013 without having any material adverse effect on our business, we cannot assure you that we will not
face similar claims in the future. If we are found to have violated the intellectual property rights of others, we may be enjoined from using such intellectual property, be forced to pay fines and
damages, and we may incur licensing fees or be forced to develop alternatives. In addition, we may incur substantial expenses and diversion of our financial and management resources in defending
against these third party infringement claims, regardless of their merit. Successful infringement or other intellectual property rights claims against us may result in substantial monetary
liabilities, which may disrupt our operations and materially adversely affect our business, results of operations and prospects.
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 are 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 or we may have used or disclosed trade secrets or other proprietary information of the former employers of our employees.
Moreover,
we currently derive, and expect to continue to derive, substantial revenues and profits from online games based on intellectual property licensed to us by third parties. Any of
our licensors may be subject to intellectual property rights claims with respect to those aspects of the online game licensed to us. If any of our licensors cannot prevail on the intellectual property
rights claims brought against it, we might lose our license from such licensor and may not be able to obtain the license from the legitimate owner of the intellectual property, and our results of
operations could be materially and adversely affected.
We may be the target of harassing or other detrimental conducts by third parties including
defamatory and malicious internet postings and allegations reported to government authorities that could harm our reputation and adversely affect the price of our ADSs.
We have been, and in the future may be, the target of harassing or other detrimental conducts by third parties. For example, in January
2012, there were anonymous allegations posted on certain Chinese language websites regarding the corporate governance and business ethics of our company and
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our
management. To our knowledge, some of these defamatory and malicious allegations were also reported to certain government authorities. We have been, and in the future may continue to be, subject
to government or regulatory inquiries or investigation as a result of such third-party conducts. We may need to spend significant time and incur substantial costs to respond to such third-party
conducts, and there is no assurance that we will be able to conclusively refute each of the allegations within a reasonable period of time, or at all. Our reputation and the price of our ADSs may also
be negatively affected as a result of such detrimental third-party conducts.
Undetected programming errors or flaws in our games or failure to maintain effective customer
service 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 become apparent after their release, particularly as we launch new games or
introduce new features to existing games under tight time constraints. From time to time, our players informed us of programming flaws affecting their game play experience, which we were generally
able to resolve promptly. Furthermore,
customer service, including in-game masters, is critical for retaining customers, and we may not be able to maintain and continuously improve the quality of our services to meet customers'
expectations. If our games contain programming errors or other flaws, or if we inadvertently delete our customers' records or otherwise fail to provide effective customer service, our customers may be
less inclined to continue or resume playing our games or recommend our games to other potential customers, and may switch to our competitors' games. Undetected programming errors, game defects and
unsatisfactory customer service can disrupt our operations, adversely affect the game experience of our customers, harm our reputation, cause our customers to stop playing our games, and delay market
acceptance of our games, any of which could materially and adversely affect our results of operations.
Network interruptions or loss of critical customer data caused by system failures or other internal
or external factors may lead to player attrition and revenue reduction and harm our business and reputation.
Any failure to maintain the satisfactory performance, reliability, security and availability of our network and computer infrastructure
may cause significant harm to our reputation and our ability to attract and maintain players. From time to time, our customers in certain locations could not gain access to our online game services
for a period of time lasting from several minutes to several hours due to server interruptions, power shutdowns, internet connection problems or other reasons. Any server interruptions, break-downs,
design deficiencies, or system failures, including failures which may be attributable to events within or outside our control that could result in a sustained shutdown of all or a material portion of
our services or loss of critical customer data, could adversely impact our ability to service our players and lead to player attrition and revenue reduction.
Our
network systems are also vulnerable to damage from computer viruses, fire, flood, earthquake, power loss, telecommunications failures, computer hacking and similar events. We do not
maintain insurance policies covering losses relating to our systems and do not have business interruption insurance.
If our system and network infrastructure fails to operate effectively, our business may be harmed.
We use internally developed software systems that support nearly all aspects of our billing 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. Furthermore, our network capacity depends on our owned and leased network servers and the communication bandwidth that we lease. Constraints in network capacity could cause unanticipated
system disruptions and slower response time, affecting data transmission and game play. These factors could, among other things, cause us to lose existing or
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potential
customers, which could, in turn, materially and adversely affect our business and results of operations.
We rely on services from third parties to carry out our businesses, and if there is any interruption
or deterioration in the quality of these services, our customers may cease playing our games.
We rely on a distribution network composed of non-exclusive third-party distributors throughout China to carry out a portion of sales
of our online game services to our customers. Our distributors also distribute games for our competitors. We do not have long-term agreements with any of our distributors, and cannot assure you that
we will continue to maintain favorable relationships with them. In addition, we rely on various internet data centers to host our servers. Any interruption in our ability to obtain the services of
these or other third parties or deterioration in their performance could impair the timeliness and quality of our service. 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 channels of distribution or services on a timely basis or on terms favorable to us or at all.
The financial soundness of our licensees, distributors and vendors could affect our business and
results of operations.
If our licensees, distributors, service or product suppliers and other vendors experience cash flow concerns, licensees and
distributors may delay their payment to us and vendors may increase their prices, reduce their output or change terms of sales. Additionally, if the operating and financial performance of our
licensees, distributors and/or vendors deteriorates, or if they are unable to make scheduled payments or obtain credit, licensees or distributors may not be able to pay, or may delay payment of,
accounts receivable owed to us and vendors may restrict credit or impose different payment terms. Any inability of current or potential licensees or distributors to pay us or any demands by vendors
for different payment terms may adversely affect our earnings and cash flow.
We need a substantial amount of cash to fund our operations; if we fail to obtain additional capital
when we require it, our growth prospects and future profitability may be materially and adversely affected.
We require a significant amount of cash to fund our operations. In particular, we will need capital to fund the expansion of our
business and our research and development activities in order to remain competitive in this market. Future expansions, changes in market conditions or other developments may also cause us to require
additional funds. Our ability to obtain external financing in the future is subject to a number of uncertainties, including:
-
- our future financial condition, operations and reputation;
-
- general market conditions in our industry; and
-
- economic, political and other conditions in China and elsewhere.
If
we are unable to obtain necessary capital in a timely manner or on commercially acceptable terms, our operation, results of operations and growth prospects may be materially and
adversely affected.
We could be liable for breaches of security of our website and third party online payment channels,
which may have a material adverse effect on our reputation and business.
Currently, a portion of our online game operation revenues are generated from sales through third-party online payment platforms. 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, in
some cases including our website as well, is
essential to maintain consumer confidence. While we have not experienced any material breach of our security measures to date, we cannot assure you that our current security measures are adequate. In
addition, we expect that an increasing amount of our sales will be conducted over the internet as a result of the
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growing
use of online payment systems over time. In the meantime, the associated online crime will likely increase as well and we must be prepared to increase our security measures and efforts so that
our customers have confidence in the reliability of the online payment systems that we use. We do not have control over the security measures of our third party online payment vendors and we cannot
assure you that these vendors' security measures are adequate or will be adequate with the expected increased usage of online payment systems. Security breaches of the online payment systems that we
use could expose us to litigation and possible liability for failing to secure confidential customer information and could harm our reputation, ability to attract customers and ability to encourage
customers to purchase in-game items.
We have experienced and may continue to experience fluctuations in quarterly operating results.
Although our entire game portfolio does not exhibit clear cyclic characteristics, our quarterly operating results have experienced
fluctuations and may continue to fluctuate in the future. Such fluctuations are due to a variety of factors, including the demand for our products and services and our competitors' products and
services, the launch of our new games, changes in estimation of the average period that players typically play our games, the quality of the expansion packs for our existing games, 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, development and promotional expenses related to the introduction of new products,
network interruptions and other system problems. As an online game operator, our revenues in any quarter depend on various factors that can cause significant fluctuations, including timing and
strength of the expansion packs release and in-game promotions, the amount and mixture of in-game items purchased by players, the game playing time spent by our players and evolving market conditions.
To a significant degree, our operating expenses are based on planned expenditures and our expectations regarding prospective customer usage and purchases. Failure to meet our expectations or our
inability to accurately estimate customer usage and purchases, could disproportionately and adversely affect our operating results in any given quarter. Given the adoption of the item-based revenue
model, it may be difficult to estimate customer usage and purchases. As a result, we believe that period-to-period comparisons of operating results are not necessarily indicative of our future
results.
Our business and growth are substantially dependent on the continuing efforts of our senior
executive officers, and our business may be severely disrupted if we lose their services.
Our future success depends substantially on the continued services of our senior executive officers and key employees. If one or more
of our senior executive officers were unable or unwilling to continue in their present positions, we might not be able to replace them easily, timely, or at all, our business may be severely
disrupted, and our financial conditions and results of operations may be materially and adversely affected. If any of our senior executive officers joins a competitor or forms a competing
company, we may lose distributors, customers, service providers, know-how and key professionals and staff members. Each of our senior executive officers has entered into an employment agreement with
us, which contains non-competition provisions. However, if any dispute arises between our senior executive officers and us, these agreements may not be enforceable in China, where these executive
officers reside, in light of the uncertainties relating to China's legal system. See "Risks Related to Doing Business in ChinaUncertainties with respect to the PRC legal
system could adversely affect us."
If we are unable to attract, train and retain key employees, our business may be adversely affected.
We will need to hire and retain additional qualified employees, particularly experienced game development personnel with expertise in
the online game industry. 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 formed five new controlled companies, in which we hold majority stakes, in line with the restructuring plan of our research and development
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teams,
to help retain, attract and incentivize top talents. However, we cannot assure you that, by implementing this plan or any other measures we may take in the future, we will be able to attract or
retain the qualified key personnel that we will need to achieve our business objectives. In addition, as we are still a relatively young company and our business has grown rapidly since our
establishment, our ability to train and integrate new employees into our operations may not meet the increasing demands of our business.
If we fail to maintain an effective system of internal control over financial reporting, we may be
unable to accurately report our financial results, and investor confidence and the market price of our ADSs may be adversely affected.
We are subject to the reporting obligations under the U.S. securities laws. Under Section 404 of the Sarbanes-Oxley Act of 2002,
or Section 404, we are required to include a report of management on the effectiveness of our internal control over financial reporting in our annual report. In addition, our independent
registered public accounting firm must issue an attestation report on the effectiveness of our internal control over financial reporting. If we fail to maintain effective internal control over
financial reporting in the future, a material misstatement of our financial statements may not be prevented or detected on a timely basis. In addition, we and our independent registered public
accounting firm may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting at a reasonable assurance level in accordance with Section 404.
This could in turn result in the loss of investor confidence in the reliability of our financial statements and negatively impact the trading price of our ADSs. 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. If we are not able to continue to meet the requirements of Section 404 in a timely manner or with adequate compliance, we may be subject to sanctions or investigation by the
SEC or other regulatory authorities. Any such action could adversely affect our financial results and the market price of our ADSs.
We face risks related to health epidemics and other natural disasters.
Our business could be adversely affected by the effects of Ebola virus disease, influenza, avian flu, severe acute respiratory
syndrome, or SARS, or any other epidemic or outbreak. Any prolonged recurrence of Ebola virus disease, 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, closure of internet cafés and other public areas where people access the internet, and a
general slowdown in the Chinese economy. 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 Ebola virus disease, 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. For example, the earthquake, tsunami and nuclear crisis hitting Japan in March 2011 caused a temporary decline in the number of game players logged on to our games in Japan and a delay of
the commercial launch of our new games in Japan.
If PRC tax benefits currently available to our PRC subsidiaries and our PRC affiliated entities are
reduced or repealed, our business and results of operations could suffer.
Under the corporate income tax law that took effect on January 1, 2008, foreign-invested enterprises, such as our subsidiary,
Beijing Perfect World Software Co., Ltd., or PW Software, and domestic companies are subject to corporate income tax at a uniform rate of 25%. Preferential tax
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treatments
will continue to be granted to entities which conduct businesses in certain encouraged sectors and to entities classified as "software enterprises" and/or "high and new technology
enterprises." See "Item 5. Operating and Financial Review and ProspectsA. Operating ResultsTaxationPRCPRC Corporate Income Tax." In addition,
according to tax rules and regulations that are favorable to technology development businesses, revenues generated from software development and relevant technology consulting services may enjoy
business tax exemption. Any expiration of, or changes to, these tax benefits or treatments will have a material adverse effect on our operating results.
Our global income may be subject to PRC tax under the corporate income tax law, which would have a
material adverse effect on our results of operations.
Under the corporate income tax law and the Implementing Rules, an enterprise established outside of the PRC with "de facto management
bodies" within the PRC is considered a resident enterprise and will be subject to the corporate income tax on its global income. According to the Implementing Rules, "de facto management bodies" refer
to "establishments that carry out substantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties, etc. of an enterprise." Accordingly,
Perfect World Co., Ltd. and its subsidiaries outside the PRC may be considered a resident enterprise and may therefore be subject to PRC corporate income tax on our global income. If
Perfect World Co., Ltd. and its subsidiaries outside the PRC are considered a resident enterprise and earn income other than the dividends from our PRC subsidiaries, such PRC income tax
on our global income could significantly increase our tax burden and materially and adversely affect our cash flow and profitability.
In
addition, with the uncertainty regarding the interpretation and implementation of the corporate income tax law and its implementation rules, if we are regarded as a PRC resident
enterprise, then any
dividends to be distributed by us to our non-PRC shareholders or ADS holders or any gains realized by non-PRC shareholders or ADS holders from transfer of our shares or ADSs may be subject to PRC
withholding tax. If we are required under the corporate income tax law to withhold PRC income tax on the above dividends or gains, the investment in our shares or ADSs may be materially and adversely
affected.
The PRC withholding tax rate on dividends that PW Hong Kong receives from our PRC subsidiaries may
rise under the corporate income tax law, which would have a material adverse effect on our results of operations.
Pursuant to the corporate income tax law and the Implementing Rules, dividends generated after January 1, 2008 and payable by a
foreign-invested enterprise to its foreign investors are subject to a 10% withholding tax if the foreign investors are considered non-resident enterprises without any establishment or place within
China or if the dividends payable have no connection with the establishment or place of the foreign investors within China, unless any such foreign investor's jurisdiction of incorporation has a tax
treaty with China that provides for a different withholding arrangement. Perfect Online Holding Limited, or PW Hong Kong, our wholly owned subsidiary and the direct holder of 100% equity interest in
PW Software, Shanghai Perfect World Software Co., Ltd., or Shanghai PW Software and Beijing Perfect World Game Software Co., Ltd., or PW Game Software, is incorporated in
Hong Kong. According to a tax arrangement between Mainland China and Hong Kong, dividends paid by a foreign-invested enterprise in China to its direct holding company in Hong Kong are subject to
withholding tax at a rate of no more than 5% if the foreign investor directly owns at least 25% of the shares of the foreign-invested enterprise. However, if PW Hong Kong is not considered to be the
beneficial owner of dividends paid to it by its PRC subsidiaries under a tax notice promulgated on October 27, 2009, such dividends should be subject to withholding tax at a rate of 10%.
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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, loss of data 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.
Risks Related to Our Corporate Structure
If the PRC government finds that the arrangements that establish the structure for operating our
business and investing in a venture capital fund do not comply with PRC government restrictions on foreign investment, we could be subject to severe penalties.
We are a Cayman Islands company and, as such, we are classified as a foreign enterprise under Chinese laws, and our wholly owned PRC
subsidiaries are foreign-invested enterprises. Various regulations in China currently restrict or prevent foreign ownership of companies that operate online game, online reading and other TMT
businesses. In light of these restrictions, we operate our businesses and make investments through our variable interest entities in China. Specifically, we rely (i) on Beijing Perfect World
Network Technology Co., Ltd., or PW Network, and Beijing Perfect World Digital Technology Co., Ltd., or PW Digital Technology, to conduct our online game businesses in
China; and (ii) on Trendsters Investment to hold our investment in a venture capital fund that may invest in various TMT businesses. We previously operated our film and television business
through Beijing Perfect Moment Network Technology Co., Ltd. (previously known as Beijing Perfect Moment Pictures Co., Ltd.), or Perfect Moment, in China, which no longer
has material business operations after we sold the film and television business in August 2011. We had operated our online reading business through Beijing Huanxiang Zongheng Chinese Literature
Website Co., Ltd. (previously known as Beijing Huanxiang Zongheng Network Technologies Co., Ltd.), or PW Literature, before we sold PW Literature to an unrelated party in
December 2013. We treat PW Network, PW Digital Technology, Trendsters Investment, Perfect Moment, and PW Literature, for the period before we sold it in December 2013, as our variable interest
entities. Our variable interest entities hold the licenses and own intellectual property, facilities and other assets that are essential for our business operations.
Each
of our variable interest entities and their respective equity owners have entered into a series of contractual arrangements with PW Software, or in the case of PW Digital
Technology, with PW Game Software, through which we have effective control over each of our variable interest entities. The agreements between PW Literature, its equity owners and PW Software were
terminated when we sold PW Literature to an unrelated party in December 2013. For a description of these contractual arrangements with PW Network, PW Digital Technology, Trendsters Investment, Perfect
Moment and PW Literature, see "Item 4. Information on the CompanyA. History and Development of the Company," "Item 7. Major Shareholders and Related Party
TransactionsB. Related Party TransactionsContractual Arrangements with PW Network and its Equity Owners," "Item 7. Major Shareholders and Related Party
TransactionsB. Related Party TransactionsContractual Arrangements with PW Digital Technology and its Equity Owners," "Item 7. Major Shareholders and Related Party
TransactionsB. Related Party TransactionsContractual Arrangements with Trendsters Investment and its Equity Owners," "Item 7. Major Shareholders and Related
Party TransactionsB. Related Party TransactionsContractual Arrangements with Perfect Moment and its Equity Owners" and "Item 7. Major Shareholders and Related
Party TransactionsB. Related Party TransactionsContractual Arrangements with PW Literature and its Equity Owners."
Under
the equity pledge agreements, the equity holders of our variable interest entities pledged their respective equity interests in our variable interest entities to PW Software or to
PW Game Software in the case of PW Digital Technology. According to the PRC Property Rights Law which took
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effect
on October 1, 2007, such equity pledge has to be registered with the relevant administration for industry and commerce. We completed the registration of the pledge of PW Literature's
equity interests in early 2011 and again in 2012 after the change of PW Literature's equity owners in July 2011. We completed the registration of the pledge of the equity interests of PW Network,
Perfect Moment and Trendsters Investment in 2012 and the registration of the pledge of the equity interest of PW Digital Technology in 2014.
The
Circular on Strengthening the Administration of Foreign Investment in and Operation of Value-added Telecommunications Business issued by the Ministry of Industry and Information
Technology (previously known as the Ministry of Information Industry), or the MIIT, in July 2006, reiterated the regulations on foreign investment in telecommunications businesses, which require
foreign investors to set up foreign-invested enterprises and obtain a business operating license for internet content provision, or ICP license, to conduct any value-added telecommunications business
in China. Under this circular, an ICP license holder must own relevant trademarks and domain names that are used in the value-added telecommunications business, have necessary facilities for its
approved business operations, and maintain network and information security in accordance with the standards set forth under relevant PRC regulations. Furthermore, an ICP license holder is prohibited
from leasing, transferring or selling the license to foreign investors in any form, and from providing any assistance, including providing resources, sites or facilities, to foreign investors that
conduct value-added telecommunications business illegally in China. Due to a lack of interpretative materials from the regulator, it is unclear what impact this circular will have on us or the other
Chinese internet companies that have adopted the same or similar corporate and contractual structures as ours. We have made verbal inquiries with the officials at the MIIT, but have not been able to
get a definitive answer as to the applicability of this circular to our corporate structure and to the enforcement and performance of the contractual arrangements between our wholly owned PRC
subsidiaries on the one hand, and our variable interest entities and their respective equity holders on the other.
On
September 28, 2009, the General Administration of Press and Publication of China, or GAPP, which was reorganized as the State Administration of Press, Publication, Radio, Film,
and Television, or SAPPRFT, in 2013, the National Copyright Administration, and National Office of Combating Pornography and Illegal Publications jointly issued a Notice on Further Strengthening on
the Administration of Pre-examination and Approval of Online Games and the Examination and Approval of Imported Online Game, or the GAPP Notice. The GAPP Notice restates that foreign investors are not
permitted to invest in online game-operating businesses in China via wholly owned, equity joint venture or cooperative joint venture investments and expressly prohibits foreign investors from gaining
control over or participating in domestic online game operators through indirect ways such as establishing other joint venture companies, or contractual or technical arrangements. However, the GAPP
Notice does not provide any interpretation of the term "foreign investors" or make a distinction between foreign online game companies and China based companies under a similar corporate structure
like ours. Thus, it is unclear whether such regulations will be applicable to us or many other China based companies that rely on similar contractual arrangements with variable interest entities to
operate online games in China.
In
the opinion of King & Wood Mallesons, our PRC counsel, each of the above agreements constitutes valid and legally binding obligations of each party to such contractual
agreements under PRC Laws. However, King & Wood Mallesons is of the view that the interpretation and implementation of the laws and regulations in the PRC and their application to and effect on
the legality, binding effect and enforceability of contracts are subject to the discretion of competent PRC authorities, and therefore there is no assurance that relevant PRC authorities will take the
same position as the opinion of King & Wood Mallesons herein in respect of the legality, binding effect and enforceability of each of the contractual agreements.
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It
is uncertain whether any new PRC laws, rules or regulations relating to variable interest entity structures will be adopted or if adopted, what they would provide. In particular, in
January 2015, the Ministry of Commerce published a discussion draft of the proposed Foreign Investment Law for public review and comments. Among other things, the draft Foreign Investment Law expands
the definition of foreign investment and introduces the principle of "actual control" in determining whether a company is considered a foreign-invested enterprise. Under the draft Foreign Investment
Law, variable interest entities would also be deemed as foreign-invested enterprises if they are ultimately "controlled" by foreign investors, and be subject to restrictions on foreign investments.
However, the draft law has not taken a position on what actions will be taken with respect to the existing companies with the "variable interest entity" structure, whether or not these companies are
controlled by Chinese parties. It is uncertain when the draft would be signed into law and whether the final version would have any substantial changes from the draft. See "Risks Related
to Doing Business in ChinaSubstantial uncertainties exist with respect to the enactment timetable, interpretation and implementation of draft PRC Foreign Investment Law and how it may
impact the viability of our current corporate structure, corporate governance and business operations."
If
we are found to be in violation of any existing or future PRC laws or regulations, the relevant regulatory authorities would have broad discretion in dealing with such violation,
including levying fines, confiscating our income, revoking business licenses of PW Software and PW Game Software or the business or operating licenses of our variable interest entities, requiring us
to restructure the relevant ownership structure or operations, and requiring us to discontinue all or any portion of our online game operations. Any of these actions could cause significant disruption
to our business operations and may materially and adversely affect our business, financial condition and results of operations.
Our contractual arrangements with our variable interest entities may result in adverse PRC tax
consequences to us.
We could face material and adverse PRC tax consequences if the PRC tax authorities determine that PW Software's and PW Game Software's
contractual arrangements with our variable interest entities were not made on an arm's length basis and adjust our income and expenses for PRC tax purposes in the form of a transfer pricing
adjustment. A transfer pricing adjustment could adversely affect us by (i) increasing the PRC tax liabilities of these variable interest entities without reducing the PRC tax liabilities of PW
Software and PW Game Software, which could further result in late payment fees and other penalties to these variable interest entities for underpaid taxes; or (ii) limiting the ability of PW
Software, PW Game Software and these variable interest entities to maintain preferential PRC tax treatments and other financial incentives.
Our contractual arrangements with our PRC variable interest entities and their respective equity
owners may not be as effective in providing control over these entities as direct ownership of these entities.
We conduct substantially all of our operations, and generate substantially all of our revenues, in China through contractual
arrangements with our PRC variable interest entities and their respective equity owners that provide us with effective control over these variable interest entities. We have no direct ownership
interest in our PRC variable interest entities. The contractual arrangements among our wholly owned subsidiaries, PW Software and PW Game Software, and our PRC variable interest entities and their
respective equity owners may not be as effective in providing us with control over these variable interest entities as direct ownership subject to the discretion of competent PRC authorities. Our PRC
variable interest entities or their respective equity owners may breach their contractual arrangements. The equity owners of these variable interest entities may bring claims against us to demand
their economic and other rights in these entities by virtue of the fact that they are
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registered
equity holders of these entities. They may also refuse to transfer their equity interests in our PRC variable interest entities to us or our designee when and if we request so. There is no
assurance that the equity owners of our variable interest entities will act in our interests in the event of conflicts of interest between their own interests and those of our company.
In
any such event, we would have to rely on legal remedies under PRC law. These remedies may not always be effective, particularly in light of uncertainties in the PRC legal system. See
"Risks Related to Doing Business in ChinaUncertainties with respect to the PRC legal system could adversely affect us." In addition, PRC laws and regulations governing the
validity of our contractual arrangements are uncertain and the government authorities, including courts, have broad discretion in interpreting these laws and regulations. See "If the PRC
government finds that the arrangements that establish the structure for operating our business and investing in a venture capital fund do not comply with PRC government restrictions on foreign
investment, we could be subject to severe penalties."
On
February 2, 2012, a Chinese company unrelated to our company sought a court order of attachment against the assets of Beijing Jiuzhou Tianyuan Investment
Management Co., Ltd., or Jiuzhou Tianyuan, an equity owner of PW Network. The law suit was later withdrawn in July 2012 according to a court record.
On
March 20, 2012, Jiuzhou Tianyuan filed a case against PW Network seeking access to financial and other information of PW Network as an equity holder of PW Network,
notwithstanding that it has entered into an equity pledge agreement to pledge all its equity interests in PW Network to PW Software. Jiuzhou Tianyuan withdrew its case in June 2012 and the
registration of the equity pledge of Jiuzhou Tianyuan with the relevant administration for industry and commerce was completed in July 2012.
While
our effective control over our variable interest entities has not been materially adversely affected, we may consider taking additional actions to maximize the protection of our
interests in these entities, including restructuring our operations. Any of these actions may be time consuming, divert our management's attention, result in substantial costs on our part and cause
unintended adverse consequences that may materially and adversely affect our business, financial condition and reputation.
Risks Related to Doing Business in China
Our business may be adversely affected by public opinions and government policies and regulations in
China.
Due to the high degree of user loyalty to client-based online PC games and other online games, easy access to personal computers 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 academics
and sports. Furthermore, excessive game play may adversely affect the health of players, especially teenage players. Internet cafés, which are currently the most important outlets for
online games, have been criticized by the general public in China for having exerted a negative influence on the youth of China. Due primarily to such adverse public reaction, local and central
governments in China have tightened their regulation of internet café operations. A notice jointly issued by several central governmental agencies in February 2007 suspended nationwide
approval for the establishment of new internet cafés for the year of 2007 and increased the punishment for internet cafés admitting minors. This notice also tightened the
administration of in-game currency, and its impact on us and other operators of item-based online games is uncertain. 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 many of our customers access our games website from
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internet
cafés, any restrictions on internet café operations could result in a reduction of the amount of time our customers spend on our online games or a reduction in
or slowdown in the growth of our customer base or customer purchases of in-game items, thus adversely affecting our business and results of operations.
The
PRC government may decide to adopt more stringent policies to monitor the online game industry as a result of adverse public reaction to perceived addiction to online games,
particularly among minors. In April 2007, eight PRC government authorities, including GAPP and several other governmental authorities issued a notice requiring all Chinese online game operators to
adopt an "anti-fatigue system" in an effort to curb addiction to online games by minors. Under the anti-fatigue system, three hours or less of continuous play is defined as "healthy," three to five
hours is defined as "fatiguing," and five hours or more is defined as "unhealthy." Game operators are required to reduce the value of game benefits for minor game players by half when those game
players reach the "fatigue" level, and to zero when they reach the "unhealthy" level. In addition, online game players in China are now required to register their identity card numbers before they can
play an online game. This system allows game operators to identify which game players are minors.
The
implementation of the aforementioned systems and regulations may discourage or otherwise prevent or restrict our young and other customers from playing our online games, which could
limit the growth of or reduce our revenues, thus adversely affecting our business and results of operations. If we fail to implement these systems timely and successfully, the relevant government
authorities may have broad discretion in dealing with our noncompliance, including rejecting our application for the operation of new games, suspending our online game operations and revoking our
relevant licenses. In addition, it is also possible that the PRC government authorities may decide to adopt more stringent policies to monitor the online game industry as a result of adverse public
reaction or otherwise. Any such restrictions on online game playing would adversely affect our business and results of operations.
The continued growth of China's internet market as well as our growth may be adversely affected by
an inadequate telecommunications infrastructure.
Although private sector internet service providers currently exist in China, almost all access to the internet is maintained through
state-owned telecommunications operators under the administrative control and regulatory supervision of the MIIT. We rely on this infrastructure to provide data communications capacity primarily
through local telecommunications lines. Although the government has announced plans to develop aggressively the national information infrastructure, we cannot assure you that this infrastructure will
be developed as planned or at all. In addition, we 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 and in our business.
Adverse changes in political and economic policies of the PRC government could have a material
adverse effect on the overall economic growth of China, which could reduce the demand for our services and adversely affect our competitive position.
Most of our operations are conducted in China and most of our revenues are sourced from China. Accordingly, our results of operations,
financial condition and prospects are subject to a significant degree to the economic, political and legal developments of China. Since the late 1970s, the PRC government has been reforming the
economic system in China. These reforms have resulted in significant economic growth. However, we cannot predict the future direction of economic reforms or the effects such measures may have on our
business, financial position or results of operations. Furthermore, while the economy of China has experienced significant growth in the past 30 years, growth has been uneven, both
geographically and among various sectors of the economy. The PRC
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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. Future actions and policies of the PRC government could materially affect our liquidity and access to capital and our
ability to operate our business.
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 would 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, the MIIT, the GAPP that was reorganized as the SAPPRFT in 2013, the Ministry of Culture and the Ministry of Public Security are empowered to issue and implement
regulations governing various aspects of these industries. We are required to obtain applicable permits or approvals from different regulatory authorities in order to provide online game services. For
example, an internet content provider, or ICP, such as PW Network, must obtain an ICP license in order to engage in any commercial ICP operations within China. Online game operators must also obtain a
license from the Ministry of Culture and an internet publishing license from the GAPP that was reorganized as the SAPPRFT in 2013 in order to distribute games through the internet.
Before
May 2008, we did not hold an internet publishing license as the issuance of such licenses had been suspended by the GAPP that was reorganized as the SAPPRFT in 2013. PW Network
obtained an internet publishing license for online game publishing in May 2008, which allows PW Network to distribute and publish online games on the internet. Hefei Perfect World Network
Technology Co., Ltd, or Hefei PW Network, a wholly owned subsidiary of PW Digital Technology, obtained an internet publishing license for online game and mobile game publishing in June
2012, which allows Hefei PW Network to distribute and publish online games and mobile games on the internet. Currently, our self-operated online games are published in China by PW Network or Hefei PW
Network. We have filed internet publications of our client-based online PC games and certain of our self-developed web games and mobile games with SAPPRFT, and we are in the process of filing internet
publications of our other self-developed web games and mobile games.
As
the online game industry is at a relatively 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. As a result, substantial uncertainties exist regarding the interpretation and implementation of current and any future PRC laws
and regulations applicable to these industries. We cannot assure you that we will be able to timely obtain required licenses or any other new license required in the future, or at all. We cannot
assure you that we will not be found in violation of any current or future PRC laws and regulations.
Substantial uncertainties exist with respect to the enactment timetable, interpretation and
implementation of draft PRC Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate governance and business operations.
The Ministry of Commerce published a discussion draft of the proposed Foreign Investment Law in January 2015 aiming to, upon its
enactment, replace the trio of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise
Law and the Wholly Foreign-owned Enterprise Law, together with their implementation rules and ancillary regulations. The draft Foreign Investment Law embodies an expected PRC regulatory trend to
rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for
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both
foreign and domestic investments. The Ministry of Commerce solicited comments on this draft and substantial uncertainties exist with respect to its enactment timetable, interpretation and
implementation. The draft Foreign Investment Law, if enacted as proposed, may materially impact the viability of our current corporate structure, corporate governance and business operations in many
aspects.
Among
other things, the draft Foreign Investment Law expands the definition of foreign investment and introduces the principle of "actual control" in determining whether a company is
considered a foreign-invested enterprise. The draft Foreign Investment Law specifically provides that entities established in China but "controlled" by foreign investors will be treated as
foreign-invested enterprises, whereas an entity set up in a foreign jurisdiction would nonetheless be, upon market entry clearance by the Ministry of Commerce, treated as a PRC domestic investor
provided that the entity is "controlled" by PRC entities and/or citizens. In this connection, "control" is broadly defined in the draft law to cover the following summarized categories:
(i) holding 50% or more of the voting rights of the subject entity; (ii) holding less than 50% of the voting rights of the subject entity but having the power to secure at least 50% of
the seats on the board or other equivalent decision making bodies, or having the voting power to material influence on the board, the shareholders' meeting or other equivalent decision making bodies;
or (iii) having the power to exert decisive influence, via contractual or trust arrangements, over the subject entity's operations, financial matters or other key aspects of business
operations. Once an entity is determined to be a foreign-invested enterprise, it will be subject to the foreign investment restrictions or prohibitions set forth in a "negative list," to be separately
issued by the State Council later, if the foreign-invested enterprise is engaged in the industry listed in the negative list. Unless the underlying business of the foreign-invested enterprise falls
within the negative list, which calls for market entry clearance by the Ministry of Commerce, prior approval from the government authorities as mandated by the existing foreign investment legal regime
would no longer be required for establishment of the foreign-invested enterprise.
The
"variable interest entity" structure, or Contractual Arrangement, has been adopted by many PRC-based companies, including us, to obtain necessary licenses and permits in the
industries that are currently subject to foreign investment restrictions in China. See "Risks Related to Our Corporate Structure" and "Item 7. Major Shareholders and Related Party
TransactionsB. Related Party Transactions.\" Under the draft Foreign Investment Law, variable interest entities that are controlled via contractual arrangement would also be deemed as
foreign-invested enterprises, if they are ultimately "controlled" by foreign investors. Therefore, for any companies with a Contractual Arrangement in an industry category that is on the "negative
list," the Contractual Arrangement may be deemed legitimate only if the ultimate controlling person(s) is/are of PRC nationality (either PRC companies or PRC citizens). Conversely, if the actual
controlling person(s) is/are of foreign nationalities, then the variable interest entities will be treated as foreign-invested enterprises and any operation in the industry category on the "negative
list" without market entry clearance may be considered as illegal.
Through
our dual-class share structure, our founder and chairman of board of directors Mr. Michael Yufeng Chi, a PRC citizen, controlled 56.0% of the voting power of our company
as of April 26, 2015. However, the draft Foreign Investment Law has not taken a position on what actions shall be taken with respect to the existing companies with a Contractual Arrangement,
whether or not these companies are controlled by Chinese parties, while it solicited comments from the public on this point. Moreover, it is uncertain whether the online game industry, in which our
variable interest entities operate, will be subject to the foreign investment restrictions or prohibitions set forth in the "negative list" to be issued. If the enacted version of the Foreign
Investment Law and the final "negative list" mandate further actions, such as Ministry of Commerce market entry clearance, to be completed by companies with existing Contractual Arrangement like us,
we face uncertainties as to whether such clearance can be timely obtained, or at all.
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The
draft Foreign Investment Law, if enacted as proposed, may also materially impact our corporate governance practice and increase our compliance costs. For instance, the draft Foreign
Investment Law imposes stringent ad hoc and periodic information reporting requirements on foreign investors and the applicable foreign-invested enterprises. Aside from investment implementation
report and investment amendment report that are required at each investment and alteration of investment specifics, an annual report is mandatory, and large foreign investors meeting certain criteria
are required to report on a quarterly basis. Any company found to be non-compliant with this information reporting obligations may potentially be subject to fines and/or administrative or criminal
liabilities, and the persons directly responsible may be subject to criminal liabilities.
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. Meanwhile, when internet content providers and internet publishers find that
information falling within the above scope is transmitted on their websites or is stored in their electronic bulletin service systems, they should terminate the transmission of such information or
delete such information immediately and keep records and report to relevant authorities. Failure to comply with these requirements could result in the revocation of the ICP license 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.
In
addition, the 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 in our online games and on our websites, and keep records and report to
relevant authorities, which may reduce our player base, the amount of time our games are played or the purchases of in-game items. This would 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 online
games and websites, including a suspension or shutdown of our operations.
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There are currently no laws or regulations in the PRC governing property rights of virtual assets
and therefore it is not clear what liabilities, if any, we may have relating to the loss of virtual assets by our game players.
In the course of playing our games, players acquire and accumulate some virtual assets, such as performance-enhancing items, clothing,
accessories, pets and other in-game items. Such virtual assets can be highly valued by game players. In practice, virtual assets can be lost for various reasons, such as data loss caused by delay of
network service, by a network crash, or by hacking activities. There are currently no PRC laws and regulations governing property rights of virtual assets. As a result, it is unclear who is the legal
owner of virtual assets and whether the ownership of virtual assets is protected by law. In addition, it is unclear under PRC law whether an operator of online games such as us would have any
liability (whether in contract, tort or otherwise) for loss of such virtual assets by game players. Based on several judgments regarding the liabilities of online game operators for loss of virtual
assets by game players, the courts have generally required the online game operators to provide well-developed security systems to protect such virtual assets owned by game players. In the event of a
loss of virtual assets, we may be sued by game players and may be held liable for damages.
Restrictions on virtual currency may adversely affect our revenues from game operations in China.
Our revenues from game operations in China are collected through the sale of our prepaid cards or sale of our online points. The Notice
on the Reinforcement of the Administration of Internet Cafés and Online Games issued by the Ministry of Culture on February 15, 2007 directs the People's Bank of China to
strengthen the administration of virtual currency in online games to avoid any adverse impact on the PRC economy and financial system. This notice provides that the total amount of virtual currency
issued by online game operators and the amount purchased by individual game players should be strictly limited, with a strict and clear division between virtual transactions and real transactions
carried out by way of ecommerce. This notice also provides that virtual currency should only be used to purchase in-game items. On June 4, 2009, the Ministry of Commerce and the Ministry of
Culture jointly issued Notice on the Reinforcement of the Administration of Virtual Currency in Online Games, which defines what is virtual currency and requires that entities should obtain the
approval from the Ministry of Commerce before issuing virtual currency and engaging in transactions using virtual currency in connection with online games. Entities are prohibited from using virtual
currency to carry out gambling business.
These
restrictions may result in lower sales of our prepaid cards or online points, and could have an adverse effect on our game operations revenues.
PRC regulations relating to internet video/audio program services may adversely affect the operation
of our online games.
On December 12, 2007, the Ministry of Public Security, and the State Administration of Radio, Film and Television, or the SARFT,
and MIIT promulgated the Administrative Measures on internet Video/Audio Program Services, which requires that, among others, a service provider of internet video/audio program should obtain a license
from the SARFT, failure of which may result in the suspension or close of the website providing the internet video/audio program services. On April 1, 2010, the SARFT issued the Tentative
Catalogue of internet Video/Audio Program Services, which classifies the internet video and audio services into three categories and provides detailed description on each category. We obtained the
SARFT license to provide internet video and audio services through our website wanmei.com in 2010. If any PRC regulatory agency determines that our operation of internet video/audio program is not in
compliance with the requirements of this regulation, the regulatory agency may impose fines and penalties or take actions to prevent us from providing internet video and audio services through our
online games websites, which may adversely affect the operation of our online games.
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PRC regulations relating to offshore investment activities by PRC residents may limit our PRC
subsidiaries' ability to increase their registered capital or distribute profit to us or otherwise expose us to liabilities and penalties under PRC law.
On July 14, 2014, the PRC State Administration of Foreign Exchange, or SAFE, issued the Circular on Relevant Issues Concerning
Domestic Residents' Investment and Offshore Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, which requires PRC residents (including PRC entities and PRC
resident individuals) to register with SAFE or its local branches in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or
financing, with such PRC residents' legally owned assets or equity interests in domestic enterprises or offshore assets or interests. In addition, such PRC residents shall update their SAFE
registrations when the offshore special purpose vehicle undergoes any change of basic information (including change of such PRC individual shareholder, name and operation term), or material events
relating to increases or decreases in investment amount contributed by PRC resident individual, transfers or exchanges of shares, or mergers or divisions.
SAFE
Circular 37 is issued to replace 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 SAFE Circular 75.
SAFE
Circular 37, and any subsequent implementation rules as may be issued by SAFE, may apply to our shareholders who are PRC residents ultimately owned by PRC residents and may apply to
any of our potential offshore acquisitions in the future.
If
our shareholders who are PRC residents do not complete their registration with the local SAFE branches, our PRC subsidiaries may be prohibited from distributing their profits and
proceeds from any reduction in capital, share transfer or liquidation to us, and we may be restricted in our ability to contribute additional capital to our PRC subsidiaries. Moreover, failure to
comply with the SAFE registration described above could result in liability under PRC laws for violation of applicable foreign exchange restrictions.
We
have requested our shareholders who are PRC residents to make the necessary applications, filings and amendments as required under SAFE Circular 37 and the relevant SAFE regulations
and guidance. We attempt to comply, and attempt to ensure that our shareholders who are subject to these rules
comply with the relevant requirements. However, we cannot provide any assurance that all of our shareholders who are PRC residents will comply with our request to make or obtain any applicable
registrations or comply with other requirements required by SAFE Circular 37 and the relevant SAFE regulations and rules. The failure or inability of our PRC resident shareholders to make any required
registrations or comply with other requirements may subject such shareholders or our PRC subsidiaries to fines and legal sanctions and may also limit our ability to contribute additional capital into
or provide loans to our PRC subsidiaries or variable interest entities, restrict our overseas or cross-border investment activities, limit our PRC subsidiaries' ability to pay dividends or otherwise
distribute profits to us, or otherwise adversely affect us.
We may be subject to fines and legal sanctions if we or our Chinese employees fail to comply with
PRC regulations relating to employee stock options granted by overseas listed companies to PRC citizens.
In February 2012, SAFE promulgated the Notice relating to Foreign Exchange Administration for Domestic Individuals Participating in
Stock Incentive Plan of Overseas-Listed Company, or SAFE Notice 7, which replaced an earlier SAFE notice promulgated in 2007. Under SAFE Notice 7, PRC individuals and foreign citizens having resided
in the PRC for one year or more who participate in a stock incentive plan of an overseas listed company are required, through a PRC domestic agent or PRC subsidiary of the overseas listed company, to
register with SAFE and complete certain other procedures. We and our Chinese employees who have been granted restricted shares or stock options
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pursuant
to our share incentive plan are subject to this notice because we are an overseas listed company. If we or our Chinese employees fail to comply with the provisions of this notice, we and/or
our Chinese employees may be subject to fines and legal sanctions imposed by SAFE or other PRC government authorities.
A PRC regulation promulgated in August 2006 and certain other PRC regulations set forth complex
procedures for acquisitions conducted by foreign investors which could make it more difficult to pursue growth through acquisitions.
On August 8, 2006, six PRC government and regulatory authorities, including the Ministry of Commerce, and the Chinese Securities
Regulatory Commission, or the CSRC, promulgated a rule entitled "Provisions regarding Mergers and Acquisitions of Domestic Enterprises by
Foreign Investors," which became effective on September 8, 2006, and were amended on June 22, 2009. This regulation, among other things, sets forth complex procedures and requirements
that could make merger and acquisition activities by foreign investors more time-consuming and complex, including requirements in some instances that the Ministry of Commerce be notified in advance of
any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise. We made some acquisitions and investments in the past and we may grow our business in part by
acquiring complementary businesses in the future. Complying with the requirements of this regulation to complete such transactions could be time-consuming, and any required approval processes,
including obtaining approval from the Ministry of Commerce, may delay or inhibit the completion of such transactions, which could affect our ability to expand our business or maintain our market
share. In addition, if any PRC regulatory agency determines that any of our past acquisitions was not in compliance with the requirements of this regulation, the regulatory agency may impose fines and
penalties on our operations in the PRC, limit our operating privileges in the PRC, or take other actions that could have a material adverse effect on our business, financial condition, results of
operations, reputation and prospects.
Also,
other recently adopted regulations and rules concerning mergers and acquisitions set forth additional procedures and requirements that could make merger and acquisition activities
of foreign investors more time consuming and complex. For example, on February 3, 2011, the General Office of the State Council promulgated a Notice on Establishing the Security Review System
for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the Circular No. 6, which officially establishes a security review system for mergers and acquisitions of domestic
enterprises by foreign investors. Under Circular No. 6, 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 with "national security" concerns.
In
the future, we may grow our business by acquiring complementary businesses. Complying with the requirements of the above-mentioned regulations and other relevant rules to complete
such transactions could be time consuming, and any required approval processes, including obtaining approval from the Ministry of Commerce or its local counterparts may delay or inhibit our ability to
complete such transactions. It is unclear whether our business would be deemed to be in an industry that raises "national defense and security" or "national security" concerns. If the Ministry of
Commerce or other government agencies determines in the future that our business is in an industry subject to the security review, our future acquisitions in the PRC, including those by way of
entering into contractual control arrangements with target entities, may be closely scrutinized or prohibited. Our ability to expand our business or maintain or expand our market share through future
acquisitions would as such be materially and adversely affected.
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Uncertainties with respect to the PRC legal system could adversely affect us.
We are a holding company, and we conduct our business primarily through our subsidiaries and variable interest entities incorporated in
China. These entities are subject to PRC laws and regulations including, in the case of our wholly owned subsidiaries, laws applicable to wholly-foreign owned enterprises. In addition, we depend on
our variable interest entities and their equity holders to honor their agreements 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 involve 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 partly rely on dividends paid by our operating subsidiaries in China for our cash needs.
We may partly rely on dividends paid by our PRC subsidiaries for our cash needs, including the funds necessary to pay dividends and
other cash distributions, if any, to our shareholders, to service any debt we may incur and to pay our operating expenses. The payment of dividends by entities organized in China is subject to
limitations. Regulations in the PRC currently permit payment of dividends only out of accumulated profits as determined in accordance with accounting standards and regulations in China. Our PRC
subsidiaries are also required to set aside at least 10% of their after-tax profit based on PRC accounting standards each year to their general reserves until the accumulative amount of such reserves
reach 50% of their registered capital. These reserves are not distributable as cash dividends. In addition, if our PRC subsidiaries incur debt on their own behalf in the future, the instruments
governing the debt may restrict their ability to pay dividends or make other distributions to us.
The audit report included in this annual report is prepared by an auditor who is not inspected by
the Public Company Accounting Oversight Board and, as such, you are deprived of the benefits of such inspection.
Auditors of companies that are registered with the U.S. Securities and Exchange Commission and traded publicly in the United States,
including our independent registered public accounting firm, must be registered with the Public Company Accounting Oversight Board, or the PCAOB, in the United States and are required by the laws of
the United States to undergo regular inspections by the PCAOB to assess their compliance with the laws of the United States and
professional standards in connection with their audits of financial statements filed with the SEC. Because our auditors are located in the People's Republic of China, a jurisdiction where the PCAOB is
currently unable to conduct inspections without the approval of the Chinese authorities, our auditors are not currently inspected by the PCAOB. This lack of PCAOB inspections in China prevents the
PCAOB from regularly evaluating audits and quality control procedures of any auditors operating in China, including our auditors. The inability of the PCAOB to conduct inspections of auditors in China
makes it more difficult to evaluate the effectiveness of our auditor's audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. As
a result, investors may be deprived of the benefits of PCAOB inspections.
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If additional remedial measures are imposed on the certain PRC-based accounting firms, including our
independent registered public accounting firm, in administrative proceedings brought by the SEC, we could be unable to file timely future financial statements in compliance with the requirements of
the Securities Exchange Act of 1934, as amended, or the Exchange Act.
In December 2012, the SEC brought administrative proceedings against five accounting firms in China, including our independent
registered public accounting firm, alleging that they violated U.S. securities laws and the SEC's rules and regulations thereunder by refusing to produce audit work papers and other documents related
to certain other PRC-based companies under investigation by the SEC. On January 22, 2014, an initial administrative law decision was issued, censuring these five PRC-based accounting firms and
suspending four of them, which are members of large international networks associated with the "Big Four" accounting firms, from practicing before the SEC for a period of six months. The decision is
neither final nor legally effective unless and until reviewed and approved by the SEC. On February 12, 2014, these four PRC-based accounting firms appealed to the SEC against this decision. In
February 2015, each of these four PRC-based accounting firms agreed to a censure and to pay a fine to the SEC to settle the dispute and avoid suspension of their ability to practice before the SEC.
The settlement requires the firms to follow detailed procedures to seek to provide the SEC with access to Chinese firms' audit documents via the CSRC. If the firms do not follow these procedures, or
if there is a failure of the process between the SEC and the CSRC, the SEC could impose penalties such as suspensions, or it could restart the administrative proceedings.
In
the event that the SEC restarts the administrative proceedings, depending upon the final outcome, listed companies in the United States with major PRC operations may find it difficult
or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being determined to not be in compliance with the requirements of the Exchange
Act, as amended, including possible delisting. Moreover, any negative news about the proceedings against these audit firms may cause investor uncertainty regarding PRC-based, United States-listed
companies and the market price of our ADSs may be adversely affected.
If
our independent registered public accounting firm were denied, even temporarily, the ability to practice before the SEC and we were unable to timely find another registered public
accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined not to be in compliance with the requirements of the Exchange Act, as amended.
Such a determination could ultimately lead to delisting of our ordinary shares from the NASDAQ Global Select Market or deregistration from the SEC, or both, which would substantially reduce or
effectively terminate the trading of our ADSs in the United States.
Fluctuation in the value of the Renminbi may have a material adverse effect on our business and
result of operations.
The value of the Renminbi against the U.S. dollar and other currencies is affected by changes in China's political and economic
conditions and by China's foreign exchange policies, among other things. In July 2005, the PRC government changed its decades-old policy of pegging the value of the Renminbi to the U.S. dollar, and
the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the Renminbi and
the U.S. dollar remained within a narrow band. After June 2010, the Renminbi began to appreciate against the U.S. dollar again, although there have been some periods when it has lost value against the
U.S. dollar, as it did for example during 2014. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in
the future. As most of our costs and expenses are denominated in Renminbi, any appreciation in the Renminbi against the U.S. dollar could further increase our costs in U.S. dollar terms. For example,
to the extent that we need to convert U.S. dollars into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on
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the
Renminbi amount we receive from the conversion. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our shares or ADSs or for
other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount available to us.
Restrictions on currency exchange may limit our ability to receive and use our revenues or financing
effectively.
Most of our revenues and expenses are denominated in Renminbi. We may need to convert a portion of our revenues into other currencies
to meet our foreign currency obligations, including, among others, payment of dividends declared, if any, in respect of our ordinary shares or ADSs. Under China's existing foreign exchange
regulations, our PRC subsidiaries are able to pay dividends in foreign currencies, without prior approval from SAFE, by complying with certain procedural requirements. However, we cannot assure you
that the PRC government will not take further measures in the future to restrict access to foreign currencies for current account transactions.
Foreign
exchange transactions by our subsidiaries and affiliated entities in China under capital accounts continue to be subject to significant foreign exchange controls and require the
approval of, or registration with, PRC governmental authorities. In particular, if our subsidiaries or affiliated entities in China borrow foreign currency loans from us or other foreign lenders,
these loans must be registered with SAFE, and if we finance them by means of additional capital contributions, these capital contributions must be approved or registered by certain government
authorities including SAFE, the Ministry of Commerce or their local counterparts. These limitations could affect the ability of these entities to obtain foreign exchange through debt or equity
financing, and could affect our business and financial condition.
Our non-PRC resident enterprise investors face PRC tax uncertainty with respect to indirect
transfers of equity interests in PRC resident enterprises.
Pursuant to the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or
Circular 698, which is issued by the PRC State Administration of Taxation and became effective retroactively from January 1, 2008, where a non-resident enterprise investor transfers equity
interests in a PRC resident enterprise indirectly by way of disposing equity interests in an overseas holding company, and such overseas holding company is located in a tax jurisdiction that:
(i) has an effective tax rate less than 12.5% or (ii) does not tax foreign income of its residents, the non-resident enterprise investor should report such indirect transfer to the
relevant tax authority of the PRC resident enterprise. The PRC tax authorities will then adopt the "substance over form" principle to review the transaction and may disregard the existence of the
overseas holding company if they consider the establishment of the holding company to be lack of a reasonable commercial purpose and is mainly for the purpose of reducing, avoiding or deferring PRC
tax. As a result, gains derived from such indirect transfer may be subject to PRC withholding tax at the rate of up to 10%. In addition, the PRC resident enterprise may be required to provide
necessary assistance to support the enforcement of Circular 698.
However,
there are uncertainties related to the application of Circular 698. For example, while the term "Indirect Transfer" is not clearly defined, it appears that the PRC tax
authorities are authorized
to request information from a wide range of foreign entities that have no direct link to China. Moreover, there are uncertainties regarding the interpretation and implementation of the related
regulations. In addition, there is lack of regulations regarding how to determine whether an indirect share transfer is arranged mainly for the purpose of reducing, avoiding or deferring PRC tax. In
our case, although it appears that Circular 698 is not intended to apply to transfers of publicly traded shares, it remains unclear whether such exemption will be applicable to the ordinary shares or
ADSs transfer of our company. If Circular 698 is determined by the tax authorities to be applicable to the
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disposal
of our ordinary shares or ADSs, our investors who are non-PRC resident enterprises may be subject to additional PRC reporting obligations or tax burdens. Further, in the case that our non-PRC
resident enterprise investors are required but fail to comply with Circular 698 requirements, the PRC tax authorities may take actions including requesting us to provide assistance for their
investigation, which could lead to additional obligations to be fulfilled by the company.
In
addition, the PRC State Administration of Taxation, or SAT, promulgated Administrative Measures on the General Anti-Avoidance Rule (Trial), or GAAR Measures, on December 12,
2014, which shows the authority's intention to fight against tax avoidance scheme that is adopted to obtain unwarranted tax benefit without reasonable commercial purpose. A press release, made by the
State Administration of Taxation to clarify certain issues relating to the application of the GAAR Measures, stated that the GAAR Measures may be applicable if any general tax-avoidance scheme exists
in the offshore indirect transfer of equity interests. Since GAAR Measures was recently promulgated and it is unclear how this set of measures, and any future implementation rules thereof, will be
interpreted, amended and implemented by the relevant governmental authorities, we cannot predict how these regulations will affect our business operation, future acquisitions or strategy.
The
SAT released the Bulletin on Certain Issues relating to Indirect Transfer of Assets by Non-resident Enterprises, or SAT Bulletin 7, on February 3, 2015, which clarifies
several provisions in Circular 698, expands the applicable scope thereof and provides a comprehensive guidance on non-residents' indirect assets transfer. SAT Bulletin 7 took effect on the issuance
date, but it also applies to transactions concluded before the issuance date but the tax treatment therefore has yet to be decided upon by the Chinese tax authorities. SAT Bulletin 7 expanded the
scope of the subject assets of the indirect transfer to cover not only equity investment in Chinese resident enterprises, but also assets attributable to an establishment in China and immovables
situated in China, collectively defined as "Chinese Taxable Assets." It also provides a list of factors to assess whether a transfer arrangement may be deemed as having reasonable commercial purpose,
as well as a set of threshold tests for determining the arrangement that shall be directly regarded as without reasonable commercial purpose. In addition, SAT Bulletin 7 has lifted the burden of
mandatory reporting requirement and shifted the regime to a more relaxed voluntary reporting system, but it still grants the Chinese tax authority the right to require relevant parties to fill
necessary documents if it so determines. Furthermore, a safe harbor for qualifying group reorganization has been carved out by SAT Bulletin 7, falling under which no Chinese tax exposure will arise.
Since
GAAR Measures and SAT Bulletin 7 were recently promulgated and it is unclear how this set of measures and regulations, and any future implementation rules thereof, will be
interpreted, amended and implemented by the relevant governmental authorities, we cannot predict how these regulations will affect our business operation, future acquisitions or strategy.
Risks Related to Our Shares and ADSs
There can be no assurance that the Agreement and Plan of Merger dated April 26, 2015 and the
going private transaction contemplated thereby will be approved by our shareholders or successfully consummated. Potential uncertainty involving the going private transaction may adversely affect our
business and the market price of our ADSs.
Our board of directors received a preliminary non-binding proposal letter dated December 31, 2014 from our founder and chairman
of the board of directors, Mr. Michael Yufeng Chi, to acquire all of our outstanding ordinary shares not already directly or indirectly owned by him in a going private transaction for US$20.0
per ADS in cash, or US$4.0 per ordinary share in cash. Our board of directors formed a special committee of independent directors, or the Special Committee, on January 2, 2015 to consider and
evaluate the proposal and any other alternative proposals or other strategic alternatives that may be available to our company, and to negotiate the terms of any potential definitive agreement.
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On
April 26, 2015, we entered into an Agreement and Plan of Merger, or the Merger Agreement, with Perfect Peony Holding Company Limited, or Parent, a Cayman Islands company
beneficially owned by Mr. Michael Yufeng Chi, and Perfect World Merger Company Limited, or Merger Sub, a wholly owned subsidiary of Parent. Subject to satisfaction of the Merger Agreement's
terms and conditions, Merger Sub will merge with and into our company, with our company continuing as the surviving corporation and a wholly owned subsidiary of Parent. Each of our ordinary shares or
ADSs will be cancelled in exchange for the right to receive US$4.04 per ordinary share or US$20.20 per ADS in cash without interest, except for shares, including such shares represented by ADSs,
already directly or indirectly owned by Mr. Michael Yufeng Chi, and shares held by shareholders who have validly exercised and not
effectively withdrawn or lost their rights to dissent from the merger. The merger is subject to customary closing conditions including the approval of the Merger Agreement by an affirmative vote of
holders of shares representing at least two-thirds of the voting power of the shares present and voting in person or by proxy at a meeting of our shareholders which will be convened to consider the
approval of the Merger Agreement and the merger. As of April 26, 2015, Mr. Michael Yufeng Chi controlled 56.0% of the voting power of our company. However, there can be no assurance that
the merger will be approved by sufficient affirmative vote or consummated.
The
merger, whether or not consummated, presents a risk of diverting management focus, employee attention and resources from other strategic opportunities and from operational matters.
In addition, we are subject to various restrictions under the Merger Agreement on the conduct of our business prior to the completion of the merger, which may delay or prevent us from undertaking
business opportunities that may arise pending completion of the merger. Also, the development of the merger, such as completion of the merger or termination of the Merger Agreement, may increase
volatility of the trading price of our ADSs.
The market price of our ADSs has been and may continue to be volatile.
The trading price of our ADSs has been and may continue to be subject to wide fluctuations. During the period from January 1,
2010 until April 24, 2015, the trading price of our ADSs has ranged from US$8.44 to US$44.63 per ADS and the closing sale price on April 29, 2015 was US$19.54 per ADS. The market price
for our ADSs may continue to be volatile and subject to wide fluctuations in response to factors including the following:
-
- actual or anticipated fluctuations in our quarterly operating results;
-
- changes in financial estimates by securities research analysts;
-
- conditions in the online game industry;
-
- changes in the economic performance or market valuations of other online game companies;
-
- announcements by us or our competitors of new products or services, new revenue models, acquisitions, strategic partnerships, joint
ventures or capital commitments;
-
- addition or departure of key personnel;
-
- fluctuations of exchange rates between the RMB and U.S. dollar or other foreign currencies;
-
- actual or potential litigation or administrative investigations;
-
- negative news or perceptions about inadequate corporate governance practices or fraudulent accounting or matters of other Chinese
companies that negatively affect the attitudes of investors towards Chinese companies in general;
-
- harassing or other detrimental conducts by third parties that harm our reputation; and
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-
- general economic or political conditions in China or any other country where one or more of our games are operated.
Volatility
in global capital markets could also have an effect on the market price of our ADSs. In addition, the securities markets have 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.
Substantial future sales of our ADSs or ordinary shares, or the perception that these sales could
occur, could cause the price of our ADSs to decline.
Additional sales of our ADSs or ordinary shares in the public market, or the perception that these sales could occur, could cause the
market price of our ADSs to decline. 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, if we pay for our future acquisitions in
whole or in part with additionally issued ordinary shares or ADSs, your ownership interests in our company would be diluted and this, in turn, could have a material adverse effect on the price of our
ADSs.
Our dual-class ordinary share structure with different voting rights could discourage others from
pursuing any change of control transactions that holders of our Class B ordinary shares and ADSs may view as beneficial.
Our ordinary shares are divided into Class A ordinary shares and Class B ordinary shares. Holders of Class A
ordinary shares are entitled to 10 votes per share, while holders of Class B ordinary shares are entitled to one vote per share. Due to the disparate voting powers attached
to these two classes, certain shareholders have significant voting power over matters requiring shareholder approval, including election of directors and significant corporate transactions, such as a
merger or sale of our company or our assets. This concentrated control could discourage others from pursuing any potential merger, takeover or other change of control transactions that holders of
Class B ordinary shares and ADSs may view as beneficial and therefore might have a negative impact on the price of our ADSs.
Our
board of directors received a preliminary non-binding proposal letter dated December 31, 2014 from our founder and chairman of the board of directors, Mr. Michael
Yufeng Chi, to acquire all of our outstanding ordinary shares not already directly or indirectly beneficially owned by him. On April 26, 2015, we entered into a Merger Agreement with entities
controlled by Mr. Chi. As of April 26, 2015, Mr. Chi controlled 56.0% of the voting power of our company. The voting power held by Mr. Chi in our company may effectively
prevent a competing bid for our company.
You may not have the same voting rights as the holders of our ordinary shares and may not receive
voting materials in time to be able to exercise your right to vote.
Except as described in this annual report, holders of our ADSs will not be able to exercise voting rights attaching to the shares
evidenced by our ADSs on an individual basis. Holders of our ADSs will appoint the depositary or its nominee as their representative to exercise the voting rights attaching to the shares represented
by the ADSs. You may not receive voting materials in time to instruct the depositary to vote, and it is possible that you, or persons who hold their ADSs through brokers, dealers or other third
parties, will not have the opportunity to exercise a right to vote.
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You may not be able to participate in rights offerings and may experience dilution of your holdings
as a result.
We may from time to time distribute rights to our shareholders, including rights to acquire our securities. Under the deposit agreement
for the ADSs, the depositary will not offer those rights to ADS holders unless both the rights and the underlying securities to be distributed to ADS holders are either registered under the
Securities Act of 1933, as amended, or exempt from registration under the Securities Act with respect to all holders of ADSs. We are under no obligation to file a registration statement with
respect to any such rights or underlying securities or to endeavor to cause such a registration statement to be declared effective. In addition, we may not be able to take advantage of any exemptions
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, holders of our ADSs may be
unable to participate in our rights offerings and may experience dilution in their holdings as a result.
You may be subject to limitations on transfer of your ADSs.
Your ADSs 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 deems 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.
You may face difficulties in protecting your interests, and your ability to protect your rights
through the U.S. federal courts may be limited, because we are incorporated under Cayman Islands law, conduct a majority of our operations in China and most of our officers and directors reside
outside the United States.
We are incorporated in the Cayman Islands, and conduct a majority of our operations in China through our wholly owned subsidiaries in
China. Most of our officers and directors reside outside the United States and some or all of the assets of those persons are located outside of the United States. It may be difficult or impossible
for you to bring an original action against us or against these individuals in a Cayman Islands or Chinese court in the event that you believe that your rights have been infringed under the U.S.
federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render you unable to enforce a judgment against our
assets or the assets of our directors and officers. You would also find it difficult to enforce a U.S. court judgment based on the civil liability provisions of the U.S. federal securities laws, in
the United States, the Cayman Islands or China, against us or our officers and directors.
Our
corporate affairs are governed by our memorandum and articles of association and by the Companies Law (2013 Revision) and common law of the Cayman Islands. The rights of shareholders
to take legal action against our directors and us, actions by non-controlling shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent
governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English
common law, which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands
law are not as clearly established as they would be under statutes or judicial 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. In addition, shareholders of Cayman Islands companies may not have standing to initiate a shareholder derivative
action before the federal courts of the United States.
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As
a result of all of the above, our public shareholders may have more difficulty in protecting their interests through actions against our management, directors or major shareholders
than would shareholders of a corporation incorporated in a jurisdiction in the United States.
We may be treated as a passive foreign investment company, which could result in adverse U.S.
federal income tax consequences to U.S. Holders of our ADSs or ordinary shares.
A non-U.S. corporation, such as our company, will be a "passive foreign investment company," or 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 disclosed in our annual reports for 2012 and 2013 that we may have been a
PFIC in prior taxable years. Similarly, we believe we may have been a PFIC for our taxable year ended December 31, 2014, as well. This determination is made based on our significant cash
balances, the market price of the ADSs and ordinary shares, and the composition of our income and assets. However, because the application of the PFIC rules to our facts and circumstances is unclear
in many important legal and factual respects, and the required calculations for 2014 yielded results that were close to the line, no assurances may be given in this regard. A U.S. Holder (as
defined in "Item 10. Additional InformationE. TaxationUnited States Federal Income Taxation") who owned (or owns) our ADSs or ordinary shares at any time when
we were (or are) a PFIC will generally be subject to reporting requirements and may incur significantly increased United States income tax on gain recognized on the sale or certain other dispositions
of our ADSs or ordinary shares and on the receipt of distributions on the ADSs or ordinary shares to the extent such distributions are treated as "excess distributions" under U.S. federal income tax
rules. Such a U.S. Holder also generally will not be able to benefit from any preferential tax rate with respect to any dividend distribution that such U.S. Holder receives from us in a year in which
we are a PFIC (or are treated as such with respect to such holder) or the following year. Certain elections may be available, however, that may mitigate certain of these adverse tax consequences to
varying degrees. U.S. Holders are urged to consult their tax advisors regarding the passive foreign investment company rules.
We
must make a separate determination after the close of each taxable year as to whether we were a PFIC for that year. Accordingly, we may continue to be, or become, a PFIC in 2015 or
future taxable years. Further, although the law in this regard is unclear, we treat our variable interest entities as being owned by us for U.S. federal income tax purposes, not only because we
control their management decisions but also because we are entitled to substantially all of the economic benefits associated with these entities, and, as a result, we consolidate these entities'
operating results in our consolidated U.S. GAAP financial statements. If it were determined, however, that we were not the owner of our variable interest entities for U.S. federal income tax
purposes, then we would likely be treated as a
PFIC even if we would not otherwise have been treated as a PFIC for that particular year. We have not sought a ruling from the Internal Revenue Service, or IRS, with respect to our PFIC status. In the
event that we determine that we are not a PFIC in 2015 or in a future taxable year, there can be no assurance that the IRS or a court will agree with our determination.
Provided
we are a PFIC for any year during which a U.S. Holder holds our ADSs or ordinary shares, we generally will continue to be treated as a PFIC as to such U.S. Holder for all
succeeding years during which such U.S. Holder holds our ADSs or ordinary shares, unless we cease to be a PFIC and the U.S. Holder makes a deemed sale election with respect to our ADSs or ordinary
shares.
For
more information, see "Item 10. Additional InformationE. TaxationUnited States Federal Income TaxationPassive Foreign Investment
Company." We urge investors in our ADSs and ordinary shares to consult their tax advisors concerning the U.S. federal income tax consequences of acquiring, holding and disposing of our ADSs or
ordinary shares.
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ITEM 4. INFORMATION ON THE COMPANY
A. History and Development of the Company
We commenced operations through PW Network, a limited liability company established in China in 2004. To enable us to raise equity capital from international
investors, our holding company, Perfect World Co., Ltd. was incorporated under the laws of the Cayman Islands in June 2006. In August 2006, we formed PW Software, our wholly owned
subsidiary in China. In September 2006, PW Software entered into contractual agreements with PW Network and its equity owners, pursuant to which PW Network transferred certain
fixed assets and certain personnel to PW Software and PW Software provides technical support and research and development services to PW Network. Through these contractual arrangements, as
amended and restated in April 2007, we have the ability to effectively control PW Network's daily operations and financial affairs, appoint senior executives and decide on all
matters subject to shareholders' approval. As a result of these contractual arrangements, we are considered to be the primary beneficiary of PW Network and PW Network is a variable interest entity of
our company under U.S. GAAP. Accordingly, we consolidate PW Network's results of operations, assets and liabilities in our financial statements. See "Item 7. Major Shareholders and
Related Party TransactionsB. Related Party Transactions" for a description of the contractual arrangements among PW Software, PW Network and its equity owners.
In
July 2007, we completed our initial public offering, in which we issued and sold 9,000,000 ADSs, representing 45,000,000 of our Class B ordinary shares, and certain of our then
shareholders sold 4,570,000 ADSs, representing 22,850,000 of our Class B ordinary shares, in each case at a public offering price of US$16.00 per ADS.
In
December 2007, we established PW Hong Kong, our wholly owned subsidiary, to capture potential business opportunities in Southeast Asian region.
In
March 2008, we opened a research and development center in Shanghai to take advantage of the skilled workforce in the game development industry in Shanghai.
In
April 2008, we entered into a capital increase and share transfer agreement with Chengdu Seasky Digital Entertainment Co., Ltd., a limited liability company in China, or
Chengdu Seasky, and its equity holders, to acquire a 20% equity interest in Chengdu Seasky. We increased our equity interest in Chengdu Seasky to 40% in the first quarter of 2010. Chengdu Seasky is
principally engaged in the design and development of online games in China. In January 2011, we entered into an agreement to transfer the 40% equity interest to an officer of Seasky.
In
April 2008, we established PW USA, a Delaware corporation and our wholly owned subsidiary, to capture potential business opportunities in North America.
From
June 2008 to July 2011, PW Software entered into a series of contractual arrangements with PW Literature, an online reading service provider in China and its equity owners. These
contractual arrangements enabled us to effectively control PW Literature's daily operations and financial affairs, appoint senior executives and decide on all matters subject to shareholders'
approval. As a result, we were considered to be the primary beneficiary of PW Literature and we had consolidated PW Literature's results of operations, assets and liabilities in our
financial statements before we sold PW Literature to Beijing Baidu Netcom Science Technology Co., Ltd., an unrelated party in December 2013.
In
August 2008, PW Network invested in a minority stake in Perfect Pictures and Media Group Co., Ltd. (previously known as Perfect World (Beijing)
Pictures Co., Ltd.), or PW Pictures, and then acquired all the remaining equity interest through a series of transactions. PW Pictures is a PRC media and
entertainment company principally engaged in film and television program production and distribution and advertising services in China. In February 2011, PW Network transferred its equity
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interest
in PW Pictures through a series of contractual arrangements to Perfect Moment, which then was a newly established variable interest entity controlled by PW Software and known as Beijing
Perfect Moment Pictures Co., Ltd. In order to sharpen our focus on our core online game development and operation business, in August 2011, we sold PW Pictures for a total consideration
of RMB360.0 million to Beijing Ever Joy Pictures Co., Ltd., which is majority-owned by Mr. Michael Yufeng Chi, our founder and chairman of the board of directors. The
transaction was approved by the board of directors and a special committee consisting of all independent members of our board of directors. Perfect Moment no longer had material business operations
after the transaction and changed its name to Beijing Perfect Moment Network Technology Co., Ltd. See "Item 7. Major Shareholders and Related Party TransactionsB.
Related Party Transactions" for a description of the contractual arrangements among PW Software, Perfect Moment and its equity owners.
In
November 2008, PW Network established Shanghai Perfect World Network Technology Co., Ltd., or Shanghai PW Network, to expand our game operation and development.
In
February 2009, we acquired a 100% equity interest in Global InterServ (Caymans) Inc., or InterServ Caymans, from Global InterServ (B.V.I.) Inc., or InterServ. Upon
consummation of the transaction, InterServ Caymans and its two PRC subsidiaries, InterServ Information and Technology (Shanghai) Co., Ltd., or InterServ Shanghai and Chengdu Perfect
World Software Co., Ltd. (previously known as Chengdu InterServ Information and Technology Co., Ltd.), became our wholly owned subsidiaries.
In
February 2009, PW Network established Chengdu Perfect World Network Technology Co., Ltd., or Chengdu PW Network, to expand our game operation and development. In April
2009, Chengdu PW Network invested in a 30% equity interest in Chengdu Ye Net Science and Technology Development Co., Ltd., or Ye Net. Ye Net is a Chinese company principally engaged in
web game development and operation. Through a series of transactions, in January 2011, we increased our equity interest in Ye Net to 80%, and in July 2012, we acquired the remaining 20% of equity
interest in Ye Net.
In
December 2009 and January 2010, we established Perfect World Universal Coöperatieve U.A., or PW Universal, and Perfect World Europe B.V., or PW Europe,
respectively, both in Netherlands, to capture potential business opportunities in Europe.
In
April 2010, we acquired a 100% equity interest in C&C Media Co., Ltd., or C&C Media, from Atlus Co., Ltd., a Japanese computer and video game developer,
publisher, and distributor and other shareholders of C&C Media. Upon consummation of the transaction, C&C Media became our wholly owned subsidiary.
In
April 2010, PW Network invested a 20% equity interest in Beijing Zhizhu Network Technology Co., Ltd., or Zhizhu Network. This strategic investment is expected to allow
us to leverage Zhizhu Network's large user base to further grow our online game community. There were certain transactions between us and Zhizhu Network. For a description of these transactions, see
"Item 7. Major Shareholders and Related Party TransactionsB. Related Party Transactions" in this report.
In
May 2010, we acquired a majority stake in Runic Games, Inc., or Runic Games, a specialized developer of PC-based entertainment software in the United States. In addition, we
acquired 40% equity interest in Unknown Worlds Entertainment, Inc., or Unknown Worlds and 100% equity interest in Cryptic Studios, Inc., or Cryptic Studios, both online game developers
in the United States, in August 2011. In February 2013, we increased our equity interest in Unknown Worlds to a majority stake.
In
November 2011, we established Perfect World Korea Co., Ltd. (previously known as NGL Co., Ltd.), or PW Korea, jointly with Nexon Korea Corporation, to
manage and operate online
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games
in Korea. In October 2012, we acquired the entire equity interest in PW Korea held by Nexon Korea Corporation, as a result, PW Korea became our wholly owned subsidiary.
In
2011, we entered into a limited partnership agreement to invest up to RMB643.5 million as a limited partner in a venture capital fund over a nine-year period. The venture
capital fund will invest in high growth companies in the TMT industries. In early 2013, we increased our committed capital for an additional RMB396.0 million and the investment term has been
changed to 12 years. The venture capital fund intends to invest the additional capital received as a limited partner into another private equity fund, which focuses on investment into mature
companies in the consumer and retail, financial services, health care, TMT, energy and natural resources, and high value-added manufacturing industries in China. Under the amended limited partnership
agreement, the total investment of the venture capital fund will be RMB1,050 million and one percent of which will be contributed by the general partner. The partners will first receive the
return of capital contribution when exit investments and will share the remaining cash proceeds, if any, in proportions to be agreed between the partners. The general partner is also entitled to an
annual management fee to be agreed upon annually between the partners.
The
venture capital fund is managed by a general partner unrelated to us. Because various regulations in China currently restrict or prevent foreign-invested entities from engaging in
certain technology, media and telecommunications industries which are the targeted industries of the venture capital fund, we use Trendsters Investment, a variable interest entity we established in
November 2011, as an investment vehicle to hold our investment in the fund. Trendsters Investment does not itself make investment decisions for the fund or involve in the management of the fund. PW
Software has entered into a series of contractual agreements with Trendsters Investment and its equity owners, namely Mr. Qing Li and Mr. Qi Zhu, pursuant to which PW Software provides
technical support and consulting services to Trendsters Investment. Through these contractual arrangements, we have the ability to effectively control Trendsters Investment's daily operations and
financial affairs, appoint senior executives and decide on all matters subject to shareholders' approval. Thus, Trendsters Investment is a variable interest entity of our company under
U.S. GAAP. Accordingly, we consolidate Trendsters Investment's results of operations, assets and liabilities in our financial statements. See "Item 7. Major Shareholders and Related
Party TransactionsB. Related Party Transactions" for a description of the contractual arrangements among PW Software, Trendsters Investment and its equity owners.
In
November 2013, we entered into definitive agreements to acquire 100% equity interest in Wuhu Huitian Shengshi Network Technology Co., Ltd., or Wuhu Huitian, and 30%
equity interest in Beijing Shouyou Daqu Technology Co., Ltd., or Daqu. Wuhu Huitian and Daqu run TGBus.com and PTBus.com, two leading Chinese game portals, respectively. In June 2014, we
increased our equity interest in Daqu to 40%.
In
May 2014, we acquired a total of 30,326,005 Class A ordinary shares of Shanda Games Limited (NASDAQ: GAME), or Shanda Games, a leading online game developer, operator and
publisher in China, from Shanda SDG Investment Limited, for a total consideration of US$100 million in cash. In September 2014, we entered into an agreement to sell such 30,326,005
Class A ordinary shares of Shanda Games at a premium for a total consideration of US$104,624,717 in cash to Shanghai Buyout Fund L.P., an unrelated third party. Concurrently, we withdrew
from a consortium to which we had joined early in 2014 in the proposed "going private" transaction with respect to Shanda Games.
In
June 2014, we entered into a definitive agreement to acquire 100% equity interest of Fuzhou Online Game Information Technology Co., Ltd., which runs 766.com, a leading
Chinese game portal.
In
November 2014, we formed five controlled companies, in which we hold majority stakes, in line with the restructuring plan of our research and development teams, to help retain,
attract and
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incentivize
top talents, allow faster reaction to changing market trends and boost game development productivity.
Our
board of directors received a preliminary non-binding proposal letter dated December 31, 2014 from our founder and chairman of the board of director, Mr. Michael Yufeng
Chi, to acquire all of our outstanding ordinary shares not already directly or indirectly owned by him in a going private transaction for US$20.0 per ADS in cash, or US$4.0 per ordinary share in cash.
Our board of directors formed a special committee of independent directors on January 2, 2015 to consider the proposal. On April 26, 2015, we entered into a Merger Agreement with
Perfect Peony Holding Company Limited, or Parent, a Cayman Islands company beneficially owned by Mr. Michael Yufeng Chi, and Perfect World Merger Company Limited, or Merger Sub, a wholly owned
subsidiary of Parent. Subject to satisfaction of the Merger Agreement's terms and conditions, Merger Sub will merge with and into our company, with our company continuing as the surviving corporation
and a wholly owned subsidiary of Parent. Each of our ordinary shares or ADSs will be cancelled in exchange for the right to receive US$4.04 per ordinary share or US$20.20 per ADS in cash without
interest, except for shares, including such shares represented by ADSs, already directly or indirectly owned by Mr. Michael Yufeng Chi, and shares held by shareholders who have validly
exercised and not effectively withdrawn or lost their rights to dissent from the merger. The merger is subject to customary closing conditions including the approval of the Merger Agreement by an
affirmative vote of holders of shares representing at least two-thirds of the voting power of the shares present and voting in person or by proxy at a meeting of our shareholders which will be
convened to consider the approval of the Merger Agreement and the merger.
Our
principal executive offices are located at Perfect World Plaza, Tower 306, 86 Beiyuan Road, Chaoyang District, Beijing 100101, People's Republic of China. Our telephone number at
this address is (8610) 5780-5700. Our registered office in the Cayman Islands is located at the offices of Maples Corporate Services Limited, PO Box 309, Ugland House, Grand Cayman,
KY1-1104, Cayman Islands.
B. Business Overview
We are a leading online game developer and operator in China. We primarily develop online games based on our proprietary game engines and game development
platforms. Our strong technology and creative game design capabilities, combined with our extensive knowledge and experience in the online game market, enable us to frequently and promptly introduce
popular games designed to cater to changing customer preferences and market trends. Since 2006, we have launched in China a number of self-developed client-based online PC games. Currently, we operate
Perfect World, Legend of Martial Arts, Perfect World II, Zhu Xian, Chi Bi, Hot Dance Party, Pocketpet Journey West, Battle of the Immortals, Fantasy Zhu Xian, Forsaken World, Empire of the Immortals,
Return of the Condor Heroes, Saint Seiya Online, Swordsman Online, Holy King and Legend of the Condor Heroes, as well as several web games, such as Touch. Since our expansion into mobile games in
2013, we have launched in China several mobile games. Currently we operate Legend of Chu and Han, Rise of the King,
Return of the Condor Heroes Mobile, Fantasy of the Immortals, Forsaken World Mobile, CrossGate Mobile, Touch Mobile, Forever Mars, Dawn after Dark, Swordsman Mobile and Saint Seiya Mobile. To expand
our reach in the U.S. and European market to capture potential business opportunities, we established our wholly owned U.S. and European subsidiaries, PW USA and PW Europe, in April 2008 and January
2010, respectively. Currently, PW USA and PW Europe operate a number of our own online games including some games developed by our wholly owned U.S. based subsidiary, Cryptic Studios, as well as
several games licensed from other developers. To further expand our overseas operating capabilities in Asia, we acquired C&C Media in Japan, established PW Korea in Korea, and extended our coverage to
Southeast Asia through PW Hong Kong. Currently, we operate, in Japan, a number of our own games and certain games licensed from other developers through C&C Media; and also in Southeast Asia and
Korea, several of our own games through PW Hong Kong and PW Korea,
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respectively.
We plan to develop more online games with a variety of themes, cultural characteristics and features that appeal to different segments of the online game player community.
Our
core technology capabilities consist of our proprietary game engines, game development platforms and real-time anti-cheating expertise, all developed and built by our experienced
development team. In particular, our proprietary game engines enable us to create superior graphics with impressive visual effects and provide the technical foundation for realizing innovative
features in the game environment. Our game development platforms are built on modularized functions which allow us to have the ability to develop our online games with relatively short development
cycle and to update our games frequently through expansion packs.
We
have achieved an impressive game development track record. In September 2014, we won the "Top 10 Influential Brands in Asia" and "Top 500 Asia Brands Award" at the 9th Asia
Brand Ceremony. In October 2014, we won the "China Online Culture Achievement Award" at the China International Digital Content Expo 2014. In November 2014, our PC online game Legend of the Condor
Heroes won the award for the "Top 10 Most Anticipated Online Games by Game Players"; our PC and console versions of Neverwinter won awards for the "Best Overseas Online Games" and the "Top 10 Most
Anticipated Console Games by Game Players," respectively; and our mobile game CrossGate Mobile won an award for the "Top 10 Most Favorite Mobile Games among Game Players," in the "2014 Golden Plume
Awards Annual Best Games Election" held by ChinaJoy Expo, also known as the China Digital Entertainment Exposition and Conference. In December 2014, we won the "2014 Outstanding Enterprise in Chinese
e-Game Industry Award" and "2014 Outstanding Enterprise in research and development in Chinese e-Game Industry Award" in the 2014 Annual Conference of Chinese e-Game Industry. Our client-based online
PC games DOTA2 and Neverwinter won the Gold Finger Awards of "2014 Outstanding Online Game" and "2014 Most Anticipated Online Game," respectively. And our mobile games CrossGate Mobile and Perfect
World Begins won the Gold Finger Awards of "2014 Outstanding Mobile Game" and "2014 Most Anticipated Mobile Game," respectively in the 2014 Annual Conference of Chinese e-Game Industry. Legend of the
Condor Heroes was ranked among the "Top 10 Popular Domestic Online Games" and the top ten "China Domestic 3D MMORPGs" in 2014 according to International Data Corporation, or IDC, a premier global
provider of market intelligence, advisory
services, and events for the information technology, telecommunications and consumer technology markets. In addition, DOTA2 was ranked among the "Top 10 Popular Online Games," and Neverwinter was
ranked among the "2015 Top 10 Anticipated Client-based Online Games" in China in 2014. Dragon Ascension and Swordsman Mobile were also ranked among the "2015 Top 10 Anticipated Web Games" and the
"2015 Top 10 Anticipated Mobile Games," respectively, according to IDC.
We
use a time-based revenue model for our first game, Perfect World, under which we charge players based on the time they spend playing the game. We use an item-based revenue model for
our other self-developed online games 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, accessories
and pets. In 2012, 2013 and 2014, a substantial majority of our online game operation revenues were generated through this item-based revenue model. Although a majority of our revenues are generated
in China, as of the date of this annual report, we have exported a number of our games to various countries and regions, and we plan to export more of our games and continue to develop our business
overseas.
Products and Services
Since our inception in March 2004, we have developed, operated and distributed a number of our self-developed client-based online PC
games. Currently, we operate eleven 3D MMORPGs, namely, Perfect World, Legend of Martial Arts, Perfect World II, Zhu Xian, Chi Bi, Pocketpet Journey West, Forsaken World, Saint Seiya Online, Swordsman
Online, Holy King and Legend of the Condor Heroes, a 3D online casual game, Hot Dance Party, two 2.5D MMORPGs, Battle of the Immortals and Empire of the Immortals, and two 2D turn-based MMORPGs,
Fantasy Zhu Xian and Return of the Condor Heroes. Our games offer "anytime play," meaning users can play the games 24 hours a day, seven days a week.
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Our games offer significant opportunities for social interaction in cyberspace. Life-like features in some of our games include marriages among online characters
and martial arts apprenticeships, which are historical associations formed by martial arts masters according to Chinese legends. In addition, characters in our games may visually express feelings by
their actions or by using emoticons that appear within a character's dialogue box. We believe that these features significantly expand the interface for player interaction, allow players to express
their own personalities or virtual personalities through their virtual characters and create a certain level of social reality in the game. Although each game character may be unique, groups of
players may, and often must, form teams or alliances to achieve certain collective game objectives, such as battles and missions. Our games also incorporate instant messaging systems and chat rooms,
which allow players to communicate and interact with each other in real-time groups or in one-on-one discussions. The bulletin boards in our games allow players to post notes or inquiries and respond
to other players' notes or inquiries. Our games are designed to be flexible to present an effective game experience even for players who may not have state-of-the-art hardware.
In
addition to our self-developed games, we have obtained exclusive license to operate a world-famous online game, DOTA2, in China. Developed by a leading entertainment software and
technology company based in the United States, this game features a unique mix of action, RTS and RPG gameplay and has become one of the most popular games at professional e-sport competitions. We
started to commercialize this game in December 2013 in China.
The
following table summarizes the launch date of the games and the number of expansion pack releases since the respective launch for each of our self-developed client-based online PC
games that we are currently operating in China.
|
|
|
|
|
|
|
Game
|
|
Date of Launch |
|
Number of Expansion
Packs Released Since
Date of Launch |
|
Perfect World |
|
January 2006 |
|
|
14 |
|
Legend of Martial Arts |
|
September 2006 |
|
|
12 |
|
Perfect World II |
|
November 2006 |
|
|
15 |
|
Zhu Xian |
|
May 2007 |
|
|
18 |
|
Chi Bi |
|
January 2008 |
|
|
12 |
|
Hot Dance Party |
|
March 2008 |
|
|
9 |
|
Pocketpet Journey West |
|
October 2008 |
|
|
1 |
|
Battle of the Immortals |
|
April 2009 |
|
|
8 |
|
Fantasy Zhu Xian |
|
October 2009 |
|
|
9 |
|
Forsaken World |
|
October 2010 |
|
|
7 |
|
Empire of the Immortals |
|
March 2011 |
|
|
3 |
|
Return of the Condor Heroes |
|
September 2012 |
|
|
3 |
|
Saint Seiya Online |
|
May 2013 |
|
|
3 |
|
Swordsman Online |
|
June 2013 |
|
|
4 |
|
Holy King |
|
September 2013 |
|
|
|
|
Legend of the Condor Heroes |
|
September 2014 |
|
|
1 |
|
Perfect World. We launched Perfect World in January 2006. We adopted a time-based revenue model for this game, i.e.,
charging players based on
the time they spend playing the game. Perfect World is an adventure and fantasy game with traditional Chinese settings. Players can take on various roles, including swordsmen, magicians, archers,
priests and magical creatures. Players can also design and customize the appearance and characteristics of their characters and roles. Perfect World offers a variety of features that were once
innovative in China, such as day-and-night shifting and weather effects and changes. The game allows characters to fly freely and move in a continuous and changing terrain and environment seamlessly
without having to wait for scenery changes as is often the case in many other online games. Perfect World offers sophisticated 3D graphics that realistically represent
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real-life
characters and items moving in captivating scenes. The game can be displayed on a 16:9 widescreen to provide a movie-like visual effect.
Legend of Martial Arts. We launched Legend of Martial Arts in September 2006, when we sold in-game items during the open beta
testing. We developed
Legend of Martial Arts based on a popular TV drama series with the same Chinese name,
. Legend of Martial Arts is an adventure story of
Chinese swordsmen set in an ancient kingdom. It is designed to provide a more light-hearted and less intense game environment
than Perfect World. The game attempts to capture the look and the feel that have made the TV series a hit with the Chinese audience. We have enriched the game content by creating stories
developed specifically for the game. We engage a team of writers, including the playwright of the TV series. In addition to employing many of the customization features found in Perfect World, Legend
of Martial Arts contains several features designed to provide players a flavor of traditional oriental culture. Legend of Martial Arts is the first game for which we adopted an item-based revenue
model. Unlike the time-based revenue model, users can play the basic functions of Legend of Martial Arts free of charge for as long as they want. Players are charged when they purchase in-game items,
such as performance-enhancing items, clothing, accessories and pets. This allows players to further express their own or virtual personalities and enhance the game experience. In-game items can be
"purchased" at virtual stores within the game using one of two kinds of currencies: either with an in-game virtual currency known as "yuanbao," which game players obtain by purchasing prepaid cards or
online points with real money, or with another in-game virtual currency known as "gold coins," which game players can obtain for free by completing certain missions and activities within the game.
Perfect World II. We launched 3D MMORPG Perfect World II in November 2006. The storyline of Perfect World II is set in a similar
content and graphic
background as Perfect World. Compared to Perfect World, we adopted an item-based revenue model for Perfect World II, and further improved the playing methods and game environment. We provide more
user-friendly guidance on the classification and ranking of in-game weapons, and players can purchase virtual raw materials to manufacture their weapons. We have also optimized the visual effects of
our in-game items to enhance the attraction to players and transaction volumes. As Perfect World II offers more appealing play experience and operates under a different model compared to Perfect
World, we have noted that some users play these two games concurrently, particularly those players who have already achieved advanced game attributes in Perfect World and are trying to enjoy a more
personalized experience.
Zhu Xian. We launched 3D MMORPG Zhu Xian in May 2007 and adopted an item-based revenue model for this game. Zhu Xian was
developed based on a popular
internet novel with the same name. The internet novel was ranked the No. 1 most read internet novel in 2005 and was among the top five most read internet novels in 2006 according to the click
statistics of Baidu, Inc. The basic story concept of Zhu Xian is a martial arts focused adventure set in a fantasy world. The game players are able to experience the various fantastic scenes
and plots that have made the internet novel popular, such as martial arts training, use of magical weapons, upgrading of special capabilities and contests to obtain magical treasure, from the
perspectives of the novel characters that they choose to play. We also add a time dimension, so that the player can enter into any game scenario based on the time parameter that they select without
having to wait for the plot development like a novel reader. We believe that this feature diversifies the game content and increases players' interests in the game environment.
Chi Bi. We launched 3D MMORPG Chi Bi in January 2008 and adopted an item-based revenue model for this game. Chi Bi is a war story
developed based on
the well-known period in ancient Chinese history known as the Three Kingdoms. This game is designed to include various in-game weapons and large-scale map of the game environment in a historical
cultural setting. Game players can freely choose to join any of the Three Kingdoms, i.e., Wei, Shu, or Wu, and are provided with full experience of the historical battles of the Three Kingdoms
period. In addition, Chi Bi also features
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motion
fighting system, allowing players to attack their opponents as they move, which we believe enhances appeal to game players. We co-promoted "Chi Bi" alongside the movie "Red Cliff," which has
the same Chinese name as "Chi Bi," in China, according to an agreement signed with China Film Group Corporation, which owns the copyright to the movie in China.
Hot Dance Party. We launched Hot Dance Party, our first 3D online casual game, in March 2008 and adopted an item-based revenue
model for this game.
Hot Dance Party allows players to enjoy dancing game play in a captivating 3D game environment with a variety of background music choices. Furthermore, we have incorporated certain community features
such as establishing a virtual family, into this game. Game players can also raise virtual pets in the game environment and improve game characters' appearance by using cosmetics.
Pocketpet Journey West. We launched Pocketpet Journey West, in October 2008 and adopted an item-based revenue model for this
game. Pocketpet Journey
West (
) is a pet-themed 3D MMORPG and is developed based on "Journey to the West (
)," one of the four classical novels of Chinese literature. The game is designed to include distinctive adventurers adapted from the novel. The game features innovative
diversified pet systems, which not only allow users to catch monsters as their pets, raise pets, and enhance attributes of pets, but also have many creative features which enable online game players
to exchange pets, obtain particular skills and attributes by collecting special items, and combine two separate pets to create customized or enhanced attributes. The diversified pet systems are
designed to bring an entirely new interactive pet raising experience to online game players.
Battle of the Immortals. We launched Battle of the Immortals, in April 2009 and adopted an item-based revenue model for this
game. Battle of the
Immortals, our first mysterious adventure 2.5D MMORPG, is developed based on our proprietary Cube engine. Battle of the Immortals enables game players to travel between Eastern and Western
cultures, featuring themes ranging from Norse mythology to the history of China's Qin Dynasty, catering to game players with different interests. This game also includes adventures in historic sites
and turf wars.
Fantasy Zhu Xian. We launched Fantasy Zhu Xian in October 2009 and adopted an item-based revenue model for this game. Fantasy
Zhu Xian is our first
2D turn-based MMORPG, which is based on the same popular internet fantasy novel Zhu Xian as our 3D MMORPG Zhu Xian. The game represents the world of Zhu Xian in a refreshing cartoon style. The game is
developed based on our proprietary EPARCH 2D engine and can exhibit special visual effects such as reflections, particle effects and translucency effects. In addition, it introduces the concept of
altitude into a 2D game and creates a realistic flying visual effect within a 2D game environment.
Forsaken World. We launched Forsaken World in October 2010 and adopted an item-based revenue model for this game. Forsaken World
is a 3D MMORPG set
against the backdrop of a fantasy world called Grand Mundo, where players themselves alter the fate of Grand Mundo through their individual actions in the game. The game features exciting elements
such as rule of time, rule of space, magic and divinity. Forsaken World adopts a system of annalistic history, and allows players to impact core contents such as the epoch, the orbiting of
constellations and the birth of deities.
Empire of the Immortals. We launched Empire of the Immortals in March 2011. Following Battle of the
Immortals, Empire of the Immortals is the second 2.5D MMORPG in our Immortals franchise. Featuring the international style of the Immortals series and running on an upgraded Cube engine, Empire of the
Immortals introduces novel game experiences and exciting visual effects to satisfy various tastes of different players.
Return of the Condor Heroes. We launched Return of the Condor Heroes in September 2012 and adopted an item-based revenue model
for this game. The
game is adapted from Louis Cha's acclaimed martial arts novel of the same name. In a traditional 2D turn-based online game environment, the game adopts some advanced 3D technologies to render delicate
visual effects and various fun options
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to
players, providing a refreshing game experience for fans of traditional 2D games. It also introduces a series of new exciting features, including "Qinggong," a gameplay that adopts a style of
martial arts with gravity-defying moves, and a powerful pet system.
Saint Seiya Online. We launched Saint Seiya Online in May 2013 and adopted an item-based revenue model for this game. This is a
3D comic-based MMORPG
adapted from the globally famous comic series "Saint Seiya." The game presents a variety of classic elements from the original comic. Running on our proprietary game engine, Saint Seiya Online renders
exquisite graphics, elaborate game design and a smooth and enjoyable game experience to players.
Swordsman Online. We launched Swordsman Online in June 2013 and adopted an item-based revenue model for this game. Swordsman
Online is a 3D martial
arts MMORPG adapted from Louis Cha's acclaimed classic martial arts novel of the same Chinese name. Running on our proprietary "Angelica 3D" game engine, the game presents exquisite visual effects and
recreates the grand and free martial arts world depicted in the original novel. The game also features a refreshing design of martial arts actions and combat, dazzling character skills, and various
interesting instances full of fun and challenges. Additionally, the game involves gamers in active interaction with others and embeds captivating story plots.
Holy King. We launched Holy King in September 2013 and adopted an item-based revenue model for
this game. Holy King is a 3D fantasy MMORPG adapted from the popular online novel of the same Chinese name. Running on our proprietary "Echoles" game engine, the game presents an immersive fantasy
world with vivid graphics and grand scenery.
Legend of the Condor Heroes. We launched Legend of the Condor Heroes in September 2014 and adopted an item-based revenue model
for this game. Legend
of the Condor Heroes is a 3D MMORPG adapted from Louis Cha's acclaimed martial arts novel of the same name. Powered by our proprietary "ARK" game engine, Legend of the Condor Heroes provides players
with a brand new online game experience that can incorporate data from offline sports and other activities through certain wearable devices.
In
North America, Europe, Japan, Southeast Asia and Korea, besides localizing and operating some of the above games through our wholly owned subsidiaries, we also operate certain games
developed by our U.S. based subsidiary, Cryptic Studios, as well as games licensed from other developers.
Since
2013, we began tapping into the mobile game segment to capitalize on the growing popularity of the mobile internet and devices in China, leveraging our existing knowledge in
client-based online PC games. We have developed, operated and distributed several mobile games covering a wide range of game genres, namely, Legend of Chu and Han, Rise of the King, Return of the
Condor Heroes Mobile, Fantasy of the Immortals, Forsaken World Mobile, CrossGate Mobile, Touch Mobile, Forever Mars, Dawn after Dark, Swordsman Mobile and Saint Seiya Mobile.
In
addition to the above client-based online PC games and mobile games, we also developed and operate several web games such as Touch.
Online Games under Development. We currently have a number of new games in pipeline, ranging from client-based online PC games
to mobile games.
In addition to operating online games, we also generated advertising revenue from our game portals and revenue from selling our
pay-per-install games, such as Torchlight and Torchlight 2, developed by our majority-owned subsidiary Runic Games based in the U.S.
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Our Proprietary Technologies
Game Engines
Anticipating the potential growth of online games in China and recognizing the importance of possessing our own game engine, we have
developed several proprietary game engines for our various types of games. For example, our Angelica 3D game engine enables us to create superior 3D graphics with impressive visual effects,
realistically representing real-life characters moving in captivating scenes. Our Angelica 3D game engine employs the latest technology to realize 3D features, including shadow mapping, light
reflection and refraction on water surfaces. It also enables characters to fly freely in the game environment, to embrace and thus enhance interaction between players, and enables our game players to
create, customize and personalize virtual content and characters.
The
Angelica 3D game engine is designed to be flexible to allow for effective game play on both high-end and lower-end computers. Many of the international game operators that license
games to China use game engines that require players to have the newest and most advanced computers to play the game or enjoy the game experience. We believe these engines may not be suitable to the
hardware environment in China, because a large number of game players in China play online games using hardware that may be generations behind the most advanced computers. In comparison, the games
developed on our Angelica 3D game engine are compatible with a variety of hardware platforms by simplifying certain computation requirements for low-end hardware. This allows us to access a broad
range of players in China.
The
logic part of the Angelica 3D game engine provides the framework for the continuous evolution of the game story and game episodes. Under the logic engine, all game elements including
characters, weapons, skills, game plots and scenes, are defined as abstract parameters and assigned with relative probabilities. Based on the complicated algorithms, formulas and computation processes
supported by
the logic engine, our program developers optimize and maintain the systematic balance and evolution of the various game elements to create a consistently challenging and exciting game experience and a
game environment that is perceived as fair by the players.
The
network part of the Angelica 3D game engine provides a platform to streamline online data transmission, game operation and user control.
Our
Angelica 3D game engine can support the development of a range of styles of games under various game environments. We have employed this engine and its upgraded versions to develop a
number of our existing 3D MMORPGs and our 3D online casual game.
We
have also developed several game engines for our 2.5D and 2D games. For example, our Cube 2.5D game engine, which was used to develop Battle of the Immortals and Empire of the
Immortals, balances graphics quality and hardware requirements: it can generate high-quality graphics with 3D depiction of the background, in-game items and characters, while the games developed by
Cube engine have relatively low hardware requirements compared to 3D games. Our Cube 2.5D engine adopts angle locking technique and manages to reduce the technical difficulty of graphics display by
shielding sky and distant objects in the game scenes.
Our
EPARCH 2D engine, which was used to develop Fantasy Zhu Xian, has the advantages of typical 2D game engines such as highly-refined image quality, compatibility with both high and low
end computers and user friendly interface for new game development. In addition, it adopts technologies used in 3D game engines to enable our games to fully utilize hardware potentials. For example,
it introduces the concept of altitude into 2D games and creates a realistic flying visual effect within 2D game environment. It can also create various light effects that alter in real time following
the change of game environment.
Our
Echoles 3D engine, which was used to develop Holy King, provides solution to achieve full dynamic visual effects in games, such as whole scene lights and shadows, without sacrificing
details and
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fidelity
of images. Featuring multithreaded resource management, Echoles enables games to run with enhanced smoothness and stability. Echoles is integrated with a pack of powerful special effect
system and character control system, which improve the game image quality and ensure the efficient game running.
Our
ARK 3D engine, which was used to develop Legend of the Condor Heroes, creates impressive visual effects by leveraging state-of-the-art technologies, including static mixed lights and
shadows, high-dynamic-range lighting rendering, realistic screen-space ambient occlusion, efficient anti-aliasing, dynamic weather, etc. It also provides full support to large-scale outdoor scene,
ecological environment simulation, lights and shadows rendering, interactive processing and other stunning processing effects.
Game Development Platforms
Our game development platforms have been designed with modularized functions to allow our game designers and graphic artists to quickly
enhance and expand on the game play, design and settings without getting bogged down by technical computer programming language. Designers and graphic artists can program by going through a series of
user-friendly menus. This significantly shortens our game development process and allows us to quickly add content and features to our games even after their launch. Furthermore, as the same program
development team supports the programming of multiple games via the same development platform, any programming improvement originated from one game can be readily introduced to other games. We believe
that our various game development platforms provide us with a solid foundation to rapidly and frequently develop and introduce new games and to update our existing games.
Anti-cheating Technology
Our game engine also provides the technological foundation for the real-time detection and resolution of unauthorized character
enhancements and other attacks from hacking and cheating activities. Our games have built-in detection mechanisms, which include a verification process between the user end hardware and our operation
servers and the rapid detection of cheating activities. We believe this is important to ensure players' confidence in the fairness and reliability of our games, in particular given the propensity of
hacking and cheating activities in online games in China and in other parts of the Asia Pacific region.
Game Development
We believe that rapid and high-quality game development is critical to our success. Our game development team mainly consists of our
programming personnel, design personnel and graphics personnel. Several core members of our development team have worked together for more than a decade. In March 2008 we opened a research and
development center in Shanghai to take advantage of the skilled workforce in the game development industry there. In February 2009 we acquired InterServ Caymans and its two PRC subsidiaries in
Shanghai and Chengdu, both of which have further strengthened our research and development capability. We acquired a majority stake in Runic Games in May 2010 and 100% equity interests in Cryptic
Studios in August 2011, respectively, which allowed us to further enhance our strong research and development capabilities and to leverage their creative and professional development teams to create
global titles. In November 2014, we restructured our research and development teams to form five new controlled companies, in which we hold majority stakes. In order to help retain, attract and
incentivize top talents, non-controlling interest of each of these five controlled companies was granted to be beneficially held by our key research and development employees. We believe this new
arrangement will help invigorate the game development process, support game design flexibility, allow faster reaction to changing market trends, and boost game development productivity.
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Unlike
many of our competitors in China that operate client-based online PC games licensed from foreign game developers, we have in-house capabilities that allow us to develop games
rapidly and in response to constantly changing market demands and trends.
Our
systematic game development process includes the following key steps:
-
- Concept generation. Our design team takes the lead in
generating game development ideas based on the latest trends in player preferences. We recruit game players into our design team to closely track the hot topics among our players and on the internet.
We also encourage all of our employees to provide creative ideas and concepts for game development.
-
- Detailed proposal. Upon management's approval of the new
game concept, the design team will prepare a detailed proposal that sets preliminary storylines and game characters, estimates of costs and target markets.
-
- Development plan. After the completion of the technical
review of the proposal, a project team consisting of our programming staff, design staff and graphics artists work together to set the technical criteria for the game development, and then formulate a
game development plan with development milestones.
-
- Design, style and story concepts. Based on the game
development plan, our graphics artists will determine the style of the new game and design game characters, our game designers will develop the game story and define game environments, and our program
developers will develop both the server-end software and the user-end software modules.
-
- Internal reviews. Mid-term management reviews will take
place upon the completion of each milestone of the development plan. Concurrently, our testing department tests the accuracy and completeness of the development, and our marketing department initiates
marketing campaigns according to the development milestones.
-
- Closed beta testing and open beta testing. We conduct
closed beta testing to work out technical issues and eliminate technical problems. Thereafter, we conduct open beta testing to test the operation of new games under open market conditions and
introduce new games to players.
Our
games are realized through coordination among teams of program developers, game designers and graphic artists. Our in-house development team also supports our frequent game upgrades
and updates to accommodate the latest user tastes and preferences and evolving market trends. We also try to design each of our games to cater to distinct market segments to grow our overall player
base rather than merely shifting players from one game to another. Furthermore, our games are developed with built-in multiple-language capability to support our timely expansion into international
markets through a convenient localization process.
Membership Management and Payment System
We offer Perfect Pass, our integrated membership management system, to our customers in China. It is designed to provide our customers
with an integrated user-friendly platform to log in, play and purchase any products and services that we offer. To play our online games, a customer must register an account with our Perfect Pass
system. Once registered, the customer may log into our network, select and activate the desired games that the customer wishes to play, and then charge his account with prepaid cards or online points
that enable the customer to play for a specified period of time or purchase in-game items. Each customer needs to maintain only one Perfect Pass account, which provides information regarding the
customer's available prepaid online points, profile and payment history of the last three months.
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A customer can purchase the prepaid cards through our various distribution channels both online and offline. Each prepaid card contains a unique access code and
password that enables a player to add online points to his account. Our prepaid cards are offered in a variety of denominations to provide players with flexibility, and each prepaid card may be used
to play any of our online games. To avoid third parties' misuse of our customers' accounts, we offer a series of security measures by linking the account with our customer's mobile phones, such as the
lock-up of account and lock-up of IP addresses via short message instructions.
Customers
in North American and Europe can set up their billing profile and carry ZEN, a virtual currency, after creating their Perfect World accounts. Customers can purchase ZEN, to
make payments for all games operated by PW USA and PW Europe, through various payment methods including but not limited to credit cards, prepaid cards and mobile phone payments.
Customers
in Japan can create their MK accounts through MK-STYLE, our self-developed and operated online game portal site. Customers in Japan can use their MK Points, to make payments
for all games operated by C&C Media. MK Points can be purchased through major payment gateways widely available in Japan.
In
various markets, we cooperate with local payment gateways to provide more payment method options to and facilitate convenient paying process for our customers.
Pricing and Distribution
Pricing. We mainly have two different pricing models: (1) time-based, which we have adopted for Perfect World; and
(2) item-based,
which we have adopted for our other online games. Under the time-based model, players pay for game playing time. The pricing was determined near the end of the open beta 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. Under the item-based model, players
can play the basic functions of the game free of charge for as long as they want. We generate revenues when players purchase and consume the in-game items such as performance-enhancing items,
clothing, accessories and pets that enhance the game play experience. We determine the price of each in-game item before its introduction, generally based on an analysis of a series of benchmarks,
such as the price of similar items offered in other online games, the market price of the real-life item represented by the in-game item, and pricing of other popular forms of entertainment.
Distribution. We established our distribution network by leveraging our management team's extensive connections accumulated from
their previous game
and software distribution experience. We distribute our physical and virtual prepaid cards and online points through various channels.
Physical cards: We generally sell physical cards through a network of third-party distributors. We sell the cards directly to a number
of qualified
distributors, who resell the cards to numerous internet cafés, newsstands, convenience stores and other retail outlets throughout China.
Electronic distribution system: Each of our regional distributors in our electronic distribution network has a sales account in our
E-sales system.
Upon receipt of their payment, we allocate to the distributor a number of online points or virtual cards on the central E-sales computer system operated and monitored by us. The distributors can
electronically transfer the online points or virtual cards in their
sales accounts to the accounts of their sub-distributors, retailers or players on our central E-sales computer system. Through this system, we also cooperate with telecommunication operators and
bundle the collection of fees for our games with their user services, such as their prepaid phone cards and SMS services. As a result, gamers can conveniently make payments through their mobile
phones. This system of electronic sales simplifies logistics by eliminating the need for, and the cost of, physical game cards, and allows us to centrally monitor the transfers of the online points or
virtual cards by the distributors.
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Online payment platforms: We sell our online points directly to players for charging their accounts via our own website. Payments for
purchases are
processed by banks and other third-party online payment platform service providers. These online payment platform service providers receive transaction fees, which reduce the net payment we receive
from them.
Digital Storefronts and Game Platforms: We distribute mobile games to end-users through digital storefronts and game platforms, such as
Apple's App
Store and Qihoo 360's game platform. These storefronts and platforms sell in-game virtual currencies, which are used by game players to redeem virtual items in our mobile games. After retaining their
revenue sharing amounts at a pre-agreed percentage, the storefronts and platforms remit us the proceeds that they have received from game players.
Overseas Licensing
In order to extend our reach in the overseas markets, we license our games to overseas operators. Under our license agreements, we
allow our overseas licensees to exclusively operate, promote, service and distribute our games in specified territories. In return, we are generally entitled to an initial fee and ongoing royalties,
the latter of which is generally determined based on the amount of money charged to players' accounts or the services fees payable by the players to the licensee in a specific country or region. The
licensees are responsible for the sales and marketing of our games in the specified territories, including setting the price of our games and virtual items, and usually there are minimum requirements
on promotion expenditures. The licensees are also generally in charge of maintenance of the network infrastructure and customer service. We are responsible for the technical support for the operation
of our games, including providing technical tools for the localization
of our games. We generally agree to provide our licensees with updates or upgrades to the licensed games, usually every three to six months or on a when-and-if-available basis. We also usually assist
the licensees in preventing, detecting, and resolving hacking and cheating activities.
We
plan to license more of our games to leading online game operators in various countries and regions overseas to further strengthen our global presence. All of the games we license to
overseas operators use an item-based revenue model. We work with the licensees to determine the pricing of in-game items based on the local market conditions as well as our input.
The
following table lists the countries or regions where we have licensed our client-based online PC games.
|
|
|
Game
|
|
Country/Region |
Perfect World II |
|
Taiwan, Hong Kong, Macau, Vietnam, The Philippines, Brazil, Thailand, Indonesia, and The Russian Federation and other Russian-speaking territories |
Zhu Xian |
|
Thailand, Taiwan, The Russian Federation and other Russian-speaking territories and Indonesia |
Chi Bi |
|
The Philippines |
Hot Dance Party |
|
Vietnam |
Battle of the Immortals |
|
Taiwan |
Forsaken World |
|
Taiwan, The Russian Federation and other Russian-speaking territories, Brazil and the Spanish-speaking countries in Latin America |
Empire of the Immortals |
|
Taiwan and Indonesia |
Saint Seiya Online |
|
Taiwan |
Swordsman Online |
|
Taiwan, Vietnam and Indonesia |
Legend of the Condor Heroes |
|
Taiwan |
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Marketing and Promotion
We employ a variety of innovative and traditional marketing and promotional activities to attract new game players and increase
revenues from existing players. These activities include tailor-made marketing programs, live promotions, in-game marketing and advertising and online promotions.
Tailor-made Marketing Programs. Based on our extensive local knowledge and experience, we have designed, for each of our games,
innovative
promotional activities with entertainment and fashion elements. For some of our games, we have appointed celebrities, ranging from pop stars to famous actors and actresses, to be our spokespersons,
and have worked with popular bands and singers to record theme songs. For the games that are developed from well-known novels, such as Chi Bi, we cooperated with the film maker to co-promote our game
and the movie that are developed from the same novel.
Live Promotions. We regularly organize a variety of off-line promotion activities to develop and support the community of game players,
such as
internet café gatherings, player clubs, product press conferences, college marketing, distribution of free game-related posters, distribution of promotional online points and
cross-marketing with telecommunication operators. For example, we organized Perfect World International Championship for our flagship games. We have promotion personnel to organize cooperative
promotion campaigns with local distributors and internet cafés throughout China. We also promote Perfect World's brand and our games by attending various industrial exhibitions,
including China Joy Expo game exhibition in China and E3 industrial exhibition in the U.S.
In-game Marketing. We conduct in-game marketing programs for our players from time to time, including player unions and game
tournaments. We also
frequently post announcements in the game environment to promote new items and features, usually linking with in-game events. Leveraging our in-house development capability, we offer new in-game items
periodically, especially around the holidays and certain special events, such as the offering of in-game moon cakes and in-game pets "Jade Rabbit" during the Chinese Moon Festival.
Advertising and Online Promotions. We advertise in many online game sites and game magazines that are updated regularly. To enhance our
market
penetration, especially among working professionals, we also advertise through flat-panel television displays placed in high-traffic areas of commercial office buildings, such as in lobbies and near
elevators.
For
each of our games, we have a dedicated product management team responsible for marketing activities, managing player community and developing operational plans. We believe that our
multi-channel marketing activities help build up a players' community and satisfy our players' need for social outlets and social interaction. We believe this in turn helps to generate and improve
players' loyalty to our games.
Customer Service
We have focused on providing excellent customer service in order to retain our existing customers and to attract new game players.
Our
players can access our customer service center via phone, online in-game chats or e-mail at any time 24 hours a day, seven days a week. Many of our dedicated customer service
representatives are online game fans with deep understanding of game play and players. All of our customer service representatives are required to participate in a formal training program before
commencing work. We have implemented detailed performance measures to monitor our calls to ensure that our customers will receive quality service. In addition, we also operate online bulletin boards
that enable players to post questions to, and receive responses from, other players. In addition to providing customer service to our players, our customer service representatives also collect player
comments and complaints about
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our
games and generate periodic reports for our management and operations personnel that summarize important issues raised by players and our responses to those issues.
We
have in-game masters that are responsible for organizing in-game events, troubleshooting and responding to players' inquiries. Our in-game masters work together with our dedicated
engineering team to detect and remove bugs and viruses. They are also actively involved in identifying and resolving any issues arising from unauthorized character enhancements and other hacking or
cheating activities.
We
have service centers which are open to walk-in customers during normal business hours in China. Our customers in North America, Europe and Japan can reach our customer service support
via phone or online service channels. All of our representatives at our service centers are trained to address our customers' questions and concerns and resolve any problems they may have with our
products and services. Our customer service in China has maintained the ISO 9001:2000 certification since August 2007.
Network Infrastructure
We aim to build a reliable and secure network infrastructure to fully support our operations. We maintain an efficient hardware and
software infrastructure with a large network capacity consisting of self-owned and leased servers.
We
have a network operation team responsible for stability and security of our network. The team follows a workflow plan of problem detection, recording, analyzing and solving. The
primary responsibilities of the team members consist of monitoring system performance, troubleshooting, detecting system error, random sample testing on servers, maintaining equipment, and testing,
evaluating and installing hardware and software. In addition, we frequently upgrade our game server software to ensure the stability of our operation and reduce risks of hacking. Our streamlined
server groups support a large number of concurrent users.
Competition
Competition in the online game market in China and the overseas markets where we offer our games is intense. We believe that the key
competitive factors include the design, quality, popularity and price of online games and in-game items, the ability to rapidly update and upgrade games, marketing activities, sales and distribution
network and customer service. We compete principally with the following groups of competitors:
-
- online game developers and operators in China, including Tencent, NetEase, Shanda Games, Changyou, Giant Interactive, Kingsoft,
Tiancity, Guangyu Huaxia, KongZhong, NetDragon and other mobile game developers who recently entered into this emerging market; and
-
- other competitors, including major internet portal operators in China, and game developers and operators in the overseas markets where
we offer our games.
Some
of our existing and potential competitors have significantly greater financial and marketing resources and a larger portfolio of game offerings than we do. For a discussion of risks
relating to competition, see "Item 3. Key InformationD. Risk FactorsRisks Related to Our BusinessWe may not be able to maintain our revenues and
profitability as we operate in a highly competitive industry and compete against many companies."
Seasonality
Our quarterly operating results may fluctuate due to various factors and reasons. For example, as part of our normal product cycle, our
revenues may be relatively low when we decelerate promotional activities for some time in order to lengthen the life cycle of existing games and maintain long-term sustainable growth. Based on our
experience, our user traffic may also be relatively low as result of the
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"golden"
holidays in China, such as the Chinese New Year holiday in January or February when many of our game players may go back to home town and have less access to the internet, and national
college admission exams in the second quarter when our game players spent less time playing online game. Other factors that may cause our operating results to fluctuate include a deterioration of
economic conditions in China and potential changes to the regulation of the online game industry in China, which are discussed elsewhere in this annual report.
Intellectual Property
Our intellectual property rights include trademarks, trade secrets and domain names in China and copyright and other rights associated
with our websites, game engines, technology platforms, self-developed software and other aspects of our business. We regard our intellectual property rights as critical to our business. We rely on
trade secret protection, trademark and copyright law, non-competition and confidentiality agreements with our employees, and license agreements with our partners, to protect our intellectual property
rights. We require our key employees to enter into agreements requiring them to keep confidential all information relating to our software, technology, business and trade secrets during and after
their employment with us. These agreements also require our employees to assign to us all of their inventions and other intellectual property rights developed by them primarily in connection with our
business.
We
have registered our domain names www.pwrd.com, www.wanmei.com and www.perfectworld.com, and have registered a series of domain names in connection with each of games, including
without limitation, www.world2.com.cn, www.wulin2.com.cn, www.w2i.com.cn, www.zhuxian.com, www.chibi.com, www.rwpd.com, www.kdxy.com, www.sgcq.com.cn, www.mhzx.com.cn, www.smdl.com, www.sgsj.com,
sdxl.wanmei.com, http://seiya.wanmei.com, http://xa.wanmei.com, http://sw.wanmei.com and http://sd.wanmei.com with China Internet Network Information Center, and have legal rights over these domain
names. We have filed trademark applications for the Chinese names of a number of our
existing online games with the Trademark Office of the State Administration for Industry and Commerce in China. For example, the
trademark
has been registered in classes 9, 16 and 35 in China, the
and the
trademarks have been registered in classes 9, 16 and 41 in China, respectively, the
and the
trademarks have
been registered in class 41 in China, the
trademark has been registered in class 9 and 41 in China and the
trademark has been registered in class 9 in China. We have registered all of our self-developed client-based online PC games, web games and mobile
games that are
currently in operation, and a number of our game engines with the National Copyright Administration for copyright protection. We have taken steps to legally protect our intellectual property,
acknowledging, however, that historically China has not been able to successfully protect a company's intellectual property to the same extent as the United States. We mainly rely on our licensees for
copyright, domain names and trademark protection outside China, although very limited protection has been secured to date.
We
have licensed from third parties certain intellectual property, based on which we are entitled to develop online games. For examples, PW Network obtained exclusive licenses to use
certain intellectual property of the TV drama series
and the internet novel Zhu Xian for the production and commercial operation of Legend
of Martial Arts, Zhu Xian and Fantasy Zhu Xian, respectively. We have fully paid the
license fees under these license agreements.
Government Regulations
Our provision of online games and related content on our websites is subject to various PRC laws and regulations relating to the
telecommunications industry, internet and online games, and regulated by various government authorities, including:
-
- the Ministry of Industry and Information Technology and, before its formal establishment in 2008, its predecessor, the Ministry of
Information Industry;
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-
- the State Administration of Press, Publication, Radio, Film and Television, or SAPPRFT , before the formal reorganization in 2013, its
predecessors, the General Administration of Press and Publications (the National Copyright Administration), or GAPP, and the State Administration of Radio, Film, and Television;
-
- the State Administration for Industry and Commerce;
-
- the Ministry of Culture; and
-
- the Ministry of Public Security.
The
principal PRC regulations governing the internet content provision industry as well as the online game services in China include:
-
- Telecommunications Regulations (2000);
-
- the Administrative Rules for Foreign Investments in Telecommunications Enterprises (2001, and as amended in 2008);
-
- the Administrative Measures for Telecommunications Business Operating Licenses (2009);
-
- the Internet Information Services Administrative Measures (2000);
-
- the Interim Measures for the Administration of Online Games (2010);
-
- the Tentative Measures for Administration of Internet Culture (2011);
-
- the Tentative Measures for Administration of Internet Publication (2002);
-
- the Notice of Implementing the State Council's "Regulation 'San Ding"' and Relevant Interpretation Issued by State Commission Office
for Public Sector Reform and Further Strengthen the Administration and Approval of the Pre-approval and Import of Online Games (2009);
-
- the Foreign Investment Industrial Guidance Catalogue (2011);
-
- the Administrative Measures on Electronic Publications (2008);
-
- the Administrative Measures on Software Products (2009);
-
- the Measures on Computer Software Copyright Registration (2002);
-
- the Notice of the Ministry of Culture on Enhancing the Content Review Work of Online Game Products (2004);
-
- the Notice of the Ministry of Culture on Improving and Enhancing the Management Work of Online Game Content (2009);
-
- Some Opinions of the Ministry of Culture and the MIIT on the Development and Administration of Online Games (2005);
-
- the Notice on the Work of Purification of Online Games (2005);
-
- the Circular on Strengthening the Administration of Foreign Investment in and Operation of Value-added Telecommunications Business
(2006);
-
- the Circular on Implementing Online Game Anti-fatigue System to Protect the Health of the Minors (2007);
-
- the Administrative Measures on Internet Video/Audio Program Services (2007);
-
- the Notice on Initializing the Verification of Real-name Registration for Anti-fatigue System on Internet Games (or the Real-name
Registration Notice) (2011);
-
- the Notice on In-depth Development of the Verification of Real-name Registration for Anti-fatigue System on Internet Games (2014);
-
- the Tentative Catalogue of Internet Video/Audio Program Services (2010);
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-
- the Notice on Regulating Operation Order of Online Games and Inspection of Gambling via Online Games (2007);
-
- the Notice on the Reinforcement of the Administration of Internet Cafés and Online Games (2007);
-
- the Notice on the Reinforcement of the Administration of Virtual Currency in Online Games (2009);
-
- the Administrative Measures for Online Trading (2014);
-
- the Notice on Strengthening the Administration of Virtual Currency of Online Games (2009);
-
- the Several Provisions on Regulation of the Order of Internet Information Service Market (2011);
-
- the Decision of the Standing Committee of the National People's Congress on Strengthening Network Information Protection (2012);
-
- the Provisions on Protection of Personal Information of Telecommunication and Internet Users (2013); and
-
- the Circular of the Ministry of Culture on Implementing the Administrative Measures for Content Self-review of Network Culture
Operators (2013).
As
the online game 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
Chinese laws and regulations applicable to the online game industry. See "Item 3. Key InformationD. Risk FactorsRisks Related to Doing Business in
ChinaThe 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 would be materially and adversely affected."
Restrictions on Foreign Investment
Under the above regulations, a foreign investor is currently prohibited from owning more than 50% of the equity interest in a Chinese
entity that provides value-added telecommunications services, including online game, online reading and other internet content provision services. In addition, foreign and foreign-invested enterprises
are currently not able to apply for certain required licenses to provide these services.
The
Circular on Strengthening the Administration of Foreign Investment in and Operation of Value-added Telecommunications Business issued by the MIIT in July 2006, reiterated the
regulations on foreign investment in telecommunications business, which require foreign investors to set up foreign-invested enterprises and obtain an ICP license in order to conduct any value-added
telecommunications business in China. Under this circular, a domestic company that holds an ICP license is prohibited from leasing, transferring or selling the license to foreign investors in any
form, and from providing any assistance in forms of resources, sites or facilities to foreign investors that conduct value-added telecommunications business illegally in China. Furthermore, the
relevant trademarks and domain names that are used in the value-added telecommunications business shall be owned by the local ICP license holder or its shareholders. This circular 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
telecommunications service providers are required to maintain network and information security in accordance with the standards set forth under relevant PRC regulations. Due to the lack of further
necessary interpretation from the regulator, it remains
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unclear
what impact this circular will have on us or the other Chinese internet companies that have adopted the same or similar corporate and contractual structures as ours.
On
September 28, 2009, GAPP, the National Copyright Administration, and National Office of Combating Pornography and Illegal Publications jointly issued the GAPP Notice, which
restates that foreign investors are not permitted to invest in online game-operating businesses in China via wholly owned, equity joint venture or cooperative joint venture investments. The GAPP
Notice expressly prohibits foreign investors from gaining control over or participating in domestic online game operators through indirect ways such as establishing other joint venture companies, or
contractual or technical arrangements. However, the GAPP Notice does not provide any interpretation of the term "foreign investors" or make a distinction between foreign online game companies and
China based companies under a similar corporate structure like ours. Thus, it is unclear whether such regulations will be applicable to us or many other China based companies that rely on similar
contractual arrangements
with variable interest entities to operate online games in China. Since the promulgation of the GAPP Notice, we have applied for and obtained ISBNs from the then GAPP for internet publications of
several new games without encountering any problem. We are not aware that either the GAPP or the SAPPRFT has taken any enforcement action under the GAPP Notice against any online game operators under
a similar corporate structure like ours.
We
conduct our online game and related internet content provision businesses in China through contractual arrangements with PW Network and PW Digital Technology. We used to conduct the
online reading business through contractual arrangements with PW Literature before we sold PW Literature to an unrelated party in December 31, 2013. In addition, we use Trendsters Investment as
an investment vehicle to hold our investment in a venture capital fund. The venture capital fund will be managed by one or several general partners unrelated to us and will be focusing on companies
with high-growth potentials in certain technology, media and telecommunications sectors. Trendsters Investment does not itself make investment decisions for the fund or involve in the management of
the fund. In the opinion of our PRC legal counsel, King & Wood Mallesons, each of the agreements constitutes valid and legally binding obligations of each party to such contractual agreements
under PRC Laws. However, King & Wood Mallesons is of the view that the interpretation and implementation of the laws and regulations in the PRC and their application to and effect on the
legality, binding effect and enforceability of contracts are subject to the discretion of competent PRC authorities, and therefore there is no assurance that relevant PRC authorities will take the
same position as the opinion of King & Wood Mallesons herein in respect of the legality, binding effect and enforceability of each of the contractual agreements. Meanwhile, 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 involve uncertainties, which may
limit legal protections available to us to enforce the contractual arrangements should our variable interest entities or their equity holders fail to perform their obligation under those arrangements.
Regulation of Licenses for Online Games
Online game operators are required to hold a variety of permits and licenses, which, among others, include:
ICP License. Under current Chinese laws and regulations, a commercial operator of internet content provision services must
obtain a value-added
telecommunications business operating license for internet content provision from the appropriate telecommunications authorities in order to carry on any commercial internet content provision
operations in China. PW Network, Hefei PW Network and PW Digital Technology, among our other consolidated entities, each has obtained the ICP license.
Internet Culture Operation License. Each ICP license holder that engages in the supply of internet culture products and related
services, including
provision of online games, must obtain an additional internet culture operation license from the appropriate culture administrative authorities pursuant to
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the
newly issued Tentative Measures for Administration of Internet Culture (2011), which superseded the Tentative Measures for Administration of Internet Culture (2003, and as amended in 2004). PW
Network obtained an internet culture operation license for the operation of online games in May 2008, which was renewed in February 2015. Hefei PW Network and PW Digital Technology among our other
consolidated entities, each has obtained the internet culture operation license for the operation of online games.
Internet Publishing License. The GAPP that was reorganized as the SAPPRFT in 2013 and the 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. According to the Tentative Measures for Administration of Internet Publication (2002), the provision of online games is deemed an internet publication activity.
Therefore, online game operators need to obtain an internet publishing license in order to directly make their online games publicly available in China. Historically, we did not hold such a license as
issuances of such licenses were temporarily suspended by the then GAPP. PW Network obtained an internet publishing license for online game publishing in May 2008, which allows PW Network to distribute
and publish online games on the internet. Hefei PW Network, a subsidiary of PW Digital Technology, obtained an internet publishing license for online game and mobile game publishing in June 2012,
which allows Hefei PW Network to distribute and publish online games and mobile games on the internet. Currently, our self-operated online games are published in China by PW Network or Hefei PW
Network. We have filed internet publication of our client-based online PC games and certain of our self-developed web games and mobile games with the GAPP, and we are in the process of filing internet
publications of our other self-developed web games and mobile games.
Online Bulletin Board Service Approval. The 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. Although such rules were abandoned in July 2010 by the State Council, certain telecommunication authorities still
require online bulletin board services be itemized in ICP license if an ICP license holder intends to provide such services.
In
addition to the aforementioned permits and licenses that are required for online game operators, for each online game that an operator operates, additional permits or licenses are
required, which include, among others, those set forth below in "Regulation of Internet Content" and "Regulation of Information Security."
In
the opinion of our PRC legal counsel, King & Wood Mallesons, except as described above, no consent, approval or license other than those already obtained by PW Network and PW
Digital Technology is required under any of the existing laws and regulations of China for our businesses and operations.
Regulation of Internet Content
The Chinese government has promulgated measures relating to internet content through a number of ministries and agencies, including the
MIIT, the Ministry of Culture and the GAPP that was reorganized as the SAPPRFT in 2013. These measures specifically prohibit internet activities, which includes the operation of online games, among
other businesses, that result in the publication of any content which is found to, among other things, propagate obscenity, gambling or violence, instigate crimes, undermine public morality or the
cultural traditions of the PRC, or compromise State security or secrets. When an internet content provider or an internet publisher finds that information falling within the above scope is transmitted
on its website or is stored in its electronic bulletin service system, it shall terminate the transmission of such information or delete such information immediately and keep records and report to
relevant authorities. If an ICP license holder violates these measures, the PRC government may revoke its ICP license and shut down its websites. In addition, in accordance
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with
the Provisional Measures for the Regulation of Online Games promulgated by the Ministry of Culture in June 2010, imported online games should be filed with the Ministry of Culture before the
operation of the games and domestic online games should be filed with the Ministry of Culture within one month of their operations. We have successfully completed the filings with the Ministry of
Culture for our client-based online PC games Perfect World, Legend of Martial Arts, Perfect World II, Zhu Xian, Chi Bi, Hot Dance Party, Pocketpet Journey West, Battle of the Immortals, Forsaken
World, Empire of the Immortals, Saint Seiya Online, Swordsman Online, Holy King and DOTA2. We have submitted to the Ministry of Culture the relevant filing documents for our other self-operated online
games. We believe that our submissions met all filing requirements. However, we cannot assure you that these submissions will be deemed successfully filed by the Ministry of Culture. Except as
described
above with respect to the filing of certain online games with the Ministry of Culture, we have complied with all the requirements described in this paragraph.
Regulation of Information Security
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 use of the internet in ways which, among other things, result in a leak 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 public security bureaus. If an ICP
license holder violates these measures, the PRC government may revoke its ICP license and shut down its websites.
Regulation on Intellectual Property Rights
The State Council and the National Copyright Administration have promulgated various regulations and rules relating to protection of
software in China. Under these regulations and rules, software owners, licensees and transferees may register their rights in software with the National Copyright Administration or its local branches
and obtain software copyright registration certificates. We have registered all of our self-developed client-based online PC games, web games and mobile games that are currently in operation, and a
number of our game engines with the National Copyright Administration. 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 protections.
The
PRC Trademark Law together with its implementation rules protects registered trademarks. The Trademark Office of the State Administration for Industry and Commerce, or SAIC, handles
trademark registrations and grants a protection term of ten years to registered trademarks.
Internet Café Regulation
Internet cafés are required to obtain a license from the Ministry of Culture and the SAIC, and are subject to
requirements and regulations with respect to location, size, number of computers, age limit of customers and business hours. In 2004, the Ministry of Culture, the SAIC and some other governmental
authorities jointly issued a notice to suspend issuance of new internet café licenses. Though this nationwide suspension has been generally lifted in 2005, the local authorities have
the authority of controlling the volume and recipients of new licenses at their discretion. In addition, local and higher-level governmental authorities may from time to time strictly enforce customer
age limits and other requirements relating to internet cafés, as a result of the occurrence of, and media attention on, gang fights, arsons or other incidents in or related to internet
cafés. As many of our customers
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access
our games website from internet cafés, any reduction in the number, or any slowdown in the growth, of internet cafés in China as a result of any intensified
internet café regulation 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. A notice jointly issued by several central governmental agencies in February 2007 suspended nationwide the approval for the establishment of new internet cafés
for the year of 2007 and enhanced the punishment for internet cafés admitting minors.
Privacy Protection
Chinese law does 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. Chinese 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, the MIIT or its local bureaus may impose
penalties and the internet content provider may be liable for damages caused to its users.
Anti-fatigue System and Real Identification Registration System
In April 2007, the GAPP and several other governmental authorities issued a circular requiring the implementation of an "anti-fatigue
system" and a real-name registration system by all PRC online game operators, in an effort to curb addictive online game play behaviors of minors. Under the anti-fatigue system, three hours or less of
continuous play by minors is considered to be "healthy," three to five hours to be "fatiguing," and five hours or more to be "unhealthy." Game operators are required to reduce the value of in-game
benefits to a player by half if the player has reached "fatiguing" level, and to zero in the case of "unhealthy" level.
To
identify whether a player is a minor and thus subject to the anti-fatigue system, a real-name registration system is also adopted, which requires online game players to register their
real identity information before they play online games. We have developed our own anti-fatigue system and real identification number registration system, and have implemented them since July 2007.
On
July 1, 2011, the GAPP and several other government authorities jointly promulgated a notice to strengthen the implementation of the anti-fatigue system and real-name
registration, entitled Notice on Initializing the verification of Real-name Registration for Anti-Fatigue System on Internet Games, or the Real-name Registration Notice, which took effect on
October 1, 2011. Pursuant to the Real-name Registration Notice, the authority may terminate the operation of an online game if its operator violates the anti-fatigue and real-name registration
requirements.
Virtual Currency
On February 15, 2007, the Ministry of Commerce, the People's Bank of China and other relevant government authorities jointly
issued the Notice on the Reinforcement of the Administration of Internet Cafés and Online Games, or the Internet Cafés Notice. Under this notice, the People's Bank of
China is directed to strengthen the administration of virtual currency in online games to avoid any adverse impact on the economy and financial system. This notice provides that the total amount of
virtual currency issued by online game operators and the amount purchased by individual game players should be strictly limited, with a strict and clear division between virtual transactions and real
transactions carried out by way of electronic commerce. This notice also provides that virtual currency should only be used to purchase in-game items.
On
June 4, 2009, the Ministry of Commerce and the Ministry of Culture jointly issued Notice on the Reinforcement of the Administration of Virtual Currency in Online Games, which
defines what is virtual currency and requires that entities shall obtain the approval from the Ministry of Commerce
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before
issuing virtual currency and engaging in transactions using virtual currency in connection with online games. Entities are prohibited from using virtual currency to carry out gambling business.
Regulation of Internet Video/Audio Program Services
On December 12, 2007, the SARFT and MIIT promulgated the Administrative Measures on Internet Video/Audio Program Services, which
requires that, among others, a service provider of internet video/audio program shall obtain a license from the SARFT, failure of which may result in the suspension or close of the website providing
the internet video/audio program services. See "Item 3. Key InformationD. Risk FactorsRisks Related to Doing Business in ChinaPRC regulations relating to
internet video/audio program services may adversely affect the operation of our online games."
Regulation on Taxation
For a discussion of applicable PRC tax regulations, see "Item 5. Operating and Financial Review and ProspectsA.
Operating ResultsTaxation."
Regulation of Foreign Currency Exchange and Dividend Distribution
Foreign Currency Exchange. The principal regulations governing foreign currency exchange in China are the Foreign Exchange
Administration Regulations
(1996), as amended in August 2008. Under these regulations, the RMB is freely convertible for current account items, including the distribution of dividends, interest payments, trade and
service-related foreign exchange transactions, but not for capital account items, such as direct investment, loan, repatriation of investment and investment in securities outside China, unless
previously approved by and/or registered with SAFE or its authorized local branches.
Pursuant
to the Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), foreign-invested enterprises in China may purchase or remit foreign exchange, subject
to a cap approved by SAFE, for settlement of current account transactions without the approval of SAFE. Foreign exchange transactions under the capital account are still subject to limitations and
require approvals from, or registration with, SAFE and other relevant PRC governmental authorities.
Dividend Distribution. The principal regulations governing distribution of dividends of foreign holding companies include the
Foreign Investment
Enterprise Law (1986), as amended, and the Administrative Rules under the Foreign Investment Enterprise Law (2001).
Under
these regulations, foreign-invested 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-invested enterprises in China are required to allocate at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds unless
these reserves have reached 50% of the registered capital of the enterprises. These reserves are not distributable as cash dividends.
SAFE Circular 37. On July 14, 2014, SAFE issued SAFE Circular 37, which replaced the SAFE Circular 75. According to SAFE
Circular 37, PRC
residents (including PRC entities and PRC resident individuals) shall register with SAFE or its local branches in connection with their establishment or control of an offshore entity established for
the purposes of overseas investment or financing, with such PRC residents' legally owned assets or equity interests in domestic enterprises or offshore assets or interests. In addition, such PRC
residents shall update their SAFE registrations when the offshore special purpose vehicles undergo any change of basic information (including change of such PRC resident individual shareholder, name
and operation term), or material events relating to increase or decrease in investment amount contributed by PRC resident individual shareholder, transfers or exchanges of shares, or mergers or
divisions. SAFE may subsequently issue implementation guidance.
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Under
the relevant rules, failure to comply with the registration procedures set forth in SAFE Circular 37 and any subsequent implementation guidance as may be issued by SAFE, 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 relevant PRC residents to penalties under PRC foreign exchange administration regulations. PRC
residents who control our company from time to time are required to register with SAFE in connection with their investments in us.
SAFE Notice 7. In December 2006, the People's Bank of China promulgated the Administrative Measures of Foreign Exchange Matters
for Individuals, or
PBOC Notice 78, setting forth the respective requirements for foreign exchange transactions by PRC individuals under either the current account or the capital account. In February 2012, SAFE
promulgated the Notice relating to Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas-Listed Company, or SAFE Notice 7, which replaced an
earlier SAFE notice issued in 2007. SAFE Notice 7 is applicable to domestic directors, supervisors, senior management and other employees of an overseas-listed domestic company, PRC subsidiaries or
branches of an overseas-listed company and any PRC entities which are directly or indirectly controlled by an overseas-listed company ("Domestic Company"), including PRC citizens and foreign citizens
who have resided in the PRC for one year or more ("Domestic Individuals"). Under SAFE Notice 7, Domestic Individuals who are granted stock options or any other stock-related rights and benefits under
a stock incentive plan by an overseas publicly listed company are required, through the Domestic Company or a PRC agent ("Domestic Agent"), to complete certain procedures and transactional foreign
exchange matters under the stock incentive plan upon the examination by, and the approval of, SAFE or its authorized local counterparts; and the Domestic Agent is required to register relevant
information of the stock incentive plan with the authorized local counterparts of SAFE. If we or our PRC optionees fail to comply with the SAFE Notice 7, we or our PRC optionees and their local
employer may be subject to fines and legal sanctions.
Regulation of Investment into Equity Investment Enterprise
The National Development and Reform Commission, or the NDRC, issued the Circular on Promoting and Standardize the Development of Equity
Investment Enterprises on November 23, 2011, which regulates (1) the establishment, fundraising and investment of equity investment enterprises, (2) risk-control mechanisms of
equity investment enterprises, (3) responsibilities
of equity investment management entities as entrusted management entities of the equity investment enterprises, (4) information disclosure systems of the equity investment enterprises, and
(5) the record filings and industry self-regulation of the equity investment enterprises. The NDRC also issued a series of implementation guidance for the operation and management of capital
equity investment enterprises. This circular and the corresponding guidance set out the requirements for an investor in an equity investment enterprise, including the investor's risk profile and fund
contribution requirements, including that subscription in an equity investment enterprise by each investor shall not be less than RMB10 million. In addition, an investor shall invest with one's
lawful equity funds and hold the investment in an equity investment enterprise directly instead of by way of trust or any other similar measures.
Trendsters
Investment, our variable interest entity, is an investor and a limited partner in a venture capital fund, which falls in the category of equity investment enterprises under
this circular. We believe that we are in compliance with all the requirements for an investor set forth in this circular and the series of guidance.
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C. Organizational Structure
The following diagram illustrates our corporate structure as of the date of this annual report:
- *
- Beijing
Shiji Xiangshu Technology Co., Ltd. is 88.03% owned by Mr. Michael Yufeng Chi, our founder and chairman of the board of directors
and an owner of our ordinary shares, 6.38% owned by Mr. Tongyan Wang, a Chinese citizen, and 5.59% owned by Mr. Di He, our chief technology officer.
- **
- Beijing
Jiuzhou Tianyuan Investment Management Co., Ltd. is 60% owned by Mr. Huan Su, a Chinese Citizen, 35.72% owned by
Mr. Furui Chen, a Chinese citizen, and 4.28% owned by Mr. Di He, our chief technology officer.
- ***
- Includes
a number of consolidated entities incorporated in China that are not illustrated in this chart.
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Beneficial Interest |
(1) |
|
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|
Contractual arrangements including an Exclusive Technology Support and Service Agreement, a Development Cooperation Agreement, a Business Operation Agreement, a Call Option Agreement and an Equity Pledge Agreement. For a
description of these agreements, see "Item 7. Major Shareholders and Related Party TransactionsB. Related Party TransactionsContractual Arrangements with PW Network and its Equity Owners." |
(2) |
|
|
|
Contractual arrangements including a Business Operation Agreement, a Call Option Agreement, an Equity Pledge Agreement and a Power of Attorney. For a description of these agreements, see "Item 7. Major Shareholders
and Related Party TransactionsB. Related Party TransactionsContractual Arrangements with PW Network and its Equity Owners." |
(3) |
|
|
|
Contractual arrangements including a Business Operation Agreement, a Call Option Agreement, an Equity Pledge Agreement and a Power of Attorney. For a description of these agreements, see "Item 7. Major Shareholders
and Related Party TransactionsB. Related Party TransactionsContractual Arrangements with Perfect Moment and its Equity Owners." |
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|
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(4) |
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|
Contractual arrangements including an Exclusive Technology Support and Service Agreement, a Development Cooperation Agreement, a Business Operation Agreement, a Call Option Agreement and an Equity Pledge Agreement. For a
description of these agreements, see "Item 7. Major Shareholders and Related Party TransactionsB. Related Party TransactionsContractual Arrangements with Perfect Moment and its Equity Owners." |
(5) |
|
|
|
Contractual arrangements including an Exclusive Technology Support and Service Agreement, a Development Cooperation Agreement, a Business Operation Agreement, a Call Option Agreement and an Equity Pledge Agreement. For a
description of these agreements, see "Item 7. Major Shareholders and Related Party TransactionsB. Related Party TransactionsContractual Arrangements with Trendsters Investment and its Equity Owners." |
(6) |
|
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|
Contractual arrangements including two Loan Agreements, a Business Operation Agreement, a Call Option Agreement, an Equity Pledge Agreement and a Power of Attorney. For a description of these agreements, see "Item 7.
Major Shareholders and Related Party TransactionsB. Related Party TransactionsContractual Arrangements with Trendsters Investment and its Equity Owners." |
(7) |
|
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|
Contractual arrangements including two Loan Agreements, a Business Operation Agreement, a Call Option Agreement, an Equity Pledge Agreement and a Power of Attorney. For a description of these agreements, see "Item 7.
Major Shareholders and Related Party TransactionsB. Related Party TransactionsContractual Arrangements with PW Digital Technology and its Equity Owners." |
(8) |
|
|
|
Contractual arrangements including an Exclusive Technology Support and Service Agreement, a Development Cooperation Agreement, a Business Operation Agreement, a Call Option Agreement and an Equity Pledge Agreement. For a
description of these agreements, see "Item 7. Major Shareholders and Related Party TransactionsB. Related Party TransactionsContractual Arrangements with PW Digital Technology and its Equity Owners." |
D. Property, Plants and Equipment
In the first quarter of 2011, we moved our principal executive offices into an office building of approximately 55,000 square meters that we purchased in Beijing
when it became available for occupancy. We also have two office premises of approximately 4,500 square meters and approximately 2,700 square meters located in Beijing, which we purchased in November
2007 and January 2008,
respectively. In June 2013, we purchased office premises with an area of approximately 14,140 square meters in Chengdu. In June 2014, we entered into an agreement to purchase office premises with an
area of approximately 12,800 square meters in Chongqing at a total price of approximately RMB104.9 million (US$16.9 million), and the purchase was completed in April 2015.
Our
major leased properties in China include approximately 11,040 square meters of office space in Beijing, approximate 6,200 square meters of office space in Shanghai, approximate 1,320
square meters of office space in Hefei and approximate 710 square meters of office space in Fuzhou. Our U.S. subsidiaries' office lease is for an aggregate of approximately 15,310 square meters. Our
Japan office lease is approximately 860 square meters. Our Netherlands office lease is approximately 990 square meters. Our Korea office lease is approximately 1,120 square meters. We maintain an
efficient hardware and software infrastructure with a large network capacity consisting of self-owned and leased servers.
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ITEM 4A. UNRESOLVED STAFF COMMENTS
Not Applicable.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion of our financial condition and results of operations is based upon and should be read in conjunction with our
consolidated financial statements and their related notes included in this annual report on Form 20-F. This report contains forward-looking statements. See "Forward-Looking Information." In
evaluating our business, you should carefully consider the information provided under the caption "Item 3. Key
InformationD. Risk Factors" in this annual report on Form 20-F. We caution you that our businesses and financial performance are subject to substantial risks and uncertainties.
A. Operating Results
Overview
We are a leading online game developer and operator in China as measured by the popularity of our games in China in 2014, according to
a report published by the International Data Corporation. We primarily develop online games based on our proprietary game engines and game development platforms. Our strong technology and creative
game design capabilities, combined with our extensive knowledge and experience in the online game market, enable us to frequently and promptly introduce popular games designed to cater to changing
customer preferences and market trends.
We
currently operate in China a number of our self-developed client-based online PC games, including eleven 3D MMORPGs, namely, Perfect World, Legend of Martial Arts, Perfect World II,
Zhu Xian, Chi Bi, Pocketpet Journey West, Forsaken World, Saint Seiya Online, Swordsman Online, Holy King and Legend of the Condor Heroes, two 2.5D MMORPGs, Battle of the Immortals and
Empire of the Immortals, two 2D turn-based MMORPGs, Fantasy Zhu Xian and Return of the Condor Heroes, and an online casual game, Hot Dance Party.
In
North America, Europe, Japan, Southeast Asia and Korea, we localize and operate some of the above games through our wholly owned subsidiaries. In some of these markets, we also
operate certain games developed by our U.S. based subsidiary Cryptic Studios such as Neverwinter, as well as games licensed from other developers.
In
addition to the above client-based online PC games, we also developed and operate several web games such as Touch, and mobile games, such as Return of the Condor Heroes Mobile,
Forsaken World Mobile, CrossGate Mobile, Forever Mars, Dawn after Dark, Swordsman Mobile and Saint Seiya Mobile.
We
use a time-based revenue model for our first game, Perfect World, under which we charge players based on the time they spend playing the game. We use an item-based revenue model for
our other
self-developed online games, 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, accessories and pets.
In 2012, 2013 and 2014, a substantial majority of our online game operation revenues were generated through this item-based revenue model. Although a majority of our revenues are generated in China,
as of the date of this annual report, we have exported a number of our games to various countries and regions, and we plan to export these games and our new games to more countries and regions. We
generated revenues of RMB2.8 billion, RMB3.1 billion and RMB3.8 billion (US$619.4 million) in 2012, 2013 and 2014, respectively. We achieved net income of
RMB540.7 million, RMB542.4 million and RMB471.4 million (US$76.0 million) in the years ended December 31, 2012, 2013 and 2014, respectively.
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To
sharpen our focus on our core online game development and operation business, we sold the online reading business to an unrelated party in December 2013. As a result, the online
reading business is accounted for as discontinued operations and our consolidated statements of income and comprehensive income in this annual report separates the discontinued operations from our
remaining business operations for all years presented.
Factors Affecting Our Results of Operations
We are affected by general conditions typically affecting the online game industry in China. For example, we benefited from the overall
economic growth in China in the past several years, which resulted in increases in disposable income and discretionary consumer spending. We have also benefited from other general conditions in China,
including the increasing use of the internet with the growth of PC and broadband penetration; the growing popularity of online games in comparison with other forms of entertainment; and favorable
demographic trends, particularly the growth of the population in the age groups more inclined to play online games. Our results of operations may be adversely affected by economic slowdown in China
and other countries and regions where our games are operated and the arrival of additional competitions into the markets of each of our businesses. The government regulation imposed on online game
industry may also have significant impact on our results of operations.
Our
operating results are more directly affected by company-specific factors including the following:
-
- the number of our online games available in the market;
-
- the popularity of our games and in-game items compared with those of our competitors;
-
- the speed at which we develop and launch new online games and related in-game items in China and other regions where we operate our
games directly;
-
- the cost of developing, operating and marketing online games;
-
- the cost to purchase additional servers and equipment in anticipation of new games;
-
- our ability to streamline our costs in response to the global economic crisis; and
-
- the success of our investments and merger and acquisition activities.
Our
future growth will depend significantly upon our ability to continually and successfully develop, market and operate additional online games that are attractive to players, to
increase monetization of our existing and future games and to expand internationally by licensing our games to various countries and regions and by operating our own games through our overseas
subsidiaries. Our acquisitions and expansion in foreign markets may increase our capital expenditure, create downward pressure on our
liquidity and depress margins in the short term. However, we believe that our acquisitions and expansion in foreign markets will in the long run increase revenues, diversify our user base and enhance
our research and development and operating capability, which in turn will help improve our liquidity, capital resources, results of operation and key performance measures such as average concurrent
users and maintain and improve our profit margin as well.
Revenues
For the years ended December 31, 2012, 2013 and 2014, we generated revenues of RMB2.8 billion, RMB3.1 billion and
RMB3.8 billion (US$619.4 million), respectively. We expect that our future revenue growth will be primarily driven by our launch of additional games, increasing monetization of our
existing games, and expansion of our overseas business. For the years ended December 31, 2012, 2013 and 2014, our online game operation revenues are net of sales discounts and rebates to our
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distributors,
which averaged approximately 10.3%, 9.4% and 7.8%, respectively, of the face value of our prepaid cards sold to our distributors. The following table sets forth the revenues generated
from our online game operations and licensing, and from other sources, both in absolute amount and as a percentage of total revenues for the periods indicated.
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For the Year Ended December 31, |
|
|
|
2012 |
|
2013 |
|
2014 |
|
|
|
RMB
|
|
%
|
|
RMB
|
|
%
|
|
RMB
|
|
US$
|
|
%
|
|
|
|
(in thousands except percentages)
|
|
Revenues: |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online game operation revenues |
|
|
2,499,419 |
|
|
90.2 |
|
|
2,800,321 |
|
|
91.7 |
|
|
3,597,595 |
|
|
579,827 |
|
|
93.6 |
|
Licensing revenues |
|
|
171,564 |
|
|
6.2 |
|
|
149,318 |
|
|
4.9 |
|
|
168,956 |
|
|
27,231 |
|
|
4.4 |
|
Other revenues |
|
|
99,604 |
|
|
3.6 |
|
|
103,024 |
|
|
3.4 |
|
|
76,673 |
|
|
12,357 |
|
|
2.0 |
|
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Total revenues |
|
|
2,770,587 |
|
|
100.0 |
|
|
3,052,663 |
|
|
100.0 |
|
|
3,843,224 |
|
|
619,415 |
|
|
100.0 |
|
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In 2012, 2013 and 2014, the majority of our revenues were generated from our online game operations. We launched our first game,
Perfect World, in China in January 2006, using the time-based revenue model. In 2012, 2013 and 2014, 1.1%, or RMB27.4 million, 0.9%, or RMB24.1 million and 0.3%, or
RMB12.3 million (US$2.0 million), of our online game operation revenues were derived from this game, respectively. With respect to games operated under the time-based revenue model, the
revenue growth will depend primarily on the increase in the number of players and their playtime. We expect that our revenues generated from games operated under the time-based revenue model will
remain a small portion of our online game operation revenues as we have continued to use the item-based revenue model for our new online games since we began to use that model in September 2006.
We
launched additional self-developed online games using the item-based model in China: Legend of Martial Arts in September 2006, Perfect World II in November 2006, Zhu Xian in May 2007,
Chi Bi in January 2008, Hot Dance Party in March 2008, Pocketpet Journey West in October 2008, Battle of the Immortals in April 2009, Fantasy Zhu Xian in October 2009, Forsaken World in October 2010,
Empire of the Immortals in March 2011, Return of the Condor Heroes in September 2012, Saint Seiya Online in May 2013, Swordsman Online in June 2013, Holy King in September 2013 and Legend of the
Condor Heroes in September 2014, as well as a number of web games and mobile games, such as Touch in September 2013, Return of the Condor Heroes Mobile in August 2013, Forsaken World Mobile in June
2014, CrossGate Mobile in July 2014, Forever Mars in November 2014, Dawn after Dark, Swordsman Mobile and Saint Seiya Mobile in December 2014. In North America and Europe, through PW USA and PW
Europe, we operate a number of our own games including some games developed by our wholly owned U.S. based subsidiary Cryptic Studios, as well as several games that we licensed from other developers.
In Japan, through C&C Media, we operate a number of our own games and certain games licensed from other developers. In Southeast Asia and Korea, we operate several of our own games through PW Hong
Kong and PW Korea, respectively.
In
2012, 2013 and 2014, a substantial amount of our online game operation revenues were derived from our games using the item-based revenue model. With respect to games using the
item-based revenue model, the revenue growth will depend primarily on the increase in the number of players and the monetization level of our games. We expect that revenues derived from our games
operated under the item-based revenue model will remain a dominant source of our online game operation revenues in the foreseeable future.
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We
believe that our proprietary game engines, powerful game development platforms and creative game design will facilitate our successful development of games that cater to changing
customer preferences and market trends. Furthermore, our creative utilization of extensive knowledge and experience in the online game market and strong and consistent operations will help increase
the monetization of our existing and future games. We currently have a number of new games under development. We intend to continue to develop new games to expand our game portfolio and replace our
existing games as they reach the end of their useful economic lives. We expect the percentage of our online game operation revenues derived from particular games to change from period to period over
the life span of each individual game.
The
following table sets forth, for the periods indicated, certain operating statistics for online PC games under operation in Mainland China.
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For the Three Months Ended |
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March 31,
2014 |
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June 30,
2014 |
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September 30,
2014 |
|
December 31,
2014 |
|
Quarterly average concurrent users |
|
|
662,000 |
|
|
661,000 |
|
|
623,000 |
|
|
642,000 |
|
Average
concurrent users, or ACU, for any of our online PC games operated in China is the number of users logged on to that game at particular points of time with 5-minute intervals. The
daily average concurrent users for that game is determined by averaging the 5-minute interval data over the course of a day. The daily average data are then averaged over the course of a month to
derive the monthly average concurrent users of the game. Quarterly average concurrent users for a game is the average of monthly average concurrent users of such game during the relevant quarter. The
fluctuation of ACU during the fiscal year 2014 was mainly due to our anti-cheating efforts with regard to our core games for the purpose of maintaining a healthy and fun gaming environment for our
players. Although ACU does not always correlate with changes in our domestic online game revenues, we believe that ACU reflects the popularity and health of our games in the long run.
The
following table sets forth, for the periods indicated, certain operating statistics for our client-based online PC games under the item-based revenue model.
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For the Year Ended
December 31, |
|
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|
2012 |
|
2013 |
|
2014 |
|
Annual active charging accounts (in thousands)(1) |
|
|
3,009 |
|
|
3,323 |
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|
2,780 |
|
Annual average revenue per active charging accounts (in RMB)(2) |
|
|
817 |
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|
784 |
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|
946 |
|
- (1)
- Annual
active charging accounts is defined as the aggregate number of accounts for our client-based online PC games under the item-based revenue model which
have received deposit at least once during a calendar year.
- (2)
- Annual
average revenue per active charging accounts is calculated by dividing the revenues derived from our client-based online PC games under the
item-based revenue model in a year by the number of annual active charging accounts in that year.
The
active charging accounts and the average revenue per active charging account may fluctuate significantly from period to period due to a number of factors, including our promotional
activities and unpredictable player deposit and spending patterns.
In 2012, 2013 and 2014, we recorded revenues of RMB171.6 million, RMB149.3 million and RMB169.0 million
(US$27.2 million), respectively, for the initial fees and usage-based royalties we
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earned
from licensees of our online games. Licensing revenues represented 6.2%, 4.9% and 4.4% of our total revenues in 2012, 2013 and 2014, respectively. Majority of our licensing revenues were
generated from overseas. As of the date of this annual report, we have licensed a number of our games to leading game operators overseas. All of these licensed games are operated under the item-based
revenue model by the respective operators. Under our license agreements with licensees, we are generally entitled to receive from the licensees an initial fee and ongoing usage-based royalties. The
usage-based royalties are generally determined based on the amount of money charged to players' accounts or service fees payable by players in a given country or region. We plan to further strengthen
our global presence by licensing more of our existing games and new games we develop in the future to leading online game operators in various countries and regions overseas.
In 2012, 2013 and 2014, we recorded other revenues in the amount of RMB99.6 million, RMB103.0 million and
RMB76.7 million (US$12.4 million), which represented 3.6%, 3.4% and 2.0% of our total revenues, respectively. Other revenues included, among other things, advertising revenue from our
game portals and revenues generated from Torchlight series, our pay-per-install games developed by our majority owned subsidiary Runic Games.
Revenue Collections
Online game operations.
Client-based Online PC Games. For our client-based online PC games, we collect our online game operation revenues through sales of
(i) physical and virtual prepaid cards, which record entitlements to certain numbers of our online points, and (ii) online points, which entitle players to play our games for a specified
period of time or to purchase our in-game items. We generally sell physical prepaid cards through an offline network of third-party distributors, which in turn distribute our cards to retailers,
including internet cafés, newsstands and convenience stores. Our virtual prepaid cards and online points are sold via third-party online distributors and telecommunication operators who
bundle the collection of fees for our games with the fees for their services to users. Through our electronic distribution system, we electronically sell virtual prepaid cards or online points to
distributors and our distributors electronically sell the online points in their accounts to the accounts of their sub-distributors, retailers or players. We also sell online points directly to
players via online payment platform service providers.
In
most cases, we receive cash payments from distributors upon or before delivering our prepaid cards or online points to them. In other cases, the online payment platform service
providers or other third parties generally pay us within several days after they collect the payments or after our monthly or weekly settlement with them.
We
offer a discount to the face value of our game cards to our customers. We also offer certain volume rebate as a percentage of the face value of our game cards to our major
distributors in China if they have achieved a pre-set sales target. The rebate is provided to these major distributors in the form of free game cards. To date, all of these major distributors have
been able to achieve the pre-set sales target. The average total discount rate we have offered to all of our distributors in China was approximately 10.3%, 9.4% and 7.8% for the years ended
December 31, 2012, 2013 and 2014, respectively, of the face value of our game cards.
Mobile Games. We distribute mobile games to end-users through digital storefronts and game platforms, such as Apple's App Store and
Qihoo 360's game
platform. These storefronts and platforms sell in-game virtual currencies, which are used by game players to redeem virtual items in our mobile games. After retaining their revenue sharing amounts at
a pre-agreed percentage, the storefronts and platforms remit us the proceeds that they have received from game players.
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Licensing. Under our license agreements with licensees, we are generally entitled to receive, from the licensees, an initial fee and
ongoing
usage-based royalties. The ongoing usage-based royalties are generally determined based on the amount of money charged to players' accounts or service fees payable by players in a given country or
region. We generally receive ongoing usage-based royalties on a monthly basis. We generally receive our initial fees in installments, usually within several days after the signing of the license
agreements or the commencement of the closed beta testing, the open beta testing and/or the commercial launch of our games, respectively. In some cases, in consideration of the initial fees, we are
required to provide a combination of licenses to use the software, training and post contract services, such as provision of when-and-if-available or periodic upgrades to the games, during the license
period. In other cases, we are required to provide free post-contract customer support, or PCS, in the first year of the licensing period to the licensees who have the option to acquire the PCS at
certain percentage of the initial fees after the first year of the licensing period.
Revenue Recognition
Online game operations.
Client-based Online PC Games. For our client-based online PC games, to use the online points on a prepaid card, a player must activate
the card by
using an access code and password to transfer the online points on the card to such player's personal game account. Players can directly charge the online points they purchased into their accounts.
Under both the time-based and the item-based revenue models, the net proceeds we receive from sales of online points to players are recorded as deferred revenues, while the net proceeds we receive
from sales of online points to distributors and sales of prepaid cards are initially recorded as advances from customers. As we do not have the control and generally do not know the ultimate selling
price of the prepaid cards or online points sold by third-party distributors, we record the net proceeds collected from distributors as advances from customers. Upon activation of the game cards or
charge of the online points, these advances from customers are immediately transferred to deferred revenues. As of December 31, 2012, 2013 and 2014, our advances from customers amounted to
RMB133.9 million, RMB102.5 million and RMB65.9 million (US$10.6 million), respectively, and our deferred revenues related to online game operations amounted to
RMB411.0 million, RMB774.6 million and RMB886.0 million (US$142.8 million), respectively.
The
timing of recognizing deferred revenues as revenues depends on whether the game is using the time-based revenue model or the item-based revenue model. For our game that uses the
time-based revenue model, we recognize revenues when the activated prepaid cards or the charged online points representing the playing time are actually used by the players to play our games. For our
games that use the item-based revenue model, we recognize revenues over the expected lives of the purchased in-game items or as these items are consumed.
Mobile Games. We record revenues generated from mobile games on a gross basis, which is based on the total amount billed to game players,
including
the commissions retained by digital storefronts and game platforms, as we are acting as the principal and the primary obligor toward game players for the games distributed through digital storefronts
and game platforms.
The
revenues with regard to a mobile game are then ratably recognized over paying players' estimated average player life, which is the average period between the first date the game
players charge online points to their accounts and the expected last date these paying players would play the game.
Licensing. We enter into licensing arrangements with licensees to operate our games in other countries and regions. These licensing
agreements
provide for two revenue streams: the initial fees and the usage-based royalty fees.
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In
certain licensing arrangements, we provide PCS for the first year, which includes free upgrades, maintenance support and training. The licensee has the option to purchase PCS in
subsequent years at a specified renewal rate. In these arrangements, we allocate the initial fee into two parts. The first part represents the license of the game and is recognized as revenue upon
commercial launch. The second part represents PCS and is recognized ratably over the one-year PCS period.
In
other licensing arrangements, we provide PCS over the full licensing period without additional charge. In those cases, the total amount of the initial fee is recognized ratably over
the full contractual licensing period.
According
to the license agreements, we are also entitled to ongoing usage-based royalties determined based on the amount of money charged to the players' accounts or services payable by
players in a given country or region. The usage-based royalties are recognized when they are earned, provided that the collection is probable.
For
more details of our revenue recognition policies for our revenues from online game operations and licensing, see "Critical Accounting PoliciesRevenue
Recognition."
Cost of Revenues
Our cost of revenues consists primarily of server and bandwidth leasing fees, salary and benefits expenses related to the operation of
our online games, depreciation and amortization expenses, revenue sharing cost or royalties paid to third parties, value added tax ("VAT") and business tax and other direct costs of providing online
game services. Other direct costs of providing online game services primarily comprise rental cost for the premises used in relation to the operation of our online games and manufacturing costs of
physical game cards. We expect that our online game related cost will increase as our revenues increase.
Server
and bandwidth leasing fees were equal to 2.8%, 3.5% and 2.7% of our revenues in 2012, 2013 and 2014, respectively. We rent communication bandwidth to connect our game operating
networks to the internet and interchange data traffic to and from our networks and our users. Our bandwidth needs
are considerable given the large number of concurrent users of our games and because our games are highly interactive between online users, requiring considerable amounts of data to be exchanged at
high frequencies. We expect our payments for bandwidth leasing fees will increase in the future as we launch new games, broaden our geographic reach, add features to advance our network security and
data traffic management systems and address additional growth in our player base. We purchase majority of the servers for the operation. To ensure that we have sufficient network capacity to meet the
needs of our players at all times, we generally increase our server capacity in line with the rate of increase in our peak concurrent users.
Salary
and benefits expenses were equal to 5.2%, 5.1% and 4.6% of our revenues in 2012, 2013 and 2014, respectively. Salary and benefits expenses included in our cost of revenues
primarily relate to employees involved in the operation of our online games, including network operation and customer service. Salary and benefits expenses primarily include employee wages and social
welfare benefits, such as medical insurance, housing subsidies, unemployment insurance and pension benefits.
The
amount of net VAT and business tax with related surcharge included in cost of revenues for the years ended December 31, 2012, 2013 and 2014 was RMB117.6 million,
RMB157.8 million and RMB195.1 million (US$31.4 million), respectively, equal to 4.2%, 5.1% and 5.1% of our revenues in 2012, 2013 and 2014, respectively. Our subsidiaries and
variable interest entities incorporated in China are subject to either a 5% business tax or a VAT at an effective rate of 3% or 6% on revenues generated from our online game businesses in China.
Starting from September 1, 2012, our subsidiaries and variable interest entities incorporated in China are subject to VAT at an effective rate of 6% for revenues derived from overseas
licensing. In addition, according to the applicable tax rules and
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regulations,
being a technology development business and technology export enterprise, an entity may enjoy VAT exemption for revenues generated from software development and relevant technology
consulting services, and overseas licensing, respectively. The sales proceeds generated from our overseas businesses are subject to VAT or consumption tax applicable in the respective jurisdictions.
See "Taxation."
The
amount of depreciation and amortization expenses included in cost of revenues for the years ended December 31, 2012, 2013 and 2014 was RMB88.7 million,
RMB108.8 million and RMB132.7 million (US$21.4 million), respectively, equal to 3.2%, 3.6% and 3.5% of our revenues in 2012, 2013 and 2014, respectively. Depreciation and
amortization expenses comprise primarily of depreciation and amortization expenses of servers, computer equipment and copyrights that are directly related to our business operation. We expect our
depreciation and amortization expenses to increase as we purchase additional servers, computer equipment and office premises to meet the needs of our business expansion.
The
amount of revenue sharing cost or royalties paid to third parties for the years ended December 31, 2012, 2013 and 2014 was RMB41.0 million, RMB103.8 million and
RMB442.7 million (US$71.4 million), respectively, equal to 1.5%, 3.4% and 11.5% of our revenues in 2012, 2013 and 2014, respectively. Revenue sharing cost consists primarily of revenue
sharing with mobile game distribution platforms, as well as license fees and royalty fees paid to third parties related to our client-based online PC games.
Operating Expenses
Our operating expenses consist of research and development expenses, sales and marketing expenses, and general and administrative
expenses, each of which includes share-based compensation.
We
expect that our operating expenses will increase in the future as we further expand our game portfolio, enhance our research and development and sales and marketing activities.
Research and development expenses were equal to 28.8%, 29.0% and 27.9% of our revenues in 2012, 2013 and 2014, respectively. From April
of 2010, due to the extended game development cycle and the incurrence of material online game development costs, we started to capitalize the qualified online game development costs as intangible
assets. For the years ended December 31, 2012, 2013 and 2014, the amount of online game development costs capitalized as intangible assets was approximately RMB5.9 million,
RMB47.9 million and RMB19.2 million (US$3.1 million), respectively. The decrease from 2013 to 2014 is primarily due to the decrease in online game development activities and
expenditure associated with new games during 2014 that met the conditions of capitalization in accordance with our accounting policy, see "Critical Accounting
PoliciesSoftware Development Costs." Our research and development expenses consist primarily of salary and benefits expenses of personnel engaged in the research and development of our
game engines, game development platforms and online games, share-based compensation expenses, and rental cost for the premises used in our development of online game products. We expect that our
research and development expenses will increase in the near future as we plan to increase research and development expenditures to develop more client-based online PC games, mobile games and other
online games, and upgrade our proprietary game engines and game development platforms.
Sales and marketing expenses were equal to 18.8%, 23.9% and 22.4% of our revenues in 2012, 2013 and 2014, respectively. Our sales and
marketing expenses consist primarily of expenses for advertisement and promotion, and salary and benefits of our sales and marketing personnel. Our
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advertisement
and promotion expenses include advertising payments to various online game sites and game magazines and other advertising service providers as well as expenses for sponsoring media
events. We plan to intensify our marketing and promotional efforts when we launch new games in the future, which will result in the increase in our sales and marketing expenses.
General and administrative expenses were equal to 11.1%, 10.2% and 10.3% of our revenues in 2012, 2013 and 2014, respectively. Our
general and administrative expenses consist primarily of salary and benefits and share-based compensation expenses for general management, finance and administrative personnel and professional service
fees for services rendered in connection with our acquisition, audit and tax consultation. We expect that our general and administrative expenses will increase due to, among other things, our overall
operational expansion.
Goodwill impairment was RMB58.2 million (US$9.4 million) for the year ended December 31, 2014, which primarily
comprised impairment associated with our U.S. subsidiaries, compared to RMB40.8 million and RMB77.3 million for the years ended December 31, 2012 and 2013,
respectively, which primarily comprised impairment associated with our Japanese subsidiary. For goodwill impairment, see "Critical Accounting PoliciesGoodwill."
We have adopted share incentive plans to motivate, attract and retain employees, directors and consultants, and promote the success of
our business. See "Item 6. Directors, Senior Management and EmployeesB. Compensation of Directors and Executive OfficersShare Incentive Plan." As of
December 31, 2014, there were outstanding options to purchase a total of 25,042,720 Class B ordinary shares. The amounts of these share-based compensation charges were
RMB71.1 million, RMB75.9 million and RMB47.7 million (US$7.7 million) for the years ended December 31, 2012, 2013 and 2014, respectively. As of December 31,
2014, the unamortized compensation expenses in connection with our outstanding options were RMB57.8 million (US$9.3 million). In 2014, our board of directors approved a restructuring
plan of our research and development teams, under which five new controlled companies have been formed. Non-controlling interest of each of these five controlled companies was granted to be
beneficially held by our key research and development employees. The shares beneficially held by our key employees were recognized as share-based compensation expenses in our consolidated financial
statements, and the total compensation cost of RMB119.9 million (US$19.3 million) would be amortized over the requisite service periods of these key research and development employees on
a straight-line basis, among which approximately RMB3.8 million (US$0.6 million) expenses were recorded for the year ended December 31, 2014.
Taxation
Under the current laws of the Cayman Islands, we are not subject to tax on income or capital gain in the Cayman Islands. In addition,
payments of dividends by us to our shareholders are not subject to withholding tax in the Cayman Islands.
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Under the current laws of the British Virgin Islands, we are not subject to tax on income or capital gain in the British Virgin
Islands. In addition, dividend payments by our subsidiaries in the British Virgin Islands are not subject to withholding tax in the British Virgin Islands.
PW USA, Runic Games, Cryptic Studios and Unknown Worlds are generally subject to corporate income tax rates ranging from 15% to 35% at
the federal level and, in some instances, are also subject to tax at the state level. State tax rates vary by jurisdiction. Our sales proceeds from online game operation in the states of Massachusetts
and Washington of the U.S. are
subject to sales tax at rates of 6.25% and 6.5%, respectively. For other states where we operate online games, sales tax is not levied according to local tax regulation.
Under the current Hong Kong Inland Revenue Ordinance, our subsidiaries established in Hong Kong are subject to 16.5% income tax on
their taxable income generated from operations in Hong Kong. In addition, payments of dividends from PW Hong Kong to us are not subject to any Hong Kong withholding tax. Hong Kong does not levy
turnover tax.
Perfect Star Co., Ltd. engages in offshore licensing activity. It is subject to a fix amount corporate income tax of
MYR20,000 a year. Perfect Play SDN. BHD. engages in onshore business activities, and is subject to a 25% corporate income tax rate. Our sales proceeds from online game operation supporting service
conducted in Malaysia are subject to service tax at a rate of 6%.
Our subsidiary established in Taiwan is subject to a 17% corporate income tax rate (taxable income up to TWD120,000 is exempt). Our
sales proceeds from online game operation supporting service conducted in Taiwan are subject to VAT at a rate of 5%.
The fiscal unity PW Universal in Netherlands engages in intra-group licensing and local sales and marketing. The standard corporate
income tax rate is 25%. A lower rate of 20% applies to the first EUR200,000 of taxable income. Our sales proceeds from online game operation conducted in the Netherlands are subject to VAT at a rate
of 21%.
The corporate income tax rate applicable to C&C Media and CCO Co., Ltd is 40.7% in 2012, 38.0% from 2013 to
March 31, 2014 and 35.6% from April 1 to December 31, 2014. Our sales proceeds from online game operation conducted in Japan are subject to consumption tax at a rate of 5% from
2012 to March 31, 2014 and 8% from April 1 to December 31, 2014.
PW Korea is generally subject to corporate income tax rates ranging from 11.0% to 24.2%. Our sales proceeds from online game operation
conducted in Korea are subject to VAT at a rate of 10%.
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Perfect World (Thailand) Co., Ltd., our subsidiary established in Thailand in 2013, is subject to a corporate income tax
rate of 20%. Our sales proceeds from online game operation conducted in Thailand are subject to VAT at a rate of 7%.
For Perfect World Games (Singapore) Pte. Ltd., our subsidiary established in Singapore in June 2014, 75% of the first SGD10,000
of normal chargeable income is exempt from tax, and 50% of the next SGD290,000 is exempt from tax. The balance of chargeable income is fully taxable at the standard rate of 17%. Our sales proceeds
from online game operation conducted in Singapore are subject to goods and services tax at a rate of 7%.
PRC
PRC Corporate Income Tax
On March 16, 2007, the National People's Congress of PRC enacted a corporate income tax law, which became effective on
January 1, 2008. Under the corporate income tax law, foreign-invested enterprises and domestic companies are subject to corporate income tax at a uniform rate of 25%. There is a five-year
transition period for foreign-invested enterprises, during which foreign-invested enterprises are allowed to continue to enjoy their existing preferential tax treatments. Preferential tax treatments
will continue to be granted to entities which conduct businesses in certain encouraged sectors and to entities otherwise classified as "software enterprises" and/or "high and new technology
enterprises," whether foreign-invested enterprises or domestic companies.
Under
the corporate income tax law, enterprises that were established before March 16, 2007 and already enjoyed preferential tax treatments will continue to enjoy them
(i) in the case of preferential tax rates, for a period of five years from January 1, 2008 to December 31, 2012, or (ii) in the case of preferential tax exemption or
reduction for a specified term, until the expiration of such term.
PW
Network has been qualified as a "high and new technology enterprise" under the corporate income tax law from 2008 to 2017. Therefore, PW Network enjoyed a preferential tax rate of 15%
from 2012 to 2014 as a "high and new technology enterprise."
PW
Software has been qualified as a "high and new technology enterprise" from 2008 to 2017. Therefore, PW Software was entitled to the tax exemption in 2008 and 2009 and a 50% reduction
of its applicable corporate income tax rate of 15% from 2010 to 2012, and enjoyed a preferential tax rate of 15% in 2013 and 2014 as a "high and new technology enterprise."
Shanghai
PW Network has been qualified as having "software enterprise" status from 2009 to 2013 and "high and new technology enterprise" status from 2014 to 2016. Therefore, Shanghai PW
Network was entitled to the tax exemption in 2009 and 2010 and was subject to a 50% income tax reduction to a rate of 12.5% from 2011 to 2013 as a "software enterprise," and enjoyed a preferential tax
rate of 15% in 2014.
Beijing
Perfect World Digital Entertainment Software Co., Ltd., or PW Digital Software and Beijing Perfect World Digital Entertainment Co., Ltd., or PW
Digital, have been qualified as having "software enterprise" status from 2010 to 2014. PW Digital Software and PW Digital were entitled to the tax exemption in 2010 and 2011 and were subject to a 50%
income tax reduction to a rate of 12.5% in 2012, 2013 and 2014.
PW
Game Software has been qualified as a "software enterprise" from 2010 to 2014. PW Game Software achieved cumulative taxable income for the year ended December 31, 2013, and
therefore was entitled to the tax exemption in 2013 and 2014. PW Game Software will be subject to a 50% income
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tax
reduction to a rate of 12.5% from 2015 to 2017, provided that it continues to be qualified as a "software enterprise" during such period.
Hefei
PW Network has been qualified as a "high and new technology enterprise" and a "software enterprise" since 2013. Hefei PW Network achieved cumulative taxable income for the year
ended December 31, 2013, and therefore was entitled to the tax exemption in 2013 and 2014 as a "software enterprise." Hefei PW Network will be subject to a 50% income tax reduction to a rate of
12.5% from 2015 to 2017, provided that it continues to be qualified as a "software enterprise" during such period.
Chengdu
PW Network has been qualified as a "software enterprise" since 2010. Chengdu PW Network achieved cumulative taxable income for the year ended December 31, 2014, and
therefore was entitled to the tax exemption in 2014. Chengdu PW Network will continue to enjoy the tax exemption in 2015 and be subject to a 50% income tax reduction to a rate of 12.5% from 2016 to
2018, provided that it continues to be qualified as a "software enterprise" during such period.
Except
for PW Network, PW Software, Shanghai PW Network, PW Digital Software, PW Digital, PW Game Software, Hefei PW Network and Chengdu PW Network, our other major China-based
subsidiaries and variable interest entities are subject to a 25% corporate income tax rate.
Furthermore,
under the corporate income tax law, a "PRC resident enterprise," which includes an enterprise established outside of China with its "de facto management body" located in
China, is subject to PRC corporate income tax. If the PRC tax authorities subsequently determine that Perfect World Co., Ltd. and our subsidiaries established outside of China should be
deemed as resident enterprises, our global income, other than the dividends from our PRC subsidiaries, will be subject to PRC corporate income tax at a rate of 25%. See "Item 3. Key
InformationD. Risk FactorsRisks Related to Our BusinessOur global income may be subject to PRC tax under the corporate income tax law, which would have a
material adverse effect on our results of operations."
We have adopted the gross presentation for VAT and business tax, and therefore VAT and business tax are included in revenues and cost
of revenues. A pilot program for transition from business tax to VAT for revenues from certain industries was launched in Shanghai on January 1, 2012. On August 1, 2013, all regions in
China have launched the pilot program. On June 1, 2014, the pilot program has been extended to more industries.
Prior
to the pilot program, our subsidiaries and variable interest entities incorporated in China were subject to business tax. After the launch, our subsidiaries and variable interest
entities incorporated in China are subject to VAT at an effective rate of 6% for revenues derived from overseas licensing, software development and relevant technology consulting services. In
addition, according to the applicable tax rules and regulations, being a technology development business and technology export enterprise, an entity may enjoy VAT exemption for revenues generated from
software development and relevant technology consulting services, and overseas licensing, respectively.
For
operation of online games, the tax treatment varies depending on the nature of games and the local tax policies of provinces where the games are operated. In general, our variable
interest entities incorporated in China are subject to VAT at a rate of 6% or 17% (with refund on the portion of tax payment exceeding an effective tax rate of 3%) and business tax at a rate of 5%
plus related surcharges on revenues from online game operations.
Under the PRC corporate income tax law which went into effect on January 1, 2008, dividends attributable to earnings generated
after January 1, 2008 and payable by a foreign-invested enterprise in China to its foreign investors are subject to a 10% withholding tax unless any such foreign investor's
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jurisdiction
of incorporation has a tax treaty with China that provides for a different withholding arrangement. According to the Mainland and Hong Kong Taxation Arrangement, dividends paid by a
foreign-invested enterprise in China to its direct holding company in Hong Kong will be subject to withholding tax at a rate of no more than 5% (if the foreign investor owns directly at least 25% of
the shares of the foreign-invested enterprise). As PW Hong Kong, which holds 100% equity interest of PW Software, Shanghai PW Software and PW Game Software, is a Hong Kong tax resident, dividends
declared by our aforesaid PRC subsidiaries to PW Hong Kong should be subject to the withholding tax at a rate of 5%.
For
the potential distribution of dividends to our shareholders, we accrue and record the withholding income tax for all standalone undistributed earnings of our PRC subsidiaries. For
the years ended December 31, 2012, 2013 and 2014, withholding taxes of RMB19.6 million, RMB26.5 million and RMB21.3 million (US$3.4 million) were accrued and
recorded as deferred tax liabilities, respectively. For our variable interest entities, we will continue to indefinitely reinvest the remaining undistributed earnings to fulfill working capital needs
and non-cancellable contractual commitments, to fund capital expenditures to expand our business in China. The unrecognized deferred tax liabilities related to the withholding tax on undistributed
earnings of our variable interest entities at a rate of 5% as of December 31, 2012, 2013 and 2014 were approximately RMB60.5 million, RMB69.8 million and RMB77.9 million
(US$12.6 million), respectively.
Our subsidiaries and variable interest entities which license our games to certain overseas licensees are subject to withholding taxes
on the license fees and usage-based royalties received from our licensees in various jurisdictions outside of China. Our overseas licensees pay the
withholding taxes to the local tax authorities on our behalf. We recognize such foreign withholding taxes as income tax expense when related revenue of initial fees and ongoing usage-based royalties
are recognized. We recognized RMB9.9 million, RMB8.2 million and RMB12.5 million (US$2.0 million) as income tax expense related to withholding taxes for the years ended
December 31, 2012, 2013 and 2014, respectively.
Inflation
Since our inception, inflation in China has not had a material adverse impact on our results of operations. According to the National
Bureau of Statistics of China, the year-over-year percent changes in the consumer price index for December 2012, 2013 and 2014 were increases of 2.5%, 2.5% and 1.5%, respectively. Although we have not
been materially affected by inflation, we may be affected if China experiences higher rates of inflation in the future.
Critical Accounting Policies
We prepare financial statements in accordance with U.S. GAAP, which requires us to make judgments, estimates and assumptions
that affect (i) the reported amounts of our assets and liabilities, (ii) the disclosure of our contingent assets and liabilities at the end of each fiscal period and (iii) the
reported amounts of revenues and expenses during each fiscal period. We continually evaluate these estimates based on our own historical experience, knowledge and assessment of current business and
other conditions, and our expectations regarding the future based on available information and reasonable assumptions, which together form our basis for making judgments about matters that are not
readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ from those estimates. Some of our
accounting policies require a higher degree of judgment than others in their application.
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When
reviewing our financial statements, you should consider (i) our selection of critical accounting policies, (ii) the judgment and other uncertainties affecting the
application of such policies and (iii) the sensitivity of reported results to changes in conditions and assumptions. We believe the following accounting policies involve the most significant
judgments and estimates used in the preparation of our financial statements.
Revenue Recognition
Online game operation revenues.
Client-based Online PC Games
Most of our revenues are earned through providing online game operation services to players. We have been providing online game
services for our client-based online PC games to our players pursuant to a time-based revenue model and an item-based revenue model. Under the time-based revenue model, we charge players based on the
time they spend playing our games. Under the item-based revenue model, the basic game play functions are free of charge, and we charge users for purchases of in-game items.
Revenue
recognition policies adopted for time-based and item-based revenue models are as follows:
Time-based revenue model. We recognize revenues when the online points representing the playing time are actually used by the players to
play our
games.
Item-based revenue model. Under this model, the players can access our games free of charge, but may utilize their activated prepaid
cards or online
points credited to their accounts to purchase in-game items. We categorize our in-game items as either consumable items or permanent ownership items.
Management determines whether a virtual item is permanent or consumable by such item's real functions and features in the game, which does not require any estimate or assumption.
Consumable
items, such as facial expressions and fireworks, represent in-game items that can be consumed by a specific player action or expire over a pre-determined expiration time. We
keep track of the consumption or expiration of all the consumable items in the game. The common characteristics of the consumable items include (a) items will be no longer displayed on the
player's game account after a specified period of time ranging from several days to several months or after a player consumes the items through performing in-game actions, and (b) once the
items are consumed or expired, we do not have further obligations in connection with such items. Revenues in relation to consumable items are recognized over the period that they are expiring or after
they are consumed, as our obligations in connection with such items have been fully rendered to our players after their consumption or expiration.
Permanent
ownership items, such as mine stones, materials, clothing and riding mounts, represent in-game items that are accessible to the players who purchased the items, or "paying
players," as long as such players play the game. We will provide continuous online game services in connection with these permanent ownership items until they are no longer used by our players. Since
we cannot determine the actual lives of these permanent ownership items without considering the player's future activities in that game, revenues in relation to the permanent ownership items are
recognized over their estimated lives. We consider player behavior patterns in estimating the lives of permanent ownership items, including period that the paying players typically play our games,
which are affected by various factors such as acceptance and popularity of expansion packs, promotional events launched and market conditions. We believe that the estimated player life of all paying
players, or "estimated player life," which is the average period between the first date the paying players charge their activated prepaid cards or online points to their accounts and the last date
these paying players would play the game,
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represents
our best estimate for the lives of the in-game permanent ownership items purchased by the paying players.
A
paying player's estimated player life represents the player's existing life in the game plus the player's estimated future life. The existing life is the period from the first date the
player charged the activated prepaid cards or online points to his/her account in the game to the date of the player's last log-off from the game. We use actual data for all paying players in the game
since the game's launch to determine the paying players' existing life.
The
key assumptions and estimates used to determine the estimated player life is to estimate the game's paying players' future playing life which is based on the probability of the
game's paying players
returning to the game after a given period of inactivity. We use a statistical model to estimate such probability for each of our games based on historical log-on patterns of all of its paying players
over years of game operations starting from the launch of the games. Below are the major steps employed by us to estimate the game's paying players' future life:
1. Collect
paying player's log-on data. We keep records of each paying player's daily log on activities in the games. All paying players' log-on data for a game is used as
data samples for the statistical model to estimate the probability;
2. Calculate
paying players' log on probabilities. We perform statistical analysis on the collected paying players' historical log on data to calculate probabilities of the
players returning to the game after logging off from the game for a specified period; and
3. Estimate
each of the paying players' future life. The probability rates are applied to each paying players' historical log on pattern to estimate future playing life of
the player since the date of the player's last log-off from the game, i.e. "future life."
The
"estimated player life" of a game is the average of all paying player's estimated player life.
For
PRC self-developed games with more than 3-year operating history, we determine the estimated player life separately for each of our individual games. For the games developed by our
overseas subsidiaries, given the fact that the games are considerably different from those developed by our PRC team in game design and concept, playing manner, game environment setting, monetization
strategy and target customer groups, we start to estimate the game's own estimated player life after the game's operating history reaches 18 months. For games without sufficient operating
history, we consider estimated player life for our other games with similar characteristics, as well as other factors such as acceptance and popularity of the games and the future operating strategies
for the games to determine the estimated player life of the games. Those factors are subjective and require judgment.
In
addition, we have adopted the policy of performing the reassessment of the estimated player life of each game twice a year in various quarters on a rotating basis for the games with
the operating history less than five years and once a year for the games with the operating history more than five years. We will keep revising such estimates in the future as the games' operation
periods become longer and we continue to gain more operating history and data. Any adjustments arising from changes in the estimates of lives of in-game items would be applied prospectively on the
basis that such changes are caused by new information indicating a change in the player behaviors pattern. Any changes in our estimate of lives of the in-game items may result in our revenues being
recognized on a different basis than in prior periods and may cause our operating results to fluctuate.
For
the years ended December 31, 2012, 2013 and 2014, the estimated player life of our different games that generated more than 90% of our revenues ranged from 155 days to
491 days, 107 days to 561 days and 102 days to 661 days, respectively. The increase in the upper end of the estimated player life is primarily due to the longer
estimated player life in foreign countries based on the analysis of the overseas player behavior patterns as a result of our continuous expansion in overseas online game
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markets.
The operating history and data collected for certain games have exceeded 3 years and we adopted the estimated player life for each of these individual games in 2014, which resulted in
the decrease in the lower end of the estimated player life.
Under
both the time-based and the item-based revenue models, proceeds received from sales of online points to players are recorded as deferred revenues, while proceeds received from
sales of online points to distributors and sales of prepaid cards are initially recorded as advances from customers. As we do not have control over and generally do not know the ultimate selling price
of the prepaid cards or online points sold by the distributors, net proceeds received from distributors after deduction of sales discounts are recorded as advances from customers. Upon activation of
the game cards or charge of the online points, these advances from customers are immediately transferred to deferred revenues. We provide sales incentives in the form of rebates to major distributors
that meet or exceed the sales target. Accrued rebates, which are settled in the form of additional free prepaid cards, will result in higher average discount rate on in-game points, and will partially
delay the revenue recognition until the consumption of free prepaid cards. According to our published expiration policy, prepaid cards will expire on the expiration date printed thereon. The proceeds
from the expired prepaid cards that have never been activated are recognized as other income upon expiration of the cards. For the years ended December 31, 2012, 2013 and 2014, we recognized
RMB4.4 million, RMB1.6 million and RMB1.7 million (US$0.3 million) as other income from expired cards, respectively.
In
the case of prepaid online points obtained by players through prepaid cards or other channels, once these points are charged to a player's personal online game account, they will not
expire as long as the personal game account remains active, i.e. being accessed or charged by the player. The unused online points in an inactive personal game account are recognized as
revenues when the likelihood that we would provide further online game service with respect to such online points is remote. We recognized revenue related to the inactive accounts based on the
estimated churn rate of the inactive players and the unused game points and items in these accounts. We believe we have sufficient operating history to reliably estimate the inactive players' churn
rate. We have adopted the policy of performing the reassessment of the estimated churn rate annually and considered its estimates to be reasonable. For the years ended December 31, 2012, 2013
and 2014, we recognized RMB98.4 million, RMB98.4 million and RMB93.3 million (US$15.0 million), respectively, as revenue from the unused game points and items in the
accounts inactive for greater than 360 consecutive days.
For
the years ended December 31, 2012, 2013 and 2014, the amount of revenues attributable to consumable virtual goods were RMB1,799.7 million, RMB1,845.6 million and
RMB1,396.1 million (US$225.0 million), respectively, and the amount of revenues attributable to permanent virtual goods were RMB424.7 million, RMB661.9 million and
RMB1,144.6 million (US$184.5 million), respectively.
We operate mobile games under the item-based revenue model. We distribute mobile games to end-users through digital storefronts and
game platforms, such as Apple's App Store and Qihoo 360's game platform. These storefronts and game platforms sell in-game virtual currencies, which are used by game players for virtual items in our
mobile games. After retaining their revenue sharing amounts at a pre-agreed percentage, the storefronts and platforms remit us the proceeds that they have received from game players.
We
record revenue generated from mobile games on a gross basis, which is based on the total amount billed to game players, including the commissions retained by digital storefronts and
game platforms, as we are acting as the principal and the primary obligor toward game players for the games distributed through digital storefronts and game platforms. The principal agent
consideration is based on an assessment of various factors, including but not limited to whether we (i) are the primary obligor in the arrangement; (ii) have latitude in establishing the
selling price; (iii) change the product or perform part of the service and (iv) have involvement in the determination of product and service specifications.
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We recognize revenue, when persuasive evidence of an arrangement exists, the service has been provided to the end-users, the price paid by the user is fixed or
determinable, and collectability is reasonably assured. Consistent with the our revenue recognition policies for client-based online PC games, under the item-based revenue model, for the purposes of
determining when the service has been provided to the end-users, we have determined that an implied obligation exists to the paying user to continue displaying the purchased virtual items within the
game over the virtual items' estimated useful lives. However, currently, due to our limited operating history of mobile games, we do not have the ability to differentiate the redemption respectively
on consumable or permanent items and track the consumption of each consumable item. Therefore, we recognize revenues earned from the sale of virtual items with regard to a mobile game ratably over
paying players' estimated player life, which is the average period between the first date the paying players charge online points to their accounts and the expected last date these paying players
would play the game.
For
mobile games, paying players' estimated player lives represent the weighted average playing period based on the paying players' churn rate. The key estimates and prediction used to
determine the estimated player life is to estimate the game's paying players' churn rate which is the attrition statistics based on the logging behaviors of those paying players in the following
months after their first in-game deposit. To compute the paying players' estimated player lives, we use actual data for all paying players in a mobile game since the game's launch, and track the
logging history of all paying players since the first date the paying players charge online points to their accounts until the last date these paying players play the game. Below are the major steps
employed by us to estimate the mobile game's paying players' estimated player life:
1. Collect
paying player's log-on data. We keep records of each paying player's daily log on activities in mobile games, and group the monthly populations of paying players
(the "monthly cohort") from the date of their first in-game deposit and track each monthly cohort to determine the number of players from each monthly cohort who played the game in the following month
after the initial deposit;
2. Calculate
paying players' churn rate. The collected paying players' historical log on data is used to calculate actual observed churn rate. And we extrapolate and
forecast future declines based on the continuation of the churn rate trend from the actual observed log-on data; and
3. Calculate
estimated player life. We compute a weighted average using churn rate dataset (actual observed churn rate + extrapolated churn rate) to arrive at
the weighted-average playing period of paying users for each game.
For
mobile games we operated more than one year, we determine the estimated player life separately for each of our individual games. For games without sufficient operating history, we
consider estimated player life for our other games with similar characteristics and sufficient operating history, or refer to industry practice, as well as consider other factors such as acceptance
and popularity of the games and the future operating strategies for the games to determine the estimated player life of the games. Those factors are subjective and require judgment.
In
addition, we have adopted the policy of performing the reassessment of the estimated player life of each game twice a year in various quarters on a rotating basis. We will keep
revising such estimates in the future as the games' operation periods become longer and we continue to gain more operating history and data. Any adjustments arising from changes in the estimates of
lives of in-game items would be applied prospectively on the basis that such changes are caused by new information indicating a change in the player behaviors pattern. Any changes in our estimate of
lives of the in-game items may result in our revenues being recognized on a different basis than in prior periods and may cause our operating results to fluctuate.
For
the year ended December 31, 2013, the estimated player life of our mobile games was 90 days. For the year ended December 31, 2014, one of our mobile games has
reached one year operating
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history,
and thus we assessed the game's estimated player time by using the game's own logging history and estimated a player life of 125 days. For other mobile games which are not similar to
that one,
considering they have not reached one year operating history in 2014, we continue to use the estimated player life of 90 days based on prior year practice.
We
believe our estimates to be reasonable in view of actual mobile game operating data available, characteristics of mobile games in design and operations, as well as common practices in
industry. However, given the relatively short operation history of our mobile games, the estimate of player pay life may not accurately depict such period. We will keep revising such estimates in the
future as the games' operation periods become longer and we continue to gain more operating history and data. Any adjustments arising from changes in the estimates of player pay life would be applied
prospectively on the basis that such changes are caused by new information indicating a change in the player behaviors pattern. Any changes in our estimate of player pay life may result in our
revenues being recognized on a different basis than in prior periods and may cause our operating results to fluctuate.
We have adopted the gross presentation for VAT and business tax, therefore VAT and business tax are included in revenues and cost of
revenues. The amount of net VAT and business tax with related surcharge included in our cost of revenues for the years ended December 31, 2012, 2013 and 2014 were RMB117.6 million,
RMB157.8 million and RMB195.1 million (US$31.4 million), respectively.
We enter into licensing arrangements with licensees to operate our games in other countries and regions. These licensing agreements
provide for two revenue streams: the initial fees and the usage-based royalty fees.
In
certain licensing arrangements, we provide free upgrades, maintenance support and training (i.e. PCS) for the first year, and the licensee has the option to purchase PCS in
subsequent years at a specified renewal rate. In these arrangements, we allocate the initial fee into two parts. The first part represents the license of the game and is recognized as revenue upon
commercial launch. The second part represents PCS and is recognized ratably over the one-year PCS period.
In
other licensing arrangements, we provide PCS over the full licensing period for no additional charge. In those cases, the total amount of the initial fee is recognized ratably over
the full contractual licensing period.
According
to the license agreements, we are also entitled to ongoing usage-based royalties determined based on the amount of money charged to the players' accounts or services payable by
players in a given country or region. The usage-based royalties are recognized when they are earned, provided that the collection is probable.
Consolidation of Variable Interest Entities
PRC laws and regulations currently prohibit or restrict foreign-invested companies from holding certain licenses required to operate
online games and online reading services, including internet content provision, internet culture operation and internet publishing licenses, or engaging in the investment in certain technology, media
and telecommunications sectors. In light of these restrictions, we rely on our variable interest entities to hold and maintain the licenses necessary to operate the online games or investment in
certain technology, media and telecommunications companies in China. We have entered into a series of contractual arrangements with PW Network and its equity owners, PW Literature and its equity
owners, Perfect Moment and its equity owners, Trendsters Investment and its equity owners and PW Digital Technology and its equity owners, respectively. As a result of these contractual arrangements,
we have the ability to effectively control PW Network, PW Literature, Perfect Moment,
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Trendsters
Investment and PW Digital Technology, and we are considered the primary beneficiary of these entities, and accordingly these entities are variable interest entities of our company under
U.S. GAAP and we consolidate the results in our consolidated financial statements. In December 2013, we entered into a definitive agreement to sell PW Literature to an unrelated party, and PW
Literature ceased to be our variable interest entity. We have consulted our PRC legal counsel in assessing our ability to control PW Network, Perfect Moment, Trendsters Investment and PW Digital
Technology through these contractual arrangements. Any changes in PRC laws and regulations that affect our ability to control these entities might preclude us from consolidating these entities in the
future.
On
February 2, 2012, a Chinese company unrelated to our company sought a court order of attachment against the assets of Jiuzhou Tianyuan, which was later withdrawn in July 2012
according to a court record.
On
March 20, 2012, Jiuzhou Tianyuan filed a case against PW Network seeking access to financial and other information of PW Network as an equity holder of PW Network,
notwithstanding that it has entered into an equity pledge agreement to pledge all its equity interests in PW Network to PW Software. Jiuzhou Tianyuan withdrew its case in June 2012 and the
registration of the equity pledge of Jiuzhou Tianyuan with the relevant administration for industry and commerce was completed in July 2012.
Software Development Costs
Costs incurred for the development of online game products prior to the establishment of technological feasibility are expensed when
incurred and are included in product development expenses. Once an online game product has reached technological feasibility, all subsequent product development costs are capitalized until the product
is available for general release to customers. Commencing the game is available for marketing use, the capitalized product development costs are amortized as online game related costs over the
estimated life of the game.
The
evaluation of technological feasibility establishment requires significant judgment and is carried out on a product-by-product basis. Typically the establishment of technological
feasibility is featured by the completion of both technical design and game design documentation, and only occurs when the online games have a proven ability to be operated in the online game
environment in the market. Online game products development costs consist primarily of salaries and benefits paid, depreciation and other expenses in relation to the development, maintenance,
monitoring and management of our online game products.
For
the years ended December 31, 2012, 2013 and 2014, the amount of online game development costs capitalized as intangible assets was approximately RMB5.9 million,
RMB47.9 million and RMB19.2 million (US$3.1 million), respectively.
Long-Lived AssetsProperty, Equipment and Intangible Assets
Property, equipment and intangible assets are stated at historical cost less accumulated depreciation and amortization. Depreciation of
property and equipment is computed using a straight-line method over the estimated useful lives of the assets, generally 33 to 45 years for buildings, 20 years for office improvements
and between four and six years for all other property and
equipment. Amortization of intangible assets is computed using a straight-line method over the estimated useful lives of the assets, which are generally two to twenty years. Judgment is required to
determine the estimated useful lives of assets, especially for servers, including determining how long existing equipment can function and when new technologies will be introduced at cost-effective
price points to replace existing equipment. Changes in these estimates and assumptions could materially impact our financial position and results of operations.
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Intangible
assets arising from the asset acquisitions and business combinations are recognized and measured at fair value upon acquisition. Intangible assets from such transactions are
amortized using the straight-line method over the assets estimated economic useful lives. Qualified online game development costs, capitalized as intangible assets, are amortized over the estimated
life of the corresponding online games.
Long-lived
assets including intangible assets subject to amortization are reviewed 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 we had originally estimated. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting
from the use of the asset and its eventual disposition. Measurement of any impairment charge for long-lived assets including certain identifiable intangible assets that we expect to hold and use is
based on the amount the carrying value exceeds the fair value of the asset. 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 charge is recognized equal in amount to that excess.
The
impairment charges of intangible assets recorded in cost of revenues for the years ended December 31, 2012, 2013 and 2014 amounted to RMB11.2 million, nil and
RMB6.2 million (US$1.0 million), respectively. The impairment charges of intangible assets recorded in general and administrative expenses for the years ended December 31, 2012,
2013 and 2014 amounted to RMB1.6 million, RMB5.0 million and RMB23.3 million (US$3.8 million), respectively. The impairment charges of intangible assets recorded in
research and development expenses for the years ended December 31, 2012, 2013 and 2014 amounted to nil, nil and RMB6.4 million (US$1.0 million), respectively. The impairment
charges of long-lived assets recorded in cost of revenues for the years ended December 31, 2012, 2013 and 2014 amounted to RMB8.1 million, RMB18.9 million and
RMB2.5 million (US$0.4 million), respectively.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the identifiable assets and liabilities acquired in a
business combination.
Goodwill
is not depreciated or amortized but is tested for impairment at reporting unit level on an annual basis every November 30, and in between annual tests when an event
occurs or circumstances change that could indicate that the asset might be impaired. Commencing in September 2011, in accordance with the FASB revised guidance on "Testing of Goodwill for Impairment,"
a company first has the option to assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the company
decides, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is
mandatory. Otherwise, no further testing is required. The quantitative impairment test consists of a comparison of the fair value of each reporting unit with its carrying amount, including goodwill.
If the carrying amount of each reporting unit exceeds its fair value, an impairment charge equal to the difference between the implied fair value of the reporting unit's goodwill and the carrying
amount of goodwill will be recorded. Application of a goodwill impairment test requires significant management judgment, including the identification of reporting units, assigning assets and
liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value of each reporting unit. The judgment in estimating the fair value of reporting units includes
estimating future cash flows, determining appropriate discount rates and making other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value
for each reporting unit.
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We
have determined that we operate in two principal operating segments: (i) PRC operations and (ii) International operations. Under PRC operating segment, we identified one
reporting unit as PRC online game business for goodwill impairment testing.
Under
international operating segment, we identified the following three reporting units for 2014 goodwill impairment testing: Runic Games, U.S. online game business and Unknown Worlds.
In
September 2014, in view of U.S. online game business' performance during 2014 and near-term business outlook that were below our expectations, we performed an interim assessment on
the goodwill related to the reporting unit of U.S. online game business and recorded an estimated goodwill
impairment charge of RMB40.2 million (US$6.5 million) in the third quarter of fiscal year 2014. The goodwill impairment charge of RMB40.2 million (US$6.5 million) had no
cash flow impact.
As
of November 30, 2014, we performed our annual goodwill impairment analysis of each reporting unit, based on which an impairment charge of RMB18.0 million
(US$2.9 million) associated with Unknown Worlds reporting unit was recognized in view of sequential decline of revenue generated from the pay-per-install game developed by Unknown Worlds and
its near-term business outlook. Thereafter, all goodwill arising from the acquisition of Unknown Worlds in February 2013 was fully impaired. The goodwill impairment charge of RMB18.0 million
(US$2.9 million) had no cash flow impact.
For
the annual goodwill impairment analysis of U.S. online game business reporting unit, in view of the recent interim goodwill impairment assessment performed in September 2014, we
assessed qualitative factors including macroeconomic conditions, industry and market considerations, the unit's overall financial performance and other events that may affect the reporting unit and
determined that it is not more-likely-than-not that the fair value of the U.S. online game business reporting unit is less than its carrying amount and concluded that no further assessment was
necessary. For the remaining reporting units, namely PRC online game business and Runic Games, we compared the fair value of the reporting units with their carrying amounts using income approach, and
concluded that the fair value of the reporting units exceeded their carrying values and determined that no adjustment to the carrying value of goodwill for these reporting units was necessary. For PRC
online game business reporting unit, the percentage by which fair value exceeds carrying value of goodwill was approximately 21.6%. For Runic Games reporting unit, the percentage by which fair value
exceeds carrying value of goodwill was approximately 16.2%.
We
used discounted cash flow method to estimate the fair value of our reporting units. This analysis requires significant judgments, including estimation of future cash flows, which is
dependent on internal forecasts, and assumptions that are consistent with the plans and estimates being used to manage our business, determining appropriate discount rates, estimation of the long-term
rate of growth for the our business, estimation of the duration over which cash flows will occur, determination of our weighted average cost of capital, and terminal value. The estimates of fair value
of a reporting unit result from a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions at a point in time. The valuations are based on
information available as of the impairment review date and are based on expectations and assumptions that have been deemed reasonable by management. Any changes in key assumptions, including
unanticipated events and circumstances, may affect the accuracy or validity of such estimates and could potentially result in an impairment charge. Sensitivity assessment of certain key assumptions
for the reporting units during the annual goodwill impairment testing is presented below:
-
- Discount rate assumptions. A hypothetical percentage increase of 13.7% and 17.1%, respectively, in the discount rates for the
reporting units of PRC online game business and Runic Games, holding all other assumptions constant, would not have decreased the fair value of the reporting units below their respective carrying
value.
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-
- Long-term growth rate assumptions. A hypothetical percentage decrease of 31.9% and 49.6%, respectively, in the long-term rate of
growth for the reporting units of PRC online game business and Runic Games, holding all other assumptions constant, would not have decreased the fair value of the reporting units below their carrying
value.
We
recorded goodwill impairment charges amounted to RMB40.8 million, RMB77.3 million and RMB58.2 million (US$9.4 million) for the years ended
December 31, 2012, 2013 and 2014, respectively.
Operating Leases
Leases where substantially all the rewards and risks of ownership of assets remain with the lessor are accounted for as operating
leases. We have signed lease arrangements for servers and offices premises. We have assessed these arrangements to be operating leases because (i) the lease does not transfer the ownership to
us by the end of the lease term, (ii) the lease does not contain any bargain purchase option, (iii) the lease term is less than 75% of the estimated economic life of the assets and
(iv) the present value of the minimum lease payments at the beginning of the lease term is less than 90% of the fair value to the lessor less any investment credit retained by the lessor.
Payments made under operating leases are charged to the consolidated statements of income and comprehensive income on a straight-line basis over the lease periods as specified in the lease agreements.
Judgment is required to determine the estimated economic lives or the fair values of the servers. Changes in these estimates and assumptions could materially impact our financial position and results
of operations.
Share-based Compensation Expenses
In September 2006, we adopted a share incentive plan, which was subsequently supplemented and amended. Prior to the amendment to the
plan in February 2009, 32,145,000 Class B ordinary shares have been reserved for future issuance under the share incentive plan. On February 28, 2009, our shareholders approved an
amendment to the share incentive plan that effectively increased the number of Class B ordinary shares authorized for issuance under the share incentive plan by 10,000,000. The 10,000,000
additional Class B ordinary shares were registered for issuance pursuant to a registration statement on Form S-8 filed on August 10, 2009 (File No. 333-161193). On
November 14, 2009, our shareholders approved a further amendment to the share incentive plan that increased the number of Class B ordinary shares authorized for issuance under the share
incentive plan to 44,645,000. In addition, the option expiry date was changed to the earlier of (i) the tenth anniversary of the grant date, unless an earlier time is set in the option award
agreement, (ii) three months after the termination of service with us other than for disability or death, or (iii) one year after the termination of service with us due to disability or
death. The amendment applies to share options granted after November 14, 2009. On August 14, 2010, our shareholders approved a 2010 Share Incentive Plan, under which 30,000,000
Class B ordinary shares have been reserved for future issuance and such shares were registered on Form S-8 filed on September 13, 2010 (File No. 333-169333). On
November 22, 2013, our shareholders approved a 2013 Share Incentive Plan, 5,024,818 shares have been reserved in the award pool for future issuance. Starting January 1, 2015, the award
pool will be increased by a number on the first day of each year equal to 2% of the then total number of Class B ordinary shares outstanding, provided that at no time the unissued shares
reserved in the award pool immediately after such annual increase shall exceed 5% of the then total number of Class B ordinary shares outstanding.
During 2014, we granted options to purchase an aggregate of 200,000 Class B ordinary shares to some of our senior executives and
employees. In addition to service-based share options, we granted performance-based share options to our officers and employees.
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We
use the Black-Scholes option pricing model to determine the fair value of share options. The determination of the fair value of share-based compensation awards on the date of grant
using an
option-pricing model is affected by our share price as well as assumptions regarding a number of complex and subjective variables, including our expected share price volatility over the term of the
awards, the expected term of the awards, risk-free interest rates and expected dividends. When estimating the fair value of our ordinary shares, both internal and external sources of information are
reviewed. Furthermore, we are required to estimate forfeitures at the time of grant and record share-based compensation expenses only for those awards that are expected to vest. If actual forfeitures
differ from these estimates, we may need to revise those estimates used in subsequent periods.
The
Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable, which are
characteristics not present in our option grants. Existing valuation models, including the Black-Scholes and lattice binomial models, may not provide reliable measures of the fair value of our
share-based compensation. Consequently, there is a risk that our estimates of the fair values of our share-based compensation awards on the grant dates may be significantly different from the actual
values realized upon the exercise, expiration, early termination or forfeiture of those share-based payments in the future. Certain share-based compensation awards, such as employee share options, may
expire worthless or otherwise result in zero intrinsic value as compared to the fair value originally estimated on the grant date and reported in our financial statements. Alternatively, values that
are significantly higher than fair values originally estimated on the grant date and reported in our financial statements may be realized from these instruments. There is currently no market-based
mechanism or other practical application to verify the reliability and accuracy of the estimates stemming from these valuation models, nor is there a means to compare and adjust the estimates to
actual values.
If
factors change and we employ different assumptions for estimating share-based compensation expense in future periods or if we decide to use a different valuation model, our
share-based compensation in future periods may differ significantly from what we have recorded in prior periods and could materially affect our operating income, net income and net income per share.
For our service-based share option awards, share-based compensation cost is measured at the grant date based on the fair value of the awards and is recognized as an expense on a straight-line basis,
net of estimated forfeitures, over the requisite service period, which is generally the vesting period. For our performance-based share option awards, the performance goals and vesting schedule of
these awards are determined by the board of directors. For the performance-based awards, an evaluation is made each quarter as to the likelihood of performance criteria being met. Share-based
compensation expenses are then recorded for the number of options expected to vest on a graded-vesting basis, net of estimated forfeitures, over the requisite service period, which is generally the
vesting period.
A
change in any of the terms or conditions of stock options shall be accounted for as a modification of the plan. Therefore, we calculate incremental compensation cost of a modification
as the excess of the fair value of the modified option over the fair value of the original option immediately before its terms are modified, measured based on the share price and other pertinent
factors at the modification date. For vested options, we would recognize incremental compensation cost in the period the modification occurs. For unvested options, we would recognize, over the
remaining requisite service period, the sum of the incremental compensation cost and the remaining unrecognized compensation cost for the original award on the modification date.
The
application of these principles may be subject to further interpretation and refinement over time. There are significant differences among valuation models and there is a possibility
that we will adopt different valuation models in the future. This may result in a lack of consistency in future periods and materially affect the fair value estimates of share-based compensation
awards. It may also result in a lack of comparability with other companies that use different models, methods and assumptions.
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In
2014, our board of directors approved a restructuring plan of our research and development teams, under which five new controlled companies have been formed. Non-controlling interest
of each of these five controlled companies was granted to be beneficially held by our key research and development employees. The shares held by our key employees were recognized as share-based
compensation expenses in our consolidated financial statements to be amortized over the requisite service periods of these key employees on a straight-line basis.
Income Taxes
We account for income taxes as described in note 3(21) and note 19 in our consolidated financial statements. Under this
method, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory rates applicable to future years to differences between the financial
statement carrying amounts and the tax bases of existing assets and liabilities. The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes. The effect
on deferred taxes of a change in tax rates is recognized in the consolidated statements of income and comprehensive income in the period of change. A valuation allowance is provided to reduce the
amount of deferred tax assets if it is considered more likely than not that all or a portion of the deferred tax assets will not be realized. Accordingly, we will record valuation allowances to reduce
our deferred tax assets if and when we believe it is more likely than not that we will not be able to utilize the deferred tax asset amounts based on our estimates of future taxable income and prudent
and feasible tax planning strategies. Management must make assumptions, judgments and estimates to determine our current provision for income taxes and our deferred tax assets and liabilities and any
valuation allowance to be recorded against a deferred tax asset. Our judgments, assumptions and estimates relative to current provision for income tax take into account current tax laws, our
interpretation of current tax laws and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. Changes in tax law and our interpretation of tax laws and the
resolution of current and future tax audits could significantly impact the amounts provided for income taxes in our consolidated financial statements. When there is no clarity in the change of the PRC
corporate income tax, we would accrue based on tax law requirements and then subsequently evaluate whether there is any new information that would change the accrual. Our assumptions, judgments and
estimates relative to the value of a deferred tax asset take into account predictions of the amount and category of future taxable income, such as income from operations.
Actual operating results and the underlying amount and category of income in future years could make our current assumptions, judgments and estimates of recoverable net deferred taxes inaccurate. Any
of the assumptions, judgments and estimates mentioned above could cause our actual income tax obligations to differ from our estimates, and thus materially impact our financial position and results of
operations.
Our
subsidiaries and variable interest entities which license our games to certain overseas licensees are subject to withholding taxes on the license fees and usage-based royalties
received from our licensees in various jurisdictions outside of China. Our overseas licensees pay the withholding taxes to the local tax authorities on our behalf. We recognize such foreign
withholding taxes as income tax expense when related revenue of initial fees and ongoing usage-based royalties are recognized. Accordingly, we recognized the foreign income tax of approximately
RMB9.9 million, RMB8.2 million and RMB12.5 million (US$2.0 million) in our consolidated financial statements as income tax expense in 2012, 2013 and 2014, respectively.
Under
the PRC corporate income tax law which went into effect on January 1, 2008, dividends attributable to earnings generated after January 1, 2008 and payable by a
foreign-invested enterprise in China to its foreign investors are subject to a 10% withholding tax unless any such foreign investor's jurisdiction of incorporation has a tax treaty with China that
provides for a different withholding arrangement. According to the Mainland and Hong Kong Taxation Arrangement, dividends paid by a foreign-invested enterprise in China to its direct holding company
in Hong Kong will be subject to withholding tax at a rate of no more than 5% (if the foreign investor owns directly at least 25% of the shares of the foreign-invested enterprise). As PW Hong Kong,
which holds 100% equity interest of PW Software, Shanghai PW Software and PW Game Software, is a Hong Kong tax resident, dividends declared by our aforesaid PRC subsidiaries to PW Hong Kong should be
subject to the withholding tax at a rate of 5%.
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Table of Contents
For the potential distribution of dividends to our shareholders, we accrue and record the withholding income tax for all standalone undistributed earnings of our
PRC subsidiaries. For the years ended December 31, 2012, 2013 and 2014, withholding taxes of RMB19.6 million, RMB26.5 million and RMB21.3 million (US$3.4 million)
were accrued and recorded as deferred tax liabilities, respectively. For our variable interest entities, we will continue to indefinitely reinvest the remaining undistributed earnings to fulfill
working capital needs and non-cancellable contractual commitments, to fund capital expenditures to expand our business in China. The unrecognized deferred tax liabilities related to the withholding
tax on undistributed earnings of our variable interest entities at a rate of 5% as of December 31, 2012, 2013 and 2014 were approximately RMB60.5 million, RMB69.8 million and
RMB77.9 million (US$12.6 million), respectively.
The
guidance on accounting for uncertainties in income taxes prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. Guidance was also provided on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities,
accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods, and income tax disclosures. Significant judgment is required in evaluating our
uncertain tax positions and determining its provision for income taxes.
Foreign Currency Translation
Our reporting currency is Renminbi, or RMB. The functional currency of Perfect World Co., Ltd., our Cayman Islands
holding company, is U.S. dollars. The functional currency of our international subsidiaries is evaluated on a case-by-case basis and is often the local currency. On December 1, 2013, PW Hong
Kong changed its functional currency prospectively from RMB to U.S. dollars to reflect the increased concentration of its activities in U.S. dollars. The change was triggered by the completion of the
reorganization of our overseas business structure, following which PW Hong Kong became the parent of our overseas subsidiaries in Europe, U.S., Japan and Korea. The change in functional currency of PW
Hong Kong has immaterial impact on our consolidated financial statements for the year ended December 31, 2013.
Transactions
denominated in currencies other than functional currency are translated into functional currency at the exchange rates quoted by authoritative banks prevailing at the dates
of the transactions. Exchange gains and losses resulting from those foreign currency transactions denominated in a currency other than the functional currency are recorded as a component of "others,
net" in the consolidated statements of income and comprehensive income.
The
financial statements of our overseas subsidiaries are translated from their functional currency into RMB, our reporting currency. Assets and liabilities denominated in foreign
currencies are translated into RMB using the applicable exchange rates quoted by the People's Bank of China at the balance sheet dates. Equity accounts other than earnings generated in current period
are translated into RMB at the appropriate historical rates. Revenues, expenses, gains and losses are translated into RMB using the periodic weighted average exchange rates. The resulting foreign
currency translation adjustments are recorded as "accumulated other comprehensive income/(loss)" in shareholders' equity.
If
our operational strategies change in the future, there may be changes in our functional currency.
Equity Investment
Our equity investments are comprised of investments in privately held companies. We account for an equity investment over which we have
significantly influence but do not own a majority equity interest or lack of control using the equity method. For equity investment over which we do not have significant influence, the cost method
accounting is used. We assess our equity investments for other-than-temporary impairment by considering factors as well as all relevant and available
89
Table of Contents
information
including, but not limited to, current economic and market conditions, the operating performance of the invested companies including current earnings trends and other company-specific
information including recent financing rounds. Impairment charges on equity investment are included in "share of (loss)/income from equity investments." For the years ended December 31, 2012,
2013 and 2014, nil, nil and RMB4.4 million (US$0.7 million) were recorded as impairment charges, respectively. For our investment to the venture capital fund accounted for under equity
method, we retain the industry-specific guidance applied by the venture capital fund as an investment company, as a result of which we recognize the share on the changes of the fair values of the
venture capital fund's investments as "share of (loss)/income from equity investments" in our consolidated statements of income and comprehensive income.
Recent Accounting Pronouncements
On May 28, 2014, the FASB and IASB issued their long-awaited converged standard on the recognition of revenue from contracts
with customers. The standard is intended to improve the financial reporting of revenue and improve comparability of the top line in financial statements globally. The FASB is amending the FASB
Accounting Standards Codification and creating a new Topic 606, Revenue from Contracts with Customers, to supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and
most industry-specific guidance throughout the Industry Topics of the Codification. Additionally, the amendments supersede some cost guidance included in Subtopic 605-35, Revenue
RecognitionConstructionType and ProductionType Contracts. For a public entity, the amendments are effective for annual reporting periods beginning after
December 15, 2016, including interim periods within that reporting period. Early application is not permitted. We are currently evaluating the impact on our consolidated financial statements of
adopting this guidance.
In
June 2014, under ASC 718, CompensationStock Compensation, the FASB issued Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target
Could Be Achieved after the Requisite Service Period. These amendments apply to all reporting entities that grant their employees share-based payments in which the terms of the award provide that a
performance target that affects vesting could be achieved after the requisite service period. That is the case when an employee is eligible to retire or otherwise terminate employment before the end
of the period in which a performance target could be achieved and still be eligible to vest in the award if and when the performance target is achieved. For all entities, the amendments are effective
for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. We are currently evaluating the impact on our consolidated
financial statements of adopting this guidance.
In
August 2014, the FASB issued Presentation of Financial StatementsGoing Concern. This standard requires management to evaluate for each annual and interim reporting period
whether it is probable that the reporting entity will not be able to meet its obligations as they become due within one year after the date that the financial statements are issued. If the entity is
in such a position, the standard provides for certain disclosures depending on whether or not the entity will be able to successfully mitigate its going concern status. This guidance is effective for
annual periods ending after December 15, 2016 and interim periods within annual periods beginning after December 15, 2016. Early application is permitted. We do not anticipate that
adoption will have a significant impact on our financial position, results of operations, or cash flows.
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Results of Operations
The following table sets forth a summary of our consolidated statements of income and comprehensive income as a percentage of net
revenues for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, |
|
|
|
2012 |
|
2013 |
|
2014 |
|
|
|
RMB
|
|
%
|
|
RMB
|
|
%
|
|
RMB
|
|
US$
|
|
%
|
|
|
|
(in thousands except percentages)
|
|
Consolidated Statements of Income and Comprehensive Income Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online game operation revenues |
|
|
2,499,419 |
|
|
90.2 |
|
|
2,800,321 |
|
|
91.7 |
|
|
3,597,595 |
|
|
579,827 |
|
|
93.6 |
|
Licensing revenues |
|
|
171,564 |
|
|
6.2 |
|
|
149,318 |
|
|
4.9 |
|
|
168,956 |
|
|
27,231 |
|
|
4.4 |
|
Other revenues |
|
|
99,604 |
|
|
3.6 |
|
|
103,024 |
|
|
3.4 |
|
|
76,673 |
|
|
12,357 |
|
|
2.0 |
|
Total revenues |
|
|
2,770,587 |
|
|
100.0 |
|
|
3,052,663 |
|
|
100.0 |
|
|
3,843,224 |
|
|
619,415 |
|
|
100.0 |
|
Cost of revenues(1) |
|
|
(539,936 |
) |
|
(19.5 |
) |
|
(711,648 |
) |
|
(23.3 |
) |
|
(1,115,831 |
) |
|
(179,839 |
) |
|
(29.0 |
) |
Gross profit |
|
|
2,230,651 |
|
|
80.5 |
|
|
2,341,015 |
|
|
76.7 |
|
|
2,727,393 |
|
|
439,576 |
|
|
71.0 |
|
Research and development expenses |
|
|
(797,067 |
) |
|
(28.7 |
) |
|
(886,084 |
) |
|
(29.0 |
) |
|
(1,072,884 |
) |
|
(172,917 |
) |
|
(27.9 |
) |
Sales and marketing expenses |
|
|
(520,620 |
) |
|
(18.8 |
) |
|
(729,657 |
) |
|
(23.9 |
) |
|
(859,236 |
) |
|
(138,484 |
) |
|
(22.4 |
) |
General and administrative expenses |
|
|
(306,256 |
) |
|
(11.1 |
) |
|
(310,044 |
) |
|
(10.2 |
) |
|
(396,130 |
) |
|
(63,845 |
) |
|
(10.3 |
) |
Goodwill impairment |
|
|
(40,770 |
) |
|
(1.5 |
) |
|
(77,290 |
) |
|
(2.5 |
) |
|
(58,211 |
) |
|
(9,382 |
) |
|
(1.5 |
) |
Total operating expenses(1) |
|
|
(1,664,713 |
) |
|
(60.1 |
) |
|
(2,003,075 |
) |
|
(65.6 |
) |
|
(2,386,461 |
) |
|
(384,628 |
) |
|
(62.1 |
) |
Operating profit |
|
|
565,938 |
|
|
20.4 |
|
|
337,940 |
|
|
11.1 |
|
|
340,932 |
|
|
54,948 |
|
|
8.9 |
|
Total other income |
|
|
127,641 |
|
|
4.6 |
|
|
154,021 |
|
|
5.0 |
|
|
236,288 |
|
|
38,083 |
|
|
6.2 |
|
Income before tax |
|
|
693,579 |
|
|
25.0 |
|
|
491,961 |
|
|
16.1 |
|
|
577,220 |
|
|
93,031 |
|
|
15.1 |
|
Income tax expense |
|
|
(116,119 |
) |
|
(4.2 |
) |
|
(69,998 |
) |
|
(2.3 |
) |
|
(121,494 |
) |
|
(19,581 |
) |
|
(3.2 |
) |
Net income from continuing operations, net of tax |
|
|
577,460 |
|
|
20.8 |
|
|
421,963 |
|
|
13.8 |
|
|
455,726 |
|
|
73,450 |
|
|
11.9 |
|
Discontinued operations(2): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of tax |
|
|
(30,215 |
) |
|
(1.1 |
) |
|
(44,322 |
) |
|
(1.5 |
) |
|
|
|
|
|
|
|
|
|
Gain from disposal of discontinued operations, net of tax |
|
|
|
|
|
|
|
|
166,288 |
|
|
5.5 |
|
|
|
|
|
|
|
|
|
|
(Loss)/income from discontinued operations, net of tax(1) |
|
|
(30,215 |
) |
|
(1.1 |
) |
|
121,966 |
|
|
4.0 |
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
547,245 |
|
|
19.7 |
|
|
543,929 |
|
|
17.8 |
|
|
455,726 |
|
|
73,450 |
|
|
11.9 |
|
Net (income)/loss attributable to non-controlling interests |
|
|
(6,594 |
) |
|
(0.2 |
) |
|
(1,515 |
) |
|
(0.0 |
) |
|
15,664 |
|
|
2,524 |
|
|
0.4 |
|
Net income attributable to the Company's shareholders |
|
|
540,651 |
|
|
19.5 |
|
|
542,414 |
|
|
17.8 |
|
|
471,390 |
|
|
75,974 |
|
|
12.3 |
|
Net Income |
|
|
547,245 |
|
|
19.7 |
|
|
543,929 |
|
|
17.8 |
|
|
455,726 |
|
|
73,450 |
|
|
11.9 |
|
Other comprehensive loss: Foreign currency translation adjustment |
|
|
(20,112 |
) |
|
(0.7 |
) |
|
(45,994 |
) |
|
(1.5 |
) |
|
(30,513 |
) |
|
(4,918 |
) |
|
(0.8 |
) |
Comprehensive income |
|
|
527,133 |
|
|
19.0 |
|
|
497,935 |
|
|
16.3 |
|
|
425,213 |
|
|
68,532 |
|
|
11.1 |
|
Comprehensive (income)/loss attributable to non-controlling interests |
|
|
(6,594 |
) |
|
(0.2 |
) |
|
(1,515 |
) |
|
(0.0 |
) |
|
15,664 |
|
|
2,524 |
|
|
0.4 |
|
Comprehensive income attributable to the Company's shareholders |
|
|
520,539 |
|
|
18.8 |
|
|
496,420 |
|
|
16.3 |
|
|
440,877 |
|
|
71,056 |
|
|
11.5 |
|
- (1)
- Total
share-based compensation charges included in cost of revenues and operating expenses were amounting to RMB71.1 million, RMB75.9 million
and RMB51.5 million (US$8.3 million) for the years ended December 31, 2012, 2013 and 2014, respectively. Total share-based compensation charges included in loss from discontinued
operations was amounting to nil, RMB21.5 million and nil for the years ended December 31, 2012, 2013 and 2014, respectively.
91
Table of Contents
- (2)
- To
sharpen our focus on our core online game development and operation business, we sold the online reading business to an unrelated party in December 2013.
As a result, the online reading business is accounted for as discontinued operations and our consolidated statements of income and comprehensive income in this annual report separates the discontinued
operations from our remaining business operations for all years presented.
Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
Revenues. In 2014, we generated revenues of RMB3.8 billion (US$619.4 million), an increase of 25.9% from
RMB3.1 billion in 2013.
Online
game operation revenues were RMB3.6 billion (US$579.8 million) in 2014, an increase of 28.5% from RMB2.8 billion in 2013. Online game operation revenues
generated from PRC operations were RMB3.0 billion (US$486.0 million) in 2014 as compared to RMB2.1 billion in 2013. The increase in online game operation revenues generated from
PRC operations was primarily due to the combined effects of (i) the continued strength of our mobile game Return of the Condor Heroes Mobile, and the revenue growth following the commercial
launches of a series of new mobile games in 2014, such as CrossGate Mobile and Forsaken World Mobile; (ii) the increased revenue contribution from some of the client-based online PC games that
we operate in China, such as DOTA2, Perfect World II and Swordsman Online; and (iii) the natural decline in revenues of some of our other client-based online PC games which reached a relatively
mature stage of their respective life circle.
Online
game operation revenues generated from international operations were RMB582.4 million (US$93.9 million) in 2014 as compared to RMB664.4 million in 2013. The
decrease was primarily due to the natural decline of some of the existing games operated by our U.S. subsidiary, and the lack of significant new game launch in the U.S. market in 2014.
Licensing
revenues were RMB169.0 million (US$27.2 million) in 2014, representing a 13.2% increase from RMB149.3 million in 2013. The increase was largely associated
with some of our new games launched in certain overseas markets in 2014.
Other
revenues were RMB76.7 million (US$12.4 million) in 2014, compared to RMB103.0 million in 2013. The decrease was primarily due to fewer installations of
"Torchlight 2," our popular
pay-per-install game released in 2012, partially offset by an increase in advertising revenue from our game portals.
Cost of Revenues. In 2014, our cost of revenues amounted to RMB1.1 billion (US$179.8 million), or 29.0% of our revenues,
representing
an increase of RMB404.2 million (US$65.1 million) from RMB711.6 million, or 23.3% of our revenues in 2013.
Cost of PRC operations. In 2014, our cost of PRC operations was RMB835.1 million (US$134.6 million), compared to
RMB401.9 million in 2013. The increase was mainly attributable to an increase in revenue sharing to third parties by RMB339.0 million (US$54.6 million), resulting from the revenue
increase of our mobile games and licensed games.
Cost of international operations. In 2014, our cost of international operations was RMB280.8 million (US$45.3 million),
compared to
RMB309.7 million in 2013. The decrease from 2013 was mainly due to a decrease in impairment charge by RMB14.3 million (US$2.4 million) associated with certain of our smaller games
and a decrease in sales-related tax by RMB13.6 million (US$2.2 million).
Gross Profit. In 2014, our gross profit was RMB2.7 billion (US$439.6 million), an increase of 16.5% from
RMB2.3 billion in 2013.
Our gross margin decreased to 71.0% in 2014 from 76.7% in 2013 primarily due to lower profit margin from mobile games and licensed games.
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Table of Contents
Operating Expenses. In 2014, our operating expenses were RMB2.4 billion (US$384.6 million), an increase of 19.1% from
RMB2.0 billion in 2013. The year-over-year increase in operating expenses was mainly due to an increase in personnel costs and an increase in advertising and promotional expenses.
Research and development expenses. In 2014, our research and development expenses increased by 21.1% to RMB1.1 billion
(US$172.9 million) from RMB886.1 million in 2013, primarily due to the increase in personnel costs from RMB706.7 million in 2013 to RMB897.8 million
(US$144.7 million) in 2014.
Sales and marketing expenses. In 2014, our sales and marketing expenses increased by 17.8% to RMB859.2 million
(US$138.5 million) from
RMB729.7 million in 2013. The increase was primarily due to an increase in advertising and promotional expenses from RMB409.6 million in 2013 to RMB482.8 million
(US$77.8 million) in 2014 as we launched several new games during the year, and an increase in personnel costs from RMB180.2 million in 2013 to RMB214.6 million
(US$34.6 million) in 2014.
General and administrative expenses. In 2014, our general and administrative expenses increased by 27.8% to RMB396.1 million
(US$63.8 million) from RMB310.0 million in 2013. The increase was mainly due to the impairment of intangibles via acquisitions amounted to RMB23.3 million (US$3.8 million)
associated with our U.S. subsidiary, an increase in personnel costs by RMB18.0 million (US$2.9 million), and an increase in professional service fee by RMB10.5 million
(US$1.7 million).
Goodwill impairment. In 2014, our goodwill impairment amounted to RMB58.2 million (US$9.4 million), as compared to
RMB77.3 million in 2013. The goodwill impairment was associated with our U.S. subsidiaries in 2014 and our Japanese subsidiary in 2013 respectively. For goodwill impairment, see
"Critical Accounting PoliciesGoodwill."
Total Other Income. In 2014, our total other income increased by 53.4% to RMB236.3 million (US$38.1 million) from
RMB154.0 million in 2013. The increase was primarily due to an equity investment gain of RMB38.2 million (US$6.2 million) in 2014, including a gain of approximately
RMB28.5 million (US$4.6 million) from the disposal of ordinary shares of Shanda Games, as compared to an equity investment loss of RMB15.2 million in 2013, and to a lesser extent,
due to an increase in foreign exchange gain by RMB20.5 million (US$3.3 million) in 2014.
Income Tax Expense. Our income tax expense was RMB121.5 million (US$19.6 million) in 2014, as compared to
RMB70.0 million in
2013. The increase was primarily due to the decrease in deferred tax
assets of RMB59.8 million (US$9.6 million) in 2014 as a result of the valuation allowance provided by our U.S. subsidiaries.
Net Income from Continuing Operations. As a result of the foregoing, we had a net income from continuing operations of
RMB455.7 million
(US$73.5 million) in 2014, as compared to RMB422.0 million in 2013.
(Loss) / Income from Discontinued Operations, net of tax. We had no loss or income from discontinued operations in 2014, as
compared to an income
from discontinued operation of RMB122.0 million in 2013.
Net (income) / Loss Attributable to Non-controlling Shareholders. In 2014, net loss attributable to non-controlling shareholders
was
RMB15.7 million (US$2.5 million), as compared to net income of RMB1.5 million in 2013. While we generated significant net income on the consolidated basis for the year ended
December 31, 2014, our majority owned subsidiaries or their variable interest entities had net loss in the year mainly resulting from operating loss and /or amortization expenses of intangible
assets arising from business acquisitions.
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Table of Contents
Net Income Attributable to the Company's Shareholders. Net income attributable to our shareholders was RMB471.4 million
(US$76.0 million) in 2014, as compared to RMB542.4 million in 2013.
Year Ended December 31, 2013 Compared to Year Ended December 31, 2012
Revenues. In 2013, we generated revenues of RMB3.1 billion, an increase of 10.2% from RMB2.8 billion in 2012.
Online
game operation revenues were RMB2.8 billion in 2013, an increase of 12.0% from RMB2.5 billion in 2012. Online game operation revenues generated from PRC operations
were RMB2.1 billion in 2013 as compared to RMB1.9 billion in 2012. The increase in online game operation revenues generated from PRC operations was primarily attributable to the strong
performance of several of our new games, including Swordsman Online and Saint Seya Online, which were launched in China in 2013.
Online
game operation revenues generated from international operations were RMB664.4 million in 2013 as compared to RMB580.2 million in 2012. The increase was primarily
attributable to the continued strength of our U.S. and European subsidiaries, including the strong contribution of our new game Neverwinter launched in the United States and Europe in 2013, and the
expanded online game operation by our own subsidiaries in Southeast Asia and Korea. This was partially offset by underperformance of some of the existing games in the Japanese market.
Licensing
revenues were RMB149.3 million in 2013, representing a 13.0% decrease from RMB171.6 million in 2012. The decrease was primarily because more of our games began to
be operated by our own subsidiaries in some overseas markets in 2013.
Other
revenues were RMB103.0 million in 2013, compared to RMB99.6 million in 2012.
Cost of Revenues. In 2013, our cost of revenues amounted to RMB711.6 million, or 23.3% of our revenues, representing an
increase of
RMB171.7 million from RMB539.9 million, or 19.5% of our revenues in 2012.
Cost of PRC operations. In 2013, our cost of PRC operations was RMB401.9 million, representing an increase of 27.7% from
RMB314.7 million in 2012. The increase was primarily due to an increase by RMB44.3 million in revenue sharing paid to third parties, including mobile game distribution platforms and an
increase in internet data center cost by RMB23.7 million in 2013.
Cost of international operations. In 2013, our cost of International operations was RMB309.7 million, representing an increase of
37.5% from
RMB225.3 million in 2012. The increase was mainly due to an increase in sales-related tax by RMB34.4 million, an increase in revenue sharing paid to third parties by
RMB18.6 million associated with our new game launched in 2013 and an increase in impairment charge of RMB10.8 million associated with certain of our smaller games in 2013.
Gross Profit. In 2013, our gross profit was RMB2.3 billion, an increase of 4.9% from RMB2.2 billion in 2012. Our gross
margin decrease
to 76.7% in 2013 from 80.5% in 2012 primarily due to an increase in revenue sharing paid to third parties and an increase in sales-related tax in our overseas operations.
Operating Expenses. In 2013, our operating expenses were RMB2.0 billion, an increase of 20.3% from RMB1.7 billion in
2012. The
year-over-year increase in operating expenses was mainly due to an increase in advertising and promotional expenses and an increase in personnel costs.
Research and development expenses. In 2013, our research and development expenses increased by 11.2% to RMB886.1 million from
RMB797.1 million in 2012, primarily due to an increase in personnel costs from RMB619.1 million in 2012 to RMB706.7 million in 2013.
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Sales and marketing expenses. In 2013, our sales and marketing expenses increased by 40.2% to RMB729.7 million from
RMB520.6 million in
2012, primarily due to an increase in advertising and promotion cost from RMB243.7 million in 2012 to RMB409.6 million in 2013 as we launched several new games during the year and
started to ramp up promotions for mobile games.
General and administrative expenses. In 2013, our general and administrative expenses slightly increased by 1.2% to
RMB310.0 million from
RMB306.3 million in 2012.
Goodwill impairment. In 2013, our goodwill impairment amounted to RMB77.3 million as compared to RMB40.8 million in 2012. The
goodwill
impairment was associated with our Japanese subsidiary. As of December 31, 2013, all goodwill arising from the acquisition of our Japanese subsidiary in April 2010 was fully impaired.
Total Other Income. In 2013, our total other income was RMB154.0 million compared to RMB127.6 million in 2012. The
increase was
primarily due to platform services commissions amounting to RMB21.5 million in 2013, as compared to nil in 2012. Platform services commissions are the commissions generated from the technical
support provided to our cooperated platform starting from 2013.
Income Tax Expense. Our income tax expense was RMB70.0 million in 2013, a decrease of 39.7%, from RMB116.1 million in
2012. The
decrease was primarily due to the decrease in the operating profit in 2013 and some of the new games launched in 2013 are operated by some of our controlled entities that enjoy a greater preferential
tax treatment.
Net Income from Continuing Operations. As a result of the foregoing, we had a net income from continuing operations of
RMB422.0 million in
2013, as compared to RMB577.5 million in 2012.
(Loss) / Income from Discontinued Operations, net of tax. In December 2013, we sold the online reading business to an unrelated
party, the related
gain of RMB166.3 million was recorded in the "gain from disposal of discontinued operations, net of tax" account in the consolidated statements of income and comprehensive income. In 2013, loss
from discontinued operations was RMB44.3 million, as compared to loss of RMB30.2 million in 2012.
Net Income Attributable to Non-controlling Shareholders. In 2013, net income attributable to non-controlling shareholders was
RMB1.5 million,
as compared to RMB6.6 million in 2012.
Net Income Attributable to the Company's Shareholders. Net income attributable to our shareholders was RMB542.4 million in
2013, as compared
to RMB540.7 million in 2012.
B. Liquidity and Capital Resources
Cash Flows and Working Capital
We are a holding company that conducts our operations primarily through our PRC wholly owned subsidiaries and their variable interest
entities in China and through our overseas subsidiaries. The flow of earnings from our PRC wholly owned subsidiaries and their variable interest entities is as
follows:
-
- Pursuant to the relevant equity pledge agreements, our variable interest entities are required not to distribute any dividends, bonus
or profits to their respective nominal equity holders. Where these nominal equity holders are entitled to any kind of interests other than dividends, bonuses or profit distributions from the pledged
equity interests, such interests shall be directly remit to the relevant PRC wholly owned subsidiaries of our Company.
-
- Part of the earnings and cash of our variable interest entities are used to pay service fees and consulting fees to the relevant PRC
wholly owned subsidiaries of ours in a manner and amount as specified in the exclusive technology support and service agreements, development
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cooperation
agreements and business operating agreements between these entities. See "Item 7. Major Shareholders and Related Party TransactionsB. Related Party Transactions." The
rest of earnings and cash are reinvested in our variable interest entities. The total amount of fees paid by our variable interest entities to our PRC wholly owned subsidiaries since the entering of
the variable interest entities contractual arrangements ranged approximately from 45% to 75% of the revenues generated by respective games operated by these variable interest entities. For the years
ended
December 31, 2012, 2013 and 2014, the total amount of fees charged by our PRC wholly owned subsidiaries to our variable interest entities amounted to approximately RMB1.1 billion,
RMB1.2 billion and RMB1.4 billion (US$230.2 million), respectively.
-
- After paying the business tax, enterprise income tax and other PRC taxes applicable to the revenues and earnings of these PRC wholly
owned subsidiaries and appropriating the statutory reserves and any earnings to be retained from accumulated profits, the standalone net profits of these PRC wholly owned subsidiaries may be
distributable to their intermediate holding companies outside the PRC, subject to dividend withholding tax.
-
- Any net profits of these intermediate holding companies may then be distributable to Perfect World Co., Ltd., our Cayman
Islands holding company, through dividend or other distributions, and may also be distributed to our shareholders directly as dividend upon authorization by our board of directors.
The
payment of dividends by entities organized in China is subject to limitations. Regulations in the PRC currently permit payment of dividends only out of accumulated profits as
determined in accordance with accounting standards and regulations in China. The differences between our retained earnings as calculated pursuant to PRC accounting standards and regulations and
retained earnings presented in our financial statements as of December 31, 2014 were not material. Such differences were mainly attributable to the timing differences in recognizing overseas
licensing revenues.
Our
PRC subsidiaries and variable interest entities are also required to set aside at least 10% of their after-tax profit based on PRC accounting standards each year to their general
reserves until the accumulative amount of such reserves reach 50% of their registered capital. These reserves are not distributable as cash dividends. In addition, if our PRC subsidiaries incur debt
on their own behalf, the instruments governing the debt may restrict their ability to pay dividends or make other distributions to us.
In
addition, we are required to accrue monthly for staff welfare benefits for the full-time employees of our subsidiaries and the variable interest entities incorporated in the PRC and
make contributions to the government and relevant state sponsored pension and medical plans with all the amounts accrued. Such staff welfare benefits include medical care, welfare subsidies,
unemployment insurance, pension benefits and housing fund and are determined based on certain percentages of the employees' respective salaries in accordance with relevant regulations. The amount of
such cash contributions may increase due to our expanding workforce as we grow our business or increase wage levels. However, we do not expect that such increase will have a material effect on our
liquidity.
Furthermore,
our wholly owned PRC subsidiaries and variable interest entities are subject to the PRC government controls on the convertibility of Renminbi into foreign currencies and, in
certain cases, the remittance of currency out of China. Most of our revenues and expenses are denominated in Renminbi. We may need to convert a portion of our revenues into other currencies to meet
our foreign currency obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related
foreign exchange transactions, can be made in foreign currencies without prior SAFE approval by complying with certain procedural requirements.
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On
the other hand, foreign exchange transactions by our subsidiaries and affiliated entities in China under capital accounts continue to be subject to significant foreign exchange
controls and require the approval of, or registration with, PRC governmental authorities. In particular, if our subsidiaries or affiliated entities in China borrow foreign currency loans from their
holding companies outside the PRC or other foreign lenders, these loans must be registered with SAFE, and if we finance them by means of additional capital contributions, these capital contributions
must be approved or registered by certain government authorities including SAFE, the Ministry of Commerce or their local counterparts. These limitations could affect the ability of these entities to
obtain foreign exchange through debt or equity financing, and could affect the business operations and liquidity of these entities.
Since
2006, we have financed our operations primarily through cash flows from operations.
As
of December 31, 2014, we had RMB933.8 million (US$150.5 million) in cash and cash equivalents, 65.8% of which were denominated in Renminbi. As of
December 31, 2014, cash and cash equivalents held by our consolidated variable interest entities amounted to RMB522.0 million (US$84.1 million). Our current cash and cash
equivalents primarily consist of cash on hand and demand deposits, which have original maturities of three months or less. We believe our cash and cash equivalents are sufficient to fund our
operations, commitments, capital expenditures, etc. for at least the next 12 months. We expect positive operating cash flow as we generally receive cash payments from distributors upon delivery
of our prepaid cards to them and from players when they deposit cash into their online accounts.
The
following table sets forth a summary of our cash flows for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 |
|
2013 |
|
2014 |
|
|
|
For the Year Ended December 31, |
|
|
|
RMB |
|
RMB |
|
RMB |
|
US$ |
|
|
|
(in thousands)
|
|
Net cash provided by operating activities |
|
|
739,489 |
|
|
1,032,879 |
|
|
923,349 |
|
|
148,817 |
|
Net cash (used in)/provided by investing activities |
|
|
(1,712,163 |
) |
|
10,334 |
|
|
(1,307,341 |
) |
|
(210,705 |
) |
Net cash (used in)/provided by financing activities |
|
|
(375,244 |
) |
|
(618,449 |
) |
|
120,888 |
|
|
19,483 |
|
Effect of exchange rate changes on cash and cash equivalent |
|
|
(2,662 |
) |
|
(12,240 |
) |
|
(15,227 |
) |
|
(2,454 |
) |
Net (decrease)/increase in cash and cash equivalents |
|
|
(1,350,580 |
) |
|
412,524 |
|
|
(278,331 |
) |
|
(44,859 |
) |
Cash and cash equivalents at the beginning of the year |
|
|
2,150,213 |
|
|
799,633 |
|
|
1,212,157 |
|
|
195,364 |
|
Cash and cash equivalents at the end of the year |
|
|
799,633 |
|
|
1,212,157 |
|
|
933,826 |
|
|
150,505 |
|
Operating Activities
Net cash provided by operating activities in 2014 was RMB923.3 million (US$148.8 million), decreased by 10.6% from
RMB1.0 billion in 2013, which was primarily due to the increase in our cash outflows related to costs and expenses. Net cash provided by operating activities in 2014 was primarily attributable
to (i) a net income of RMB455.7 million (US$73.4 million), (ii) adding back certain non-cash expenses including the depreciation and amortization expenses in the amount of
RMB222.6 million (US$35.9 million), share-based compensation expenses in the amount of RMB51.5 million (US$8.3 million), goodwill impairment in the amount of
RMB58.2 million (US$9.4 million), and impairment of intangible assets and other long-lived assets in the amount of RMB38.4 million (US$6.2 million), offset by investment
income picked under equity method in the amount of RMB38.2 million (US$6.2 million), and exchange gain in the amount of RMB27.2 million (US$4.4 million),
(iii) adding back changes in working capital accounts that positively affected operating cash flow, including an increase of RMB125.1 million (US$20.2 million) in deferred
revenues, an increase of RMB72.6 million (US$11.7 million) in salary and welfare payable, an increase of RMB68.2 million (US$11.0 million) in accounts payable, an increase
of RMB17.1 million
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(US$2.8 million)
in accrued expenses and other liabilities, and a decrease of RMB33.4 million (US$5.4 million) in long term prepayments, (iv) offset by changes in certain
working capital accounts
that negatively affected operating cash flow, primarily including an increase in accounts receivable of RMB177.5 million (US$28.6 million), an increase in current prepayments and other
assets of RMB49.4 million (US$8.0 million) and a decrease in advance from customers of RMB34.9 million (US$5.6 million).
Net
cash provided by operating activities in 2013 was RMB1.0 billion, increased by 39.7% from RMB739.5 million in 2012, which was primarily due to the increase of our
online game operation revenues. Net cash provided by operating activities in 2013 was primarily attributable to (i) a net income of RMB543.9 million, (ii) adding back certain
non-cash expenses including the share-based compensation expenses in the amount of RMB97.3 million, depreciation and amortization expenses in the amount of RMB200.2 million, goodwill
impairment in the amount of RMB77.3 million, impairment of intangible assets and other long-lived assets in the amount of RMB23.9 million and offset by gain from disposal of discontinued
operations in the amount of RMB166.3 million, (iii) adding back changes in working capital accounts that positively affected operating cash flow including an increase of
RMB38.6 million in accounts payable, an increase of RMB53.2 million in salary and welfare payable and an increase of RMB357.5 million in deferred revenues and (iv) offset
by changes in certain working capital accounts that negatively affected operating cash flow primarily including an increase in accounts receivable of RMB81.0 million, an increase in current
prepayments and other assets of RMB126.1 million and a decrease in advance from customers of RMB29.3 million.
Net
cash provided by operating activities in 2012 was RMB739.5 million, primarily attributable to (i) a net income of RMB547.2 million, (ii) adding back
certain non-cash expenses including the share-based compensation expenses in the amount of RMB71.1 million, depreciation and amortization expenses in the amount of RMB183.1 million,
goodwill impairment in the amount of RMB40.8 million and impairment of intangible assets and other long-lived assets in the amount of RMB21.0 million, (iii) adding back changes in
working capital account that positively affected operating cash flow including a decrease of RMB32.4 million in accounts receivable and an increase of RMB38.0 million in advances from
customer and (iv) offset by changes in certain working capital accounts that negatively affected operating cash flow primarily including an increase in current and non-current prepayments and
other assets of RMB92.2 million, a decrease in deferred revenue of RMB57.0 million and a decrease in taxes payable of RMB48.2 million.
Investing Activities
Net cash used in investing activities in 2014 was RMB1.3 billion (US$210.7 million). Net cash used in investing
activities in 2014 primarily related to (i) cash paid for purchase of short-term investments in the amount of RMB3.1 billion (US$500.1 million), (ii) increase of restricted
cash in the amount of RMB559.0 million (US$90.1 million), (iii) net cash paid in 2014 for our several strategic business acquisitions and equity investments in the amount of
RMB456.5 million (US$73.6 million), (iv) cash paid for purchase of property, equipment, software, intangible assets and office building renovation in the amount of
RMB147.8 million (US$23.8 million), and (v) cash paid for capitalized product development cost in the amount of RMB19.2 million (US$3.1 million); and was partially
offset by the cash inflow related to the maturities of short-term investments in the amount of
RMB2.8 billion (US$448.1 million), the disposal of PW Literature in the amount of RMB167.0 million (US$26.9 million), and the increase of cash in the amount of
RMB28.5 million (US$4.6 million) from the purchase and disposal of ordinary shares of Shanda Games.
Net
cash provided by investing activities in 2013 was RMB10.3 million. Net cash provided by investing activities in 2013 primarily related to the decrease of restricted cash in
the amount of RMB665.4 million, the maturities of short-term investments in the amount of RMB1.9 billion and was offset by (i) cash paid for purchase of property, equipment,
software, intangible assets and office
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building
renovation in the amount of RMB348.2 million, (ii) net cash paid for our several strategic business acquisitions and equity investments in 2013 in the amount of
RMB391.9 million, (iii) cash paid for purchase of short-term investments in the amount of RMB1.7 billion, (iv) cash paid for capitalized product development cost in the
amount of RMB44.2 million and (v) cash outflow related to disposal of PW Literature in the amount of RMB24.0 million.
Net
cash used in investing activities in 2012 was RMB1.7 billion. Net cash used in investing activities in 2012 primarily related to (i) cash paid for purchases of
short-term investments in the amount of RMB1.4 billion, (ii) an increase in restricted cash and restricted time deposit of RMB363.8 million to maintain guarantee balance at bank
as a collateral for the U.S. dollar short-term bank loans or to meet the requirement of specific business operations, (iii) cash paid for capital contribution of the venture capital fund in the
amount of RMB200.0 million, (iv) purchases of property, equipment and software in the amount of RMB108.8 million to support our expanded operations, (v) cash paid for
purchases of long-term time deposits in the amount of RMB50.0 million; and was partially offset by the maturities of short-term investments in the amount of RMB470.0 million.
Financing Activities
Net cash provided by financing activities was RMB120.9 million (US$19.5 million) in 2014, primarily related to
RMB726.0 million (US$117.0 million) cash received from short-term bank loans, partially offset by RMB491.9 million (US$79.3 million) used to repay short-term bank loans and
RMB146.4 million (US$23.6 million) used to pay dividends to our shareholders.
Net
cash used in financing activities was RMB618.4 million in 2013, primarily related to RMB742.9 million used to repay short-term bank loans and RMB137.1 million
used to pay dividends to our shareholders, partially offset by RMB216.2 million cash received from short-term bank loans.
Net
cash used in financing activities was RMB375.2 million in 2012, primarily related to RMB409.6 million used to repay short-term bank loans and RMB607.6 million
used to pay dividends to our shareholders, partially offset by RMB596.8 million cash received from short-term bank loans.
Capital Expenditures
We incurred capital expenditures of RMB147.8 million (US$23.8 million) in 2014. Our capital expenditures in 2014 were
used primarily to purchase servers, computer equipment and intangible assets for the further expansion of our operations. We believe that our current cash and cash equivalents and anticipated cash
flow from operations will be sufficient to meet our anticipated cash needs, including our cash needs for working capital and capital expenditures, for at least the next 12 months. We also plan
to fund our capital expenditures beyond the next 12 months with cash flows from our operations. We may, however, require additional cash due to changing business conditions or other future
developments, including any investments or acquisitions we may decide to pursue. If our existing cash is insufficient to meet our requirements, we may seek to sell additional equity securities, issue
debt securities or borrow from lending institutions.
We
incurred capital expenditures of RMB348.2 million in 2013. Our capital expenditures in 2013 were used primarily to purchase business office property, servers, computer
equipment and intangible assets for the further expansion of our operations.
We
incurred capital expenditures of RMB115.4 million in 2012. Our capital expenditures in 2012 were used primarily to purchase servers, computer equipment and intangible assets
for the further expansion of our operations.
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C. Research and Development, Patents and Licenses
Our research and development efforts are primarily to keep pace with technological advances in order to make our online game development capabilities and our
games competitive in the market. We intend to maintain and strengthen our internal game development capabilities and export more games to more countries and regions. For the years ended
December 31, 2012, 2013 and 2014, our research and development expenses were RMB797.1 million, RMB886.1 million and RMB1.1 billion (US$172.9 million), 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, 2014 to December 31, 2014 that are reasonably likely to have a material effect on our net revenues, income, profitability, liquidity or capital resources, or that would cause
the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.
E. Off-Balance Sheet Arrangements
We are not a party to any financial guarantees or off-balance sheet arrangements as defined by the SEC Financial Reporting Release 67 (FRR-67), "Disclosure in
Management's Discussion and Analysis about Off-Balance Sheet Arrangement and Aggregate Contractual Obligations." We have not entered into any derivative contracts that are indexed to our shares and
classified as shareholder's equity, or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an
unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity,
market risk or credit support to us or that engages in leasing, hedging or research and development services with us.
F. Tabular Disclosure of Contractual Obligations
The following table sets forth our contractual obligations and commercial commitments as of December 31, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period |
|
|
|
Total |
|
Less than
1 Year |
|
1 - 3 Years |
|
3 - 5 Years |
|
More than
5 Years |
|
|
|
(in RMB thousands)
|
|
Noncurrent deferred revenues |
|
|
35,670 |
|
|
|
|
|
35,670 |
|
|
|
|
|
|
|
Contractual lease obligations |
|
|
237,376 |
|
|
96,879 |
|
|
93,648 |
|
|
44,883 |
|
|
1,966 |
|
Other purchase obligations |
|
|
160,579 |
|
|
125,515 |
|
|
14,153 |
|
|
8,602 |
|
|
12,309 |
|
Total |
|
|
433,625 |
|
|
222,394 |
|
|
143,471 |
|
|
53,485 |
|
|
14,275 |
|
In
2011, we entered into a limited partnership agreement to invest up to RMB643.5 million as a limited partner in a venture capital fund over a nine-year period. In early 2013, we
increased our committed capital for an additional RMB396.0 million and the investment term was changed to a 12-year period. As of December 31, 2014, we have contributed
RMB615.7 million to the venture capital fund. We will contribute the remaining committed capital of RMB423.8 million over the investment term upon the capital call by the general
partner. The venture capital fund is managed by one general partner unrelated to us. See "Item 4. Information on the CompanyA. History and Development of the Company."
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Other
than the obligations set forth above, we did not have any material long-term debt obligations, operating lease obligations, purchase obligations or other long-term liabilities as
of December 31, 2014.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
The following table sets forth information regarding our executive officers and directors as of the date of this annual report.
|
|
|
|
|
|
Directors and Executive Officer
|
|
Age |
|
Position/Title |
Michael Yufeng Chi |
|
|
43 |
|
Founder and Chairman of the Board of Directors |
Daniel Dong Yang |
|
|
43 |
|
Independent Director |
Bing Xiang |
|
|
52 |
|
Independent Director |
Han Zhang |
|
|
52 |
|
Independent Director |
Robert Hong Xiao |
|
|
49 |
|
Chief Executive Officer |
Kelvin Wing Kee Lau |
|
|
50 |
|
Chief Financial Officer |
Di He |
|
|
41 |
|
Chief Technology Officer |
Qing Li |
|
|
41 |
|
Chief Development Officer |
Qi Zhu |
|
|
42 |
|
Chief Strategic Product Officer |
Xiaoyin Lu |
|
|
36 |
|
Chief Artist |
Yunfan Zhang |
|
|
36 |
|
Chief Operating Officer |
Alan Chen |
|
|
54 |
|
Senior Vice President |
Alex Yiran Xu |
|
|
42 |
|
Senior Vice President |
Zhengrong Huang |
|
|
43 |
|
Senior Vice President |
Haiyi Li |
|
|
38 |
|
Senior Vice President |
Cheng Wei |
|
|
38 |
|
Senior Vice President |
Yuyun Wang |
|
|
37 |
|
Senior Vice President |
Biographical Information
Mr. Michael Yufeng Chi is our founder and chairman of the board of directors.
Mr. Chi was also our chief executive officer since the inception of our company to August 2012 and then co-CEO until March 2013. Prior to founding our company, Mr. Chi founded Beijing
Golden Human Co., Ltd. in 1996, the predecessor of Human Education and Technology Co., Ltd., or Human Education, a leading Chinese education software and education solution
provider in China.
Mr. Chi has served as the chairman of Human Education since its inception. From 2003 to 2004, Mr. Chi also served as a vice president and the chief technology officer of Tsinghua
Unisplendour Corporation Limited, an information technology company listed on the Shenzhen Stock Exchange. In 2011, Mr. Chi was named one of the "2010 Most Influential Individuals in the
Chinese Game Industry" at the 2010 China Game Industry Annual Conference. In 2009, Mr. Chi was named one of the "Top 10 Most Influential Individuals in Chinese Online Game Industry for the Past
Decade" according to the 2009 Chinese Online Game Industry Survey for the Past Decade conducted in the China Digital Entertainment Exposition and Conference. In 2007, Mr. Chi was named one of
the "2007 Most Influential Individuals in Chinese Game Industry" at the China International Digital Content Expo 2007. In 2002, Mr. Chi was named one of the "Outstanding Young Entrepreneurs in
Beijing" by the Beijing Youth Federation and the Beijing Young Entrepreneur Association, and one of the "Outstanding Private Entrepreneurs" by the All-China Association of Industry & Commerce
and the China Non-Governmental Science Technology Entrepreneurs Association. In 2001, Mr. Chi was named one of the "Outstanding Young Persons of China's Software Industry" by the MIIT and the
All-China Youth Federation. Mr. Chi
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received
his bachelor's degree in chemistry from Tsinghua University in 1994 and his MBA degree from China Europe International Business School in 2004.
Mr. Daniel Dong Yang has served as our independent director since October 31, 2009. Mr. Yang has been a partner of
SAIF Partners, an Asian private equity firm, since 2004 and served as a director from 2001 to 2004. He currently serves as a director of several companies, such as Vancl.com and 58.com, both of which
are IT companies located in China. From 2000 to 2001, he served as an investment officer and director of Softbank China Venture Capital, a venture capital firm in China. Mr. Yang received his
bachelor's degree in computer science from Tsinghua University in 1995, and his master degree in accounting from University of Southern California in 1997. Mr. Yang is a Chartered Financial
Analyst.
Dr. Bing Xiang has served as our independent director since July 25, 2007. Dr. Xiang has served as an independent
director of a number of public companies listed on New York Stock Exchange, Shenzhen Stock Exchange and Hong Kong Stock Exchange, respectively. For example, he is the independent director of Yunnan
Baiyao Group Co., Ltd. and Dan Form Holdings Company Limited. Dr. Xiang has been a professor and the founding Dean of Cheung Kong Graduate School of Business since the inception
of the school in 2002. Prior to that, Dr. Xiang was a professor and founding director of EMBA and Executive Education programs at the Guanghua School of Management, Peking University. He has
also taught at the Hong Kong University of Science and Technology, Chinese University of Hong Kong and China Europe International Business School. Dr. Xiang received his bachelor's degree from
Xi'an University of Transportation in 1983 and a Ph.D. degree in accounting from University of Alberta in 1991.
Mr. Han Zhang has served as our independent director since July 2008. Since 2007, Mr. Zhang has served as a partner of Share
Capital Partners Ltd., a Chinese venture capital firm. Mr. Zhang served as the general manager of Greatwall Fund Management Co., Ltd., a fund management company in China,
from 2004 to 2005. He also served as the deputy general manager of Rongtong Fund Management Co., Ltd., a fund management company in China, from 2001 to 2003. From 1999 to 2000,
Mr. Zhang was the general manager assistant and the investment director of Penghua Fund Management Co., Ltd., a fund management company in China. He was the deputy manager of the
Finance Department of China National Technical Import & Export Corporation and also the general manager of CNTIC Shanghai Investment Advisory Co., Ltd. from 1994 to 1998.
Mr. Zhang received his bachelor's degree in chemistry from the Peking University in 1985 and his EMBA degree from China Europe International Business School in 2004.
Mr. Robert Hong Xiao has been with us since May 2008 and has served as our chief executive officer since March 2013. Previously,
Mr. Xiao served as our senior vice president in charge of our human resources and administration, later our chief operating officer, and then our co-CEO. Prior to joining us, Mr. Xiao
was at Dell (China) Company Limited from 2005 to 2008, first serving as the director of the learning and development department and then as the director of the talent management department. From 2003
to 2005, Mr. Xiao served as the director of people and organizational development department in Philips (China) Investment Co., Ltd. From 2001 to 2003, Mr. Xiao was at
Cisco Systems Hong Kong Ltd., first as the manager of the career and leadership development and then as the manager of the leadership and human resources development department. Prior to that,
Mr. Xiao served as the manager of the organizational effectiveness department in Cisco Systems (China) Networking Technologies Co., Ltd. from 2000 to 2001. In 2014,
Mr. Xiao was voted the winner of the "2013 Outstanding Individual in the Game Industry" in the 2013 Chinese Internet Industry Survey. In 2013, Mr. Xiao was named one of the "2013 Top 10
Influential Individuals in the Chinese Game Industry" at the 2013 China Game Industry Annual Conference and the "2013 Outstanding Entrepreneurs of the Chinese Animation and Game Industry" at the 2013
Annual Conference of Chinese e-Game Industry, respectively. Mr. Xiao received his bachelor's degree in
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physics
from Tsinghua University in 1989, and received his master's and Ph.D. degrees in engineering from University of Southern California, in 1991 and 1995, respectively.
Mr. Kelvin Wing Kee Lau has been our chief financial officer since March 2007. Prior to joining us, Mr. Lau was the chief
financial officer of Beijing Media Corporation Limited, a company listed on the Stock Exchange of Hong Kong Limited, from 2004 to 2007. From 2000 to 2004, Mr. Lau was a group finance director
of Shanghai Ogilvy & Mather Advertising Limited Beijing Branch. He worked for PricewaterhouseCoopers Beijing office as an audit senior manager in 2000 and an audit manager from 1996 to 1999.
Mr. Lau received his bachelor's degree in business administration from Hong Kong Baptist University in 1990. He received his EMBA degree in 2011 from Cheung Kong Graduate School of Business in
China. Mr. Lau is a member of Association of Chartered Certified Accountants and Hong Kong Institute of Certified Public Accountants.
Mr. Di He has been our chief technology officer since February 2006 in charge of research and development of our Angelica 3D game
engine and our game development. Prior to joining us, Mr. He served as the chief technology officer of E-Pie Entertainment and Technology Co., Ltd, a game development company,
from 2001 to 2006 and was involved in the programming of several PC games such as "Great Qin Warriors," "Shanghai Dragon" and "War in Burma." From 2004 to 2006, he was seconded to our company and was
involved in the development of our game engine and online games. From 1998 to 2001, Mr. He worked part-time with Beijing Golden Human Co., Ltd. and was in charge of development of
PC games such as "Honor & Freedom I" and "Honor & Freedom II." Mr. He received his bachelor's and master's degrees in automation from Tsinghua University in 1998 and 2001,
respectively.
Mr. Qing Li has been with us since February 2006 and is our chief development officer. Prior to joining us, Mr. Li served as
the chief design officer of E-Pie Entertainment and Technology Co., Ltd, a game development company, from 2001 to 2006 and was in charge of the design of several PC games such as "Great
Qin Warriors," "Shanghai Dragon" and "War in Burma." From 2004 to 2006, he was seconded to our company and in charge of game design. When working with Beijing Golden Human Co., Ltd. from
1998 to 2001, Mr. Li was in charge of the design of several PC games such as "Honor & Freedom I" and "Honor & Freedom II." Mr. Li received his bachelor's degree in
engineering physics and master's degree from the Institute of Nuclear Technology at Tsinghua University in 1997 and 2000, respectively. He received his EMBA degree in 2010 from Cheung Kong Graduate
School of Business in China.
Mr. Qi Zhu has been with us since November 2004 and is our chief strategic product officer. Previously, he served as the chief
publishing officer, Asia, in charge of our game operations and publishing in Asia. Prior to joining us, Mr. Zhu served as the vice president of Beijing Qianxiang Tiancheng
Technology Co., Ltd., a company engaged in development and services of internet products in 2004. From 2003 to 2004, Mr. Zhu was the deputy general manager of Beijing CIMO
Technology Co., Ltd., an internet entertainment company. Before that, he was a marketing director of Beijing Globallink Computer Technology Co., Ltd., a Chinese online game
developer and operator, from 2000 to 2003. Mr. Zhu was a branch manager of Lenovo (Beijing) Co., Ltd., a computer company in China, from 1998 to 2000. Mr. Zhu received his
bachelor's degree in metal forming from University of Science and Technology Beijing in 1995 and his master's degree in business economics from Chinese Academy of Social Sciences in 1998 in China. In
2009, he received his EMBA degree from Cheung Kong Graduate School of Business in China.
Mr. Xiaoyin Lu has been with us since February 2006 and is our chief artist. Prior to joining us, Mr. Lu served as the art
director of E-Pie Entertainment and Technology Co., Ltd., a game development company, from 2001 to 2006 and was in charge of the art work of several PC games such as "Great Qin
Warriors," "Shanghai Dragon" and "War in Burma." The trailer animation of "Great Qin Warriors," which was directed by Mr. Lu, won the "Best Visual Effects Award" and the "Best
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Technological
Applications Award" from the Chinese Television Artists Association. From 2004 to 2006, he was seconded to our company and in charge of art management. Mr. Lu received his
bachelor's degree in fine art from Zhejiang Normal University in 2001 and EMBA degree from Cheung Kong Graduate School of Business in China in 2010.
Mr. Yunfan Zhang joined us in February 2013 and has served as our chief operating officer since January 2015. Prior to that,
Mr. Zhang served as our vice president and later became our senior vice president, in charge of the mobile game publishing business. Prior to joining us, Mr. Zhang served as the CEO of
Beijing Zhizhu Network Technology Co., Ltd. from 2008 to 2012. He served as a general manager of Duowan.com from 2005 to 2008. From 2003 to 2005, he served as a product supervisor at
NetEase, Inc. Mr. Zhang received his bachelor's degree in Economics from Jiangxi University of Finance and Economics in 2003 and MBA degree from National University of Singapore in 2013.
Mr. Alan Chen has been with us since January 2008 and is our senior vice president in charge of Internet investment in North
America. Previously, he was our chief publishing officer of the U.S. and Europe, responsible for our game publishing and overall business operations in the U.S. and Europe. From 2006 to 2007,
Mr. Chen served as the chief technology officer of The9 Limited, where he led game development and technical operations. Prior to that, Mr. Chen was an executive vice president of
Hewlett-Packard (China) Ltd., where he was in charge of the company's enterprise server and storage business. He also served as vice president of professional services, greater China, at Lucent
Technologies (China) Ltd. from 2003 to 2005, and general manager of carrier packet solutions at Nortel Networks (China) Ltd. from 1998 to 2003. Mr. Chen received both his
Bachelor's degree and Master's degree in telecommunications engineering from the Beijing University of Posts and Telecommunications in 1982 and 1987, respectively. He received his Ph.D. degree in 1994
in electrical engineering from the University of Ottawa.
Mr. Alex Yiran Xu has been with us since March 2010 and is our senior vice president in charge of strategic partnership and
investment. Previously, Mr. Xu served as our vice president of strategy and later chief business officer. Prior to joining us, Mr. Xu served as a director for strategic investment at
Giant Interactive Group Inc. from 2008 to 2010. He was one of the founders and served as a director for game development and operations at RealNetworks China from 2005 to 2007, and led business
development, investment and new game development at Sohu.com Inc. from 2003 and 2005. Prior to that, Mr. Xu founded multiple startup companies in the internet and game industries and led
the development of one of the earliest 3D game engines and 3D games in China. Mr. Xu received his dual bachelor's degree in automation and precision instrument design in 1996 and master's
degree in precision instrument design in 1999, both from Tsinghua University, and MBA degree in 2007 from a joint program offered by Tsinghua University and the Chinese University of Hong Kong.
Mr. Zhengrong Huang has been with us since March 2009 and is our senior vice president, responsible for our research and
development, game publishing and overall business operations in the U.S. and Europe. Previously, Mr. Huang served as our vice president and later became senior vice president in
charge of ARC game platform, global network operation and IT infrastructure. Prior to joining us, Mr. Huang served as a director of Asia Pacific region at Bitband Technologies Ltd., an
IPTV technology provider, from 2003 to 2009. He served as a vice president at Beijing Huanuo Information Technology Co., Ltd., a company engaged in the networking service, from 2000 to
2003. He was a vice president at Infosec Technologies Co., Ltd., a company provided network security solution, from 1998 to 2000. From 1996 to 1998, Mr. Huang was an engineer of
Network Research Center of Tsinghua University. Mr. Huang received his dual bachelor's degree in computer science and technology and economics and management in 1994, and master's degree in
computer science and technology in 1996 from Tsinghua University.
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Mr. Haiyi Li has been with us since December 2006 and is our senior vice president in charge of PC game
publishing and operation in the domestic market. Previously, Mr. Li was in charge of our product management and operation of PC game in the domestic market as our director and later vice
president. Prior to joining us, he served as a director at Sohu.com Inc. from 2003 to 2006. From 2001 to 2003, Mr. Li was a senior project manager of NetEase, Inc. From 2000 to
2001, he was a product manager of Cyts Sysnet Electronics Co., Ltd., a company mainly engaged in IT consultant and system integration service for insurance companies. Mr. Li
received his bachelor's degree in international economics and business from Sichuan University of Science and Engineering in 2000. He is pursuing his EMBA degree from National University of Singapore.
Mr. Cheng Wei has been with us since November 2004 and is our senior vice president responsible for game publishing and operation
in East Asia. Previously, Mr. Wei was in charge of our product management and operation in the domestic market and East Asia as our director and later vice president. Prior to joining us,
Mr. Wei served as a marketing director at Beijing Shimo Technology Co., Ltd., an online game operator, in 2003, and later in 2004 he served as a marketing director at Beijing
Qianxiang Tiancheng Technology Co., Ltd., a company engaged in development and services of Internet products. From 2000 to 2003, he was a business development manager at Ourgame.com.
Mr. Wei received his bachelor's degree in economic information management in 2000 from Shandong University of Construction Materials Industry (currently University of Jinan) and EMBA degree
from National University of Singapore in 2014.
Ms. Yuyun Wang has been with us since December 2004 and is our senior vice president responsible for global branding, strategic
cooperation and public relations. Previously, Ms. Wang was in charge of our game marketing and operation in the domestic market as our director and later vice president. Prior to joining us,
Ms. Wang served as a marketing director at 8848.net from 2000 to 2003, a company engaging in E-commerce business. Ms. Wang received her EMBA degree from National University of Singapore
in 2012.
There
is no family relationship between any of our executive officers or directors.
B. Compensation of Directors and Executive Officers
For the year ended December 31, 2014, we paid an aggregate of approximately RMB46.0 million (US$7.4 million) and approximately
RMB1.4 million (US$0.2 million) in cash compensation to our senior executive officers and directors, respectively. For the year ended December 31, 2014, we paid an aggregate of
approximately RMB1.1 million (US$0.2 million) for pension and other social insurance contribution for our senior executive officers pursuant to PRC statutory requirements. For options
granted to our officers and directors, see "Item 6. Directors, Senior Management and EmployeesB. Compensation of Directors and Executive OfficersShare Incentive Plan."
Employment Agreements
We have entered into employment agreements with each of our senior executive officers. We may terminate a senior executive officer's
employment for cause, at any time, without prior notice or remuneration, for certain acts of the officer, including, but not limited to, material violation of our internal policies, failure to perform
agreed duties or embezzlement that cause material damage to us, or a conviction of a crime. A senior executive officer may terminate his or her employment at any time by a 30-day prior written notice.
Each senior executive officer is entitled to certain benefits upon termination, including a severance payment equal to a certain specified number of months of his or her then salary, if he or she
resigns for certain good reasons specified by the employment agreement or if his or her employment was terminated without causes.
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Table of Contents
Share Incentive Plan
We have adopted a share incentive plan in 2006, or the 2006 Plan, to motivate, attract and retain employees, directors and consultants
and to promote the success of our business. In February 2009, we amended and restated the 2006 Plan, under which the maximum number of ordinary shares reserved for future issuances upon exercise of
options and other equity incentives granted under the 2006 Plan was increased to 42,145,000 Class B ordinary shares. In November 2009, we further amended the 2006 Plan to increase the maximum
number of ordinary shares reserved for future issuances under the plan to 44,645,000 Class B ordinary shares. On August 14, 2010, our shareholders approved a 2010 Share Incentive Plan,
or the 2010 Plan, under which 30,000,000 Class B ordinary shares have been reserved for future issuance. On November 22, 2013, our shareholders approved a 2013 Share Incentive Plan, or
the 2013 Plan, under which 5,024,818 shares have been reserved in the award pool for future issuance. Starting January 1, 2015, the award pool will be increased by a number on the first day of
each year equal to 2% of the then total number of Class B ordinary shares outstanding, provided that at no time the unissued shares reserved in the award pool immediately after such annual
increase shall exceed 5% of the then total number of Class B ordinary shares outstanding. The following table summarizes, as of April 26, 2015, the outstanding options that we granted to
our current directors and executive officers and to other individuals as a group under our 2006 Plan, 2010 Plan and 2013 Plan.
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Ordinary Shares
Underlying
Outstanding Options |
|
Exercise
Price(US$/Share) |
|
Grant Date |
|
Expiration
Date |
Michael Yufeng Chi |
|
|
464,000 |
|
|
4.852 |
|
July 30, 2009 |
|
** |
|
|
|
160,650 |
|
|
4.292 |
|
March 18, 2011 |
|
*** |
|
|
|
500,000 |
|
|
2.076 |
|
August 29, 2012 |
|
*** |
Daniel Dong Yang |
|
|
* |
|
|
4.852 |
|
December 30, 2009 |
|
*** |
Robert Hong Xiao |
|
|
139,400 |
|
|
4.292 |
|
March 18, 2011 |
|
*** |
|
|
|
150,000 |
|
|
2.076 |
|
August 29, 2012 |
|
*** |
|
|
|
2,440,000 |
|
|
2.2 |
|
May 29, 2013 |
|
*** |
Kelvin Wing Kee Lau |
|
|
* |
|
|
1.782 |
|
March 3, 2009 |
|
** |
|
|
|
* |
|
|
4.292 |
|
March 18, 2011 |
|
*** |
|
|
|
* |
|
|
2.076 |
|
August 29, 2012 |
|
*** |
|
|
|
* |
|
|
2.2 |
|
May 29, 2013 |
|
*** |
Di He |
|
|
* |
|
|
2.076 |
|
August 29, 2012 |
|
*** |
|
|
|
* |
|
|
2.2 |
|
May 29, 2013 |
|
*** |
Qing Li |
|
|
* |
|
|
4.292 |
|
March 18, 2011 |
|
*** |
|
|
|
* |
|
|
2.076 |
|
August 29, 2012 |
|
*** |
|
|
|
* |
|
|
2.2 |
|
May 29, 2013 |
|
*** |
Qi Zhu |
|
|
* |
|
|
1.782 |
|
March 3, 2009 |
|
** |
|
|
|
* |
|
|
4.292 |
|
March 18, 2011 |
|
*** |
|
|
|
* |
|
|
2.076 |
|
August 29, 2012 |
|
*** |
|
|
|
* |
|
|
2.2 |
|
May 29, 2013 |
|
*** |
Xiaoyin Lu |
|
|
* |
|
|
4.292 |
|
March 18, 2011 |
|
*** |
|
|
|
* |
|
|
2.076 |
|
August 29, 2012 |
|
*** |
|
|
|
* |
|
|
2.2 |
|
May 29, 2013 |
|
*** |
Yunfan Zhang |
|
|
* |
|
|
2.2 |
|
May 29, 2013 |
|
*** |
Alan Chen |
|
|
* |
|
|
4.292 |
|
March 18, 2011 |
|
*** |
|
|
|
* |
|
|
2.076 |
|
August 29, 2012 |
|
*** |
|
|
|
* |
|
|
2.2 |
|
May 29, 2013 |
|
*** |
Alex Yiran Xu |
|
|
* |
|
|
4.292 |
|
March 18, 2011 |
|
*** |
|
|
|
* |
|
|
2.076 |
|
August 29, 2012 |
|
*** |
|
|
|
* |
|
|
2.2 |
|
May 29, 2013 |
|
*** |
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Table of Contents
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Ordinary Shares
Underlying
Outstanding Options |
|
Exercise
Price(US$/Share) |
|
Grant Date |
|
Expiration
Date |
Zhengrong Huang |
|
|
* |
|
|
2.976 |
|
May 27, 2009 |
|
** |
|
|
|
* |
|
|
4.292 |
|
March 18, 2011 |
|
*** |
|
|
|
* |
|
|
2.076 |
|
August 29, 2012 |
|
*** |
|
|
|
* |
|
|
2.2 |
|
May 29, 2013 |
|
*** |
Haiyi Li |
|
|
* |
|
|
4.292 |
|
March 18, 2011 |
|
*** |
|
|
|
* |
|
|
2.2 |
|
May 29, 2013 |
|
*** |
Cheng Wei |
|
|
* |
|
|
1.782 |
|
March 3, 2009 |
|
** |
|
|
|
* |
|
|
4.292 |
|
March 18, 2011 |
|
*** |
|
|
|
* |
|
|
2.076 |
|
August 29, 2012 |
|
*** |
|
|
|
* |
|
|
2.2 |
|
May 29, 2013 |
|
*** |
Yuyun Wang |
|
|
* |
|
|
1.782 |
|
March 3, 2009 |
|
** |
|
|
|
* |
|
|
4.292 |
|
March 18, 2011 |
|
*** |
|
|
|
* |
|
|
2.076 |
|
August 29, 2012 |
|
*** |
|
|
|
* |
|
|
2.2 |
|
May 29, 2013 |
|
*** |
Other individuals as a group |
|
|
174,305 |
|
|
1.782 |
|
March 3, 2009 |
|
** |
|
|
|
4,230 |
|
|
4.852 |
|
July 30, 2009 |
|
** |
|
|
|
97,345 |
|
|
4.852 |
|
March 3, 2010 |
|
*** |
|
|
|
|
|
|
|
|
May 18, 2010 |
|
|
|
|
|
|
|
|
|
|
August 19, 2010 |
|
|
|
|
|
|
|
|
|
|
September 20, 2010 |
|
|
|
|
|
2,184,375 |
|
|
4.292 |
|
March 18, 2011 |
|
*** |
|
|
|
|
|
|
|
|
June 7, 2011 |
|
|
|
|
|
21,875 |
|
|
3.488 |
|
August 5, 2011 |
|
*** |
|
|
|
1,012,665 |
|
|
2.076 |
|
August 29, 2012 |
|
*** |
|
|
|
150,000 |
|
|
2.102 |
|
March 14, 2013 |
|
*** |
|
|
|
1,762,810 |
|
|
2.2 |
|
May 29, 2013 |
|
*** |
|
|
|
200,000 |
|
|
2.178 |
|
March 21, 2014 |
|
*** |
- *
- The
options in aggregate held by each of these directors and officers represent less than 1% of our total outstanding shares.
- **
- Earlier
of the tenth anniversary of the grant date (unless an earlier time is set in the option award agreement) and the termination of the optionee's
services.
- ***
- Earlier
of the tenth anniversary of the grant date (unless an earlier time is set in the option award agreement) and three months after the termination of
the optionee's services other than for disability or death.
Plan Administration. Our board of directors or our compensation committee administers the share incentive plans. The compensation
committee or the
full board of directors, as appropriate, determines the provisions and terms and conditions of our awards.
Types of Awards. The following briefly describes the principal features of the various awards that may be granted under our share
incentive plan.
-
- Options. Options provide for the right to purchase our
ordinary shares at a specified price, and usually will become exercisable in the discretion of our plan administrator in one or more installments after the grant date. The option exercise price may be
paid in cash, by check, our ordinary shares which have been held by the option holder for such time as may be required to avoid adverse accounting treatment, other property with value equal to the
exercise price,
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Table of Contents
Termination of the Share Incentive Plan. Unless terminated earlier, the amended 2006 Plan will expire in 2019, the 2010 Plan will
expire in 2020, and
the 2013 Plan will expire in 2023. Our board of directors has the authority to amend or terminate these share incentive plans subject to shareholder approval with respect to certain amendments.
However, no such action may impair the rights of any recipient of the awards unless agreed by the recipient.
C. Board Practices
Every director attended all of the meetings of our board of directors and its committees on which he served after becoming a member of our board. No director is
entitled to any severance benefits upon termination of his directorship with us. In 2014, our board of directors held meetings four times.
Board of Directors
Our board of directors currently consists of four directors. A director is not required to hold any shares in the company by way of
qualification. A director may vote with respect to any contract or transaction in which he is interested, provided that he has disclosed the nature of his interest in such contract or transaction at
or prior to its consideration and any vote thereon. The directors may exercise all the powers of the company to borrow money, mortgage its undertaking, property and uncalled capital, and issue
debentures or other securities whether outright or as security for any obligation of the company or of any third party.
Committees of the Board of Directors
We have established two committees under the board of directors: the audit committee and the compensation committee. We currently do
not plan to establish a nominating committee. The independent directors of our company will select and recommend to the board for nomination by the board such candidates as the independent directors,
in the exercise of their judgment, have found to be well qualified and willing and available to serve as our directors prior to each annual meeting of our shareholders at which our directors are to be
elected or re-elected. In addition, our board of directors has resolved that director nomination be approved by a majority of the board as well as a majority of the independent directors of the board.
In compliance with Rule 5605 of the NASDAQ Stock Market Rules, all of the members of each of our board committees are independent directors. We have adopted a charter for each of the board
committees. Each committee's members and responsibilities are described below.
Audit Committee. Our audit committee consists of Daniel Dong Yang, Bing Xiang and Han Zhang. We have determined that Daniel Dong Yang,
Bing Xiang and
Han Zhang satisfy the "independence" requirements of Rule 10A-3 under the Exchange Act, as amended, and Rule 5605 of
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the
NASDAQ Stock Market Rules. Our board of directors has determined that Daniel Dong Yang is an audit committee financial expert as defined in the instructions to Item 16A of the
Form 20-F. 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 with the independent auditors any audit problems or difficulties and management's response;
-
- reviewing and approving all proposed related party transactions;
-
- discussing the annual audited financial statements with management and the independent auditors;
-
- reviewing major issues as to the adequacy of our internal controls;
-
- annually reviewing and reassessing our audit committee charter;
-
- meeting separately and periodically with management and the independent auditors; and
-
- reporting regularly to the board of directors.
In
2014, our audit committee held meetings four times.
Compensation Committee. Our compensation committee consists of Daniel Dong Yang and Bing Xiang.
We have determined that Daniel Dong Yang and Bing Xiang satisfy the "independence" requirements of Rule 5605 of the NASDAQ Stock Market Rules. The compensation committee assists the board in
reviewing and approving the compensation structure, including all forms of compensation, relating to our directors and executive officers. Our chief executive officer may not be present at any
committee meeting during which their compensation is deliberated. The compensation committee is responsible for, among other things:
-
- reviewing and approving, or recommend to the board of directors for its approval, the total compensation package for our senior
executives;
-
- evaluating the appropriate level of compensation for board and committee services by non-employee directors; and
-
- reviewing periodically and approving any long-term incentive compensation or equity plans, programs or similar arrangements, annual
bonuses, employee pension and welfare benefit plans.
In
2014, our compensation committee passed unanimous written resolutions in lieu of meeting once.
Duties of Directors
Under Cayman Islands law, our directors have a 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 and Officers
Our officers are elected by and serve at the discretion of the board of directors. Our directors are not subject to a term of office
and hold office until such time as they are removed from office by ordinary resolution or the unanimous written resolution of all shareholders. A director will be removed from office automatically if,
among other things, the director (i) becomes bankrupt or makes any arrangement or composition with his creditors; or (ii) dies or is found by our company to be or becomes of unsound
mind.
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Table of Contents
D. Employees
We had 4,568, 4,805 and 5,378 employees as of December 31, 2012, 2013 and 2014, respectively. None of our employees are represented under collective
bargaining agreements. We consider our relations with our employees to be good.
E. Share Ownership
The following table sets forth information with respect to the beneficial ownership of our ordinary shares (including shares represented by our ADSs), assuming
each share is entitled to one vote, as of April 26, 2015, by:
-
- each of our directors and executive officers; and
-
- each person known to us to own beneficially more than 5.0% of our ordinary shares.
|
|
|
|
|
|
|
|
|
|
Share
Beneficially Owned |
|
|
|
Number(1) |
|
%(2) |
|
Directors and Executive Officers: |
|
|
|
|
|
|
|
Michael Yufeng Chi(3) |
|
|
41,896,575 |
|
|
16.8 |
|
Daniel Dong Yang(4) |
|
|
* |
|
|
* |
|
Bing Xiang |
|
|
|
|
|
|
|
Han Zhang(4) |
|
|
* |
|
|
* |
|
Robert Hong Xiao(4) |
|
|
* |
|
|
* |
|
Kelvin Wing Kee Lau(4) |
|
|
* |
|
|
* |
|
Di He(5) |
|
|
2,622,320 |
|
|
1.1 |
|
Qing Li(4) |
|
|
* |
|
|
* |
|
Qi Zhu(4) |
|
|
* |
|
|
* |
|
Xiaoyin Lu(4) |
|
|
* |
|
|
* |
|
Yunfan Zhang(4) |
|
|
* |
|
|
* |
|
Alan Chen(4) |
|
|
* |
|
|
* |
|
Alex Yiran Xu(4) |
|
|
* |
|
|
* |
|
Zhengrong Huang(4) |
|
|
* |
|
|
* |
|
Haiyi Li(4) |
|
|
* |
|
|
* |
|
Cheng Wei(4) |
|
|
* |
|
|
* |
|
Yuyun Wang(4) |
|
|
* |
|
|
* |
|
All Directors and Executive Officers as a Group(6) |
|
|
55,028,040 |
|
|
21.4 |
|
Principal Shareholders: |
|
|
|
|
|
|
|
Perfect Human Holding Company Limited(7) |
|
|
40,959,425 |
|
|
16.5 |
|
Fosun International Limited(8) |
|
|
29,344,530 |
|
|
11.8 |
|
Greenwoods Asset Management Limited(9) |
|
|
17,840,240 |
|
|
7.2 |
|
- *
- 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.
- (2)
- For
each person and group included in this table, percentage ownership is calculated by dividing the number of shares beneficially owned by such person or
group by the sum of the number of outstanding Class A ordinary shares and outstanding Class B ordinary shares as of April 26, 2015 and the number of ordinary shares underlying
share options held by such person or group that are exercisable within 60 days after April 26, 2015.
110
Table of Contents
- (3)
- Represents
27,542,625 Class A ordinary shares and 13,416,800 Class B ordinary shares held by Perfect Human Holding Company Limited, a British
Virgin Islands company controlled by Mr. Michael Yufeng Chi and 937,150 Class B ordinary shares underlying the options granted to Mr. Michael Yufeng Chi which are exercisable
within 60 days after April 26, 2015. Perfect Human Holding Company Limited has pledged 10,003,315 Class B ordinary shares to a third-party lender as collateral for certain loans
received from the lender. The business address for Mr. Chi is Perfect World Plaza, Tower 306, 86 Beiyuan Road, Chaoyang District Beijing 100101, People's Republic of China.
- (4)
- Represents
Class B ordinary shares held and/or issuable upon exercise of all of the options that are exercisable within 60 days after
April 26, 2015. The business address for these individuals is Perfect World Plaza, Tower 306, 86 Beiyuan Road, Chaoyang District Beijing 100101, People's Republic of China.
- (5)
- Represents
2,128,570 Class A ordinary shares and 493,750 Class B ordinary shares including Class B ordinary shares held by
Mr. He in the form of ADSs and Class B ordinary shares underlying the options granted to Mr. He which are exercisable within 60 days after April 26, 2015. The
business address for Mr. He is Perfect World Plaza, Tower 306, 86 Beiyuan Road, Chaoyang District Beijing 100101, People's Republic of China.
- (6)
- Includes
ordinary shares held and issuable upon exercise of all of the options that are exercisable within 60 days after April 26, 2015 held
by all of our directors and senior executive officers as a group.
- (7)
- Represents
27,542,625 Class A ordinary shares and 13,416,800 Class B ordinary shares held by Perfect Human Holding Company Limited, a British
Virgin Islands company controlled by Mr. Michael Yufeng Chi. Mr. Chi is the sole director of Perfect Human Holding Company Limited. See also note (3) to this table above. The
address for Perfect Human Holding Company Limited is P.O. Box 173, Kingston Chambers, Road Town, Tortola, British Virgin Islands.
- (8)
- Based
on the Schedule 13G/A filed with the SEC on February 11, 2015. Fosun International Limited is the beneficial owner of 29,344,530 shares
of our Class B ordinary shares in the form of ADSs. Fosun International Limited is a company organized under the laws of the Hong Kong Special Administrative Region of China and its principal
business address is Room 808, ICBC Tower, 3 Garden Road, Central, Hong Kong.
- (9)
- Based
on the Schedule 13G filed with the SEC on April 16, 2015. Greenwoods Asset Management Limited and its affiliates beneficially owned
17,840,240 shares of our Class B ordinary shares in the form of ADSs. Greenwoods Asset Management Limited is a company organized under the laws of the Cayman Islands and its principal business
address is Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman, KY1111-1, Cayman Islands.
Our
ordinary shares are divided into Class A ordinary shares and Class B ordinary shares. Holders of Class B ordinary shares are entitled to one vote per share,
while holders of Class A ordinary shares are entitled to 10 votes per share. We issued Class B ordinary shares represented by our ADSs in our initial public offering in July 2007.
Holders of our Class A ordinary shares may choose to convert their Class A ordinary shares into the same number of Class B ordinary shares at any time. We are not aware of any
arrangement that may, at a subsequent date, result in a change of control of our company. See "Item 3. Key InformationD. Risk FactorsRisks Related to Our
ADSsOur dual-class ordinary share structure with different voting rights could discourage others from pursuing
111
Table of Contents
any
change of control transactions that holders of our Class B ordinary shares and ADSs may view as beneficial."
To
our knowledge, as of April 26, 2015, approximately 88.3% of our total issued ordinary shares (including shares reserved and set aside for future issuance to employees upon
exercise of vested options) were held by a record shareholder in the United States, Deutsche Bank Trust Company Americas, the depositary of our ADS program. The number of beneficial owners of our ADSs
in the United States is likely to be much larger than the number of the record holder of our ordinary shares in the United States.
For
options granted to our officers and directors, see "Item 6. Directors, Senior Management and EmployeesB. Compensation of Directors and Executive
OfficersShare Incentive Plan."
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
See "Item 6. Directors, Senior Management and EmployeesE. Share Ownership."
B. Related Party Transactions
Contractual Arrangements with PW Network and its Equity Owners
Various regulations in China currently restrict or prevent foreign-invested entities from holding certain licenses required to operate
online games, including internet content provision, internet culture operation and internet publishing licenses. We conduct a portion of our online game and internet content provision businesses in
China through PW Software's contractual arrangements with PW Network, one of our variable interest entities. PW Software's relationships with PW Network and its equity owners are governed by the
following contractual arrangements entered into in September 2006, as amended and restated in April 2007.
Exclusive Technology Support and Service Agreement. Under the exclusive technology support and service agreement between PW
Software and PW Network,
PW Software has the exclusive right to provide to PW Network technical support and services related to PW Network's online game operations. PW Software owns the intellectual property rights developed
by either PW Software or PW Network in the performance of this agreement. PW Network pays PW Software quarterly service fees, the amount of which is determined by PW Software and PW Network based on
the complexity, time spent, contents and value of the technical services provided by PW Software as well as the market price of similar services. This agreement is effective until March 9,
2024. PW Software may early terminate this agreement by providing a 30-day prior notice to PW Network, while PW Network has no right to early terminate this agreement. If any party enter bankruptcy or
becomes insolvent, this agreement will be automatically terminated.
Development Cooperation Agreement. Under the development cooperation agreement between PW Network and PW Software, which was
further revised in April
2008, PW Network exclusively engages PW Software to develop software for PW Network's operation. PW Network and PW Software jointly own the intellectual property rights developed by PW Software and
shares the proceeds from such rights on an agreed percentage. PW Network pays PW Software monthly service fees, the amount of which is determined by PW Software and PW Network based on the complexity,
time spent, cost, contents and value of the development work done by PW Software as well as the market price of similar work. This agreement is effective until March 9, 2024 and can be early
terminated by mutual agreement of the parties.
Business Operation Agreement. Under the business operation agreement among PW Software, PW Network and the shareholders of PW
Network, PW Software
provides guidance and advice on PW
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Network's
daily operations and financial management systems. The shareholders of PW Network must elect the candidates recommended by PW Software as PW Network's directors, and procure the appointment
of PW Network's senior executives as per PW Software's designation. Moreover, PW Network and its shareholders agree that without the prior consent of PW Software, PW Network will not engage in any
transactions that could materially affect the assets, business, personnel, rights, liabilities or operations of PW Network, including incurrence or assumption of any indebtedness of more than
RMB400,000, sale or purchase of any assets or rights, incurrence of any encumbrance on any of its assets or intellectual property rights in favor of a third party, amendment of its articles of
association or business scope, or change of its normal operation procedures. The agreement also provides that if any of the agreements between PW Software and PW Network is terminated, PW Software is
entitled to terminate all of the other agreements between itself and PW Network. This agreement is effective until March 9, 2024 or the early termination by PW Software.
Call Option Agreement. Under the call option agreement among the equity owners of PW Network, PW Network and PW Software, the
equity owners of PW
Network irrevocably granted PW Software or its designated person an exclusive option to purchase from PW Network's equity owners, to the extent permitted under PRC law, all or part of the equity
interests in PW Network for the higher of (i) RMB10,000 or (ii) the minimum amount of consideration permitted by the applicable law. PW Software or its designated person has sole
discretion to decide when to exercise the option. This agreement is effective until March 9, 2024. PW Software may early terminate this agreement by providing a 30-day prior notice, while other
parties have no right to terminate this agreement without a consensus of the parties involved.
Equity Pledge Agreement. Under the equity pledge agreement among the equity owners of PW Network, PW Network and PW Software,
the equity owners of PW
Network pledged all of their equity interests in PW Network to PW Software to guarantee PW Network's performance of its obligations under the exclusive technology support and service agreement, the
development cooperation agreement, the business operation agreement and the call option agreement. If PW Network or either of its equity owners breaches its respective contractual obligations, PW
Software, as pledgee, will be entitled to certain rights, including the right to sell the pledged equity interests. The equity owners of PW Network agreed not to take any actions that would prejudice
PW Software's interest. We completed the registration of the pledge of the equity interest of PW Network in 2012. This agreement is effective until March 9, 2024.
Power of Attorney. Each equity owner of PW Network has executed a power of attorney to appoint PW Software as its
attorney-in-fact to exercise all of
its rights as equity owner of PW Network, including voting rights and the rights to transfer any or all of its equity interest in PW Network. The
appointment of PW Software as attorney-in-fact will remain effective until the termination of the above business operation agreement or the dissolution of PW Software.
Contractual Arrangements with PW Digital Technology and its Equity Owners
We conducted a portion of our online games and internet content provision businesses in China through PW Game Software's contractual
arrangements with PW Digital Technology, one of our variable interest entities. PW Game Software's relationships with PW Digital Technology and its equity owners are governed by a series contractual
arrangements, including the Business Operation Agreement, Call Option Agreement, Equity Pledge Agreement and Power of Attorney between PW Game Software and PW Digital Technology and its equity owners
and the Exclusive Technology Support and Service Agreement and Development Cooperation Agreement between PW Game Software and PW Digital Technology. The terms of these contractual arrangements are
substantially the same as the contractual agreements between PW Software and PW Network and its equity owners except that the former agreements were entered into in August 2013, as amended and
restated in
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Table of Contents
December
2013, and the term will end on December 10, 2033. We completed the registration of the pledge of the equity interest of PW Digital Technology in 2014. In addition, each of PW Digital
Technology's equity owners has entered into a loan agreement with PW Game Software, under which PW Game Software agrees to extend RMB9.0 million interest-free loan to Mr. Michael Yufeng
Chi and RMB1.0 million interest-free loan to Mr. Xiaoxi Yang solely for them to fund the capitalization of PW Digital Technology. The term of the loans is twenty years.
Contractual Arrangements with Trendsters Investment and its Equity Owners
In 2011, we entered into a limited partnership agreement to invest up to RMB643.5 million as a limited partner in a venture
capital fund over a nine-year period. The venture capital fund will invest in high growth companies in the technology, media and telecommunication industries. In early 2013, we increased our committed
capital for an additional RMB396.0 million and the investment term was changed to 12 years. The venture capital fund intends to invest the additional capital received as a limited
partner into another private equity fund, which focuses on investment into
mature companies in the consumer and retail, financial services, health care, TMT, energy and natural resources, and high value-added manufacturing industries in China. The venture capital fund is
managed by a general partner unrelated to us. Because various regulations in China currently restrict or prevent foreign-invested entities from engaging in certain technology, media and
telecommunications industries which are the targeted industries of the venture capital fund, we use Trendsters Investment, a variable interest entity we established in November 2011, as an investment
vehicle to hold our investment in the fund. Trendsters Investment does not itself make investment decisions for the fund or involve in the management of the fund. PW Software has entered into a series
of contractual agreements with Trendsters Investment and its equity owners, namely Mr. Qing Li and Mr. Qi Zhu, in November 2011. Such contractual arrangements are substantially the same
as the contractual arrangements between PW Software and PW Network and its equity owners and will remain effective until August 2026. We completed the registration of the pledge of the equity interest
of Trendsters Investment in 2012. In addition, each of Messrs Li and Zhu entered into a loan agreement with PW Software in October 2011, under which PW Software agreed to make an
RMB0.5 million interest-free loan to each of Messrs Li and Zhu solely for them to fund the capitalization of Trendsters Investment. The term of the loans is twenty years.
Contractual Arrangements with Perfect Moment and its Equity Owners
The business operation agreement, call option agreement, equity pledge agreement and power of attorney between PW Software and Perfect
Moment and its equity owners and the exclusive technology support and service agreement and development cooperation agreement between PW Software and Perfect Moment are substantially the same as the
contractual agreements between PW Software and PW Network and its equity owners. The business operation agreement, call option agreement, equity pledge agreement and power of attorney will remain
effective until 2024, and the exclusive technology support and service agreement and development cooperation agreement will remain effective until 2026. We completed the registration of the pledge of
the equity interest of Perfect Moment in 2012. As a result of these contractual arrangements, we are considered to be the primary beneficiary of Perfect Moment and Perfect Moment is a variable
interest entity of our company under U.S. GAAP. Accordingly, we consolidate Perfect Moment's results of operations, assets and liabilities in our financial statements. In August 2011, Perfect
Moment sold PW Pictures to Beijing Ever Joy Pictures Co., Ltd., which is majority-owned by Mr. Michael Yufeng Chi, our founder and chairman of the board of directors. After the
sale, Perfect Moment, then known as Beijing Perfect Moment Pictures Co., Ltd., no longer had material business operations and changed its name to Beijing Perfect Moment Network
Technology Co., Ltd.
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Table of Contents
Contractual Arrangements with PW Literature and its Equity Owners
Various regulations in China restrict or prevent foreign-invested entities from holding certain licenses required to operate online
reading business, including internet content provision, internet culture operation and internet publishing licenses. In light of these restrictions, we had operated our online reading business through
PW Literature based on a series of contractual arrangements between PW Software, PW Literature and its equity owners, before we sold PW Literature to an unrelated party in December 2013. The
contractual agreements between PW Software and PW Literature and its equity owners were substantially the same as the contractual agreements between PW Software and PW Network and its equity owners.
In December 2013, we sold PW Literature to Beijing Baidu Netcom Science Technology Co., Ltd., an unrelated party, to sharpen our focus on our core online game development and operation
business. Upon the closing of this transaction in December 2013, PW Literature ceased to be our variable interest entity.
Merger with Entities Controlled by Mr. Michael Yufeng Chi
On April 26, 2015, we entered into a Merger Agreement with Perfect Peony Holding Company Limited, or Parent, a Cayman Islands
company beneficially owned by Mr. Michael Yufeng Chi, and Perfect World Merger Company Limited, or Merger Sub, a wholly owned subsidiary of Parent. See "Item 4. Information of the
CompanyA. History and Development of the Company" for more information of the Merger Agreement.
Other Transactions with Certain Directors, Shareholders and Affiliates
In April 2010, we invested RMB27.0 million for a 20% equity interest in Zhizhu Network. We started to make payments for
advertising fees to Zhizhu Network on a project-by-project basis in late 2011. In 2012, 2013 and 2014, the marketing services provided by Zhizhu Network to us amounted to RMB0.9 million,
RMB3.4 million and RMB3.2 million (US$0.5 million), respectively.
In
2012, 2013 and 2014, we received office rental income amounted to RMB0.7 million, RMB6.3 million and RMB10.2 million (US$1.6 million) from PW Pictures,
respectively.
In
2012, 2013 and 2014, we made a number of equity investments in various entities with each individual investment equity interest ranging from 10% to 49% and we have significant
influence over these companies. For the years ended December 31, 2012, 2013 and 2014, the aggregate license fees paid to our investees were amounting to nil, RMB3.0 million and
RMB3.8 million (US$0.6 million), respectively; the aggregate short-term loans to our investees were amounting to nil, nil and RMB2.0 million (US$0.3 million), respectively,
with 2% annual interest rate of each individual loan; the aggregate considerations for copyrights purchased from our investees were amounting to nil, nil and RMB9.1 million
(US$1.5 million), respectively; the aggregate fees charged for marketing services provided by our investees were amounting to nil, nil and RMB2.3 million (US$0.4 million),
respectively.
In
November 2014, in line with our restructuring plan of our research and development teams, Chongqing Zulong Entertainment Technology Co., Ltd. was formed, among other
controlled companies. Mr. Qing Li, our chief development officer, beneficially owns minority equity interest in Chongqing Zulong Entertainment Technology Co., Ltd. The equity interest
beneficially owned by Mr. Qing Li was recognized as share-based compensation expenses in our consolidated financial statements and would be amortized over the requisite service period on a
straight-line basis.
Employment Agreements
See "Item 6. Directors, Senior Management and EmployeesB. Compensation of Directors and Executive Officers" for a
description of the employment agreements we have entered into with our senior executive officers.
115
Table of Contents
Stock Option Grants
See "Item 6. Directors, Senior Management and EmployeesB. Compensation of Directors and Executive
OfficersShare Incentive 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
We are subject to legal proceedings, investigations and claims incidental to the conduct of our business from time to time.
On
February 2, 2012, a Chinese company unrelated to our company sought a court order of attachment against the assets of Jiuzhou Tianyuan, which was later withdrawn in July 2012
according to a court record.
On
March 20, 2012, Jiuzhou Tianyuan filed a case against PW Network seeking access to financial and other information of PW Network as an equity holder of PW Network,
notwithstanding that it has entered into an equity pledge agreement to pledge all its equity interests in PW Network to PW Software. Jiuzhou Tianyuan withdrew its case in June 2012 and the
registration of the equity pledge of Jiuzhou Tianyuan with the relevant administration for industry and commerce was completed in July 2012.
On
or around January 8, 2012, a number of anonymous allegations against our company and Mr. Yufeng Chi were posted on certain Chinese language websites. The independent
audit committee of the board of directors of our company engaged an international legal counsel to conduct an internal investigation into these allegations. In the process of the investigation, the
independent legal counsel consulted with independent forensic accountants and reported its findings directly to the audit committee. The independent legal counsel had no prior relationship with our
company. The major findings of the internal investigation include the following:
-
- Perfect World did not overpay for Zhizhu Network's advertising services or equity. While Mr. Michael Yufeng Chi provided
interest-free personal loans to shareholders of Zhizhu Network to assist Zhizhu Network between 2008 and 2010, which caused Zhizhu Network to be a related party to Perfect World prior to Perfect
World's investment in Zhizhu Network, the audit committee did not find any evidence to suggest that Perfect World overpaid for any services provided by Zhizhu Network or Perfect World's investment in
20% of the equity interest in Zhizhu Network.
-
- No evidence suggests any member of Mr. Chi's family received any monetary benefit, improper or otherwise, from Perfect World's
office building renovation project. The audit committee did not uncover any evidence that Mr. Chi's family was connected to the contractors retained by Perfect World for the office building
renovation project. Additionally, the contractor vetting process by Perfect World was reasonable, including evaluations by independent third parties.
-
- The sale of the film and television business to a company majority owned by Mr. Michael Yufeng Chi was properly conducted and
the price was reasonable and fair. Mr. Chi provided proper disclosure of his intentions to acquire the film and television business and conducted
116
Table of Contents
himself
in accordance with the requirements by the special committee consisted of independent members of Perfect World's board of directors for purposes of reviewing and approving the divestiture of
the film and television business. The sale price was determined in a fair and reasonable manner, including a valuation and a fairness opinion by a reputable third-party expert.
-
- No evidence suggests that Mr. Chi improperly evaded taxes. Based on a review of Mr. Chi's tax returns and bank account
statements, the audit committee has determined that Mr. Chi disclosed the past sales of Perfect World shares and paid taxes thereon.
On
May 10, 2012, a civil case entitled Li Hong v. Perfect World Co., Ltd., et al., Case No. 12-Cv-3741, was filed in the United States District Court for the
Southern District of New York against us and Mr. Michael Yufeng Chi alleging, among other things, federal securities law violations arising from alleged lack of disclosure relating to the
transactions with Zhizhu Network and the sale of our film and television business to a company majority owned by Mr. Michael Yufeng Chi referenced above. The plaintiff sought compensatory
damages and injunctive relief in the complaint filed in the court. The case was dismissed with prejudice by the court in August 2012.
On
February 1, 2013, a Delaware company sued PW USA (Parallel Networks, LLC v. Perfect World Entertainment, Inc., Case No. 13-cv-00182) and ten other
companies in related actions for patent infringement in the United States District Court for the District of Delaware. The plaintiff alleged that PW USA's installers, downloaders and/or launchers,
which are downloaded by users from our websites in connection with the distribution of our games, infringed two of its patents. We settled this case in June 2013.
In
September 2013, Shanghai Xuanting Entertainment Information Technology Co., Ltd., or Shanghai Xuanting, an affiliate of Shanda Interactive Entertainment Limited, filed a
complaint against PW Literature, alleging that PW Literature had infringed upon its copyrights to noval "Yong Sheng." We had defended the action vigorously and appealed upon the judgment against us.
The final judgment is in favor of Shanghai Xuanting and finds that PW Literature should pay RMB3.0 million to Shanghai Xuanting. The adverse effect of the judgment on our results of operations,
financial position and cash flows was immaterial.
In
December 2013, Shanghai Xuanting filed another complaint against PW Literature, alleging that software developed by PW Literature infringed its copyright in a number of novels. The
case has not gone to trial as of the date of this annual report. We believe the case are without merit and intend to defend the actions vigorously. Regardless of the outcome of this lawsuit, we
believe that such proceeding, when finally resolved, are unlikely to have a material adverse effect on our results of operations, financial position and cash flows. The possible range of loss cannot
be estimated since the case is still at its early stage.
In
May 2014, Uniloc USA, Inc. and Uniloc Uxembourg S.A. sued PW USA for patent infringement in the United States District Court for the District of Texas. The plaintiffs
alleged that the product activation system and customer software activation/registration process employed by PW USA infringed their patents. We believe that the case is without merit and intend to
defend vigorously. We do not expect this pending proceeding to have a material adverse effect on our results of operations, financial position and cash flows, even if it is determined against us. The
possible range of loss cannot be estimated since the case is still at its early stage.
117
Table of Contents
Dividend Policy
In March 2012, our board of directors approved a change in our dividend policy to reflect our intention to distribute part of the
earnings of our wholly owned PRC subsidiaries to our shareholders from time to time. On March 14, 2012, our board of directors declared special cash dividends to our shareholders of record as
of the close of business on April 6, 2012, at US$0.40 per Class A or Class B ordinary share, or US$2.00 per ADS, each representing five Class B ordinary shares. On
April 13, 2012, we distributed the dividends which amounted to RMB607.6 million.
On
March 10, 2013, the board of directors declared an annual cash dividends in the aggregate amount of approximately US$22 million to our shareholders of record as of the
close of business on April 8, 2013, at US$0.09 per Class A or Class B ordinary share, or US$0.45 per ADS, each representing five Class B ordinary shares. On
April 15, 2013, we distributed the dividends which amounted to RMB137.1 million.
On
March 8, 2014, the board of directors declared an annual cash dividends in the aggregate amount of approximately US$24 million to our shareholders of record as of the
close of business on April 3, 2014, at US$0.096 per Class A or Class B ordinary share, or US$0.48 per ADS, each representing five Class B ordinary shares. On
April 15, 2014, we distributed the dividends of RMB146.4 million (US$23.6 million) in cash.
As
of the date of this annual report, we do not have any plan to declare or distribute any dividends.
B. Significant Changes
Except as disclosed elsewhere in this annual report, we have not experienced any significant changes since the date of our audited consolidated financial
statements included in this annual report.
ITEM 9. THE OFFER AND LISTING
A. Offering and Listing Details.
Our ADSs, each representing five of our Class B ordinary shares, have been listed on NASDAQ since July 26, 2007 under the symbol "PWRD."
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Table of Contents
The
following table provides the high and low trading prices for our ADSs on NASDAQ for (1) the years 2010, 2011, 2012, 2013 and 2014, (2) each of the four quarters of 2013
and 2014 and (3) each of the past six months.
|
|
|
|
|
|
|
|
|
|
Trading
Price ($) |
|
|
|
High |
|
Low |
|
2010 |
|
|
|
|
|
|
|
Full Year |
|
|
44.63 |
|
|
20.75 |
|
2011 |
|
|
|
|
|
|
|
Full Year |
|
|
29.10 |
|
|
9.00 |
|
2012 |
|
|
|
|
|
|
|
Full Year |
|
|
17.46 |
|
|
8.44 |
|
2013 |
|
|
|
|
|
|
|
Full Year |
|
|
22.82 |
|
|
9.72 |
|
First Quarter |
|
|
12.73 |
|
|
10.29 |
|
Second Quarter |
|
|
17.76 |
|
|
9.72 |
|
Third Quarter |
|
|
22.82 |
|
|
17.41 |
|
Fourth Quarter |
|
|
20.49 |
|
|
16.26 |
|
2014 |
|
|
|
|
|
|
|
Full Year |
|
|
26.25 |
|
|
14.78 |
|
First Quarter |
|
|
26.25 |
|
|
17.38 |
|
Second Quarter |
|
|
22.30 |
|
|
16.55 |
|
Third Quarter |
|
|
23.49 |
|
|
18.34 |
|
Fourth Quarter |
|
|
21.62 |
|
|
14.78 |
|
October |
|
|
21.62 |
|
|
19.19 |
|
November |
|
|
21.12 |
|
|
17.60 |
|
December |
|
|
18.44 |
|
|
14.78 |
|
2015 |
|
|
|
|
|
|
|
First Quarter |
|
|
19.42 |
|
|
18.20 |
|
January |
|
|
19.42 |
|
|
18.20 |
|
February |
|
|
19.09 |
|
|
18.61 |
|
March |
|
|
18.88 |
|
|
18.40 |
|
April (through April 24, 2015) |
|
|
18.86 |
|
|
17.81 |
|
B. Plan of Distribution
Not applicable.
C. Markets
Our ADSs, each representing five of our Class B ordinary shares, have been listed on the NASDAQ under the symbol "PWRD."
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
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Table of Contents
F. Expenses of the Issue
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
The following are summaries of material provisions of our currently effective amended and restated memorandum and articles of association, as well as the
Companies Law (2013 Revision) insofar as they relate to the material terms of our ordinary shares.
Registered Office and Objects
The Registered Office of our company is at the offices of Maples Corporate Services Limited, PO Box 309, Ugland House,
Grand Cayman, KY1-1104, Cayman Islands or at such other place as our board of directors may from time to time decide. The objects for which our company is established are unrestricted and we have full
power and authority to carry out any object not prohibited by the Companies Law (2013 Revision), as amended from time to time, or any other law of the Cayman Islands.
Board of Directors
See "Item 6. Directors, Senior Management and Employees."
Ordinary Shares
General. Our ordinary shares are divided into Class A ordinary shares and Class B ordinary shares. Holders of Class A
ordinary
shares and Class B ordinary shares have the same rights except for voting and conversion rights. All of our outstanding ordinary shares are fully paid and non-assessable.
Certificates representing the ordinary shares are issued in registered form. Our shareholders who are nonresidents of the Cayman Islands 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.
Conversion. Each Class A ordinary share is convertible into one Class B ordinary share at any time by the holder thereof.
Class B ordinary shares are not convertible into Class A ordinary shares under any circumstances. Upon any transfer of Class A ordinary shares by a holder thereof to any person or
entity which is not an affiliate of such holder (as defined in our memorandum and articles of association), such Class A ordinary shares shall be automatically and immediately converted into
the equal number of Class B ordinary shares. In addition, if at any time our founder and chairman of the board of directors, Mr. Michael Yufeng Chi, and his affiliates collectively own
less than 5% of the total number of the issued and outstanding Class A ordinary shares, each issued and outstanding Class A ordinary share shall be automatically and immediately
converted into one Class B ordinary share, and we shall not issue any Class A ordinary shares thereafter.
Voting Rights. All of our shareholders have the right to receive notice of shareholders' meetings and to attend, speak and vote at such
meetings. In
respect of matters requiring shareholders' vote, each Class A ordinary share is entitled to 10 votes, and each Class B ordinary share is entitled to one vote. A shareholder may
participate at a shareholders' meeting in person, by proxy or by telephone
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conference
or other communications equipment by means of which all the shareholders participating in the meeting can communicate with each other. At any shareholders' meeting, a resolution put to the
vote of the meeting shall be decided on a show of hands unless voting by way of a poll is required or demanded accordingly.
A
quorum for a shareholders' meeting consists of one or more shareholders holding at least one third of the outstanding voting share capital of the Company present in person or by proxy
or, if a corporation or other non-natural person, by its duly authorized representative. We shall, if required by the Companies Law, hold a general meeting of shareholders as our annual general
meeting and shall specify the meeting as such in the notices calling it. Our board of directors may call extraordinary
general meetings, and they must on shareholders' requisition convene an extraordinary general meeting. A shareholder requisition is a requisition of shareholders holding at the date of deposit of the
requisition not less than 20% of the then voting power represented by the issued shares of our company as at that date carries the right of voting at general meetings of our company. Advance notice of
at least five 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 cast attaching to the ordinary shares. A special resolution is required for important matters such as a
change of name. Holders of the ordinary shares may effect certain changes by ordinary resolution, including altering the amount of our authorized share capital, consolidating and dividing all or any
of our share capital into shares of larger amount than our existing share capital and canceling any shares.
Transfer of Shares. Subject to the restrictions of our memorandum and 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 writing and executed by or on behalf of the transferor.
Our
board of directors may, in their absolute discretion (except with respect to a transfer from a shareholder to its affiliate(s)), decline to register any transfer of shares without
assigning any reason therefor. If our board of directors refuses to register a transfer they shall notify the transferee within two months of such refusal. Notwithstanding the foregoing, if a transfer
complies with the holder's transfer obligations and restrictions set forth under applicable law (including but not limited to U.S. securities law provisions related to insider trading) and our
articles of association, our board of directors shall promptly register such transfer. Further, any director is authorized to confirm in writing addressed to the registered office to authorize a share
transfer and to instruct that the register of members be updated accordingly, provided that the transfer complies with the holder's transfer obligations and restrictions set forth under applicable law
and our articles of association and such holder is not the director who authorizes the transfer or an entity affiliated with such director. Any director is authorized to execute a share certificate in
respect of such shares for and on behalf of our company.
The
registration of transfers may be suspended at such time and for such periods as our board of directors may from time to time determine, provided, however, that the registration of
transfers shall not be suspended for more than 45 days in any year.
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 on a pro rata basis. 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, 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 special resolution.
Repurchase of Shares. Subject to the provisions of the Companies Law and our articles of association, our board of directors may
authorize repurchase
of our shares in accordance with the manner of purchase specified in our articles of association without seeking shareholder approval.
Variations 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 the holders of at least a majority of the issued shares of that class or with the sanction of a special resolution passed at a general meeting of the
holders of the shares of that class.
Inspection of Books and Records. No holders of our ordinary shares who is not a director shall have any right of inspecting any of our
accounts,
books or documents except as conferred by the Companies Law or authorized by the directors or by us in general meeting. However, we will make this annual report, which contains our audited financial
statements, available to shareholders and ADS holders. See "Item 10. Additional InformationH. Documents on Display."
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 on Form 20-F.
D. Exchange Controls
See "Item 4. Information on the CompanyB. Business OverviewGovernment RegulationsRegulation of Foreign Currency
Exchange and Dividend Distribution."
E. Taxation
The following summary of certain Cayman Islands, PRC 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 or differing interpretation, possibly with retroactive effect. 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 other federal, state, local and other tax laws not
addressed herein.
Cayman Islands Taxation
According to Maples and Calder, our Cayman Islands counsel, the Cayman Islands currently levies no taxes on individuals or corporations
based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to us levied by the
Government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or brought within the jurisdiction of, the Cayman Islands. The Cayman Islands is not party
to any double tax treaties that are applicable to any payments made to or by our company. There are no exchange control regulations or currency restrictions in the Cayman Islands.
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PRC Taxation
If we were considered a PRC resident enterprise under the corporate income tax law, our non-resident shareholders and ADS holders may
be subject to the withholding tax at the rate of 10% upon the dividends payable by us or upon any gains realized from the transfer of our shares or ADSs, if such income is deemed derived from China,
provided that in the case of non-resident enterprise shareholders, (i) such foreign enterprise investor has no establishment or premises in China, or (ii) it has establishment or
premises in China but its income derived from China has no real connection with such establishment or premises. If we were required under the corporate income tax law to withhold PRC income tax on our
dividends payable to our non-resident enterprise shareholders and ADS holders, or if any gains realized from the transfer of our shares or ADSs by our non-resident enterprise shareholders and ADS
holders were subject to the withholding tax, your investment in our shares or ADSs could be materially and adversely affected.
Provided
that our Cayman Islands holding company, Perfect World Co., Ltd., is not deemed to be a PRC resident enterprise, holders of our ADSs and ordinary shares who are
not PRC residents will not be subject to PRC income tax on dividends distributed by us or gains realized from the sale or other disposition of our shares or ADSs. SAT Bulletin 7 clarifies that, if a
non-resident enterprise derives income by acquiring and selling shares in an offshore listed enterprise in the public market, such income will not be subject to PRC tax. However, given the uncertainty
as to the application of Circular 698 and SAT Bulletin 7, we and our non-PRC resident investors may be at a risk of being required to file a return and being taxed under Circular 698 and SAT
Bulletin 7, and we may need to spend valuable resources to comply with Circular 698 and SAT Bulletin 7 or to establish that we should not be taxed under these regulations.
For
more information, see "Item 3. Key InformationD. Risk FactorsRisks Related to Doing Business in ChinaOur non-PRC resident enterprise
investors face PRC tax uncertainty with respect to indirect transfers of equity interests in PRC resident enterprises."
United States Federal Income Taxation
The following discussion describes the principal U.S. federal income tax consequences to U.S. Holders (defined below) under present law
of the acquisition, ownership and disposition of the ADSs or ordinary shares. This summary applies only to U.S. Holders that hold the ADSs or ordinary shares as capital assets (generally, property
held for investment) within the meaning of the Internal Revenue Code of 1986, as amended, or the Code, and that have the U.S. dollar as their functional currency. This discussion is based on the tax
laws of the United States as in effect on the date of this annual report and including the Code, its legislative history, 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 or differing
interpretation, which change could apply retroactively and could affect the tax consequences described below. No ruling has been sought from the IRS with respect to the U.S. federal income tax
consequences described below, and there can be no assurance that the IRS or a court will not take a contrary position.
The
following discussion does not deal with the tax consequences to any particular investor or to persons in special tax situations such
as:
-
- banks;
-
- insurance companies;
-
- broker-dealers;
-
- traders that elect to mark to market;
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-
- tax-exempt entities;
-
- persons liable for alternative minimum tax;
-
- U.S. expatriates;
-
- regulated investment companies or real estate investment trusts;
-
- persons holding an ADS or ordinary share as part of a straddle, hedge, conversion or integrated transaction;
-
- persons who acquired ADSs or ordinary shares pursuant to the exercise of any employee stock options or otherwise as compensation;
-
- persons that actually or constructively own 10% or more of the total combined voting power of all classes of our voting stock; or
-
- persons holding ADSs or ordinary shares through partnerships (or other entities treated as a partnerships for U.S. federal income tax
purposes) or other pass-through entities.
INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS ABOUT THE APPLICATION OF THE U.S. FEDERAL TAX RULES TO THEIR PARTICULAR CIRCUMSTANCES AS WELL AS THE STATE, LOCAL AND NON-U.S.
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 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 treated 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 generally will be treated as the beneficial owner of the underlying ordinary shares represented by those ADSs for U.S.
federal income tax purposes.
Passive Foreign Investment Company
A non-U.S. corporation, such as our company, will be a "passive foreign investment company," or 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. For this purpose, passive income generally includes dividends, interest, certain types
of rents and royalties, annuities, net gains from the sale or exchange of property producing such income, net gains from commodity transactions, net foreign currency gains, and net income from
notional principal contracts. In addition, cash, cash equivalents, securities held for investment purposes, and certain other similar assets are generally categorized as passive assets.
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We disclosed in our annual reports for 2012 and 2013 that we believe we may have been a PFIC in prior taxable years. Similarly, we believe we may have been a PFIC
for our taxable year ended December 31, 2014, as well. This determination is made based on our significant cash balances, the market price of the ADSs and ordinary shares and the composition of
our income and assets. However, because the application of the PFIC rules to our facts and circumstances is unclear in many important legal and factual respects, and the required calculations for 2014
yielded results that were close to the line, no assurances may be given in this regard.
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, 25%
or more (by value) of the stock. In applying this rule, however, it is not clear whether the contractual arrangements between us and our variable interest entities will be treated as ownership of
stock. Although the law in this regard is unclear, we treat our variable interest entities as being owned by us for U.S. federal income tax purposes, not only because we control their management
decisions but also because we are entitled to substantially all of the economic benefits associated with these entities, and, as a result, we consolidate these entities' operating results in our
consolidated U.S. GAAP financial statements. If it were determined, however, that we were not the owner of our variable interest entities for U.S. federal income tax purposes, we would likely
be treated as a PFIC even if we would not otherwise have been treated as a PFIC for that particular year.
We
must make a separate determination after the close of each taxable year as to whether we were a PFIC for that year. Accordingly, we may continue to be, or become, a PFIC in 2015 or
future taxable years. Whether we are or will be classified as a PFIC in the current or any future taxable year will be determined on the basis of, among other things, the market price of our ADSs or
ordinary shares (which may fluctuate considerably), our asset values (including, among other items, the level of cash, cash equivalents, and securities held for investment purposes), and gross income
(including whether such income is active versus passive income) for such taxable year, all of which are subject to change. We have not sought a ruling from the Internal Revenue Service, or IRS, with
respect to our PFIC status. In the event that we determine that we are not a PFIC in 2015 or in a future taxable year, there can be no assurance that the IRS or a court will agree with our
determination.
Provided
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 an election is
made, you will be deemed to have sold the ADSs or ordinary shares you hold at their fair market value as of the last day of the last year during which we were a PFIC, and any gain from such deemed
sale would be taxed as an "excess distribution" as described below. Any loss from the deemed sale would not be recognized. After the deemed sale election, your ADSs or ordinary shares with respect to
which such election was made will generally not be treated as shares in a PFIC unless we subsequently become a PFIC. You are urged to consult your tax advisor regarding our potential status as a PFIC
as well as the consequences of making the deemed sale election.
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" that you receive and any gain
you realize from a sale or other disposition (including a pledge) of the ADSs or ordinary shares, unless, with respect to the ADSs, 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:
-
- the excess distribution or gain will be allocated ratably over your holding period for the ADSs or ordinary shares,
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-
- 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
-
- the amount allocated to each other year will be subject to tax at the highest tax rate in effect for individuals or corporations, as
applicable, for each such year and will be increased by an additional tax equal to interest on the resulting tax deemed deferred with respect to each such other taxable 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) realized on the sale 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 during which you hold the ADSs or ordinary shares and any entity treated as our non-U.S. subsidiary for U.S. federal
income tax purposes is also a PFIC, you would generally be treated as owning a proportionate amount (by value) of the shares of the lower-tier PFIC for purposes of the application of the PFIC rules to
any such entity. U.S. Holders are urged to consult their tax advisors regarding the applicability of the PFIC rules to such entities.
A
U.S. Holder of "marketable stock" (defined below) of a PFIC may make a mark-to-market election for such stock to elect, to some degree, out of the tax treatment discussed in the
preceding paragraphs. If you make a valid mark-to-market election for the ADSs, you will include in income for each year that we are treated as a PFIC with respect to you an amount equal to the
excess, if any, of the fair market value of the ADSs as of the close of your taxable year over your adjusted tax basis in such ADSs. You will be allowed a deduction for the excess, if any, of the
adjusted tax basis of the ADSs 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
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, will be treated
as ordinary income. Ordinary loss treatment will also apply to the deductible portion of any mark-to-market loss on the ADSs, as well as to any loss realized on the actual sale or disposition of the
ADSs, to the extent that the amount of such loss does not exceed the net mark-to-market gains previously included for such ADSs. Your tax basis in the ADSs will be adjusted to reflect any such income
or loss amounts. Also, the tax rules that apply to distributions by corporations which are not PFICs would generally apply to distributions by us, except that the lower capital gains rate applicable
to qualified dividend income (discussed below under "Taxation of Dividends and Other Distributions on the ADSs or Ordinary Shares") may not apply. If a U.S. Holder makes a mark-to-market
election in respect of a corporation classified as a PFIC and such corporation ceases to be classified as a PFIC, the holder generally will not be required to take into account the mark-to-market gain
or loss described above during any period that such corporation is not classified as a PFIC.
The
mark-to-market election is available only for "marketable stock," which is stock that is regularly traded (or traded in other than de minimis quanitities on at least 15 days
during each calendar quarter) on a qualified exchange or other market, as defined in applicable U.S. Treasury regulations. Our ADSs are listed on the NASDAQ, which is a qualified exchange or other
market for these purposes. Consequently, if the ADSs continue to be listed on the NASDAQ and are regularly traded, and you are a holder of ADSs, we expect that the mark-to-market election will be
available to you, but no assurances may be given in this regard.
Because
a mark-to-market election, as a technical matter, cannot be made for any lower-tier PFICs that we may own, you may continue to be subject to the PFIC rules with respect to your
indirect interest in any investments held by us that are treated as equity interests in a PFIC for U.S. federal income tax purposes.
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In
the case of a U.S. Holder that has held ADSs during any taxable year in respect of which we were treated as a PFIC with respect to such U.S. Holder and continues to hold such ADSs (or
any portion thereof) and has not previously determined to make a mark-to-market election and who later considers making a mark-to-market election, special tax rules may apply relating to "purging the
PFIC taint" of such ADSs.
We
do not intend to provide information necessary for U.S. Holders to make qualified electing fund, or QEF, elections, which, if available, would result in tax treatment different from,
and generally less adverse than, the general tax treatment of PFICs described above. If you hold ADSs or ordinary shares in any year in which we are treated as a PFIC with respect to you, you will
generally be required to file IRS Form 8621. Significant penalties are imposed for the failure to file such form if required.
You
are urged to consult your tax advisor regarding the application of the PFIC rules to your investment in ADSs or ordinary shares, including the possibility of making a mark-to-market
election, the unavailability of the QEF election, and the Form 8621 filing requirement, taking into account the uncertainty as to whether we are or may become a PFIC.
The
discussion below under "Taxation of Dividends and Other Distributions on the ADSs or Ordinary Shares" and
"Taxation of Disposition of ADSs or Ordinary Shares" applies only in the event that we are not classified as a PFIC, nor treated as such with respect to
you, for United States federal income tax purposes.
Taxation of Dividends and Other Distributions on the ADSs or Ordinary Shares
Subject to the passive foreign investment company rules discussed above, the gross amount of all our distributions to you with respect
to the ADSs or ordinary shares (including the amount of any PRC tax withheld) generally will be included in your gross income as dividend income on the date of actual or constructive 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 determined
under U.S. federal income tax principles). Because we currently do not and do not intend to calculate our earnings and profits under United States federal income tax principles, any distribution paid
will generally be treated as a "dividend" for United States federal income tax purposes. Any dividends we pay will not be eligible for the dividends-received deduction allowed to corporations in
respect of dividends received from other U.S. corporations.
With
respect to certain non-corporate U.S. Holders, including individual U.S. Holders, dividends will be "qualified dividend income" that is taxed at the lower applicable capital gains
rate, provided that certain conditions are satisfied, including (1) the ADSs 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 "passive foreign investment company" nor treated as such with
respect to you (as discussed above) for our taxable year in which the dividend is paid and the preceding taxable year, and (3) certain holding period requirements are met. U.S. Treasury
guidance indicates that 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 the NASDAQ, as are our ADSs (but not our ordinary shares). There can be no assurance that our ADSs will be considered readily tradable on an
established securities market in later years. If we are treated as a "resident enterprise" for PRC tax purposes under the PRC corporate income tax law, a U.S. Holder may be subject to withholding
taxes on dividends paid on our ADSs or ordinary shares. However, we may be eligible for the benefits of the income tax treaty between the United States and the PRC, and dividends we pay on our shares,
regardless of whether such shares are represented by ADSs, would be eligible for reduced rates of taxation applicable to qualified dividend income as described above. For more information regarding
the PRC corporate income tax law, see "Item 3. Key InformationD. Risk
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FactorsRisks
Related to Our BusinessOur global income may be subject to PRC tax under the corporate income tax law, which would have a material adverse effect on our results
of operations." 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 and in light of our belief that we may have been a PFIC for our taxable year ended December 31, 2014, and prior taxable years.
Dividends
will generally be treated as income from foreign sources for United States foreign tax credit purposes and will generally constitute "passive category income," or, in the case
of certain U.S. Holders, "general category income." Depending on your particular facts and circumstances, you may be eligible to claim a U.S. foreign tax credit in respect of any foreign
withholding taxes imposed on dividends received on our ADSs or ordinary shares. A U.S. Holder who does not elect to claim a foreign tax credit for foreign tax withheld may instead claim a deduction
for U.S. federal income tax purposes in respect of such withholding but only for a year in which the U.S. Holder elects to do so for all creditable foreign income taxes. 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.
Taxation of Disposition of ADSs or Ordinary Shares
Subject to the passive foreign investment company 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, if any, 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. The gain or loss generally will be capital gain or loss. If you are a non-corporate U.S. Holder, such as an individual U.S. Holder, that has held the ADS or
ordinary share for more than one year, you will be eligible for reduced tax rates. The deductibility of capital losses is subject to limitations. Any such gain or loss that you recognize will
generally be treated as U.S. source gain or loss for U.S. foreign tax credit limitation purposes, which will generally limit the availability of U.S. foreign tax credits, subject to exceptions and
limitations. However, if we are treated as a "resident enterprise" for PRC tax purposes, we may be eligible for the benefits of the income tax treaty between the United States and the PRC. In such
event, if PRC withholding tax were to be imposed on any gain from the disposition of the ADSs or ordinary shares, 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 more information, see "Item 3. Key InformationD. Risk FactorsRisks Related to Our
BusinessOur global income may be subject to PRC tax under the corporate income tax law, which would have a material adverse effect on our results of operations." You should consult your
tax advisors regarding the proper treatment of gain or loss in your particular circumstances, including the availability of the foreign tax credit in the event that withholding tax is imposed under
Circular 698 or SAT Bulletin 7 (for more information, see "Item 3. Key InformationD. Risk FactorsRisks Related to Doing Business in ChinaOur
non-PRC resident enterprise investors face PRC tax uncertainty with respect to indirect transfers of equity interests in PRC resident enterprises.").
Medicare Tax
Legislation enacted in 2010 generally imposes a 3.8% Medicare tax on a portion or all of the net investment income of certain
individuals with a modified adjusted gross income of over US$200,000 (or US$250,000 in the case of joint filers or US$125,000 in the case of married individuals filing separately) and on the
undistributed net investment income of certain estates and trusts. For these purposes, net investment income generally includes interest, dividends (including dividends paid with respect to our ADSs
or ordinary shares), annuities, royalties, rents, net gain attributable to the disposition of property not held in a trade or business (including net gain from the sale, exchange or other taxable
disposition
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of
an ADS or ordinary share) and certain other income, reduced by any deductions properly allocable to such income or net gain. Special rules may apply if we are treated as a PFIC with respect to a
U.S. Holder. U.S. Holders are urged to consult their tax advisors regarding the applicability of the Medicare tax to their income and gains in respect of their investment in the ADSs or ordinary
shares.
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
may be subject to information reporting to the IRS and possible U.S. backup withholding at a current rate of 28%, unless the conditions of an applicable exception are satisfied. Backup withholding
will not apply to a U.S. Holder that furnishes a correct taxpayer identification number and makes any other required certification or that is otherwise exempt from backup withholding. U.S. Holders
that are required to establish their exempt status generally must provide such certification on IRS Form W-9. U.S. Holders should consult their tax advisors regarding the application of the
U.S. information reporting and backup withholding rules.
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 timely filing the appropriate claim for refund with the IRS and furnishing any required information in a timely manner.
Additional Tax Reporting Requirements
Pursuant to the Hiring Incentives to Restore Employment Act of 2010, individual U.S. Holders and certain domestic entities may be
required to submit certain information to the IRS with respect to his, her or its beneficial ownership of our ADSs or ordinary shares, if such ADSs or ordinary shares are not held on his, her or its
behalf by a financial institution. This law also imposes penalties and potential other adverse tax consequences if a U.S. Holder is required to submit such information to the IRS and fails to do so.
You are urged to consult your tax advisors regarding the potential reporting requirements that may be imposed with respect to ownership of ADSs or ordinary shares.
F. Dividends and Paying Agents
Not Applicable.
G. Statement by Experts
Not Applicable.
H. Documents on Display
We previously filed with the SEC our registration statement on Form F-1 (Registration No. 333-144282) and the prospectus under the Securities Act of
1933, with respect to our ordinary shares. We have also filed with the SEC a related registration statement on F-6 (Registration No. 333-144296) to register the ADSs.
We
are subject to the periodic reporting and other informational requirements of the Exchange Act, as amended. Under the Exchange Act, we are required to file reports and other
information with the SEC. Specifically, we are required to file annually a Form 20-F: (1) within six months after the end of each fiscal year, which is December 31, for fiscal
years ending before December 15, 2011; and (2) within
four months after the end of each fiscal year for fiscal years ending on or after December 15, 2011. 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 Securities and Exchange Commission at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. The
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public
may obtain information regarding the Washington, D.C. Public Reference Room by calling the Commission at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that contains reports,
proxy and information statements, and other information regarding registrants that make electronic filings with the SEC using its EDGAR system. 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 Deutsche Bank Trust Company Americas, the depositary of our ADSs, with our annual reports, which will include a review of operations and annual audited consolidated
financial statements prepared in conformity with U.S. GAAP, and all notices of shareholders' meetings and other reports and communications that are made generally available to our shareholders.
The depositary will make such notices, reports and communications available to holders of ADSs and, upon our request, will mail to all record holders of ADSs the information contained in any notice of
a shareholders' meeting received by the depositary from us.
In
accordance with NASDAQ Stock Market Rules 5250(d), we will post this annual report on Form 20-F on our website at http://www.pwrd.com.
I. Subsidiary Information
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Exchange Risk
While our reporting currency is Renminbi, we transact business in multiple currencies by operating online games through our own
overseas subsidiaries and licensing our games to third party overseas licensees. Our international revenues, costs and expenses, as well as assets and liabilities denominated in foreign currencies
expose us to the risk of fluctuations in foreign currency exchange rates against the functional currencies of our overseas subsidiaries and Renminbi. Therefore, fluctuations in currency exchange rates
could have an impact on our financial condition. Fluctuations in exchange rates, particularly between the foreign currencies against the major functional currencies of our controlled entities and
Renminbi, affect our gross and net profit margins and could result in foreign exchange and operating losses. Although in general, our exposure to foreign exchange risks should be limited, the value of
your investment in our ADSs will be affected by the foreign exchange rate between U.S. dollars and RMB because the value of our business is effectively denominated in RMB, while the ADSs are
traded in U.S. dollars. We recorded a net foreign currency exchange gain of approximately RMB27.2 million (US$4.4 million) in 2014 principally due to appreciation of U.S. dollar against
Euro, the functional currency of our European subsidiary. We may experience additional foreign exchange gain or loss in the future to the extent we hold financial assets denominated in foreign
currencies other than the functional currencies in our various subsidiaries and controlled entities.
The
value of the Renminbi against the U.S. dollar and other currencies is affected by changes in China's political and economic conditions and by China's foreign exchange policies, among
other things. In July 2005, the PRC government changed its decades-old policy of pegging the value of the Renminbi to the U.S. dollar, and the Renminbi appreciated more than 20% against the U.S.
dollar over the following three years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow band. After
June 2010, the Renminbi began to appreciate against the U.S. dollar again, although there have been some periods when it has lost value against the U.S. dollar, as it did for example during certain
periods in 2014. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the future.
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To the extent that we need to convert the functional currencies of our overseas subsidiaries into RMB for our operations, appreciation of the RMB against those
functional currencies would have an adverse effect on the RMB amount we receive from the conversion. We have not used any forward contracts or currency borrowings to hedge our exposure to foreign
currency exchange risk. For the year ended December 31, 2014, we recorded RMB30.5 million (US$4.9 million) of foreign currency translation loss in other comprehensive income. If
the exchange rates of RMB against the major functional currencies of our controlled entities are 10% higher than those we used in our financial statements, our foreign currency translation loss in
other comprehensive income would have been increased by approximately RMB27.2 million.
Interest Rate Risk
Our exposure to interest rate risk primarily relates to interest income generated by excess cash invested in demand deposits with
original maturities of three months or less. We have not used any significant derivative financial instruments to manage our interest rate risk exposure. 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 be different from expectations due to changes in market interest rates.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A. Debt Securities
Not applicable.
B. Warrants and Rights
Not applicable.
C. Other Securities
Not applicable.
D. American Depositary Shares
Fees and Charges Our ADS holders May Have to Pay
ADR holders will be charged a fee for each issuance of ADSs, including issuances resulting from distributions of shares, rights and
other property, and for each surrender of ADSs in exchange for deposited securities. The fee in each case is $5.00 for each 100 ADSs (or any portion thereof) issued or surrendered.
The
following additional charges shall be incurred by the ADR holders, by any party depositing or withdrawing shares or by any party surrendering ADRs or to whom ADRs are issued
(including, without limitation, issuance pursuant to a stock dividend or stock split declared by us or an exchange of stock regarding the ADRs or the deposited securities or a distribution of ADRs),
whichever is applicable:
-
- to the extent not prohibited by the rules of any stock exchange or interdealer quotation system upon which the ADSs are traded, a fee
of US$1.50 per ADR or ADRs for transfers of certificated or direct registration ADRs;
-
- a fee of up to US$0.05 or less per ADS (or portion thereof) for any cash distribution made pursuant to the deposit agreement;
-
- a fee of up to US$0.05 per ADS per calendar year for services performed by the depositary in administering our ADR program (which fee
shall be assessed against holders of ADRs as of the
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We
will pay all other charges and expenses of the depositary and any agent of the depositary (except the custodian) pursuant to agreements from time to time between us and the
depositary. The fees described above may be amended from time to time.
The
depositary collects its fees for issuance and cancellation 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 deduction 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 services until its fees for those services and any other unpaid fees are paid.
Fees and Other Payments Made by the Depositary to Us
Our depositary has agreed to reimburse us for the establishment and maintenance of the ADS program and to provide us with assistance in
relation to our investor relations program, the training of staff and certain other matters. Further, the depositary has agreed to share with us certain fees payable to the depositary by holders of
ADSs. As of December 31, 2014, the aggregate amount payable to us from our depositary was US$0.8 million, which is to reimburse our
investor relations activities spending and other related expenses incurred as a result of the listing of our ADSs on the NASDAQ Global Select Market.
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PART II.
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
Not Applicable.
ITEM 15. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our chief executive officer and chief financial officer have performed an evaluation of the effectiveness of our disclosure controls
and procedures (as defined in Rule 13a-15(e) under the Exchange Act, as amended) as of the end of the period covered by this annual report. Based upon that evaluation, our chief executive
officer and chief financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2014.
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
Rules 13a-15(f) under the Exchange Act, as amended. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of our
financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Our internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) 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 (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of any of our assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may
not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under
the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an assessment of the effectiveness of
our internal control over financial reporting based upon criteria established in the "Internal ControlIntegrated Framework (2013)" issued by the Committee of Sponsoring Organizations of
the Treadway Commission. Based on this assessment, our management has concluded that our internal control over financial reporting was effective as of December 31, 2014.
PricewaterhouseCoopers
Zhong Tian LLP, our independent registered public accounting firm, has audited the effectiveness of our internal control over financial reporting as of
December 31, 2014, as stated in its report, which appears on page F-2 of this annual report.
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Changes in Internal Control over Financial Reporting
During the year ended December 31, 2014, there were no changes in our internal control over financial reporting that occurred
that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors has determined that Daniel Dong Yang, an independent director and member of our audit committee, is an audit
committee financial expert.
ITEM 16B. CODE OF ETHICS
Our board of directors has adopted a code of business conduct and ethics that applies to our directors, officers, employees and agents,
including certain provisions that specifically apply to our chief executive officer, chief financial officer, and any other persons who perform similar functions for us. We have posted a copy of our
code of business conduct and ethics on our website at http://www.pwrd.com. 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 PricewaterhouseCoopers Zhong Tian LLP, our principal external auditors, for the periods indicated.
|
|
|
|
|
|
|
The Year Ended
December 31, |
|
|
2013 |
|
2014 |
Audit fees(1) |
|
US$1,855,597 |
|
US$2,028,656 |
All other fees(2) |
|
US$32,271 |
|
US$123,059 |
- (1)
- "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 and the review of our comparative interim financial data.
- (2)
- "All
other fees" means the aggregate fees billed in relation to the consulting service in 2013 and 2014.
The
policy of our audit committee is to pre-approve all audit and non-audit services provided by PricewaterhouseCoopers Zhong Tian LLP, including audit services, audit-related
services, tax services and other services as described above, other than those for de minimis 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
Not Applicable.
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ITEM 16F. CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT
Not applicable.
ITEM 16G. CORPORATE GOVERNANCE
As a foreign private issuer whose securities are listed on the NASDAQ Global Select Market, we are permitted to follow certain home
country corporate governance practices in lieu of the requirements of the NASDAQ Stock Market Marketplace Rules (the "NASDAQ Rules") pursuant to NASDAQ Rule 5615(a)(3), which provides for such
exemption to compliance with the NASDAQ Rule 5600 Series. We intend to rely on the exemption available to foreign private issuers for the requirement to hold an annual meeting of shareholders
under NASDAQ Rule 5620. We are not
required to hold meetings of our shareholders every year under the laws of the Cayman Islands and will not voluntarily meet this requirement. As a result of our use of the "foreign private issuer"
exemption, our investors will not have the same protection afforded to shareholders of companies that are subject to all of NASDAQ's corporate governance requirements.
Other
than the home country practice disclosed above, we have followed and intend to continue to follow the applicable corporate governance standards under the NASDAQ Stock Market Rules.
ITEM 16H. MINE SAFETY DISCLOSURE
Not applicable.
PART III.
ITEM 17. FINANCIAL STATEMENTS
We have elected to provide financial statements pursuant to Item 18.
ITEM 18. FINANCIAL STATEMENTS
The consolidated financial statements of Perfect World Co., Ltd. and its subsidiaries are included at the end of this
annual report.
ITEM 19. EXHIBITS
|
|
|
|
Exhibit
Number |
|
Description of Document |
|
1.1 |
|
Amended and Restated Memorandum and Articles of Association of the Registrant (incorporated by reference to Exhibit 1.1 of our annual report on Form 20-F (file no. 001-33587) filed with the SEC on
June 19, 2009). |
|
1.2 |
|
Amendments to the Amended and Restated Memorandum and Articles of Association adopted by the shareholders of the Registrant on November 14, 2009 (incorporated by reference to Exhibit 1.2 of our annual report
on Form 20-F (file no. 001-33587) filed with the Securities and Exchange Commission on June 14, 2010). |
|
1.3 |
|
Amendments to the Amended and Restated Memorandum and Articles of Association adopted by the shareholders of the Registrant on August 21, 2011 (incorporated by reference to Exhibit 1.3 of our annual report
on Form 20-F (file no. 001-33587) filed with the SEC on May 11, 2012). |
|
2.1 |
|
Registrant's Specimen American Depositary Receipt (incorporated by reference to Exhibit A to Exhibit 4.3 from our Registration Statement on Form F-1 Amendment No. 2 (file no. 333-144282) filed
with the Securities and Exchange Commission on July 23, 2007). |
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|
|
|
|
Exhibit
Number |
|
Description of Document |
|
2.2 |
|
Registrant's Specimen Certificate for Ordinary Shares (incorporated by reference to Exhibit 4.2 from our Registration Statement on Form F-1 Amendment No. 1 (file no. 333-144282) filed with the
Securities and Exchange Commission on July 11, 2007). |
|
2.3 |
|
Form of Amended and Restated Deposit Agreement among the Registrant, the depositary and holders of the American Depositary Receipts (incorporated by reference to Exhibit 3.a (1) from our Registration
Statement on Form F-6 Amendment No. 1 (file no. 333-144282) filed with the Securities and Exchange Commission on August 23, 2011). |
|
4.1 |
|
Amended and Restated Share Incentive Plan, effective November 14, 2009 (incorporated by reference to Exhibit 4.5 of our annual report on Form 20-F (file no. 001-33587) filed with the Securities and
Exchange Commission on June 14, 2010). |
|
4.2 |
|
2010 Share Incentive Plan, effective July 21, 2010 (incorporated by reference to Exhibit 4.4 from our Registration Statement on Form 20-F (file no. 001-33587) filed with the Securities and Exchange
Commission on May 9, 2011). |
|
4.3 |
|
2013 Share Incentive Plan, effective November 22, 2013 (incorporated by reference to Exhibit 99.6 of Form 6-K (file no. 001-33587) filed with the Securities and Exchange Commission on
November 4, 2013). |
|
4.4 |
|
Form of Indemnification Agreement with the Registrant's directors (incorporated by reference to Exhibit 10.2 from our Registration Statement on Form F-1 (file no. 333-144282) filed with the Securities
and Exchange Commission on July 2, 2007). |
|
4.5 |
|
English Translation of Form of Employment Contract 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 (file no. 333-144282) filed with the Securities and Exchange Commission on July 2, 2007). |
|
4.6 |
|
English Translation of Form of Intellectual Property Right Transfer, Non-Competition and Confidentiality Agreement between PW Network and its Founders (incorporated by reference to Exhibit 10.4 from our
Registration Statement on Form F-1 (file no. 333-144282) filed with the Securities and Exchange Commission on July 2, 2007). |
|
4.7 |
|
English Translation of Form of Intellectual Property Right Transfer, Non-Competition and Confidentiality Agreement between PW Software and a Senior Executive Officer (incorporated by reference to Exhibit 10.5
from our Registration Statement on Form F-1 (file no. 333-144282) filed with the Securities and Exchange Commission on July 2, 2007). |
|
4.8 |
|
English Translation of Exclusive Technology Support and Service Agreement between PW Software and PW Network dated as of April 4, 2007 (incorporated by reference to Exhibit 10.6 from our Registration
Statement on Form F-1 (file no. 333-144282) filed with the Securities and Exchange Commission on July 2, 2007). |
|
4.9 |
|
English Translation of Development Cooperation Agreement between PW Network and PW Software dated as of April 4, 2007 (incorporated by reference to Exhibit 10.7 from our Registration Statement on
Form F-1 (file no. 333-144282) filed with the Securities and Exchange Commission on July 2, 2007). |
|
4.10 |
|
English Translation of Business Operation Agreement among PW Software, PW Network, Beijing Shiji Xiangshu Technology Co., Ltd. and Beijing Jiuzhou Tianyuan Investment Management Co., Ltd. dated as
of April 4, 2007 (incorporated by reference to Exhibit 10.8 from our Registration Statement on Form F-1 (file no. 333-144282) filed with the Securities and Exchange Commission on July 2, 2007). |
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|
|
|
|
Exhibit
Number |
|
Description of Document |
|
4.11 |
|
English Translation of Call Option Agreement among PW Software, PW Network, Beijing Shiji Xiangshu Technology Co., Ltd. and Beijing Jiuzhou Tianyuan Investment Management Co., Ltd. dated as of
April 4, 2007 (incorporated by reference to Exhibit 10.9 from our Registration Statement on Form F-1 (file no. 333-144282) filed with the Securities and Exchange Commission on July 2, 2007). |
|
4.12 |
|
English Translation of Equity Pledge Agreement among PW Software, PW Network, Beijing Shiji Xiangshu Technology Co., Ltd. and Beijing Jiuzhou Tianyuan Investment Management Co., Ltd. dated as of
April 4, 2007 (incorporated by reference to Exhibit 10.10 from our Registration Statement on Form F-1 (file no. 333-144282) filed with the Securities and Exchange Commission on July 2, 2007). |
|
4.13 |
|
English Translation of Power of Attorney signed by Beijing Shiji Xiangshu Technology Co., Ltd. and Beijing Jiuzhou Tianyuan Investment Management Co., Ltd. dated as of April 4, 2007
(incorporated by reference to Exhibit 10.11 from our Registration Statement on Form F-1 (file no. 333-144282) filed with the Securities and Exchange Commission on July 2, 2007). |
|
4.14 |
|
English Translation of Supplementary Agreement to the Development Cooperation Agreement between PW Network and PW Software dated as of April 1, 2008 (incorporated by reference to Exhibit 4.31 from our Annual
Report on Form 20-F (file no. 001-33587) filed with the Securities and Exchange Commission on May 16, 2008). |
|
4.15 |
|
English Translation of Loan Agreement between PW Software and Mr. Michael Yufeng Chi dated as of May 20, 2008, including a Commitment Letter issued by Mr. Michael Yufeng Chi dated as of April 10,
2009 (incorporated by reference to Exhibit 4.37 from our Annual Report on Form 20-F (file no. 001-33587) filed with the Securities and Exchange Commission on June 19, 2009). |
|
4.16 |
|
English Translation of Loan Agreement between PW Software and Mr. Qi Zhu dated as of May 20, 2008, including a Commitment Letter issued by Mr. Qi Zhu dated as of April 10, 2009 (incorporated by
reference to Exhibit 4.38 from our Annual Report on Form 20-F (file no. 001-33587) filed with the Securities and Exchange Commission on June 19, 2009). |
|
4.17 |
|
English Translation of Exclusive Technology Support and Service Agreement between PW Software and PW Literature dated as of June 25, 2008 (incorporated by reference to Exhibit 4.39 from our Annual Report on
Form 20-F (file no. 001-33587) filed with the Securities and Exchange Commission on June 19, 2009). |
|
4.18 |
|
English Translation of Development Cooperation Agreement between PW Software and PW Literature dated as of June 25, 2008 (incorporated by reference to Exhibit 4.40 from our Annual Report on Form 20-F
(file no. 001-33587) filed with the Securities and Exchange Commission on June 19, 2009). |
|
4.19 |
|
English Translation of Business Operation Agreement among PW Software, PW Literature, Mr. Michael Yufeng Chi and Mr. Qi Zhu dated as of June 25, 2008 (incorporated by reference to Exhibit 4.41 from
our Annual Report on Form 20-F (file no. 001-33587) filed with the Securities and Exchange Commission on June 19, 2009). |
|
4.20 |
|
English Translation of Call Option Agreement among PW Software, PW Literature, Mr. Michael Yufeng Chi and Mr. Qi Zhu dated as of June 25, 2008 (incorporated by reference to Exhibit 4.42 from our
Annual Report on Form 20-F (file no. 001-33587) filed with the Securities and Exchange Commission on June 19, 2009). |
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|
|
|
|
Exhibit
Number |
|
Description of Document |
|
4.21 |
|
English Translation of Equity Transfer Agreement among Mr. Michael Yufeng Chi, Mr. Qi Zhu and Mr. Yunfan Zhang dated as of July 25, 2011 (incorporated by reference to Exhibit 4.22 of our
annual report on Form 20-F (file no. 001-33587) filed with the SEC on May 11, 2012). |
|
4.22 |
|
English Translation of the Equity Pledge Agreement among PW Software, PW Literature and shareholders of PW Literature effective as of July 25, 2011 (incorporated by reference to Exhibit 4.23 of our annual
report on Form 20-F (file no. 001-33587) filed with the SEC on May 11, 2012). |
|
4.23 |
|
English Translation of Power of Attorney signed by Mr. Michael Yufeng Chi, Mr. Qi Zhu and Mr. Yunfan Zhang effective as of July 25, 2011 (incorporated by reference to Exhibit 4.24 of our
annual report on Form 20-F (file no. 001-33587) filed with the SEC on May 11, 2012). |
|
4.24 |
|
English Translation of Exclusive Technology Support and Service Agreement between PW Software and PW Pictures dated as of February 12, 2011 (incorporated by reference to Exhibit 4.26 from our Annual Report
on Form 20-F (file no. 001-33587) filed with the Securities and Exchange Commission on May 9, 2011). |
|
4.25 |
|
English Translation of Development Cooperation Agreement between PW Software and PW Pictures dated as of February 12, 2011 (incorporated by reference to Exhibit 4.27 from our Annual Report on Form 20-F
(file no. 001-33587) filed with the Securities and Exchange Commission on May 9, 2011). |
|
4.26 |
|
English Translation of Business Operation Agreement among PW Software, Beijing Perfect Moment Pictures Co., Ltd., and shareholders of Beijing Perfect Moment Pictures Co., Ltd., dated as of
February 12, 2011 (incorporated by reference to Exhibit 4.28 from our Annual Report on Form 20-F (file no. 001-33587) filed with the Securities and Exchange Commission on May 9, 2011). |
|
4.27 |
|
English Translation of Call Option Agreement among PW Software, Beijing Perfect Moment Pictures Co., Ltd., and shareholders of Beijing Perfect Moment Pictures Co., Ltd. dated as of February 12,
2011 (incorporated by reference to Exhibit 4.29 from our Annual Report on Form 20-F (file no. 001-33587) filed with the Securities and Exchange Commission on May 9, 2011). |
|
4.28 |
|
English Translation of Equity Pledge Agreement among PW Software, Beijing Perfect Moment Pictures Co., Ltd., and shareholders of Beijing Perfect Moment Pictures Co., Ltd. dated as of
February 12, 2011 (incorporated by reference to Exhibit 4.30 from our Annual Report on Form 20-F (file no. 001-33587) filed with the Securities and Exchange Commission on May 9, 2011). |
|
4.29 |
|
English Translation of Power of Attorney signed by Mr. Michael Yufeng Chi and Mr. Tian Liang dated as of February 12, 2011 (incorporated by reference to Exhibit 4.31 from our Annual Report on
Form 20-F (file no. 001-33587) filed with the Securities and Exchange Commission on May 9, 2011). |
|
4.30 |
|
English Translation of Exclusive Technology Support and Service Agreement between PW Software and Perfect Moment dated as of August 1, 2011 (incorporated by reference to Exhibit 4.31 of our annual report on
Form 20-F (file no. 001-33587) filed with the SEC on May 11, 2012). |
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|
|
|
|
Exhibit
Number |
|
Description of Document |
|
4.31 |
|
English Translation of Development Cooperation Agreement between PW Software and Perfect Moment dated as of August 1, 2011 (incorporated by reference to Exhibit 4.32 of our annual report on Form 20-F (file
no. 001-33587) filed with the SEC on May 11, 2012). |
|
4.32 |
|
English Translation of Business Operation Agreement among PW Software, Perfect Moment and shareholders of Perfect Moment, dated as of December 2, 2011 (incorporated by reference to Exhibit 4.33 of our annual
report on Form 20-F (file no. 001-33587) filed with the SEC on May 11, 2012). |
|
4.33 |
|
English Translation of Call Option Agreement among PW Software, Perfect Moment and shareholders of Perfect Moment dated as of December 2, 2011 (incorporated by reference to Exhibit 4.34 of our annual report
on Form 20-F (file no. 001-33587) filed with the SEC on May 11, 2012). |
|
4.34 |
|
English Translation of Equity Pledge Agreement among PW Software, Perfect Moment and shareholders of Perfect Moment dated as of December 3, 2011 (incorporated by reference to Exhibit 4.35 of our annual
report on Form 20-F (file no. 001-33587) filed with the SEC on May 11, 2012). |
|
4.35 |
|
English Translation of Power of Attorney signed by Mr. Michael Yufeng Chi and Mr. Qi Zhu dated as of December 2, 2011 (incorporated by reference to Exhibit 4.36 of our annual report on
Form 20-F (file no. 001-33587) filed with the SEC on May 11, 2012). |
|
4.36 |
|
English Translation of Exclusive Technology Support and Service Agreement between PW Software and Trendsters Investment dated as of November 4, 2011 (incorporated by reference to Exhibit 4.37 of our annual
report on Form 20-F (file no. 001-33587) filed with the SEC on May 11, 2012). |
|
4.37 |
|
English Translation of Development Cooperation Agreement between PW Software and Trendsters Investment dated as of November 4, 2011 (incorporated by reference to Exhibit 4.38 of our annual report on
Form 20-F (file no. 001-33587) filed with the SEC on May 11, 2012). |
|
4.38 |
|
English Translation of Business Operation Agreement among PW Software, Trendsters Investment and shareholders of Trendsters Investment, dated as of November 4, 2011 (incorporated by reference to Exhibit 4.39
of our annual report on Form 20-F (file no. 001-33587) filed with the SEC on May 11, 2012). |
|
4.39 |
|
English Translation of Call Option Agreement among PW Software, Trendsters Investment and shareholders of Trendsters Investment dated as of November 4, 2011 (incorporated by reference to Exhibit 4.40 of our
annual report on Form 20-F (file no. 001-33587) filed with the SEC on May 11, 2012). |
|
4.40 |
|
English Translation of Equity Pledge Agreement among PW Software, Trendsters Investment and shareholders of Trendsters Investment dated as of November 4, 2011 (incorporated by reference to Exhibit 4.41 of
our annual report on Form 20-F (file no. 001-33587) filed with the SEC on May 11, 2012). |
|
4.41 |
|
English Translation of Power of Attorney signed by Mr. Qing Li and Mr. Qi Zhu dated as of November 4, 2011 (incorporated by reference to Exhibit 4.42 of our annual report on Form 20-F (file
no. 001-33587) filed with the SEC on May 11, 2012). |
|
4.42 |
|
English Translation of Loan Agreement between PW Software and Mr. Qing Li and Mr. Qi Zhu dated as of November 4, 2011 (incorporated by reference to Exhibit 4.43 of our annual report on
Form 20-F (file no. 001-33587) filed with the SEC on May 11, 2012). |
139
Table of Contents
|
|
|
|
Exhibit
Number |
|
Description of Document |
|
4.43 |
|
English Translation of Limited Partnership Agreement for Tianjin Trendsters Venture Capital Limited Partnership dated as of December 2, 2011 (incorporated by reference to Exhibit 4.42 of our annual report on
Form 20-F (file no. 001-33587) filed with the SEC on April 26, 2013). |
|
4.44 |
|
English Translation of Amendment to Limited Partnership Agreement for Tianjin Trendsters Venture Capital Limited Partnership dated as of March 5, 2013 (incorporated by reference to Exhibit 4.43 of our annual
report on Form 20-F (file no. 001-33587) filed with the SEC on April 26, 2013). |
|
4.45 |
|
English Translation of Exclusive Technology Support and Service Agreement between PW Game Software and PW Digital Technology dated as of December 10, 2013 (incorporated by reference to Exhibit 4.45 of our
annual report on Form 20-F (file no. 001-33587) filed with the SEC on April 29, 2014). |
|
4.46 |
|
English Translation of Development Cooperation Agreement between PW Game Software and PW Digital Technology dated as of December 10, 2013 (incorporated by reference to Exhibit 4.46 of our annual report on
Form 20-F (file no. 001-33587) filed with the SEC on April 29, 2014). |
|
4.47 |
|
English Translation of Business Operation Agreement among PW Game Software, PW Digital Technology and shareholders of PW Digital Technology dated as of December 10, 2013 (incorporated by reference to
Exhibit 4.47 of our annual report on Form 20-F (file no. 001-33587) filed with the SEC on April 29, 2014). |
|
4.48 |
|
English Translation of Call Option Agreement among PW Game Software, PW Digital Technology and shareholders of PW Digital Technology dated as of December 10, 2013 (incorporated by reference to Exhibit 4.48
of our annual report on Form 20-F (file no. 001-33587) filed with the SEC on April 29, 2014) . |
|
4.49 |
|
English Translation of Equity Pledge Agreement among PW Game Software, PW Digital Technology and shareholders of PW Digital Technology dated as of December 10, 2013 (incorporated by reference to Exhibit 4.49
of our annual report on Form 20-F (file no. 001-33587) filed with the SEC on April 29, 2014). |
|
4.50 |
|
English Translation of Power of Attorney signed by Mr. Michael Yufeng Chi and Mr. Xiaoxi Yang dated as of December 10, 2013 (incorporated by reference to Exhibit 4.50 of our annual report on
Form 20-F (file no. 001-33587) filed with the SEC on April 29, 2014). |
|
4.51 |
|
English Translation of Loan Agreement, dated as of July 30, 2013 between PW Game Software and Mr. Yufeng Chi, and Loan Agreement, dated December 10, 2013, between PW Game Software and Mr. Xiaoxi
Yang (incorporated by reference to Exhibit 4.51 of our annual report on Form 20-F (file no. 001-33587) filed with the SEC on April 29, 2014). |
|
4.52 |
|
Share Purchase Agreement between Shanda SDG Investment Limited and Perfect World Co., Ltd. dated as of April 18, 2014 (incorporated by reference to Exhibit 4.52 of our annual report on
Form 20-F (file no. 001-33587) filed with the SEC on April 29, 2014). |
140
Table of Contents
|
|
|
|
Exhibit
Number |
|
Description of Document |
|
4.53 |
|
Adherence Agreement among Perfect World Co., Ltd., Shanda Interactive Entertainment Limited and Primavera Capital (Cayman) Fund I L.P. dated as of April 18, 2014 (incorporated by reference to
Exhibit 4.53 of our annual report on Form 20-F (file no. 001-33587) filed with the SEC on April 29, 2014). |
|
4.54 |
|
Adherence Agreement among FV Investment Holdings, Shanda Interactive Entertainment Limited, Primavera Capital (Cayman) Fund I L.P. and Perfect World Co., Ltd., dated April 25, 2014 (incorporated
herein by reference to Exhibit 7.07 to amendment No. 3 to Schedule 13D filed by Shanda Interactive Entertainment Limited with the SEC on April 28, 2014). |
|
4.55 |
|
Adherence Agreement among CAP IV Engagement Limited, Shanda Interactive Entertainment Limited, Primavera Capital (Cayman) Fund I L.P., Perfect World Co., Ltd. and FV Investment Holdings, dated
May 19, 2014 (incorporated herein by reference to Exhibit 7.08 to amendment No. 4 to Schedule 13D filed by Shanda Interactive Entertainment Limited with the SEC on May 19, 2014). |
|
4.56 |
|
Share Purchase Agreement among Perfect World Co., Ltd., Primavera Capital (Cayman) Fund I L.P. and Shanghai Buyout Fund L.P., dated September 1, 2014 (incorporated herein by reference to
Exhibit 7.05 to amendment No. 3 to Schedule 13D filed by Perfect World Co., Ltd. with the SEC on September 2, 2014). |
|
4.57 |
|
Withdrawal Notice executed by Perfect World Co., Ltd., FV Investment Holdings, and CAP IV Engagement Limited, and acknowledged and agreed by Shanda Interactive Entertainment Limited and Primavera Capital
(Cayman) Fund I L.P., dated September 1, 2014 (incorporated herein by reference to Exhibit 7.06 to amendment No. 3 to Schedule 13D filed by Perfect World Co., Ltd. with the SEC on September 2,
2014). |
|
4.58 |
|
Consent and Release executed by Shanda SDG Investment Limited, Primavera Capital (Cayman) Fund I L.P. and Perfect World Co., Ltd., dated September 1, 2014 (incorporated herein by reference to
Exhibit 7.07 to amendment No. 3 to Schedule 13D filed by Perfect World Co., Ltd. with the Securities and Exchange Commission on September 2, 2014). |
|
4.59 |
|
Agreement and Plan of Merger among Perfect Peony Holding Company Limited, Perfect World Merger Company Limited and Perfect World Co., Ltd. dated April 26, 2015 (incorporated herein by reference to
Exhibit 99.2 to Form 6-K filed by Perfect World Co., Ltd. with the SEC on April 27, 2015). |
|
4.60 |
|
Limited Guarantee issued by Perfect Human Holding Company Limited in favor of Perfect World Co., Ltd. dated April 26, 2015 (incorporated herein by reference to Exhibit 99.3 to Form 6-K filed
by Perfect World Co., Ltd. with the SEC on April 27, 2015). |
|
8.1 |
* |
Subsidiaries and Consolidated Entities of the Registrant. |
|
11.1 |
|
Code of Business Conduct and Ethics of the Registrant (incorporated by reference to Exhibit 99.1 from our Registration Statement on Form F-1 (file no. 333-144282) filed with the Securities and Exchange
Commission on July 2, 2007). |
|
12.1 |
* |
CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
12.2 |
* |
CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
13.1 |
** |
CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
13.2 |
** |
CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
141
Table of Contents
|
|
|
|
Exhibit
Number |
|
Description of Document |
|
15.1 |
* |
Consent of Maples and Calder. |
|
15.2 |
* |
Consent of King & Wood Mallesons. |
|
15.3 |
* |
Consent of PricewaterhouseCoopers Zhong Tian LLP. |
|
101.INS |
* |
XBRL Instance Document |
|
101.SCH |
* |
XBRL Taxonomy Extension Schema Document |
|
101.CAL |
* |
XBRL Taxonomy Extension Calculation Linkbase Document |
|
101.DEF |
* |
XBRL Taxonomy Extension Definition Linkbase Document |
|
101.LAB |
* |
XBRL Taxonomy Extension Label Linkbase Document |
|
101.PRE |
* |
XBRL Taxonomy Extension Presentation Linkbase Document |
- *
- Filed
herewith.
- **
- Furnished
herewith.
142
Table of Contents
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing its annual report on Form 20-F and that it has
duly caused and authorized the undersigned to sign this annual report on its behalf.
|
|
|
|
|
|
|
|
|
PERFECT WORLD CO., LTD. |
|
|
By: |
|
/s/ Robert Hong Xiao
|
|
|
|
|
Name: |
|
Robert Hong Xiao |
|
|
|
|
Title: |
|
Chief Executive Officer |
Date:
April 30, 2015
143
Table of Contents
F-1
Table of Contents
Report of Independent Registered Public Accounting Firm
To
the Board of Directors and Shareholders
of Perfect World Co., Ltd.:
In
our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income and comprehensive income, changes in shareholders' equity and cash flows
present fairly, in all material respects, the financial position of Perfect World Co., Ltd. and its subsidiaries at December 31, 2014 and December 31, 2013, and the results
of their operations and their cash flows for each of the three years in the period ended December 31, 2014 in conformity with accounting principles generally accepted in the
United States of America. Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in Internal ControlIntegrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Annual Report on Internal Control over Financial Reporting
appearing under Item 15 of the accompanying Form 20-F. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial
reporting based on our integrated 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting
was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
A
company's internal control over financial reporting is a process designed 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 (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) 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 (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/
PricewaterhouseCoopers Zhong Tian LLP
Beijing, the People's Republic of China
April 30, 2015
F-2
Table of Contents
Perfect World Co., Ltd.
Consolidated Balance Sheets as of December 31, 2013 and December 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
|
December 31, |
|
|
|
Notes |
|
2013 |
|
2014 |
|
2014 |
|
|
|
|
|
RMB
|
|
RMB
|
|
US$(Note 3-(5))
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
3(6),6 |
|
|
1,212,157,293 |
|
|
933,826,251 |
|
|
150,505,472 |
|
Restricted cash and time deposits |
|
3(6),5,6 |
|
|
226,100,000 |
|
|
785,145,000 |
|
|
126,542,404 |
|
Short-term investments |
|
3(7),6 |
|
|
1,307,892,890 |
|
|
1,680,156,566 |
|
|
270,792,084 |
|
Accounts receivable, net |
|
3(9),7 |
|
|
197,715,605 |
|
|
363,828,085 |
|
|
58,638,443 |
|
Due from related parties |
|
24 |
|
|
3,393,089 |
|
|
7,381,412 |
|
|
1,189,668 |
|
Prepayments and other assets |
|
8 |
|
|
424,839,088 |
|
|
305,408,441 |
|
|
49,222,906 |
|
Deferred tax assets |
|
19(d) |
|
|
40,387,485 |
|
|
42,672,938 |
|
|
6,877,629 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
|
|
3,412,485,450 |
|
|
4,118,418,693 |
|
|
663,768,606 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non current assets |
|
|
|
|
|
|
|
|
|
|
|
|
Equity investments |
|
3(10),9 |
|
|
470,018,715 |
|
|
799,797,289 |
|
|
128,903,924 |
|
Time deposits |
|
6 |
|
|
108,135,489 |
|
|
56,203,194 |
|
|
9,058,311 |
|
Restricted time deposits |
|
3(6),5,6 |
|
|
7,597,873 |
|
|
7,640,679 |
|
|
1,231,454 |
|
Property, equipment and software, net |
|
3(11),10 |
|
|
1,353,740,512 |
|
|
1,309,447,262 |
|
|
211,044,590 |
|
Construction in progress |
|
3(12) |
|
|
14,051,462 |
|
|
8,179,806 |
|
|
1,318,345 |
|
Intangible assets, net |
|
3(13),13 |
|
|
330,718,241 |
|
|
291,036,300 |
|
|
46,906,537 |
|
Goodwill |
|
3(15),14 |
|
|
511,270,880 |
|
|
479,663,396 |
|
|
77,307,707 |
|
Prepayments and other assets |
|
|
|
|
86,177,977 |
|
|
59,077,740 |
|
|
9,521,603 |
|
Deferred tax assets |
|
19(d) |
|
|
50,830,484 |
|
|
70,195 |
|
|
11,313 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
|
|
6,345,027,083 |
|
|
7,129,534,554 |
|
|
1,149,072,390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders' Equity |
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable (including amounts of the consolidated variable interest entities ("VIEs") without recourse to the primary beneficiaries of RMB67,041,366
and RMB132,744,631 (US$21,394,551) as of December 31, 2013 and 2014, respectively.) |
|
|
|
|
95,908,036 |
|
|
165,426,666 |
|
|
26,661,941 |
|
Short-term bank loans (including amounts of the consolidated VIEs without recourse to the primary beneficiaries of Nil as of December 31, 2013 and
2014.) |
|
15 |
|
|
213,391,500 |
|
|
446,687,000 |
|
|
71,992,876 |
|
Advances from customers (including amounts of the consolidated VIEs without recourse to the primary beneficiaries of RMB98,095,951 and RMB62,309,170
(US$10,042,415) as of December 31, 2013 and 2014, respectively.) |
|
3(16) |
|
|
102,469,102 |
|
|
65,894,840 |
|
|
10,620,320 |
|
Salary and welfare payable (including amounts of the consolidated VIEs without recourse to the primary beneficiaries of RMB46,858,285 and RMB70,507,030
(US$11,363,671) as of December 31, 2013 and 2014, respectively.)
|
|
|
|
|
287,057,153 |
|
|
359,667,845 |
|
|
57,967,934 |
|
Taxes payable (including amounts of the consolidated VIEs without recourse to the primary beneficiaries of RMB24,364,827 and RMB28,658,921 (US$4,618,980)
as of December 31, 2013 and 2014, respectively.) |
|
|
|
|
59,756,556 |
|
|
77,921,853 |
|
|
12,558,723 |
|
Accrued expenses and other liabilities (including amounts of the consolidated VIEs without recourse to the primary beneficiaries of RMB142,668,385 and
RMB76,017,961 (US$12,251,871) as of December 31, 2013 and 2014, respectively.) |
|
16 |
|
|
188,939,187 |
|
|
112,929,130 |
|
|
18,200,872 |
|
Due to related parties (including amounts of the consolidated VIEs without recourse to the primary beneficiaries of RMB41,750 and RMB2,818,875
(US$454,320) as of December 31, 2013 and 2014, respectively.) |
|
24 |
|
|
91,750 |
|
|
2,868,875 |
|
|
462,379 |
|
Deferred revenues (including amounts of the consolidated VIEs without recourse to the primary beneficiaries of RMB577,673,767 and RMB676,581,571
(US$109,045,155) as of December 31, 2013 and 2014, respectively.) |
|
3(17) |
|
|
742,171,227 |
|
|
863,406,258 |
|
|
139,155,829 |
|
Deferred tax liabilities (including amounts of the consolidated VIEs without recourse to the primary beneficiaries of RMB262,000 and RMB345,000
(US$55,604) as of December 31, 2013 and 2014, respectively.) |
|
19(d) |
|
|
87,173,299 |
|
|
108,548,529 |
|
|
17,494,847 |
|
Deferred government grants (including amounts of the consolidated VIEs without recourse to the primary beneficiaries of RMB5,000,000 and RMB1,200,000
(US$193,405) as of December 31, 2013 and 2014, respectively.)
|
|
|
|
|
5,000,000 |
|
|
1,368,270 |
|
|
220,525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
|
|
1,781,957,810 |
|
|
2,204,719,266 |
|
|
355,336,246 |
|
Non current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenues (including amounts of the consolidated VIEs without recourse to the primary beneficiaries of RMB11,709,845 and RMB18,149,363
(US$2,925,146) as of December 31, 2013 and 2014, respectively.) |
|
3(17) |
|
|
38,655,431 |
|
|
35,669,989 |
|
|
5,748,959 |
|
Deferred tax liabilities (including amounts of the consolidated VIEs without recourse to the primary beneficiaries of RMB9,087,650 and RMB18,684,696
(US$3,011,426) as of December 31, 2013 and 2014, respectively.) |
|
19(d) |
|
|
13,408,787 |
|
|
20,391,642 |
|
|
3,286,536 |
|
Other long-term liabilities (including amounts of the consolidated VIEs without recourse to the primary beneficiaries of RMB1,000,000 and Nil as of
December 31, 2013 and 2014, respectively.) |
|
|
|
|
2,800,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
|
|
1,836,822,028 |
|
|
2,260,780,897 |
|
|
364,371,741 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
25 |
|
|
|
|
|
|
|
|
|
|
Shareholders' Equity |
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares (US$0.0001 par value, 10,000,000,000 shares authorized, 29,671,195 Class A ordinary shares issued and outstanding, 217,308,865
Class B ordinary shares issued and outstanding as of December 31, 2013; 29,671,195 Class A ordinary shares issued and outstanding, 219,078,955 Class B ordinary shares issued and outstanding as of December 31, 2014)
|
|
18 |
|
|
197,003 |
|
|
198,091 |
|
|
31,926 |
|
Additional paid-in capital |
|
18 |
|
|
452,966,738 |
|
|
520,217,528 |
|
|
83,843,846 |
|
Statutory reserves |
|
3(22) |
|
|
312,339,625 |
|
|
331,730,844 |
|
|
53,465,307 |
|
Accumulated other comprehensive loss |
|
3(4) |
|
|
(126,536,702 |
) |
|
(157,049,083 |
) |
|
(25,311,718 |
) |
Retained earnings |
|
|
|
|
3,832,064,435 |
|
|
4,137,631,977 |
|
|
666,865,225 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Perfect World Shareholders' Equity |
|
|
|
|
4,471,031,099 |
|
|
4,832,729,357 |
|
|
778,894,586 |
|
Non-controlling interests |
|
|
|
|
37,173,956 |
|
|
36,024,300 |
|
|
5,806,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Shareholders' Equity |
|
|
|
|
4,508,205,055 |
|
|
4,868,753,657 |
|
|
784,700,649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders' Equity |
|
|
|
|
6,345,027,083 |
|
|
7,129,534,554 |
|
|
1,149,072,390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-3
Table of Contents
Perfect World Co., Ltd.
Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2012, 2013 and 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
|
|
Notes |
|
2012 |
|
2013 |
|
2014 |
|
2014 |
|
|
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
US$(Note 3-(5))
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online game operation revenues |
|
|
|
|
2,499,418,794 |
|
|
2,800,321,186 |
|
|
3,597,594,615 |
|
|
579,827,002 |
|
Licensing revenues |
|
|
|
|
171,563,574 |
|
|
149,317,502 |
|
|
168,955,522 |
|
|
27,230,687 |
|
Other revenues |
|
|
|
|
99,603,687 |
|
|
103,024,305 |
|
|
76,673,267 |
|
|
12,357,488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
3(16) |
|
|
2,770,586,055 |
|
|
3,052,662,993 |
|
|
3,843,223,404 |
|
|
619,415,177 |
|
Cost of revenues |
|
3(18) |
|
|
(539,935,810 |
) |
|
(711,648,433 |
) |
|
(1,115,830,359 |
) |
|
(179,839,210 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
2,230,650,245 |
|
|
2,341,014,560 |
|
|
2,727,393,045 |
|
|
439,575,967 |
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses |
|
3(19) |
|
|
(797,067,359 |
) |
|
(886,083,719 |
) |
|
(1,072,883,640 |
) |
|
(172,917,455 |
) |
Sales and marketing expenses |
|
3(23) |
|
|
(520,619,687 |
) |
|
(729,657,246 |
) |
|
(859,236,282 |
) |
|
(138,483,751 |
) |
General and administrative expenses |
|
|
|
|
(306,255,965 |
) |
|
(310,043,825 |
) |
|
(396,130,362 |
) |
|
(63,844,625 |
) |
Goodwill impairment |
|
|
|
|
(40,769,946 |
) |
|
(77,290,117 |
) |
|
(58,211,063 |
) |
|
(9,381,920 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
|
|
(1,664,712,957 |
) |
|
(2,003,074,907 |
) |
|
(2,386,461,347 |
) |
|
(384,627,751 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit |
|
|
|
|
565,937,288 |
|
|
337,939,653 |
|
|
340,931,698 |
|
|
54,948,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income / (expenses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share of (loss) / income from equity investments |
|
|
|
|
(5,334,495 |
) |
|
(15,198,149 |
) |
|
38,249,264 |
|
|
6,164,662 |
|
Interest income |
|
|
|
|
94,565,745 |
|
|
93,212,910 |
|
|
110,136,012 |
|
|
17,750,703 |
|
Interest expense |
|
|
|
|
(21,866,732 |
) |
|
(7,674,899 |
) |
|
(12,585,525 |
) |
|
(2,028,418 |
) |
Others, net |
|
17 |
|
|
60,276,060 |
|
|
83,680,334 |
|
|
100,488,122 |
|
|
16,195,745 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income |
|
|
|
|
127,640,578 |
|
|
154,020,196 |
|
|
236,287,873 |
|
|
38,082,692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before tax |
|
|
|
|
693,577,866 |
|
|
491,959,849 |
|
|
577,219,571 |
|
|
93,030,908 |
|
Income tax expense |
|
3(21), 19(a)(c) |
|
|
(116,119,365 |
) |
|
(69,997,794 |
) |
|
(121,493,950 |
) |
|
(19,581,270 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, net of tax |
|
|
|
|
577,458,501 |
|
|
421,962,055 |
|
|
455,725,621 |
|
|
73,449,638 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations |
|
3(29),12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of tax |
|
|
|
|
(30,214,733 |
) |
|
(44,322,061 |
) |
|
|
|
|
|
|
Gain from disposal of discontinued operations, net of tax |
|
|
|
|
|
|
|
166,288,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) / income from discontinued operations, net of tax |
|
|
|
|
(30,214,733 |
) |
|
121,966,207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
547,243,768 |
|
|
543,928,262 |
|
|
455,725,621 |
|
|
73,449,638 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (income) / loss attributable to the non-controlling interests |
|
|
|
|
(6,593,580 |
) |
|
(1,514,629 |
) |
|
15,664,513 |
|
|
2,524,661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to the Company's shareholders |
|
|
|
|
540,650,188 |
|
|
542,413,633 |
|
|
471,390,134 |
|
|
75,974,299 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
547,243,768 |
|
|
543,928,262 |
|
|
455,725,621 |
|
|
73,449,638 |
|
Other comprehensive loss: Foreign currency translation adjustment |
|
3(4) |
|
|
(20,112,491 |
) |
|
(45,993,516 |
) |
|
(30,512,381 |
) |
|
(4,917,703 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
3(28) |
|
|
527,131,277 |
|
|
497,934,746 |
|
|
425,213,240 |
|
|
68,531,935 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (income) / loss attributable to non-controlling interests |
|
|
|
|
(6,593,580 |
) |
|
(1,514,629 |
) |
|
15,664,513 |
|
|
2,524,661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to the Company's shareholders |
|
|
|
|
520,537,697 |
|
|
496,420,117 |
|
|
440,877,753 |
|
|
71,056,596 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share, basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
|
|
|
2.39 |
|
|
1.72 |
|
|
1.90 |
|
|
0.31 |
|
Discontinued operations |
|
|
|
|
(0.13 |
) |
|
0.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earnings per share, basic |
|
|
|
|
2.26 |
|
|
2.22 |
|
|
1.90 |
|
|
0.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share, diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
|
|
|
2.35 |
|
|
1.70 |
|
|
1.86 |
|
|
0.30 |
|
Discontinued operations |
|
|
|
|
(0.12 |
) |
|
0.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earnings per share, diluted |
|
|
|
|
2.23 |
|
|
2.19 |
|
|
1.86 |
|
|
0.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per ADS, basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
|
|
|
11.94 |
|
|
8.62 |
|
|
9.51 |
|
|
1.53 |
|
Discontinued operations |
|
|
|
|
(0.63 |
) |
|
2.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earnings per ADS, basic |
|
|
|
|
11.31 |
|
|
11.12 |
|
|
9.51 |
|
|
1.53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per ADS, diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
|
|
|
11.77 |
|
|
8.49 |
|
|
9.32 |
|
|
1.50 |
|
Discontinued operations |
|
|
|
|
(0.62 |
) |
|
2.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earnings per ADS, diluted |
|
|
|
|
11.15 |
|
|
10.95 |
|
|
9.32 |
|
|
1.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in calculating basic net earnings per share |
|
|
|
|
239,119,233 |
|
|
243,958,465 |
|
|
247,943,431 |
|
|
247,943,431 |
|
Shares used in calculating diluted net earnings per share |
|
|
|
|
242,495,660 |
|
|
247,712,898 |
|
|
252,939,407 |
|
|
252,939,407 |
|
Amount attributable to the Company's shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, net of tax |
|
|
|
|
570,864,921 |
|
|
420,447,426 |
|
|
471,390,134 |
|
|
75,974,299 |
|
(Loss) / income from discontinued operations, net of tax |
|
|
|
|
(30,214,733 |
) |
|
121,966,207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
540,650,188 |
|
|
542,413,633 |
|
|
471,390,134 |
|
|
75,974,299 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation costs included in: |
|
3(20),18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
|
|
|
(4,570,357 |
) |
|
(3,671,402 |
) |
|
(1,455,604 |
) |
|
(234,601 |
) |
Research and development expenses |
|
|
|
|
(34,818,684 |
) |
|
(34,243,440 |
) |
|
(17,389,174 |
) |
|
(2,802,626 |
) |
Sales and marketing expenses |
|
|
|
|
(10,111,863 |
) |
|
(12,351,112 |
) |
|
(8,210,980 |
) |
|
(1,323,370 |
) |
General and administrative expenses |
|
|
|
|
(21,643,688 |
) |
|
(25,627,116 |
) |
|
(24,438,505 |
) |
|
(3,938,772 |
) |
Loss from discontinued operations, net of tax |
|
|
|
|
|
|
|
(21,450,000 |
) |
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Table of Contents
Perfect World Co., Ltd.
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2012, 2013 and 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A and Class B
ordinary shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
other
comprehensive
loss |
|
|
|
|
|
|
|
|
|
Additional
paid-in
capital |
|
Statutory
reserve |
|
Retained
earnings |
|
Non-
controlling
interests |
|
Total
shareholders'
equity |
|
|
|
Shares |
|
Amount |
|
|
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
|
Balance as of January 1, 2012 |
|
|
230,909,215 |
|
|
186,948 |
|
|
212,421,037 |
|
|
268,014,793 |
|
|
(60,430,695 |
) |
|
3,538,087,071 |
|
|
27,129,516 |
|
|
3,985,408,670 |
|
Net profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
540,650,188 |
|
|
6,593,580 |
|
|
547,243,768 |
|
Foreign currency translation loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,112,491 |
) |
|
|
|
|
|
|
|
(20,112,491 |
) |
Share-based compensation costs |
|
|
|
|
|
|
|
|
71,144,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71,144,592 |
|
Appropriation to statutory reserves |
|
|
|
|
|
|
|
|
|
|
|
4,923,933 |
|
|
|
|
|
(4,923,933 |
) |
|
|
|
|
|
|
Ordinary shares issued upon exercise of employee stock options |
|
|
11,138,640 |
|
|
7,012 |
|
|
45,849,541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,856,553 |
|
Dividends to shareholders (Note 23) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(607,623,579 |
) |
|
|
|
|
(607,623,579 |
) |
Change in the Company's economic interests in affiliates (Note 11-(1)) |
|
|
|
|
|
|
|
|
389,338 |
|
|
|
|
|
|
|
|
|
|
|
(10,509,842 |
) |
|
(10,120,504 |
) |
Capital contribution from non-controlling interests or VIE shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,000 |
|
|
3,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2012 |
|
|
242,047,855 |
|
|
193,960 |
|
|
329,804,508 |
|
|
272,938,726 |
|
|
(80,543,186 |
) |
|
3,466,189,747 |
|
|
23,216,254 |
|
|
4,011,800,009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
542,413,633 |
|
|
1,514,629 |
|
|
543,928,262 |
|
Foreign currency translation loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(45,993,516 |
) |
|
|
|
|
|
|
|
(45,993,516 |
) |
Share-based compensation costs |
|
|
|
|
|
|
|
|
75,893,070 |
|
|
|
|
|
|
|
|
|
|
|
21,450,000 |
|
|
97,343,070 |
|
Appropriation to statutory reserves |
|
|
|
|
|
|
|
|
|
|
|
39,400,899 |
|
|
|
|
|
(39,400,899 |
) |
|
|
|
|
|
|
Ordinary shares issued upon exercise of employee stock options |
|
|
4,932,205 |
|
|
3,043 |
|
|
47,269,160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,272,203 |
|
Dividends to shareholders (Note 23) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(137,138,046 |
) |
|
|
|
|
(137,138,046 |
) |
Change in the Company's economic interests in affiliates (Note 11-(2), Note 12) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,006,927 |
) |
|
(9,006,927 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2013 |
|
|
246,980,060 |
|
|
197,003 |
|
|
452,966,738 |
|
|
312,339,625 |
|
|
(126,536,702 |
) |
|
3,832,064,435 |
|
|
37,173,956 |
|
|
4,508,205,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net profit / (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
471,390,134 |
|
|
(15,664,513 |
) |
|
455,725,621 |
|
Foreign currency translation loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30,512,381 |
) |
|
|
|
|
|
|
|
(30,512,381 |
) |
Share-based compensation costs |
|
|
|
|
|
|
|
|
47,332,010 |
|
|
|
|
|
|
|
|
|
|
|
4,162,253 |
|
|
51,494,263 |
|
Appropriation to statutory reserves |
|
|
|
|
|
|
|
|
|
|
|
19,391,219 |
|
|
|
|
|
(19,391,219 |
) |
|
|
|
|
|
|
Ordinary shares issued upon exercise of employee stock options |
|
|
1,770,090 |
|
|
1,088 |
|
|
19,918,780 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,919,868 |
|
Dividends to shareholders (Note 23) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(146,431,373 |
) |
|
|
|
|
(146,431,373 |
) |
Change in the Company's economic interests in an affiliate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
118,604 |
|
|
118,604 |
|
Capital contribution from non-controlling interests or VIE shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,234,000 |
|
|
10,234,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2014 |
|
|
248,750,150 |
|
|
198,091 |
|
|
520,217,528 |
|
|
331,730,844 |
|
|
(157,049,083 |
) |
|
4,137,631,977 |
|
|
36,024,300 |
|
|
4,868,753,657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
F-5
Table of Contents
Perfect World Co., Ltd.
Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2013 and 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
|
|
2012 |
|
2013 |
|
2014 |
|
2014 |
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
US$(Note 3-(5))
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
547,243,768 |
|
|
543,928,262 |
|
|
455,725,621 |
|
|
73,449,638 |
|
Adjustments for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation costs |
|
|
71,144,592 |
|
|
97,343,070 |
|
|
51,494,263 |
|
|
8,299,369 |
|
Depreciation and amortization expenses |
|
|
183,116,153 |
|
|
200,173,823 |
|
|
222,581,361 |
|
|
35,873,604 |
|
Exchange gain |
|
|
(3,334,352 |
) |
|
(6,677,643 |
) |
|
(27,182,781 |
) |
|
(4,381,069 |
) |
Share of loss / (income) from equity investments |
|
|
5,334,495 |
|
|
15,198,149 |
|
|
(38,249,264 |
) |
|
(6,164,662 |
) |
Goodwill impairment |
|
|
40,769,946 |
|
|
77,290,117 |
|
|
58,211,063 |
|
|
9,381,920 |
|
Impairment of intangible assets and other long-lived
assets |
|
|
20,969,607 |
|
|
23,898,022 |
|
|
38,386,266 |
|
|
6,186,743 |
|
Loss from disposal of property, equipment and software |
|
|
1,717,286 |
|
|
625,332 |
|
|
4,387,863 |
|
|
707,195 |
|
Provision for doubtful accounts |
|
|
|
|
|
|
|
|
12,540,836 |
|
|
2,021,216 |
|
Deferred income tax |
|
|
(11,042,445 |
) |
|
17,461,751 |
|
|
73,644,148 |
|
|
11,869,282 |
|
Gain from disposal of discontinued operations, net of tax |
|
|
|
|
|
(166,288,268 |
) |
|
|
|
|
|
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
32,371,438 |
|
|
(80,989,868 |
) |
|
(177,454,546 |
) |
|
(28,600,481 |
) |
Current prepayments and other assets |
|
|
(51,451,855 |
) |
|
(126,121,310 |
) |
|
(49,443,553 |
) |
|
(7,968,854 |
) |
Due from/to related parties |
|
|
35,000 |
|
|
(3,451,339 |
) |
|
(2,811,198 |
) |
|
(453,083 |
) |
Non current prepayments and other assets |
|
|
(40,737,629 |
) |
|
825,308 |
|
|
33,427,815 |
|
|
5,387,586 |
|
Accounts payable |
|
|
(5,892,676 |
) |
|
38,630,097 |
|
|
68,209,252 |
|
|
10,993,336 |
|
Advances from customers |
|
|
38,031,835 |
|
|
(29,274,312 |
) |
|
(34,947,884 |
) |
|
(5,632,576 |
) |
Salary and welfare payable |
|
|
27,187,649 |
|
|
53,166,528 |
|
|
72,598,852 |
|
|
11,700,811 |
|
Taxes payable |
|
|
(48,243,256 |
) |
|
8,696,017 |
|
|
22,834,713 |
|
|
3,680,288 |
|
Accrued expenses and other liabilities |
|
|
(10,774,994 |
) |
|
10,904,719 |
|
|
17,143,555 |
|
|
2,763,040 |
|
Deferred revenues |
|
|
(56,955,712 |
) |
|
357,540,494 |
|
|
125,052,570 |
|
|
20,154,816 |
|
Long-term liabilities |
|
|
|
|
|
|
|
|
(2,800,000 |
) |
|
(451,278 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
739,488,850 |
|
|
1,032,878,949 |
|
|
923,348,952 |
|
|
148,816,841 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property, equipment and software |
|
|
(83,664,515 |
) |
|
(234,925,652 |
) |
|
(82,058,570 |
) |
|
(13,225,441 |
) |
Cash paid for construction in progress |
|
|
(25,136,551 |
) |
|
(55,931,098 |
) |
|
(21,960,979 |
) |
|
(3,539,467 |
) |
Purchase of intangible assets |
|
|
(6,602,754 |
) |
|
(57,390,839 |
) |
|
(43,807,915 |
) |
|
(7,060,554 |
) |
Payment for capitalized product development costs |
|
|
(5,651,100 |
) |
|
(44,175,803 |
) |
|
(19,171,502 |
) |
|
(3,089,885 |
) |
(Increase) / decrease in restricted cash and restricted time deposits |
|
|
(363,776,200 |
) |
|
665,362,180 |
|
|
(559,045,000 |
) |
|
(90,101,699 |
) |
Cash paid for equity investments |
|
|
(200,000,000 |
) |
|
(256,232,823 |
) |
|
(340,590,730 |
) |
|
(54,893,261 |
) |
Cash received from disposal of equity investment |
|
|
|
|
|
|
|
|
2,000,000 |
|
|
322,341 |
|
Cash paid for business acquisitions, net of cash acquired |
|
|
|
|
|
(135,694,387 |
) |
|
(115,919,662 |
) |
|
(18,682,858 |
) |
Cash paid for purchase of additional ownership interests in subsidiaries |
|
|
(10,120,504 |
) |
|
|
|
|
|
|
|
|
|
Purchase of ordinary shares in a public company (Note 9) |
|
|
|
|
|
|
|
|
(615,280,000 |
) |
|
(99,165,136 |
) |
Cash received from sale of ordinary shares in a public company (Note 9) |
|
|
|
|
|
|
|
|
643,731,796 |
|
|
103,750,733 |
|
Cash received from disposal of PW Literature, net of cash disposed |
|
|
|
|
|
(23,977,214 |
) |
|
167,025,141 |
|
|
26,919,566 |
|
Purchase of short-term investments |
|
|
(1,437,228,875 |
) |
|
(1,710,000,000 |
) |
|
(3,102,741,238 |
) |
|
(500,071,115 |
) |
Maturities of short-term investments |
|
|
470,017,875 |
|
|
1,863,300,000 |
|
|
2,780,477,561 |
|
|
448,131,638 |
|
Purchase of time deposits |
|
|
(50,000,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) / provided by investing activities |
|
|
(1,712,162,624 |
) |
|
10,334,364 |
|
|
(1,307,341,098 |
) |
|
(210,705,138 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercises of share options |
|
|
45,182,450 |
|
|
45,399,876 |
|
|
22,957,189 |
|
|
3,700,027 |
|
Capital contribution from non-controlling interests or VIE shareholders |
|
|
3,000 |
|
|
|
|
|
10,234,000 |
|
|
1,649,421 |
|
Short-term bank loans |
|
|
596,752,900 |
|
|
216,176,500 |
|
|
726,030,400 |
|
|
117,014,860 |
|
Repayment of bank loans |
|
|
(409,558,500 |
) |
|
(742,887,100 |
) |
|
(491,902,000 |
) |
|
(79,280,211 |
) |
Dividends to shareholders |
|
|
(607,623,579 |
) |
|
(137,138,046 |
) |
|
(146,431,373 |
) |
|
(23,600,453 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) / provided by financing activities |
|
|
(375,243,729 |
) |
|
(618,448,770 |
) |
|
120,888,216 |
|
|
19,483,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
(2,663,345 |
) |
|
(12,239,897 |
) |
|
(15,227,112 |
) |
|
(2,454,168 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) / increase in cash |
|
|
(1,350,580,848 |
) |
|
412,524,646 |
|
|
(278,331,042 |
) |
|
(44,858,821 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of the period |
|
|
2,150,213,495 |
|
|
799,632,647 |
|
|
1,212,157,293 |
|
|
195,364,293 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of the period |
|
|
799,632,647 |
|
|
1,212,157,293 |
|
|
933,826,251 |
|
|
150,505,472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of non-cash investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of time deposits now maturing within one year to short-term investments |
|
|
(280,000,000 |
) |
|
|
|
|
(50,000,000 |
) |
|
(8,058,537 |
) |
Release of restricted time deposits to short-term investments |
|
|
(120,000,000 |
) |
|
|
|
|
|
|
|
|
|
Consideration payable related to equity investment and business combination |
|
|
|
|
|
(122,000,000 |
) |
|
(24,048,000 |
) |
|
(3,875,834 |
) |
Consideration receivable related to disposal of PW Literature |
|
|
|
|
|
174,280,000 |
|
|
4,061,115 |
|
|
654,533 |
|
Reclassification of short-term investments to time deposits due to the extension of the contract term |
|
|
|
|
|
(53,041,400 |
) |
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for income taxes |
|
|
(171,912,187 |
) |
|
(74,180,785 |
) |
|
(44,906,080 |
) |
|
(7,237,546 |
) |
Cash paid during the year for interest expenses |
|
|
(23,147,135 |
) |
|
(7,696,577 |
) |
|
(12,585,525 |
) |
|
(2,028,418 |
) |
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Table of Contents
Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements
(Amounts expressed in Renminbi Yuan unless otherwise stated)
1. Organization and principal activities
The accompanying consolidated financial statements include the financial statements of Perfect World Co., Ltd. (the "Company") and its subsidiaries and VIEs. The Company
was incorporated in the Cayman Islands on June 28, 2006. The Company has been listed on the NASDAQ in the United States of America since July 26, 2007. The Company, all the subsidiaries
and the VIEs are collectively referred to as the "Group."
Details
of the subsidiaries and VIEs as of December 31, 2014 are described below:
|
|
|
|
|
|
Subsidiaries
|
|
Equity
interest
held |
|
Place and Date of incorporation or
date of acquisition |
Beijing Perfect World Software Co., Ltd. ("PW Software") |
|
|
100 |
% |
Beijing, China, August 2006 |
Perfect Online Holding Limited ("PW Hong Kong") |
|
|
100 |
% |
Hong Kong, China, December 2007 |
Perfect World Entertainment Inc. ("PW USA") |
|
|
100 |
% |
Delaware, USA, April 2008 |
Perfect Game Holding Limited ("PW BVI") |
|
|
100 |
% |
British Virgin Islands, October 2008 |
Perfect Star Co., Ltd. ("PW Malaysia") |
|
|
100 |
% |
Labuan, Malaysia, January 2009 |
Global InterServ (Caymans) Inc. ("InterServ Caymans") |
|
|
100 |
% |
Cayman Islands, acquired in February 2009 |
InterServ Information and Technology (Shanghai) Co., Ltd. ("InterServ Shanghai") |
|
|
100 |
% |
Shanghai, China, acquired in February 2009 |
Chengdu Perfect World Software Co., Ltd. ("Chengdu PW Software"), formerly known as Chengdu InterServ Information and
Technology Co., Ltd. ("InterServ Chengdu") |
|
|
100 |
% |
Chengdu, China, acquired in February 2009 |
Perfect World Interactive Entertainment Co., Ltd. ("PW Interactive") |
|
|
100 |
% |
Cayman Islands, March 2009 |
Perfect Sky Online Co., Limited ("PW Sky") |
|
|
100 |
% |
Hong Kong, China, May 2009 |
Perfect Entertainment Zone N.V. ("PW Antilles") |
|
|
100 |
% |
Netherlands Antilles, August 2009 |
Perfect World Interactive Technology Co., Ltd. ("PW Taiwan") |
|
|
100 |
% |
Taiwan, China, November 2009 |
Perfect World Universal Coöperatieve U.A. ("PW Universal") |
|
|
100 |
% |
Netherlands, December 2009 |
Shanghai Perfect World Software Co., Ltd. ("Shanghai PW Software") |
|
|
100 |
% |
Shanghai, China, December 2009 |
Perfect World Europe B.V. ("PW Europe") |
|
|
100 |
% |
Netherlands, January 2010 |
C&C Media Co., Ltd. ("C&C Media") |
|
|
100 |
% |
Japan, acquired in April 2010 |
CCO Co., Ltd. ("CCO") |
|
|
100 |
% |
Japan, acquired in April 2010 |
Beijing Perfect World Digital Entertainment Software Co., Ltd. ("PW Digital Software") |
|
|
100 |
% |
Beijing, China, April 2010 |
Runic Games, Inc. ("Runic Games") |
|
|
74.47 |
% |
Delaware, USA, acquired in May 2010 |
Beijing Perfect World Game Software Co., Ltd. ("PW Game Software") |
|
|
100 |
% |
Beijing, China, August 2010 |
Cryptic Studios, Inc. ("Cryptic Studios") |
|
|
100 |
% |
California, USA, acquired in August 2011 |
Happy Moment Holding Limited ("Happy Moment") |
|
|
100 |
% |
British Virgin Islands, August 2011 |
Happy Fantasy Limited ("Happy Fantasy") |
|
|
100 |
% |
British Virgin Islands, August 2011 |
Perfect Management Holding Limited ("Perfect Management") |
|
|
100 |
% |
British Virgin Islands, October 2011 |
Perfect World Korea Co., Ltd. ("PW Korea"), formerly known as NGL Co., Ltd. ("NGL") |
|
|
100 |
% |
Korea, November 2011 |
Zongheng Limited ("Zongheng Cayman") |
|
|
70 |
% |
Cayman Islands, acquired in January 2012 |
Perfect World Games Online Limited ("PW Games Online"), formerly known as Zongheng Online LIMITED ("Zongheng Hong Kong") |
|
|
70 |
% |
Hong Kong, China, acquired in January 2012 |
Huanxiang Zongheng Software Technology Co., Ltd. ("Zongheng Software") |
|
|
70 |
% |
Beijing, China, acquired in January 2012 |
Perfect Play SDN. BHD. ("Perfect Play") |
|
|
100 |
% |
Labuan, Malaysia, November 2012 |
Unknown Worlds Entertainment, Inc. ("Unknown Worlds") |
|
|
60 |
% |
California, USA, acquired in February 2013 |
Perfect World (Thailand) Co., Ltd. ("PW Thailand") |
|
|
100 |
% |
Bangkok, Thailand, September 2013 |
Perfect World Games (Singapore) Pte. Ltd. ("PW Singapore") |
|
|
100 |
% |
Singapore, June 2014 |
Fedeen Games Limited ("Fedeen HK") |
|
|
70 |
% |
Hong Kong, China, September 2014 |
Beijing Perfect World Software Technology Development Co., Ltd. ("PW Software Technology") |
|
|
100 |
% |
Beijing, China, October 2014 |
F-7
Table of Contents
Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
1. Organization and principal activities (Continued)
|
|
|
|
|
|
VIEs
|
|
Economic
interest
held |
|
Place and Date of incorporation or
date of acquisition |
Beijing Perfect World Network Technology Co., Ltd. ("PW Network") |
|
|
100 |
% |
Beijing, China, March 2004 |
Shanghai Perfect World Network Technology Co., Ltd. ("Shanghai PW Network") |
|
|
100 |
% |
Shanghai, China, November 2008 |
Chengdu Perfect World Network Technology Co., Ltd. ("Chengdu PW Network") |
|
|
100 |
% |
Chengdu, China, February 2009 |
Beijing Perfect World Digital Entertainment Co., Ltd. ("PW Digital") |
|
|
100 |
% |
Beijing, China, September 2009 |
Chengdu Ye Net Science and Technology Development Co., Ltd. ("Ye Net") |
|
|
100 |
% |
Chengdu, China, acquired in January 2011 |
Hefei Perfect World Network Technology Co., Ltd. ("Hefei PW Network") |
|
|
100 |
% |
Hefei, China, January 2011 |
Beijing Perfect Moment Network Technology Co., Ltd. ("Perfect Moment"), formerly known as Beijing Perfect Moment Pictures Co.,
Ltd. |
|
|
100 |
% |
Beijing, China, February 2011 |
Tianjin Trendsters Investment Co., Ltd. ("Trendsters Investment") |
|
|
100 |
% |
Tianjin, China, November 2011 |
Beijing Perfect World Digital Technology Co., Ltd. ("PW Digital Technology") |
|
|
100 |
% |
Beijing, China, August 2013 |
Wuhu Huitian Shengshi Network Technology Co., Ltd. ("Wuhu Huitian") |
|
|
100 |
% |
Wuhu, China, acquired in December 2013 |
Guangdong Perfect World Educational Investment Co., Ltd. ("PW Educational Investment") |
|
|
100 |
% |
Zhuhai, China, February 2014 |
Chongqing Perfect World Interactive Technology Co., Ltd. ("Chongqing PW Interactive") |
|
|
100 |
% |
Chongqing, China, April 2014 |
Fuzhou Online Game Information Technology Co., Ltd. ("Fuzhou Online Game") |
|
|
100 |
% |
Fuzhou, China, acquired in June 2014 |
Fedeen Games (Shanghai) Co., Ltd. ("Fedeen SH") |
|
|
66 |
% |
Shanghai, China, June 2014 |
Chongqing MeiQi Interactive Technology Co., Ltd. ("MeiQi Interactive") |
|
|
51 |
% |
Chongqing, China, July 2014 |
Chongqing Star Entertainment Co., Ltd. ("Star Entertainment") |
|
|
100 |
% |
Chongqing, China, August 2014 |
Freejoy Technology (Chongqing) Co., Ltd. ("Freejoy Technology") |
|
|
51 |
% |
Chongqing, China, November 2014 |
Chongqing Enlightron Games Technology Co., Ltd. ("Enlightron Games") |
|
|
51 |
% |
Chongqing, China, November 2014 |
Tianjin Ledo Interactive Technology Co., Ltd. ("Ledo Interactive TJ") |
|
|
51 |
% |
Tianjin, China, November 2014 |
Chongqing Zulong Entertainment Technology Co., Ltd. ("Zulong Entertainment") |
|
|
51 |
% |
Chongqing, China, November 2014 |
Chongqing Superpop Interactive Technology Co., Ltd. ("Superpop Interactive") |
|
|
51 |
% |
Chongqing, China, November 2014 |
Arc Games Co., Ltd. ("Arc Games") |
|
|
100 |
% |
Tianjin, China, November 2014 |
The
Group is principally engaged in research, development, operation and licensing of online games. The Group's principal operations and geographic markets are in the People's Republic
of China (the "PRC"), United States of America, Europe, Japan, Southeast Asia and Korea.
2. Variable interest entities
The Company is a Cayman Islands company and, as such, it is classified as a foreign enterprise under Chinese laws, and the Company's
wholly owned PRC subsidiaries, PW Software and PW Game Software, are foreign-invested enterprises. Various regulations in China currently restrict or prevent foreign-invested entities from holding
certain licenses required to operate online games, including Internet content provision, Internet culture operations and Internet publishing licenses, or engaging in the investment in certain
technology, media and telecommunications sectors. In light of these restrictions, the Company relies on its VIEs to hold and maintain the licenses necessary to operate the online games, or investment
in certain technology, media and telecommunication companies in China.
F-8
Table of Contents
Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
2. Variable interest entities (Continued)
The
Company through its wholly owned PRC subsidiaries entered into a series of contractual arrangements with its VIEs and their respective equity owners to provide the Company with effective control
over the VIEs. These include exclusive technology support and service agreements, development cooperation agreements, business operation agreements, call option agreements, equity pledge agreements
and power of attorneys.
There
are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including those that govern the Group's VIE contractual arrangements. In the
opinion of management, it is currently unclear what impact the PRC government actions would have on the Group and on its ability to consolidate the financial results of these VIEs in the Group's
consolidated financial statements, if the PRC government authorities were to find the Group's legal structure and the contractual arrangements with its VIEs to be in violation of PRC laws and
regulations. The relevant regulatory authorities would have broad discretion in dealing with such violation, including, but not limited to, levying fines, confiscating income, revoking business or
operating licenses, requiring the Company to restructure the relevant ownership structure or operations, and requiring the Company to discontinue all or any portion of the online game operations or
investment in certain technology, media and telecommunications sectors. Any of these actions could cause significant disruption to the Company's business operations and may materially and adversely
affect the Company's business, financial condition and results of operations.
If
the imposition of any of these government actions causes the Company no longer able to conclude that these entities are VIEs of the Company, of which the Company is the primary
beneficiary, the Group would no longer be able to consolidate the financial results of these entities in the Group's consolidated financial statements. In the opinion of management, the likelihood for
the Company to lose such ability is remote based on current facts and circumstances. The Company's operations depend
on the VIEs to honor their contractual agreements with the Company. 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 management believes that each of the contractual agreements constitutes valid and legally binding obligations of each party to such contractual agreements under PRC Laws.
However, the interpretation and implementation of the laws and regulations in the PRC and their application to an effect on the legality, binding effect and enforceability of contracts are subject to
the discretion of competent PRC authorities, and therefore there is no assurance that relevant PRC authorities will take the same position as the Group herein in respect of the legality, binding
effect and enforceability of each of the contractual agreements. Meanwhile, 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 involve uncertainties, which may limit legal protections available to the Company to enforce the contractual arrangements should the
VIEs or their shareholders fail to perform their obligation under those arrangements.
The
following consolidated financial statement balances and amounts of the Group's VIEs and their subsidiaries were included in the accompanying consolidated financial statements as of
F-9
Table of Contents
Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
2. Variable interest entities (Continued)
December 31,
2013 and December 31, 2014, and for the years ended December 31, 2012, 2013 and 2014:
|
|
|
|
|
|
|
|
|
|
December 31,
2013 |
|
December 31,
2014 |
|
|
|
RMB
|
|
RMB
|
|
Current assets |
|
|
1,956,233,219 |
|
|
2,503,516,805 |
|
Non current assets |
|
|
933,328,152 |
|
|
1,216,314,983 |
|
|
|
|
|
|
|
|
|
Total assets |
|
|
2,889,561,371 |
|
|
3,719,831,788 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
1,364,036,110 |
|
|
2,052,126,255 |
|
Non current liabilities |
|
|
21,797,495 |
|
|
36,834,059 |
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,385,833,605 |
|
|
2,088,960,314 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
|
|
2012 |
|
2013 |
|
2014 |
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
Total revenues |
|
|
1,946,345,171 |
|
|
2,191,261,151 |
|
|
3,067,154,484 |
|
Net income |
|
|
270,187,228 |
|
|
106,301,882 |
|
|
227,335,582 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
|
|
2012 |
|
2013 |
|
2014 |
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
Net cash provided by operating activities |
|
|
214,053,830 |
|
|
322,824,505 |
|
|
300,193,924 |
|
Net cash used in investing activities |
|
|
(653,241,422 |
) |
|
(440,288,638 |
) |
|
(168,347,322 |
) |
Net cash (used in) / provided by financing activities |
|
|
(191,123,213 |
) |
|
272,077,345 |
|
|
65,491,394 |
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) / increase in cash and cash equivalents |
|
|
(630,310,805 |
) |
|
154,613,212 |
|
|
197,337,996 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of the period |
|
|
800,354,922 |
|
|
170,044,117 |
|
|
324,657,329 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of the period |
|
|
170,044,117 |
|
|
324,657,329 |
|
|
521,995,325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
recognized revenue-producing assets held by the Group's VIEs include goodwill and the intangible assets acquired through business combination, purchased copyrights and domain names,
licensed game software, servers and leasehold improvements relating to office facilities. The balances of these assets as of December 31, 2013 and 2014 were included in the line of "Non current
assets" in the table above. Goodwill primarily represents the expected synergies from combining the acquired businesses with the business of the Group. Please refer to Note 11 for details of
goodwill and intangible assets acquired through business combination.
The
unrecognized revenue-producing assets held by the Group's VIEs mainly consist of intellectual property, licenses, and trademarks that the Group relies on to operate its
self-developed and third
F-10
Table of Contents
Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
2. Variable interest entities (Continued)
party
licensed games. As of December 31, 2014, the VIEs have developed copyright registrations and applications, including but not limited to copyrights covering self-developed game software
and game engines. Some of these copyrights have been granted and are currently held by the VIEs, while others are still in the process of being registered. The VIEs own ICP license and other online
game operation license. Moreover, the VIE has made registrations for certain trademarks related to the Group's brand and games, and domain names for the operation. These unrecognized revenue-producing
assets have no book value, appraisal value or any other value that can be disclosed.
Under
the contractual arrangements with the VIEs, the Company has the power to direct activities of the VIEs and can have assets transferred out of the VIEs under its control. Therefore,
the Company considers that there is no asset in any of the consolidated VIEs that can be used only to settle obligations of the VIEs, except for registered capital and PRC statutory reserves. As all
consolidated VIEs are incorporated as limited liability companies under the PRC Company Law, creditors of the VIEs do not have recourse to the general credit of the Company for any of the liabilities
of the consolidated VIEs.
Currently
there is no contractual arrangement that requires the Company to provide additional financial support to the VIEs. As the Company is conducting its online game business mainly
through the VIEs, the Company may provide such support on a discretionary basis in the future, which could expose the Company to a loss.
The following is a summary of the contractual agreements between PW Software and PW Network and its equity owners entered into in
September 2006, as amended and restated in April 2007.
Exclusive Technology Support and Service Agreement. Under the exclusive technology support and service agreement between PW
Software and PW Network,
PW Software has the exclusive right to provide to PW Network technical support and services related to PW Network's online game operations. PW Software owns the intellectual property rights developed
by either PW Software or PW Network in the performance of this agreement. PW Network pays PW Software quarterly service fees, the amount of which is determined by PW Software and PW Network based on
the complexity, time spent, contents and value of the technical services provided by PW Software as well as the market price of similar services. This agreement is effective until March 9,
2024. PW Software may early terminate this agreement by providing a 30-day prior notice to PW Network, while PW Network has no right to early terminate this agreement. If any party enter bankruptcy or
become insolvent, this agreement will be automatically terminated.
Development Cooperation Agreement. Under the development cooperation agreement between PW Network and PW Software, which was
further revised in April
2008, PW Network exclusively engages PW Software to develop software for PW Network's operations. PW Network and PW Software jointly own the intellectual property rights developed by PW Software and
shares the proceeds from such rights on an agreed percentage. PW Network pays PW Software monthly service fees, the amount of which is determined by PW Software and PW Network based on the complexity,
time spent, cost, contents and value of the development work done by PW Software as well as the market price of
F-11
Table of Contents
Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
2. Variable interest entities (Continued)
similar
work. This agreement is effective until March 9, 2024 and can be early terminated by mutual agreement of the parties.
Business Operation Agreement. Under the business operation agreement among PW Software, PW Network and the shareholders of PW
Network, PW Software
provides guidance and advice on PW Network's daily operations and financial management systems. The shareholders of PW Network must elect the candidates recommended by PW Software as PW Network's
directors, and procure the appointment of PW Network's senior executives as per PW Software's designation. Moreover, PW Network and its shareholders agree that without the prior consent of PW
Software, PW Network will not engage in any transactions that could materially affect the assets, business, personnel, rights, liabilities or operations of PW Network, including incurrence or
assumption of any indebtedness of more than RMB400,000, sale or purchase of any assets or rights, incurrence of any encumbrance on any of its assets or intellectual property rights in favor of a third
party, amendment of its articles of association or business scope, or change of its normal operation procedures. The agreement also provides that if any of the agreements between PW Software and PW
Network is terminated, PW Software is entitled to terminate all of the other agreements between itself and PW Network. This agreement is effective until March 9, 2024 or the early termination
by PW Software.
Call Option Agreement. Under the call option agreement among the equity owners of PW Network, PW Network and PW Software, the
equity owners of PW
Network irrevocably granted PW Software or its designated person an exclusive option to purchase from PW Network's equity owners, to the extent permitted under PRC law, all or part of the equity
interests in PW Network for the higher of (i) RMB10,000 or (ii) the minimum amount of consideration permitted by the applicable law. PW Software or its designated person has sole
discretion to decide when to exercise the option. This agreement is effective until March 9, 2024. PW Software may early terminate this agreement by providing a 30-day prior notice, while other
parties have no right to terminate this agreement without a consensus of the parties involved.
Equity Pledge Agreement. Under the equity pledge agreement among the equity owners of PW Network, PW Network and PW Software,
the equity owners of PW
Network pledged all of their equity interests in PW Network to PW Software to guarantee PW Network's performance of its obligations under the exclusive technology support and service agreement, the
development cooperation agreement, the business operation agreement and the call option agreement. If PW Network or either of its equity owners breaches its respective contractual obligations, PW
Software, as pledgee, will be entitled to certain rights, including the right to sell the pledged equity interests. The equity owners of PW Network agreed not to take any actions that would prejudice
PW Software's interest. This agreement is effective until March 9, 2024.
Power of Attorney. Each equity owner of PW Network has executed a power of attorney to appoint PW Software as its
attorney-in-fact to exercise all of
its rights as equity owner of PW Network, including voting rights and the rights to transfer any or all of its equity interest in PW Network. The appointment of PW Software as attorney-in-fact will
remain effective until the termination of the above business operation agreement or the dissolution of PW Software.
The
contractual agreements between PW Software and Beijing Huanxiang Zongheng Chinese Literature Website Co., Ltd., or PW Literature, and its equity owners were
substantially the same as
F-12
Table of Contents
Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
2. Variable interest entities (Continued)
the
contractual agreements between PW Software and PW Network and its equity owners except that the former agreements were entered into in June 2008 and would remain effective until June 24,
2028. In addition, each equity owner of PW Literature has respectively entered into a loan agreement with PW Software as of May 20, 2008, under which PW Software agreed to make an RMB500,000
interest-free loan to each equity owner of PW Literature respectively solely for the latter to fund the capitalization of PW Literature. The term of the loans is twenty years. In December 2013, the
Group consummated the divesture of online reading business, and sold all its economic interest in PW Literature, the VIE, to an unrelated party (See Note 12). The above mentioned contractual
agreements between PW Software, PW Literature and its equity owners were terminated upon the closing of the transaction on December 31, 2013. All the previous loans to the equity owners of PW
Literature were paid back in the first quarter of 2014.
The
contractual agreements between PW Software and Perfect Moment and its equity owners are substantially the same as the contractual agreements between PW Software and PW Network and
its equity owners except that the former agreements were entered into in February 2011, as amended and restated in August 2011 and December 2011, respectively, and will remain effective until
March 9, 2024.
The
contractual agreements between PW Software and Trendsters Investment and its equity owners are substantially the same as the contractual agreements between PW Software and PW Network
and its equity owners except that the former agreements were entered into in November 2011 and will remain effective until August 21, 2026. In addition, each equity owner of Trendsters
Investment has respectively entered into a loan agreement with PW Software as of October 25, 2011, under which PW Software agreed to make an RMB500,000 interest-free loan to each equity owner
of Trendsters Investment respectively solely for the latter to fund the capitalization of Trendsters Investment. The term of the loans is twenty years.
The
contractual agreements between PW Game Software and PW Digital Technology and its equity owners are substantially the same as the contractual agreements between PW Software and PW
Network and its equity owners except that the former agreements were entered into in August 2013, as amended and restated in December 2013, and will remain effective until August 24, 2033. In
addition, each equity owner of PW Digital Technology has respectively entered into a loan agreement with PW Game Software as of July 30, 2013 and December 10, 2013, respectively, under
which PW Game Software agreed to make an RMB9,000,000 and RMB1,000,000 interest-free loan to each equity owner of PW Digital Technology respectively solely for the latter to fund the capitalization of
PW Digital Technology. The term of the loans is twenty years.
The
Company completed the registration of the pledge of PW Literature's equity interest in early 2011 and again in 2012 after the change of PW Literature's equity owners in July 2011
with local Administration for Industry and Commerce. This is no longer valid after the completion of disposal of PW Literature. The Company completed the registration of the pledge of the equity
interests of Perfect Network, Perfect Moment and Trendsters Investment in 2012 with local Administration for Industry and Commerce. The Company completed the registration of the pledge of the equity
interests of PW Digital Technology in March 2014 with local Administration for Industry and Commerce.
F-13
Table of Contents
Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
2. Variable interest entities (Continued)
Various fees are billed to the relevant VIEs on a monthly or quarterly basis and are due within 10 business days after receipt of the
invoices by the VIEs. The total amount of fees paid by the VIEs to the Group's PRC wholly owned subsidiaries since the entering of the VIE contractual arrangements ranged approximately from 45% to 75%
of the revenues generated by respective games operated by these VIEs. For the years ended December 31, 2012, 2013 and 2014, the total amount of fees paid by the Group's PRC wholly owned
subsidiaries to its VIEs amounted to approximately RMB1,058,328,538, RMB1,217,670,080 and RMB1,428,113,295, respectively.
The contractual arrangements between the VIEs and the relevant wholly owned subsidiaries of the Company are silent regarding renewals
of these contractual arrangements. However, as the VIEs are controlled by the Company through the power of attorney granted to the Company by each nominee shareholder of the VIEs, the contractual
arrangements will be renewed at the request of the Company.
Currently,
there is no contractual arrangement that requires the Company to provide additional financial support to the VIEs. As the Company is conducting certain businesses in the PRC
mainly through the VIEs, the Company may provide such support on a discretionary basis in the future, which could expose the Company to a loss.
The Ministry of Commerce published a discussion draft of the proposed Foreign Investment Law (the "Draft Law") in January 2015 aiming
to, upon its enactment, replace the existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture
Enterprise Law and the Wholly Foreign-owned Enterprise Law, together with their implementation rules and ancillary regulations.
Among
other things, the Draft Law introduces the principle of "actual control" in determining whether a company is considered a foreign-invested enterprise. The Draft Law specifically
provides that entities established in China but ultimately controlled, including through a VIE structure with contractual arrangement, by foreign investors will be treated as foreign-invested
enterprises, and, therefore, be subject to the foreign investment restrictions or prohibitions set forth in a "negative list" to be separately issued by the State Council later.
The
Ministry of Commerce is currently soliciting comments on this draft and substantial uncertainties exist with respect to its enactment timetable, interpretation and implementation.
The Draft Law, if enacted as proposed, may cause significant disruption to the Group's business operations, and have severe adverse impact on the Group's corporate structure, corporate governance,
financial condition and results of operations.
F-14
Table of Contents
Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
3. Summary of significant accounting policies
The consolidated financial statements of the Group have been prepared in accordance with accounting principles generally accepted in
the United States of America ("U.S. GAAP"). Significant accounting policies followed by the Group in the preparation of the accompanying consolidated financial statements are summarized below.
The consolidated financial statements include the accounts of the Company and its wholly owned and majority-owned subsidiaries and
VIEs. VIEs are consolidated if the Company determines that it is the primary beneficiary. All intercompany transactions are eliminated.
Net
income or losses of the Company's majority-owned subsidiaries and VIEs and amortization expenses of intangible assets arising from related business combinations are attributed to
their parents and non-controlling interests based on the proportional economic interests of the respective parents and non-controlling interests in such entities or contractual arrangements that
determine the attribution of income or losses. Net income or losses attributable to the non-controlling shareholders are recorded in the Group's Consolidated Statements of Income and Comprehensive
Income.
In
2014, the Company's board of directors approved a restructuring plan of its research and developments ("R&D") teams, under which five new controlled entities ("New Entities") have
been formed. The Company holds majority equity interests in each of these five entities. The non-controlling interest of each of these five new entities would be beneficially held by the Company's key
R&D employees who are required to work for the New Entities during requisite service periods of two or three years. See Note 18-(4) for more details. Net income or losses of the New Entities
would be attributed to non-controlling interests upon the completion of the requisite service periods.
The preparation of the consolidated financial statements in conformity with U.S. 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. Actual results may differ from those estimates.
Significant
accounting estimates in the Group's consolidated financial statements mainly include the useful life of in-game items, churn rate of the inactive players, useful life of
property, equipment and software and intangible assets, fair value of assets and liabilities acquired in asset acquisition and business combinations, assessment for impairment of long-lived assets,
intangible assets and goodwill, realization of deferred tax assets, provision for bad debt, share-based compensation expenses, and fair value of the investments made by the venture capital fund ("VC
Fund").
The Group's reporting currency is Renminbi ("RMB"). The functional currency of Perfect World Co., Ltd., the listing
entity incorporated in the Cayman Islands, is United States dollars
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Table of Contents
Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
3. Summary of significant accounting policies (Continued)
("US dollars"
or "US$"). The functional currency of the Group's other international subsidiaries is evaluated on a case-by-case basis and is often the local currency. On December 1,
2013, PW Hong Kong changed its functional currency prospectively from RMB to US dollars, to reflect the increased concentration of its activities in US dollars. The change was triggered by the
completion of the Group's reorganization of its overseas business structure, and PW Hong Kong became the parent of the Group's overseas subsidiaries in Europe, U.S., Japan and Korea, in addition to
its PRC subsidiaries. The change in functional currency of PW Hong Kong has immaterial impact on the Group's consolidated financial statements for the year ended December 31, 2013.
Transactions
denominated in currencies other than functional currency are translated into functional currency at the exchange rates quoted by authoritative banks prevailing at the dates
of the transactions. Exchange gains and losses resulting from those foreign currency transactions denominated in a currency other than the functional currency are recorded as a component of Others,
net in the Consolidated Statements of Income and Comprehensive Income. Total exchange gain were RMB3,334,352, RMB6,677,643 and RMB27,182,781 for the years ended December 31, 2012, 2013 and
2014, respectively.
The
financial statements of the Group's overseas subsidiaries are translated from their functional currency into RMB. Assets and liabilities denominated in foreign currencies are
translated into RMB using the applicable exchange rates quoted by the People's Bank of China at the balance sheet dates. Equity accounts other than earnings generated in current period are translated
into RMB at the appropriate historical rates. Revenues, expenses, gains and losses are translated into RMB using the periodic weighted average exchange rates. The resulting foreign currency
translation adjustments are recorded as Accumulated other comprehensive income / (loss) in shareholders' equity. Total foreign currency translation adjustment loss were RMB20,112,491, RMB45,993,516
and RMB30,512,381 for the years ended December 31, 2012, 2013 and 2014, respectively.
Translations of balances in the Consolidated Balance Sheets, Consolidated Statements of Income and Comprehensive Income and
Consolidated Statements of Cash Flows from RMB into US$ as of and for the year ended December 31, 2014 are solely for the convenience of the readers and were calculated at the rate of
US$1.00=RMB6.2046, representing the noon buying rate in The City of New York for cable transfer of RMB as certified for customs purpose by the Federal Reserve Bank of New York on December 31,
2014. No representation is made that the RMB amounts could have been, or could be, converted, realized or settled into US$ at that rate on December 31, 2014, or at any other rate.
(6) Cash and cash equivalents, restricted cash and restricted time deposits
Cash and cash equivalents represent cash on hand, demand deposits and highly-liquid investments placed with banks or other financial
institutions, which have original maturities of three months or less.
Cash
and time deposits that are restricted as to withdrawal or use for current operations is classified as restricted cash and time deposits. Cash and time deposits that are restricted
as to withdrawal or use for other than current operations is classified as non-current. The Group's restricted
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Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
3. Summary of significant accounting policies (Continued)
cash
and time deposits and non current restricted time deposits mainly represents (a) cash and time deposits held in a designated bank account for the sole purpose of guarantees for office
rental; and (b) cash and time deposits that are pledged for short-term loans.
The Group invested in certain financial instruments with a variable interest rate indexed to the performance of underlying assets.
These financial instruments had maturity dates within one year and are classified as short-term investments. In addition, short-term investments also comprise of the time deposits placed with banks
with original maturities longer than three months but less than one year. These investments were recorded at fair value with the unrealized gains or losses recorded as Accumulated other comprehensive
income in shareholders' equity. Realized gains are reflected as a component of interest income.
The
Group assesses whether there are any other-than-temporary impairment to its short-term investments due to declines in fair value or other market conditions. Declines in fair values
that are considered other-than-temporary are recorded as an impairment charge in the Consolidated Statements of Income and Comprehensive Income. No impairment charges were recorded for the years ended
December 31, 2012, 2013 and 2014.
Financial instruments of the Group primarily comprise cash and cash equivalents, restricted cash and time deposits, short-term
investments, accounts receivable, due from related parties, other receivables included in current and non current prepayments and other assets, long-term time deposits, restricted time deposits,
accounts payable, short-term bank loans, accrued expenses and other liabilities, equity investment in the VC Fund. The carrying values of the short-term financial instruments approximate their
fair value due to the short maturity of those instruments. The carrying value of the long-term time deposits, including interests accrued, approximates their fair value as the agreed interest rates
are close to market rate at each period end.
The
Group measures its cash equivalents, short-term investments and time deposits at fair value. Fair value is an exit price, representing the amount that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that
market participants would use in pricing an asset or a liability. A three-tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation
methodologies in measuring fair value:
Level 1Valuations
based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.
Level 2Valuations
based on quoted prices in markets that are not active or for which all significant inputs are observable, directly or indirectly.
Level 3Valuations
based on inputs that are unobservable and significant to the overall fair value measurement.
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Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
3. Summary of significant accounting policies (Continued)
(9) Accounts receivable, net
Accounts receivable are recorded net of allowance for bad debts. An allowance for doubtful accounts is provided based on an aging
analysis of accounts receivable balances, historical bad debt rates, repayment patterns, customer credit worthiness and industry trend analysis. The Group also makes a specific allowance if there is
strong evidence showing that the receivable is likely to be unrecoverable.
Equity investments are investments in privately held companies. The Group accounts for an equity investment over which it has
significant influence but does not own a majority of the equity interest or lack of control using the equity method. For equity investments which the Group does not have significant influence, the
cost method accounting is applied.
In
2011, the Group entered into a limited partnership agreement to invest in a VC Fund as a limited partner, and the Group accounted for the equity investments in the VC Fund under
equity method. In applying the equity method, starting from 2014, the Group retains the industry-specific guidance applied by the VC Fund as an investment company, as a result of which the Group
recognizes its share on the changes of the fair values of the VC Fund's investments as "Share of (loss) / income from equity investments" in the Group's Consolidated Statements of Income and
Comprehensive Income.
The
Group assesses its 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 invested companies including current earnings trends and other company-specific information such as financing rounds.
Impairment charges on equity investments are included in "Share of (loss) / income from equity investments." For the years ended December 31, 2012, 2013 and 2014, Nil, Nil and RMB4,448,952 were
recorded as impairment charges, respectively.
(11) Property, equipment and software, net
Property, equipment and software are stated at cost less accumulated depreciation and impairment. Property, equipment and software are
depreciated at rates sufficient to write off their costs less
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Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
3. Summary of significant accounting policies (Continued)
impairment
and residual value, if any, over the estimated useful lives on a straight-line basis. The estimated useful lives are as follows:
|
|
|
|
|
Estimated useful life |
Office building |
|
33 - 45 years |
Office furniture |
|
5 years |
Computers & office equipment |
|
4 years |
Game servers |
|
4 years |
Motor vehicle |
|
6 years |
Office improvement |
|
20 years |
Leasehold improvement |
|
Lesser of the term of the lease or the estimated useful lives of the assets |
Software |
|
5 years |
Repairs
and maintenance costs are expensed as incurred. Gain or loss on the disposal of property and equipment is the difference between the net sale proceeds and the carrying amount of
the relevant assets and is recognized in the Consolidated Statements of Income and Comprehensive Income.
Direct costs that are related to the construction of fixed assets and incurred in connection with bringing the assets to their intended
use are capitalized as construction in progress. Construction in progress is transferred to specific fixed asset items and the depreciation of these assets commences when the assets are ready for
their intended use.
(13) Intangible assets
Copyrights, domain names and game engines
Copyrights such as intellectual property licensed from third parties to develop online games, domain names and game engines purchased
from third parties are initially recorded at cost and amortized on a straight-line basis over the estimated useful economic life of approximately two to twenty years.
The Group performs valuation of the intangible assets arising from assets acquisition and business combinations to determine the
relative fair value to be assigned to each asset acquired. The acquired
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Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
3. Summary of significant accounting policies (Continued)
intangible
assets are recognized and measured at fair value and are expensed or amortized using the straight-line approach over the assets' estimated economic useful lives as follows:
|
|
|
|
|
Estimated useful life |
Game engine |
|
5 years |
Non-compete agreements |
|
3 - 5 years |
Completed game |
|
1.6 - 6 years |
Customer relationships |
|
3 - 6.5 years |
Trade name, domain name and license acquired from business combinations |
|
Indefinite life |
The accounting treatment for in-process research and developments ("IPR&D") varies based on how they were acquired. IPR&Ds acquired
from an asset acquisition are expensed at the acquisition date if it has no alternate future use. For IPR&Ds acquired from a business combination, they were initially measured at fair value using
market participant assumptions and were capitalized as indefinite-lived assets until the abandonment or completion of the associated research and development efforts. After initial recognition, those
assets shall be considered indefinite-lived and tested for impairment until the associated research and development activities are either completed, at which point a determination of the assets'
useful lives and methods of amortization should be made, or are abandoned. Research and development expenditures that are incurred after the acquisition, including those for completing the research
and development activities related to the acquired intangible research and development assets, are generally expensed as incurred.
The Group capitalizes the research and development costs qualified for the capitalization as intangible assets and amortized over the
estimated life of the corresponding online games, commencing from these games are available for marketing use. See Note 3-(19) for more details regarding online game product development costs.
Long-lived assets including intangible assets subject to amortization are reviewed 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. Determination of recoverability is based
on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of any impairment charge for long-lived assets including certain
identifiable intangible assets that management expects to hold and use is based on the amount the carrying value exceeds the fair value of the asset. 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 charge is recognized equal in amount to that excess. The impairment charges of intangible assets
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Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
3. Summary of significant accounting policies (Continued)
recorded
in cost of revenues for the years ended December 31, 2012, 2013 and 2014 were amounting to RMB11,201,856, Nil and RMB6,185,698, respectively. The impairment charges of intangible
assets recorded in general and administrative expenses for the years ended December 31, 2012, 2013 and 2014 were amounting to RMB1,649,923, RMB4,972,726 and RMB23,279,508, respectively. The
impairment charges of intangible assets recorded in research and development expenses for the years ended December 31, 2012, 2013 and 2014 were amounting to Nil, Nil and RMB6,418,553,
respectively. The impairment charges of long-lived assets recorded in cost of revenues for the years ended December 31, 2012, 2013 and 2014 were amounting to RMB8,117,828, RMB18,925,296 and
RMB2,502,507, respectively. The impairment of above mentioned intangible assets (mainly comprise of online game development costs) and long-lived assets (mainly comprise of prepaid license and royalty
fees) recorded in cost of revenues was primarily caused by unsatisfactory performance of the Group's certain smaller games in 2012, 2013 and 2014. The impairment of above mentioned intangible assets
recorded in
general and administrative expenses was caused by impairment of trademark recognized from the acquisition of C&C Media in April 2010 and U.S. subsidiary in August 2011. The impairment of above
mentioned intangible asset recorded in research and development expenses was caused by impairment of a game development engine purchased from a third party in September 2011.
Goodwill represents the excess of the purchase price over the fair value of the identifiable assets and liabilities acquired in a
business combination.
Goodwill
is not depreciated or amortized but is tested for impairment on an annual basis every November 30, and in between annual tests when an event occurs or circumstances
change that could indicate that the asset might be impaired. Commencing in September 2011, in accordance with the FASB revised guidance on "Testing of Goodwill for Impairment," a company first has the
option to assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the company decides, as a result of
its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is mandatory. Otherwise, no
further testing is required. The quantitative impairment test consists of a comparison of the fair value of each reporting unit with its carrying amount, including goodwill. If the carrying amount of
each reporting unit exceeds its fair value, an impairment charge equal to the difference between the implied fair value of the reporting unit's goodwill and the carrying amount of goodwill will be
recorded. Application of a goodwill impairment test requires significant management judgment, including the identification of reporting units, assigning assets and liabilities to reporting units,
assigning goodwill to reporting units, and determining the fair value of each reporting unit. The judgment in estimating the fair value of reporting units includes estimating future cash flows,
determining appropriate discount rates and making other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting unit. The
goodwill impairment charges for the years ended December 31, 2012, 2013 and 2014 were RMB40,769,946, RMB77,290,117 and RMB58,211,063, respectively. See Note 14 for more details regarding
goodwill.
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Table of Contents
Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
3. Summary of significant accounting policies (Continued)
The Group earns majority of its revenue through providing online game operation services to players pursuant to two types of revenue
models: a time-based revenue model and an item-based revenue model. For online games using the time based revenue model, players are charged based on the time they spend playing games. Under the
item-based revenue model, the basic game play functions are free of charge, and players are charged for purchases of in-game items. For games which use the time-based revenue model, revenue is
recognized based upon the actual usage of the game playing time by the players. For games which use the item-based revenue model, revenues from the sales of in-game items are recognized when the items
are consumed by the customers or over the estimated lives of the items. The average period that players typically play the games and other player behavior patterns, which are affected by various
factors such as acceptance and popularity of expansion packs, promotional events launched and market conditions, are utilized to arrive at the best estimates for lives of these in-game items.
The
Group assesses the estimated lives of in-game items for all the item-based online games periodically. If there are indications of any significant changes to the estimated lives of
the in-game items, it would be applied in the period of change prospectively.
For the client-based online PC games, under both the time-based and the item-based revenue models, proceeds received from sales of
online points to players are recorded as deferred revenues, while proceeds received from sales of online points to distributors and sales of prepaid cards are initially recorded as advances from
customers. As the Group does not have the control over and generally does not know the ultimate selling price of the prepaid cards or online points sold by the distributors, net proceeds received from
distributors after deduction of sales discounts are recorded as advances from customers. Upon activation or charge of the game cards or the online points, these advances from customers are immediately
transferred to deferred revenues. The Group provides sales incentives in the form of rebates to major distributors that meet or exceed the sales target. Accrued rebates, which are settled in the form
of additional free prepaid cards, will result in higher average discount rate on in-game points, and will partially delay the revenue recognition until the consumption of free prepaid cards.
Prepaid
cards will expire on the expiration date printed thereon. The proceeds from the expired game cards that have never been activated are recognized as other income upon expiration
of the cards. For the years ended December 31, 2012, 2013 and 2014, the Group recognized RMB4,428,309, RMB1,555,307 and RMB1,656,035 as other income from expired game cards, respectively.
In
the case of prepaid online points obtained by players through prepaid cards or other channels, once these points are charged to a player's personal online game account, they will not
expire as long as the personal game account remains active, i.e. being accessed or charged by the player. The unused online points in an inactive personal game account are recognized as
revenues when the likelihood that the Group would provide further online game service with respect to such online points is remote. The Group recognizes revenue related to the inactive accounts based
on the estimated churn rate of the
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Table of Contents
Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
3. Summary of significant accounting policies (Continued)
inactive
players and the unused game points and items in these accounts. The Group believes it has a sufficiently long operating history to reliably estimate the inactive players' churn rate. The
Group has adopted the policy of performing the reassessment of the estimated churn rate annually and considered its estimates to be reasonable. For the years ended December 31, 2012, 2013 and
2014, the Group
recognized RMB98,367,393, RMB98,439,474 and RMB93,251,836 as revenue from the unused game points and items in the accounts inactive for more than 360 consecutive days, respectively.
The Group primarily operates mobile games under the item-based revenue model. The Group distributes mobile games to end-users through
digital storefronts and game platforms such as Apple's App Store and Qihoo 360's game platform. These storefronts and platforms sell in-game virtual currencies to game players, which thereafter are
redeemed by game players for virtual items in the mobile games operated by the Group. The storefronts and platforms remit the proceeds that they have received from game players to the Group, after
retaining their revenue-sharing amounts at a pre-agreed percentage.
The
Group records revenue generated from mobile games on a gross basis, which is based on the total amount billed to the game players, including the commissions retained by digital
storefronts and game platforms, as the Group is acting as the principal and the primary obligor toward game players for the games distributed through digital storefronts and game platforms. The
principal agent consideration is based on an assessment of various factors, including but not limited to whether the Group (i) is the primary obligor in the arrangement; (ii) has
latitude in establishing the selling price; (iii) changes the product or performs part of the service and (iv) has involvement in the determination of product and service specifications.
The
Group recognizes revenue, when persuasive evidence of an arrangement exists, the service has been provided to the end-users, the price paid by the user is fixed or determinable, and
collectability is reasonably assured. Consistent with the Group's revenue recognition policies for client-based online PC games, under the item-based revenue model, for the purposes of determining
when the service has been provided to the end-users, the Group has determined that an implied obligation exists to the paying user to continue displaying the purchased virtual items within the game
over the virtual items' estimated useful lives. However, currently, due to the limited operating history of mobile games, the Group does not have the ability to differentiate the redemption
respectively on consumable or permanent items and track the consumption of each consumable item. Therefore, the Group recognizes revenue from the sale of virtual currencies and other virtual items
with regard to a mobile game ratably over the paying players' estimated player life, which is the average period between the first date the paying players charge online points to their accounts and
the expected last date these paying players would play the game.
The Group enters into licensing arrangements with licensees to operate the Group's games in other countries and regions. These
licensing agreements provide two revenue streams: the initial fees and the usage-based royalty fees.
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Table of Contents
Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
3. Summary of significant accounting policies (Continued)
In
certain licensing arrangements, the Group provides free upgrades, maintenance support and training (i.e. post-contract customer support or PCS) for the first year, and the
licensee has the option to purchase PCS in subsequent years at a specified renewal rate. In these arrangements, the Group allocates the initial fee into two parts. The first part represents the
license of the game and is recognized as license revenue immediately once the games are launched. The second part represents PCS and is recognized ratably over the PCS contractual period.
In
other licensing arrangements, the Group provides PCS over the full licensing period at no additional charge. In those cases, the total amount of the initial fee is recognized ratably
over the full contractual licensing period.
According
to the license agreements, the Group is also entitled to ongoing usage-based royalties determined based on the amount of money charged to the players' accounts or services
payable by players in a given country or region. The usage-based royalties are recognized when they are earned, provided that the collection is probable.
For online game revenues, deferred revenues represent a) the portion of unexpired online point fees received from players that
are either unredeemed by players, or redeemed to virtual items which have not been consumed or expired, and b) proceeds from storefronts and platforms pending to be recognized over the
estimated player life. For licensing revenues, deferred revenues represent the unamortized balance of the initial license fee paid by licensees. Non current
deferred revenues are primarily comprised of unamortized initial license fees and unrecognized online game revenues from the in-game virtual items to be recognized beyond the next 12 months.
The
deferred revenues related to online game operation as of December 31, 2013 and 2014 were RMB774,622,249 and RMB886,018,689, respectively. The deferred revenues related to
licensing as of December 31, 2013 and 2014 were RMB6,204,409 and RMB13,057,558, respectively.
Costs of revenues consist primarily of server and bandwidth leasing fees, staff costs involved in the operation of online games
including network operation and customer services, revenue-sharing cost or royalties paid to third parties, value added tax ("VAT"), business tax and other direct costs of providing these services.
The
Group has adopted the gross presentation for VAT and business tax. VAT and business tax are included in revenues and cost of revenues.
The
total amount of net VAT and business tax with related surcharges recorded in cost of revenues for the years ended December 31, 2012, 2013 and 2014 were RMB117,562,400,
RMB157,804,042 and RMB 195,083,998, respectively.
See
Note 19 for more details regarding VAT and business tax.
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Table of Contents
Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
3. Summary of significant accounting policies (Continued)
Costs incurred for the development of online game products prior to the establishment of technological feasibility are expensed when
incurred and are included in product development expenses. Once an online game product has reached technological feasibility, all subsequent online game product development costs are capitalized until
the product is available for general release to customers. Commencing the game is available for marketing use, the capitalized product development costs are amortized as a component of online game
related costs over the estimated life of the game.
The
evaluation of technological feasibility establishment requires significant judgment and is carried out on a product-by-product basis. Typically the establishment of technological
feasibility is featured by the completion of both technical design and game design documentation, and only occurs when the online games have a proven ability to be operated in the online game
environment in the market. Online game products development costs consist primarily of salaries and benefits paid, depreciation and other expenses in relation to the development, maintenance,
monitoring and management of the Group's online gaming products.
For
the years ended December 31, 2012, 2013 and 2014, the amount of online game development costs capitalized as intangible assets was approximately RMB5,875,774, RMB47,863,589
and RMB19,171,502, respectively.
Share-based compensation expense is for share awards, including share options and restricted shares. For service-based share options
awards, share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as an expense on a straight-line basis, net of estimated forfeitures, over
the requisite service period, which is generally the vesting period. For performance-based share options awards, the performance goals and vesting schedule of these awards are determined by the board
of directors. For the performance-based awards, an evaluation is made each quarter as to the likelihood of the performance criteria being met. Share-based compensation costs are then recorded for the
number of options expected to vest on a graded-vesting basis, net of estimated forfeitures, over the requisite service period, which is generally the vesting period. The Black-Scholes option pricing
model is used to determine the fair value of share options. The determination of the fair values of share-based compensation awards on the date of grant using the Black-Scholes option pricing model is
affected by the share price as well as assumptions regarding a number of complex and subjective variables, including the expected share price volatility over the expected term of the awards, the
expected term of the awards, risk-free interest rates and
expected dividends. The market price of the underlying shares on the grant date is applied in determining the fair value of the ordinary shares.
A
change in any of the terms or conditions of stock options shall be accounted for as a modification of the plan. Therefore, the Group calculates incremental compensation cost of a
modification as the excess of the fair value of the modified option over the fair value of the original option immediately before its terms are modified, measured based on the share price and other
pertinent factors at the modification date. For vested share options, the Group would recognize incremental compensation cost in the period the modification occurs. For unvested share options, the
Group would recognize, over the remaining requisite service period, the sum of the incremental
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Table of Contents
Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
3. Summary of significant accounting policies (Continued)
compensation
cost and the remaining unrecognized compensation cost for the original award on the modification date.
Current income taxes are provided on the basis of income for financial reporting purposes, adjusted for income and expense items which
are not assessable or deductible for income tax purposes, in accordance with the regulations of the relevant tax jurisdictions. Deferred income taxes are provided using the liability method. Under
this method, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory rates applicable to future years to differences between the financial
statement carrying amounts and the tax bases of existing assets and liabilities. The tax base of an asset or liability is the amount attributed to that asset or liability for tax purpose. The effect
on deferred taxes of a change in tax rates is recognized in the Consolidated Statements of Income and Comprehensive Income in the period of change. A valuation allowance is provided to reduce the
amount of deferred tax assets if it is considered more likely than not that some portion of, or all of the deferred tax assets will not be realized.
In order to assess uncertain tax positions, the Group applies a more likely than not threshold and a two-step approach for the tax
position measurement and financial statement recognition. For the two-step approach, the first step is to evaluate the tax position for recognition by determining if the weight of available evidence
indicates that it is more likely than not that the position will be sustained, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as
the largest amount that is more than 50% likely of being realized upon settlement.
The Group's subsidiaries and the VIEs incorporated in China are required to make appropriations to certain reserves.
In
accordance with the China Foreign Investment Enterprises laws, those of the Group's China-based subsidiaries that are considered under PRC law to be wholly foreign-owned enterprises
are required to make appropriations from their after-tax profit as determined under generally accepted accounting principles in the PRC (the "after-tax-profit under PRC GAAP") to non-distributable
reserve funds, including (i) a general reserve fund, (ii) an enterprise expansion fund, and (iii) a staff bonus and welfare fund. Each year, at least 10% of the after-tax-profit
under PRC GAAP is required to be set aside as general reserve fund until such appropriations for the fund equal 50% of the registered capital of the applicable entity. The appropriations for the other
two reserve funds are at the Group's discretion as determined by the board of directors of each entity.
Pursuant
to the China Company Laws, those of the Group's China-based entities that are considered under PRC law to be VIEs are required to make appropriations to non-distributable
reserve funds, comprising the statutory surplus reserve and discretionary surplus reserve, based on after-tax net income determined in accordance with generally accepted accounting principles of the
People's Republic of China (the "PRC GAAP"). Appropriation to the statutory surplus reserve should be at
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Table of Contents
Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
3. Summary of significant accounting policies (Continued)
least
10% of the after-tax net income determined in accordance with the legal requirements in the PRC until the reserve is equal to 50% of the entities' registered capital. Appropriation to the
discretionary surplus reserve is made at the discretion of the board of directors.
The
staff bonus and welfare fund is established for the purpose of providing employee facilities and other collective benefits to the employees and is non-distributable other than in
liquidation. Other statutory reserves are established for the purpose of offsetting accumulated losses, enlarging productions or increasing share capital.
For
the years ended December 31, 2012, 2013 and 2014, profit appropriation to general reserve fund and statutory surplus reserve for the Group's entities incorporated in China was
approximately RMB4,923,933, RMB39,400,899 and RMB19,391,219, respectively. No appropriation to other reserves were made for any of the years presented.
The Group expenses advertising costs as incurred. Total advertising expenses were RMB160,279,673, RMB318,854,568 and RMB328,834,695 for
the years ended December 31, 2012, 2013 and 2014, respectively, and were recorded in sales and marketing expenses.
Each lease is classified at the inception date as either a capital lease or an operating lease. For the lessee, a lease is a capital
lease if any of the following conditions exist: (a) ownership is transferred to the lessee by the end of the lease term, (b) there is a bargain purchase option, (c) the lease term
is at least 75% of the property's estimated remaining economic life or (d) the present value of the minimum lease payments at the beginning of the lease term is 90% or more of the fair value of
the leased property to the leaser at the inception date. A capital lease is accounted for as if there was an acquisition of an asset and an incurrence of an obligation at the inception of the lease.
All other leases are accounted for as operating leases. The Group has no capital leases for any of the years presented.
Basic earnings per share is computed by dividing net income attributable to holders of ordinary shares by the weighted average number
of ordinary shares outstanding during the year. Diluted earnings per share is calculated by dividing net income attributable to common shareholders as adjusted for the effect of dilutive common
equivalent shares, if any, by the weighted average number of common and dilutive common share equivalents outstanding during the period. Common share equivalents consist of the common shares issuable
upon the exercise of share options (using the treasury stock method). Common 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. Stock options with performance conditions are included in the computation of diluted EPS if the options are dilutive
and if their conditions (a) have been satisfied at the reporting date or (b) would have been satisfied if the reporting date was the end of the contingency period.
F-27
Table of Contents
Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
3. Summary of significant accounting policies (Continued)
The board of directors of the Company may from time to time declare dividends (including interim dividends) and distributions on shares
of the Company outstanding and authorize payment of the same out of the funds of the Company lawfully available.
Under
PRC regulations, the Group's subsidiaries incorporated in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC GAAP and relevant
regulations. In addition, the Group's subsidiaries are required to annually appropriate 10% of net after-tax income to the statutory general reserve fund (see Note 3-(22)) prior to payment of
any dividends, unless such reserve fund has reached 50% of their respective registered capital. The reserve fund is not distributable in the form of cash dividends to the Company.
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated
regularly by the chief operating decision maker ("CODM"), or decision making group, in deciding how to allocate resources and in assessing performance. The Group's CODM is the Chief Executive Officer.
The
Group's organizational structure is based on a number of factors that the CODM uses to evaluate, view and run its business operations which include, but are not limited to, customer
base, homogeneity of products and technology. The Group's operating segments are based on this organizational structure and information reviewed by the Group's CODM to evaluate the operating segment
results.
Comprehensive income is defined as the change in equity of a company during a period from transactions and other events and
circumstances excluding those resulting from investments by shareholders and distributions to shareholders. The Group has recognized the foreign currency translation adjustments as Other comprehensive
income / (loss) in the Consolidated Statements of Income and Comprehensive Income. See Note 3-(4) for more details concerning the foreign currency translation adjustments.
A discontinued operation is a component of the Group that may be a reportable segment or an operating segment, a reporting unit, a
subsidiary or an asset group that has been disposed or is held for sale. The results of that component are separately reported as "discontinued operations" in the Consolidated Statements of Income and
Comprehensive Income. The comparative Consolidated Statements of Income and Comprehensive Income are restated as if the operation had been discontinued from the start of the comparative period. The
assets and liabilities of such component classified as "discontinued operations" or "assets/liabilities held for sale" are presented separately in the assets and liabilities, respectively, of the
Consolidated Balance Sheets upon such classification being made.
F-28
Table of Contents
Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
3. Summary of significant accounting policies (Continued)
On May 28, 2014, the FASB and IASB issued their long-awaited converged standard on the recognition of revenue from contracts
with customers. The standard is intended to improve the financial reporting of revenue and improve comparability of the top line in financial statements globally. The FASB is amending the FASB
Accounting Standards Codification and creating a new Topic 606, Revenue from Contracts with Customers, to supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and
most industry-specific guidance throughout the Industry Topics of the Codification. For a public entity, the amendments are effective for annual reporting periods beginning after December 15,
2016, including interim periods within that reporting period. Early application is not permitted. The Group is currently evaluating the impact on its consolidated financial statements of adopting this
guidance.
In
June 2014, under ASC 718, CompensationStock Compensation, the FASB issued Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target
Could Be Achieved after the Requisite Service Period. These amendments apply to all reporting entities that grant their employees share-based payments in which the terms of the award provide that a
performance target that affects vesting could be achieved after the requisite service period. That is the case when an employee is eligible to retire or otherwise terminate employment before the end
of the period in which a performance target could be achieved and still be eligible to vest in the award if and when the performance target is achieved. For all entities, the amendments are effective
for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The Group is currently evaluating the impact on its
consolidated financial statements of adopting this guidance.
In
August 2014, the FASB issued Presentation of Financial StatementsGoing Concern. This standard requires management to evaluate for each annual and interim reporting period
whether it is probable that the reporting entity will not be able to meet its obligations as they become due within one year after the date that the financial statements are issued. If the entity is
in such a position, the standard provides for certain disclosures depending on whether or not the entity will be able to successfully mitigate its going concern status. This guidance is effective for
annual periods ending after December 15, 2016 and interim periods within annual periods beginning after December 15, 2016. Early application is permitted. The Company does not anticipate
that adoption will have a significant impact on its financial position, results of operations, or cash flows.
4. Concentration and risks
There are no customers whose revenues individually represent greater than 10% of the total revenues for the years ended December 31, 2012, 2013 and 2014.
Online
game operation revenues from the Group's certain games operated in China, namely Zhu Xian, Perfect World II and Return of the Condor Heroes Mobile, in aggregate contributed 42%,
32% and 34% of the Group's total revenues in 2012, 2013 and 2014, respectively. Except for Zhu Xian, Perfect World II and Return of the Condor Heroes Mobile, none of the rest of the Group's games
operated in any single country individually contributed more than 10% of the Group's total revenues in 2012, 2013 or 2014.
F-29
Table of Contents
Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
4. Concentration and risks (Continued)
Financial
instruments that potentially subject the Group to significant concentrations of credit risk primarily consist of cash and cash equivalents, restricted cash, short-term
investments, time deposits and restricted time deposits. As of December 31, 2013 and 2014, majority of all of the Group's cash and cash equivalents, restricted cash and time deposits,
short-term investments, time deposits and restricted time deposits were held by major financial institutions located in the PRC, Hong Kong and U.S., which management believes are of high credit
quality. China does not have an official deposit insurance program, nor does it have an agency similar to The Federal Deposit Insurance Corporation ("FDIC") in the United States. However, the Group
believes that the risk of failure of any of these PRC banks is remote. Bank failure is extremely uncommon in China and the Group believes that those PRC banks that hold the Company's cash and cash
equivalents, restricted cash, short-term investments and time deposits are financially sound based on public available information.
A
majority of the Group's operating transactions are denominated in RMB and a significant portion of the Group's assets and liabilities is denominated in RMB. RMB is not freely
convertible into foreign currencies. The value of RMB is subject to changes in the central government policies and to international economic and political developments. In the PRC, certain foreign
exchange transactions are required by law to be transacted only by authorized financial institutions at exchange rates set by the People's Bank of China ("PBOC"). Remittances in currencies other than
RMB by the Group in China must be processed through PBOC or other China foreign exchange regulatory bodies which require certain supporting documentation in order to process the remittance.
5. Restricted cash and restricted time deposits
To meet guarantee requirement for office rental, the Group has RMB7,597,873 and RMB7,640,679 non current restricted time deposits as of December 31, 2013 and 2014. To maintain
guarantee balances at the bank as a collateral for the banking facility or short-term loans of US dollars (see Note 15), as of December 31, 2013 and December 31, 2014, the Group
has RMB226,100,000 and RMB785,145,000 restricted cash and time deposits, respectively, which were bank deposits with the original term of one year at certain banks.
F-30
Table of Contents
Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
6. Fair value measurement
As of December 31, 2013 and 2014, information about inputs into the fair value measurements of the Group's assets that are measured at fair value on a recurring basis in periods
subsequent to their initial recognition is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurement at reporting date using |
|
Description
|
|
December 31,
2013 |
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1) |
|
Significant Other
Observable Inputs
(Level 2) |
|
Significant
Unobservable
Inputs
(Level 3) |
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits |
|
|
108,919,301 |
|
|
|
|
|
108,919,301 |
|
|
|
|
Money market fund |
|
|
786,536 |
|
|
786,536 |
|
|
|
|
|
|
|
Restricted cash and time deposits |
|
|
226,100,000 |
|
|
|
|
|
226,100,000 |
|
|
|
|
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities |
|
|
1,138,318,921 |
|
|
|
|
|
1,138,318,921 |
|
|
|
|
Time deposits |
|
|
169,573,968 |
|
|
|
|
|
169,573,968 |
|
|
|
|
Non current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term time deposits |
|
|
108,135,489 |
|
|
|
|
|
108,135,489 |
|
|
|
|
Restricted time deposits |
|
|
7,597,873 |
|
|
|
|
|
7,597,873 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
1,759,432,088 |
|
|
786,536 |
|
|
1,758,645,552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurement at reporting date using |
|
Description
|
|
December 31,
2014 |
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1) |
|
Significant Other
Observable Inputs
(Level 2) |
|
Significant
Unobservable
Inputs
(Level 3) |
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits |
|
|
68,080,437 |
|
|
|
|
|
68,080,437 |
|
|
|
|
Money market fund |
|
|
769,489 |
|
|
769,489 |
|
|
|
|
|
|
|
Restricted cash and time deposits |
|
|
785,145,000 |
|
|
|
|
|
785,145,000 |
|
|
|
|
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities |
|
|
1,458,814,288 |
|
|
|
|
|
1,458,814,288 |
|
|
|
|
Time deposits |
|
|
221,342,278 |
|
|
|
|
|
221,342,278 |
|
|
|
|
Non current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term time deposits |
|
|
56,203,194 |
|
|
|
|
|
56,203,194 |
|
|
|
|
Restricted time deposits |
|
|
7,640,679 |
|
|
|
|
|
7,640,679 |
|
|
|
|
Equity investment in VC Fund |
|
|
606,836,193 |
|
|
|
|
|
|
|
|
606,836,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
3,204,831,558 |
|
|
769,489 |
|
|
2,597,225,876 |
|
|
606,836,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-31
Table of Contents
Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
6. Fair value measurement (Continued)
When available, the Group uses quoted market prices to determine the fair value of an asset or liability. If quoted market prices are not available, the Group will measure fair value
using valuation techniques that use, when possible, current market-based or independently sourced market parameters, such as interest rates and currency rates. Following is a description of the
valuation techniques that the Group uses to measure the fair value of assets that the Group reports on its balance sheet at fair value on a recurring basis.
Money
market fund. The Group values its money market fund using observable inputs that reflect quoted prices for securities with identical characteristics, and accordingly, the Group
classifies the valuation techniques that use these inputs as Level 1.
Available-for-sale
securities. The Group's available-for-sale securities consisted of structured deposits with certain financial institutions. Available-for-sale securities are valued
using alternative pricing sources and models utilizing market observable inputs, and accordingly the Group classifies the valuation techniques that use these inputs as Level 2.
Time
deposits. The Group values its time deposits put in certain bank account using quoted prices for securities with similar characteristics and other observable inputs, and
accordingly, the Group classifies the valuation techniques that use these inputs as Level 2.
Restricted
cash and restricted time deposits. Restricted cash and restricted time deposits are valued based on the pervasive interest rate in the market, and accordingly, the Group
classifies the valuation techniques that use these inputs as Level 2.
Equity
investment in the VC Fund. The Group's share on the changes in the fair value of the VC Fund's investments was recorded in the Group's Consolidated Statements of Income and
Comprehensive Income. The valuation of the fair value of the VC Fund's investments is based on inputs that are unobservable in the markets. Therefore, the Group classifies the valuation technique as
Level 3 of fair value measurement.
The
following are other financial instruments not measured at fair value in the Consolidated Balance Sheets, but for which the fair value was estimated for disclosure purposes.
Short-term
receivables and payables. Accounts receivable, due from related parties, other receivables included in prepayments and other assets are financial assets with carrying values
that approximate fair value due to their short term nature. Accounts payable, short-term bank loans, accrued expenses and other liabilities, and due to related parties are financial liabilities with
carrying values that approximate fair value due to their short term nature. The rates of interest under the loan agreements with the lending banks were determined based on the prevailing interest
rates in the market. The Group classifies the valuation techniques that use these inputs as Level 2 of fair value measurements of short-term bank loans. The Group estimated fair values of other
short-term receivables and payables using the discounted cash flow method. The Group classifies the valuation technique as Level 3 of fair value measurement, as it uses estimated cash flow
input which is unobservable in the market. For the years ended December 31, 2013 and 2014, there were no materially differences between the fair values and the carrying amounts.
There
were no changes to the fair value measurement techniques, or movement of amounts from one Level to another for the years ended December 31, 2013 and 2014.
F-32
Table of Contents
Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
7. Accounts receivable, net
|
|
|
|
|
|
|
|
|
|
December 31,
2013 |
|
December 31,
2014 |
|
|
|
RMB
|
|
RMB
|
|
Accounts receivable, gross |
|
|
197,715,605 |
|
|
376,368,921 |
|
Allowance for doubtful accounts: |
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
|
|
|
|
|
Additional provision for bad debt |
|
|
|
|
|
(12,540,836 |
) |
Write-offs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
|
|
|
|
(12,540,836 |
) |
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
197,715,605 |
|
|
363,828,085 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable are mainly related to the sale of game cards to distributors, initial license fees, usage based royalty fees due from licensees and revenue-sharing due from
distribution channels. As the Company determined it is likely that some of the accounts receivable would not be collected based on the regular reviews performed in 2014, the Company made additional
provision of RMB12,540,836 for bad debt for the year ended December 31, 2014.
8. Prepayments and other current assets
|
|
|
|
|
|
|
|
|
|
December 31,
2013 |
|
December 31,
2014 |
|
|
|
RMB
|
|
RMB
|
|
Interest receivable |
|
|
15,494,867 |
|
|
34,747,291 |
|
Prepaid license and royalty fees |
|
|
127,709,674 |
|
|
155,730,560 |
|
Staff loans |
|
|
15,369,031 |
|
|
22,242,541 |
|
Rent and other deposits |
|
|
11,713,803 |
|
|
9,796,189 |
|
Prepaid advertising and promotion fees |
|
|
23,311,707 |
|
|
15,233,409 |
|
Loan repayment from PW Literature (Note 12) |
|
|
112,850,000 |
|
|
4,061,115 |
|
Receivable from Baidu on sale of PW Literature (Note 12) |
|
|
54,280,000 |
|
|
|
|
Tax receivable |
|
|
21,428,834 |
|
|
11,483,344 |
|
Others |
|
|
42,681,172 |
|
|
52,113,992 |
|
|
|
|
|
|
|
|
|
Total |
|
|
424,839,088 |
|
|
305,408,441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-33
Table of Contents
Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
9. Equity investments
The
following sets forth the changes in the Group's equity investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost Method |
|
Equity Method |
|
|
|
|
|
TiKL |
|
Other
Investments |
|
Zhizhu
Network |
|
Unknown
Worlds |
|
Venture
Capital Fund |
|
Youtang |
|
Daqu |
|
Other
Investments |
|
Total |
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
|
Balance as of December 31, 2012 |
|
|
|
|
|
|
|
|
20,944,906 |
|
|
16,400,017 |
|
|
190,487,134 |
|
|
|
|
|
|
|
|
|
|
|
227,832,057 |
|
Investments |
|
|
|
|
|
|
|
|
|
|
|
5,098,956 |
|
|
197,982,823 |
|
|
20,000,000 |
|
|
40,000,000 |
|
|
18,250,000 |
|
|
281,331,779 |
|
Share of (loss) / income in equity investments |
|
|
|
|
|
|
|
|
(589,264 |
) |
|
971,817 |
|
|
(13,345,038 |
) |
|
(700,401 |
) |
|
(109,401 |
) |
|
(1,425,862 |
) |
|
(15,198,149 |
) |
Converted to controlling interest (Note 11-(2)) |
|
|
|
|
|
|
|
|
|
|
|
(22,457,817 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,457,817 |
) |
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
(12,973 |
) |
|
(1,476,182 |
) |
|
|
|
|
|
|
|
|
|
|
(1,489,155 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2013 |
|
|
|
|
|
|
|
|
20,355,642 |
|
|
|
|
|
373,648,737 |
|
|
19,299,599 |
|
|
39,890,599 |
|
|
16,824,138 |
|
|
470,018,715 |
|
Investments |
|
|
30,762,509 |
|
|
14,150,939 |
|
|
|
|
|
|
|
|
217,737,036 |
|
|
|
|
|
16,000,000 |
|
|
43,578,726 |
|
|
322,229,210 |
|
Disposal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(666,667 |
) |
|
(666,667 |
) |
Share of income / (loss) in equity investments |
|
|
|
|
|
|
|
|
580,639 |
|
|
|
|
|
15,511,502 |
|
|
907,621 |
|
|
(149,039 |
) |
|
(3,851,386 |
) |
|
12,999,337 |
|
Impairment charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,448,952 |
) |
|
(4,448,952 |
) |
Foreign currency translation adjustments |
|
|
(167,500 |
) |
|
(77,737 |
) |
|
|
|
|
|
|
|
(61,082 |
) |
|
|
|
|
|
|
|
(28,035 |
) |
|
(334,354 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2014 |
|
|
30,595,009 |
|
|
14,073,202 |
|
|
20,936,281 |
|
|
|
|
|
606,836,193 |
|
|
20,207,220 |
|
|
55,741,560 |
|
|
51,407,824 |
|
|
799,797,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost Method
In
September 2014, the Group made an investment of RMB30,762,509 in TiKL Inc. ("TiKL") to acquire 9% of its equity interest.
Other
investments under cost method comprise of a number of equity investments in various entities with each individual investment amount ranging from approximately RMB4.9 million
to RMB9.2 million. The Group adopted cost method for these investments as it has no significant influence over these investees.
In
May 2014, the Group acquired a total of 30,326,005 Class A ordinary shares of Shanda Games Limited (NASDAQ: GAME), or Shanda Games, a leading online game
developer, operator and publisher in China, from Shanda SDG Investment Limited, for a total consideration of US$100 million (RMB615.3 million) in cash. In September 2014, the
Group sold such 30,326,005 Class A ordinary shares of Shanda Games at premium for a total consideration of US$104.6 million (RMB643.7 million) in cash
to Shanghai Buyout Fund L.P., an unrelated third party. The disposal gain amounting to US$4.6 million (RMB28.5 million) was recorded in Share of income from equity investment.
F-34
Table of Contents
Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
9. Equity investments (Continued)
Equity Method
- (1)
- Investment
in Zhizhu Network
In
April 2010, the Group made an investment of RMB27.0 million in Beijing Zhizhu Network Technology Co., Ltd. ("Zhizhu Network"), a related party, to acquire 20% of
its equity interest.
- (2)
- Investment
in Unknown Worlds
In
August 2011, the Group made an investment of RMB10,803,330 in Unknown Worlds to acquire 40% of its equity interest. In February 2013, the Group started to consolidate Unknown Worlds
as it acquired additional 20% equity interest in Unknown Worlds for RMB5,098,956 and obtained control of Unknown Worlds. See Note 11-(2) for more details.
In
2011, the Group entered into a limited partnership agreement to invest up to RMB643.5 million in a VC Fund over a nine-year period as a limited partner. The VC Fund is managed
by one general partner unrelated to the Group and is focusing on companies with high-growth potentials in certain technology, media and telecommunications sectors. In March 2013, the Group increased
its committed capital for an additional RMB396.0 million into the VC Fund, and the investment term was changed to 12 years. The Group holds 99% equity interest in the VC Fund and can
exercise significant influence over the VC Fund but does not obtain control over it, therefore the Group accounts for this investment using the equity method of accounting. As of December 31,
2014, the Group has contributed RMB615.7 million to the VC Fund.
In
July 2013, the Group made an investment of RMB20,000,000 in Shanghai Youtang Network Technology Co., Ltd. ("Youtang"), to acquire 20% of its equity interest. In July
2014, the Group signed an agreement to sell all its shares in Youtang at a cash consideration of RMB50,000,000 to an unrelated third party, which is a public company listed on Shenzhen Stock Exchange
in China. This transaction was subject to approval by Chinese Securities Regulatory Commission, which approved the transaction in March 2015. The transaction has been completed in April 2015.
In
December 2013, the Group made an investment of RMB40,000,000 in Beijing Shouyou Daqu Technology Co., Ltd. ("Daqu"), to acquire 30% of its equity interest, of which
RMB20,000,000 was paid upon investment. The remaining RMB20,000,000 was paid in 2014. In June 2014, the Group made an investment of RMB16,000,000 to acquire an additional 10% equity interest in Daqu.
Other
investments under equity method comprise of a number of equity investments in various entities with each individual investment amount ranging from approximately
RMB0.4 million to RMB12.0 million. The Group adopted equity method for these investments as the Group considered it has significant influence over these companies.
F-35
Table of Contents
Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
9. Equity investments (Continued)
- (7)
- Condensed
financial information of the Company's investees
In
accordance with Rule 4-08 of Regulation S-X, as the 10% significant subsidiary test was met for the year ended December 31, 2014, the Company summarizes the
condensed financial information of the investees of the Company's equity investments accounted for under equity method as below:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
|
|
2012 |
|
2013 |
|
2014 |
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
Operating data: |
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
56,459,782 |
|
|
38,538,079 |
|
|
153,475,932 |
|
Gross profit |
|
|
31,409,936 |
|
|
16,746,698 |
|
|
92,530,567 |
|
Operating (loss) / profit |
|
|
(3,336,123 |
) |
|
(24,452,227 |
) |
|
16,964,640 |
|
Net (loss) / income |
|
|
(3,878,652 |
) |
|
(20,965,534 |
) |
|
18,039,667 |
|
Net (loss) / income attributable to the Company's investees |
|
|
(3,878,652 |
) |
|
(20,965,534 |
) |
|
18,039,667 |
|
|
|
|
|
|
|
|
|
|
|
December 31,
2013 |
|
December 31,
2014 |
|
|
|
RMB
|
|
RMB
|
|
Balance sheet data: |
|
|
|
|
|
|
|
Current assets |
|
|
167,559,151 |
|
|
363,036,879 |
|
Non current assets |
|
|
281,478,810 |
|
|
400,264,101 |
|
Current liabilities |
|
|
19,943,244 |
|
|
59,057,731 |
|
Non current liabilities |
|
|
|
|
|
|
|
Non-controlling interests |
|
|
|
|
|
|
|
10. Property, equipment and software, net
|
|
|
|
|
|
|
|
|
|
December 31,
2013 |
|
December 31,
2014 |
|
|
|
RMB
|
|
RMB
|
|
Office building |
|
|
1,027,317,759 |
|
|
1,027,454,132 |
|
Office furniture |
|
|
16,622,238 |
|
|
19,161,369 |
|
Computers & office equipment |
|
|
140,989,743 |
|
|
164,379,627 |
|
Game servers |
|
|
363,826,724 |
|
|
338,890,869 |
|
Motor vehicles |
|
|
12,218,937 |
|
|
13,020,534 |
|
Office improvement |
|
|
138,031,593 |
|
|
154,004,892 |
|
Leasehold improvement |
|
|
75,646,121 |
|
|
81,809,334 |
|
Software |
|
|
62,749,992 |
|
|
67,688,233 |
|
|
|
|
|
|
|
|
|
Total |
|
|
1,837,403,107 |
|
|
1,866,408,990 |
|
Less: Accumulated depreciation |
|
|
(483,662,595 |
) |
|
(556,961,728 |
) |
|
|
|
|
|
|
|
|
Net book value |
|
|
1,353,740,512 |
|
|
1,309,447,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-36
Table of Contents
Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
10. Property, equipment and software, net (Continued)
The
depreciation expenses for property, equipment and software were RMB123,749,329, RMB132,442,355 and RMB140,412,434 for the years ended December 31, 2012, 2013 and 2014,
respectively.
11. Business combination
In April 2009, the Group made an investment of approximately RMB15,000,000 in Ye Net to acquire 30% of its equity interest. Ye Net is
principally engaged in web game development and operation. The equity interest of the Group in Ye Net was increased to 37.5% in 2010 triggered by certain key performance indicator set in the
original agreement with no additional consideration paid. In January 2011, the Group acquired additional 42.5% equity interest of Ye Net triggered by certain key performance indicator set in the
original agreement, for a total consideration of RMB3,000,000. The gain recognized on revaluation of the previously held equity method investment in Ye Net was not material.
As
of December 31, 2011, the Group held 80% equity interest in Ye Net. The non-controlling interest was recognized based on its acquisition date fair value, and was subsequently
adjusted by attribution of net income or loss and other comprehensive income or loss based on its relative ownership interests in Ye Net.
In
a business combination achieved in stages, the Group re-measured its previously held equity interest in Ye Net at its acquisition-date fair value using the discounted cash flow
method. The excess of (i) the total of the value of consideration transferred, fair value of the non-controlling interests and acquisition date fair value of previously held equity interest in
Ye Net over (ii) the fair value of the identifiable net assets of Ye Net was recorded as goodwill relating to the PRC operating segment. The goodwill is not expected to be deductible for tax
purposes. The Group made estimates and judgments in determining the fair value of acquired assets and liabilities, based on independent appraisal reports
F-37
Table of Contents
Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
11. Business combination (Continued)
and
management's experience with similar assets and liabilities. The final purchase price allocation results as of the acquisition date were set out below:
|
|
|
|
|
|
|
|
RMB (in thousands) |
|
Weighted average
amortization period at
the acquisition date
(in years) |
Intangible assets |
|
|
|
|
|
Completed game |
|
|
2,860 |
|
2.75 |
IPR&D |
|
|
2,120 |
|
Note 3(13) |
Trade name and domain name |
|
|
1,380 |
|
Indefinite |
Other identifiable tangible assets and liabilities |
|
|
19,672 |
|
|
|
|
|
|
|
|
Identifiable net assets acquired (a) |
|
|
26,032 |
|
|
|
|
|
|
|
|
Cash consideration (b) |
|
|
3,000 |
|
|
Previously held equity interest on acquisition date (c) |
|
|
15,170 |
|
|
Non-controlling interest (d) |
|
|
8,090 |
|
|
|
|
|
|
|
|
Goodwill (b+c+da) |
|
|
228 |
|
|
Goodwill arising from deferred tax liabilities attributed to intangible asset appreciation |
|
|
1,591 |
|
|
|
|
|
|
|
|
Goodwill |
|
|
1,819 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
primarily represents the expected synergies from combining operations of the Group and Ye Net, which are complementary in a way to each other, and any other intangible benefits
that would accrue to the Group that do not qualify for separate recognition. The fair value of non-controlling interest was estimated by applying an income approach. No measurement period adjustment
has been recorded.
Based
on the assessment on the acquired company's financial performance made by the Group, the acquired company is not considered material to the Group. Thus the presentation of the pro
forma financial information with regard to a summary of the results of operations of the Group for the business combination is not required.
In
July 2012, the Group further entered into a share transfer agreement with the other equity holders of Ye Net, to acquire the remaining 20% equity interest held by the other equity
holders for a consideration of approximately RMB4,444,444. The Group holds 100% equity in Ye Net after this transaction. As the Group maintained controlling financial interest before and after the
acquisition, such change in ownership interest was accounted for as an equity transaction and no gain or loss shall be recognized. Hence, the difference between the purchase consideration and the
carrying amount of the non-controlling interest, amounting to RMB912,252, was recorded in additional paid-in capital of the Group.
In August 2011, the Group made an investment of approximately RMB10,803,330 in Unknown Worlds to acquire 40% of its equity interest.
Unknown Worlds is principally engaged in game
F-38
Table of Contents
Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
11. Business combination (Continued)
development
and operation. In February 2013, the Group acquired additional 20% equity interest of Unknown Worlds for a total consideration of approximately RMB5,098,956. The gain recognized on
revaluation of the previously held equity method investment in Unknown Worlds was not material. The Group holds 60% equity in Unknown Worlds after this transaction. As the Group obtained control of
Unknown Worlds on the acquisition date, it started to consolidate Unknown Worlds' financial statements thereafter. The non-controlling interest was recognized based on its acquisition date fair value,
and was subsequently adjusted by attribution of net income or loss and other comprehensive income or loss based on its relative ownership interests in Unknown Worlds.
In
a business combination achieved in stages, the Group re-measured its previously held equity interest in Unknown Worlds at its acquisition date fair value using the discounted cash
flow method. The excess of (i) the total of the value of consideration transferred, fair value of the non-controlling interests and acquisition date fair value of previously held equity
interest in Unknown Worlds over (ii) the fair value of the identifiable net assets of Unknown Worlds was recorded as goodwill relating to the International operating segment. The goodwill is
not expected to be deductible for tax purposes. The Group made estimates and judgments in determining the fair value of acquired assets and liabilities, based on management's experience with similar
assets and liabilities. The final purchase price allocation results as of the acquisition date were set out below:
|
|
|
|
|
|
|
|
RMB (in thousands) |
|
Weighted average
amortization period at
the acquisition date
(in years) |
Intangible assets |
|
|
|
|
|
Completed game |
|
|
7,410 |
|
1.9 |
Other identifiable tangible assets and liabilities |
|
|
11,941 |
|
|
|
|
|
|
|
|
Identifiable net assets acquired (a) |
|
|
19,351 |
|
|
|
|
|
|
|
|
Cash consideration (b) |
|
|
5,099 |
|
|
Previously held equity interest on acquisition date (c) |
|
|
17,039 |
|
|
Non-controlling interest (d) |
|
|
12,084 |
|
|
|
|
|
|
|
|
Goodwill (b+c+da) |
|
|
14,871 |
|
|
Goodwill arising from deferred tax liabilities attributed to intangible asset appreciation |
|
|
3,444 |
|
|
|
|
|
|
|
|
Goodwill |
|
|
18,315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
primarily represents the expected synergies from combining operations of the Group and Unknown Worlds, which are complementary in a way to each other, and any other intangible
benefits that would accrue to the Group that do not qualify for separate recognition. The fair value of non-controlling interest was estimated by applying an income approach. No measurement period
adjustment has been recorded.
Based
on the assessment on the acquired company's financial performance made by the Group, the acquired company is not considered material to the Group. Thus the presentation of the pro
forma
F-39
Table of Contents
Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
11. Business combination (Continued)
financial
information with regard to a summary of the results of operations of the Group for the business combination is not required.
In December 2013, the Group invested approximately RMB255,000,000 to acquire 100% equity interest of Wuhu Huitian, of which
RMB153,000,000 was paid upon acquisition. The remaining non-contingent purchase consideration of RMB102,000,000 would be paid in one year from the contract date. Upon consummation of the transaction,
Wuhu Huitian became the Group's wholly owned subsidiary. The main purpose of the acquisition is to create synergies and provide better support for the Group's gaming business, and to capture new
growth opportunities in the broad spectrum of the future gaming industry. As of December 31, 2014, the Group has paid RMB101,200,000 out of the remaining purchase consideration to the original
shareholders of Wuhu Huitian.
The
acquisition had been accounted for as a business combination and the results of operations of Wuhu Huitian from the acquisition date have been included in the Group's consolidated
financial statements. The allocation of the purchase price is as follows:
|
|
|
|
|
|
|
|
RMB (in thousands) |
|
Weighted average
amortization period at
the acquisition date
(in years) |
Net tangible assets acquired |
|
|
6,493 |
|
|
Identifiable intangible assets: |
|
|
|
|
|
Customer relationships |
|
|
18,220 |
|
3 |
Non-compete agreements |
|
|
1,700 |
|
3 |
Trade name, domain name and license |
|
|
50,700 |
|
Indefinite |
|
|
|
|
|
|
Identifiable net assets acquired (a) |
|
|
77,113 |
|
|
Cash consideration paid (b) |
|
|
153,000 |
|
|
Cash consideration payable (c) |
|
|
102,000 |
|
|
|
|
|
|
|
|
Goodwill (b)+(c)(a) |
|
|
177,887 |
|
|
Goodwill arising from deferred tax liabilities attributed to intangible asset appreciation |
|
|
9,088 |
|
|
|
|
|
|
|
|
Goodwill |
|
|
186,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
excess of purchase price over net tangible assets and identifiable intangible assets acquired were recorded as goodwill relating to the PRC operating segment. The goodwill is not
expected to be deductible for tax purposes. No significant measurement period adjustment has been recorded.
Based
on the assessment on the acquired company's financial performance made by the Group, the acquired company is not considered material to the Group. Thus the presentation of the pro
forma financial information with regard to a summary of the results of operations of the Group for the business combination is not required.
F-40
Table of Contents
Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
11. Business combination (Continued)
In April 2014, the Group entered into an agreement to acquire 100% equity interest of Fuzhou Online Game. Pursuant to the pricing
mechanism stipulated in the agreement and a supplemental agreement signed in September 2014, the total consideration for the acquisition amounted to RMB48,248,000, among which RMB17,624,000 is subject
to an adjustment based on the fair value of equity of Fuzhou Online Game as of the settlement date prior September 3, 2015 and which is considered as contingent consideration that is recorded
at fair value. For the year ended December 31, 2014, the Group has paid cash consideration of RMB25,000,000. As of December 31, 2014, the Group did not expect a material change in the
fair value of the equity of Fuzhou Online Game on future settlement date, as a result of which there was no adjustment in the balance of contingent consideration payable for the year ended
December 31, 2014.
As
a result of the above transactions, Fuzhou Online Game became the Group's wholly owned subsidiary. Fuzhou Online Game is principally engaged in game portal operation. The main purpose
of the acquisition is to create synergies and provide better support for the Group's gaming business, and to capture new growth opportunities in the broad spectrum of the future gaming industry.
The
acquisition had been accounted for as a business combination. The excess of (i) the total consideration over (ii) the fair value of the identifiable net assets of
Fuzhou Online Game was recorded as goodwill relating to the PRC operating segment. The goodwill is not expected to be deductible for tax purposes. The Group made estimates and judgments in determining
the fair value of acquired assets and liabilities, based on management's experience with similar assets and liabilities. The purchase price allocation results as of the acquisition date were set out
below:
|
|
|
|
|
|
|
|
RMB (in thousands) |
|
Weighted average
amortization period at
the acquisition date
(in years) |
Net tangible assets acquired |
|
|
14,485 |
|
|
Identifiable intangible assets: |
|
|
|
|
|
Trade name & domain name |
|
|
5,300 |
|
Indefinite |
Non-compete agreements |
|
|
3,560 |
|
5 |
Customer relationships |
|
|
3,470 |
|
6.5 |
|
|
|
|
|
|
Identifiable net assets acquired (a) |
|
|
26,815 |
|
|
Total consideration (b) |
|
|
48,248 |
|
|
|
|
|
|
|
|
Goodwill (ba) |
|
|
21,433 |
|
|
Goodwill arising from deferred tax liabilities attributed to intangible asset appreciation |
|
|
3,083 |
|
|
|
|
|
|
|
|
Goodwill |
|
|
24,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based
on the assessment on the acquired company's financial performance made by the Group, the acquired company is not considered material to the Group. Thus the presentation of the pro
forma financial information with regard to a summary of the results of operations of the Group for the business combination is not required.
F-41
Table of Contents
Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
12. Discontinued operations
In December 2013, the Company, the equity owners of PW Literature, and Beijing Baidu Netcom Science Technology Co., Ltd. ("Baidu"), entered into a definitive agreement to
sell PW Literature to Baidu, for a total consideration of RMB191,500,000, for the acquisition of PW Literature's equity interests and the repayment of PW Literature's loan from the Company. The
transaction was completed on December 31, 2013. The Company has recorded the disposal gain of RMB166,288,268 in the "Gain from disposal of discontinued operations, net of tax" account in the
Consolidated Statements of Income and Comprehensive Income for the year ended December 31, 2013. The disposal gain represented the excess of (i) the total consideration net of direct
transaction cost incurred for the disposal over (ii) the carrying value of the net assets of PW Literature, loan provided to and non-controlling interests in PW Literature as of the disposal
date. Prior to the sale, PW Literature was included in the Company's PRC operating segment. The amount due from Baidu amounting to RMB54,280,000 was received in January 2014. Of the loan due from PW
Literature amounting to RMB112,745,141 was repaid in July 2014 and RMB4,061,115 are expected to be repaid in December 2015.
Because
there was no significant continuing cash flow from PW Literature expected to be generated by the ongoing entity and the Group will not have any significant continuing involvement
in the operations of PW Literature after December 31, 2013, the revenues and expenses related to the operations of PW Literature have been segregated from continuing operations and reported as
discontinued operations for all periods. Following are revenues and (loss) / income from discontinued operations:
|
|
|
|
|
|
|
|
|
|
For the years ended
December 31, |
|
|
|
2012 |
|
2013 |
|
|
|
RMB
|
|
RMB
|
|
Revenues |
|
|
27,783,299 |
|
|
44,255,398 |
|
|
|
|
|
|
|
|
|
|
|
For the years ended
December 31, |
|
|
|
2012 |
|
2013 |
|
|
|
RMB
|
|
RMB
|
|
Loss from discontinued operations, net of nil tax |
|
|
(30,214,733 |
) |
|
(44,322,061 |
) |
Gain from disposal of discontinued operations, net of nil tax |
|
|
|
|
|
166,288,268 |
|
|
|
|
|
|
|
|
|
(Loss) / income from discontinued operations, net of tax |
|
|
(30,214,733 |
) |
|
121,966,207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-42
Table of Contents
Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
12. Discontinued operations (Continued)
Following
are the carrying amounts of the major classes of assets and liabilities included as part of a disposal group as of disposal day:
|
|
|
|
|
|
|
December 31,
2013 |
|
|
|
RMB
|
|
Cash and cash equivalents |
|
|
14,135,057 |
|
Accounts receivable, net |
|
|
4,674,630 |
|
Prepayments and other assets |
|
|
2,183,108 |
|
Other non current assets |
|
|
2,989,932 |
|
|
|
|
|
|
Total assets |
|
|
23,982,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Received in advance |
|
|
2,219,499 |
|
Salary and welfare payable |
|
|
2,976,912 |
|
Payable to Perfect World |
|
|
120,000,000 |
|
Other current liabilities |
|
|
3,416,741 |
|
|
|
|
|
|
Total liabilities |
|
|
128,613,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13. Intangible assets, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2013 |
|
As of December 31, 2014 |
|
|
|
Gross
Carrying
Amount |
|
Accumulated
Amortization |
|
Impairment |
|
Net
Carrying
Amount |
|
Gross
Carrying
Amount |
|
Accumulated
Amortization |
|
Impairment |
|
Net
Carrying
Amount |
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
|
Copyrights |
|
|
125,988,632 |
|
|
(56,056,872 |
) |
|
|
|
|
69,931,760 |
|
|
153,120,143 |
|
|
(79,387,981 |
) |
|
(6,418,553 |
) |
|
67,313,609 |
|
Game engine |
|
|
36,355,980 |
|
|
(24,489,448 |
) |
|
|
|
|
11,866,532 |
|
|
42,885,594 |
|
|
(30,180,638 |
) |
|
|
|
|
12,704,956 |
|
Non-compete agreements. |
|
|
29,355,984 |
|
|
(27,703,206 |
) |
|
|
|
|
1,652,778 |
|
|
32,987,828 |
|
|
(28,757,050 |
) |
|
|
|
|
4,230,778 |
|
Trade name, domain name and license |
|
|
123,427,084 |
|
|
(15,737,622 |
) |
|
(6,622,649 |
) |
|
101,066,813 |
|
|
141,935,889 |
|
|
(17,043,403 |
) |
|
(29,902,157 |
) |
|
94,990,329 |
|
Customer relationships |
|
|
25,433,530 |
|
|
(7,719,641 |
) |
|
|
|
|
17,713,889 |
|
|
28,903,530 |
|
|
(14,104,385 |
) |
|
|
|
|
14,799,145 |
|
Completed game |
|
|
148,640,168 |
|
|
(60,457,472 |
) |
|
(2,122,400 |
) |
|
86,060,296 |
|
|
149,098,967 |
|
|
(93,297,050 |
) |
|
(3,930,246 |
) |
|
51,871,671 |
|
IPR&D |
|
|
2,184,736 |
|
|
|
|
|
|
|
|
2,184,736 |
|
|
2,184,736 |
|
|
|
|
|
|
|
|
2,184,736 |
|
Online game development costs |
|
|
76,223,499 |
|
|
(26,902,606 |
) |
|
(9,079,456 |
) |
|
40,241,437 |
|
|
95,395,000 |
|
|
(38,996,616 |
) |
|
(13,457,308 |
) |
|
42,941,076 |
|
Others |
|
|
1,040,000 |
|
|
(1,040,000 |
) |
|
|
|
|
|
|
|
1,040,000 |
|
|
(1,040,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
568,649,613 |
|
|
(220,106,867 |
) |
|
(17,824,505 |
) |
|
330,718,241 |
|
|
647,551,687 |
|
|
(302,807,123 |
) |
|
(53,708,264 |
) |
|
291,036,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
expenses for the intangible assets were RMB59,366,824, RMB67,731,468 and RMB82,168,927 for the years ended December 31, 2012, 2013 and 2014, respectively.
The
estimated amortization expenses for the above intangible assets for future annual periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
|
|
2015 |
|
2016 |
|
2017 |
|
2018 |
|
2019 and
thereafter |
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
|
Amortization expenses |
|
|
68,233,769 |
|
|
52,315,407 |
|
|
32,554,969 |
|
|
23,761,091 |
|
|
47,607,503 |
|
F-43
Table of Contents
Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
14. Goodwill
The goodwill is attributable to the workforce of the acquired business and the significant synergies expected to arise after the Group's acquisition. The changes in the carrying value of
goodwill and accumulated impairment charges by segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Online Game Related Operation |
|
|
|
|
|
PRC |
|
International |
|
Total |
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
Balance as of December 31, 2012 |
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
112,424,861 |
|
|
337,174,502 |
|
|
449,599,363 |
|
Accumulated impairment charges |
|
|
(1,818,861 |
) |
|
(38,951,085 |
) |
|
(40,769,946 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110,606,000 |
|
|
298,223,417 |
|
|
408,829,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction in 2013 |
|
|
|
|
|
|
|
|
|
|
Increase in goodwill related to acquisition |
|
|
186,974,504 |
|
|
18,315,375 |
|
|
205,289,879 |
|
Impairment charges |
|
|
|
|
|
(77,290,117 |
) |
|
(77,290,117 |
) |
Foreign currency translation adjustment |
|
|
|
|
|
(25,558,299 |
) |
|
(25,558,299 |
) |
Balance as of December 31, 2013 |
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
299,399,365 |
|
|
329,931,578 |
|
|
629,330,943 |
|
Accumulated impairment charges |
|
|
(1,818,861 |
) |
|
(116,241,202 |
) |
|
(118,060,063 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
297,580,504 |
|
|
213,690,376 |
|
|
511,270,880 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction in 2014 |
|
|
|
|
|
|
|
|
|
|
Increase in goodwill related to acquisition |
|
|
24,515,702 |
|
|
|
|
|
24,515,702 |
|
Impairment charges |
|
|
|
|
|
(58,211,063 |
) |
|
(58,211,063 |
) |
Foreign currency translation adjustment |
|
|
|
|
|
2,087,877 |
|
|
2,087,877 |
|
Balance as of December 31, 2014 |
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
323,915,067 |
|
|
332,019,455 |
|
|
655,934,522 |
|
Accumulated impairment charges |
|
|
(1,818,861 |
) |
|
(174,452,265 |
) |
|
(176,271,126 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
322,096,206 |
|
|
157,567,190 |
|
|
479,663,396 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Group performs its annual goodwill impairment test of each reporting unit as of November 30, or more frequently, if certain events or circumstances warrant. Events or changes
in circumstances which might indicate potential impairment in goodwill include the company-specific factors, including, but not limited to, stock price volatility, market capitalization relative to
net book value, and projected revenue, market growth and operating results. Determining the number of reporting units and the fair value of a reporting unit requires the Group to make judgments and
involves the use of significant estimates and assumptions. Under PRC operating segment, the Group identified one reporting unit as PRC online game business. Under International operating segment, the
Group identified the following three reporting units for goodwill impairment testing: U.S. online game business, Runic Games and Unknown Worlds.
In
September 2014, in view of U.S. online game business' performance during 2014 and near-term business outlook that were below our expectations, the Group performed an interim
assessment on the goodwill related to the reporting unit of U.S. online game business and recognized an estimated goodwill impairment charge of RMB40,242,058 in the third quarter of fiscal year 2014.
The impairment
F-44
Table of Contents
Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
14. Goodwill (Continued)
assessment
on U.S. online game business' goodwill weighted the results from the income approach and considered a combination of factors, including, but not limited to, market conditions, expected
future cash flows, growth rates and discount rates, which require the Group to make certain estimates and assumptions regarding industry economic factors and future profitability of the business.
As
of November 30, 2014, the Group performed its annual goodwill impairment analysis of each reporting unit, based on which an impairment charge of RMB17,969,005 associated with
Unknown Worlds reporting unit was recognized in view of sequential decline of revenue generated from the pay-per-install game developed by Unknown Worlds and its near-term business outlook.
Thereafter, all goodwill arising from the acquisition of Unknown Worlds in February 2013 was fully impaired.
For
the annual goodwill impairment analysis of U.S. online game business reporting unit, in view of the recent interim goodwill impairment assessment performed in September 2014, the
Group assessed qualitative factors including macroeconomic conditions, industry and market considerations, the unit's overall financial performance and other events that may affect the reporting unit
and determined that it is not more-likely-than-not that the fair value of the U.S. online game business reporting unit is less than its carrying amount and concluded that no further assessment was
necessary. For the remaining reporting units, namely PRC online game business and Runic Games, the Group compared the fair value of the reporting units with their carrying amounts using income
approach, and concluded that the
fair value of the reporting units exceeded their carrying values and determined that no adjustment to the carrying value of goodwill for these reporting units was necessary. For PRC online game
business reporting unit, the percentage by which fair value exceeds carrying value of goodwill was approximately 21.6%. For Runic Games reporting unit, the percentage by which fair value exceeds
carrying value of goodwill was approximately 16.2%.
The
Group used discounted cash flow method to estimate the fair value of their reporting units. This analysis requires significant judgments, including estimation of future cash flows,
which is dependent on internal forecasts, and assumptions that are consistent with the plans and estimates being used to manage the Company's business, determining appropriate discount rates,
estimation of the long-term rate of growth for the Company's business, estimation of the duration over which cash flows will occur, determination of the Company's weighted average cost of capital, and
terminal value. The estimates of fair value of a reporting unit result from a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions at a point
in time. The valuations are based on information available as of the impairment review date and are based on expectations and assumptions that have been deemed reasonable by management. Any changes in
key assumptions, including unanticipated events and circumstances, may affect the accuracy or validity of such estimates and could potentially result in an additional impairment charge.
The
goodwill impairment charges for the years ended December 31, 2012, 2013 and 2014 were RMB40,769,946, RMB77,290,117 and RMB58,211,063, respectively.
F-45
Table of Contents
Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
15. Short-term bank loans
In August 2011, the Group entered into a loan agreement with a bank whereby on August 19, 2011 the Group effectively pledged certain time deposits with a total amount of
RMB177,688,627 to secure a bank loan, totaling US$24,000,000 and bearing interest at 2.65% per annum over 3-month London Inter-Bank Offered Rate ("LIBOR") with the maturity date of August 19,
2012. Pursuant to the supplementary agreement to the loan agreement dated on August 19, 2012, the maturity date has been extended to August 19, 2013, with interest at 2.35% per annum
over 3-month LIBOR. The bank loan was fully repaid in August 2013.
In
March 2012, the Group entered into a loan agreement with a bank whereby on March 30, 2012, the Group effectively pledged certain time deposits with a total amount of
RMB658,715,750 to secure a bank loan, totaling US$95,000,000 and bearing interest at 2.19% per annum. The bank loan was fully repaid in April, 2013.
In
April 2013, the Group entered into a loan agreement with a bank whereby on April 8, 2013, the Group effectively pledged certain time deposits with a total amount of
RMB161,000,000 to secure a bank loan, totaling US$25,000,000 carrying a floating rate of interest based on 3-month LIBOR plus 1%. The bank loan was fully repaid in March, 2014.
In
August 2013, the Group entered into a loan agreement with a bank whereby on August 13, 2013, the Group effectively pledged certain time deposits with a total amount of
RMB65,100,000 to secure a bank loan, totaling US$10,000,000 and bearing interest at 1% per annum over 3-month LIBOR. The bank loan was fully repaid in August 2014.
In
April 2014, the Group entered into a banking facility agreement with a bank whereby on April 7, 2014, the Group effectively pledged certain time deposits with a total amount of
RMB152,145,000 to secure a bank loan, totaling US$23,000,000 and bearing interest at 1% per annum over 1-month LIBOR. The bank loan was fully repaid in April 2015.
In
April 2014, the Group entered into a banking facility agreement with a bank whereby on April 24, 2014, the Group effectively pledged certain time deposits with a total amount
of RMB33,000,000 to secure a bank loan, totaling US$5,000,000 and bearing interest at 1% per annum over 1-month LIBOR. The bank loan was fully repaid in April 2015.
In
May 2014, the Group entered into a banking facility agreement with a bank whereby on May 14, 2014, the Group effectively pledged certain time deposits with a total amount of
RMB300,000,000 to secure a bank loan, totaling US$45,000,000 and bearing interest at 3.3877% per annum. The bank loan was fully repaid in October 2014. The pledged time deposits remained outstanding
until May 13, 2015.
In
May 2014, the Group entered into another banking facility agreement with a bank whereby on May 15, 2014, the Group effectively pledged certain time deposits with a total amount
of RMB300,000,000 to secure a bank loan, totaling US$45,000,000 and bearing interest at 2.47% per annum over 3-month LIBOR. The bank loan was fully repaid in February 2015. The pledged time deposits
were released on April 28, 2015.
The
above pledged time deposits were classified as restricted time deposits due to the restrictions in use in due periods.
F-46
Table of Contents
Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
16. Accrued expenses and other liabilities
|
|
|
|
|
|
|
|
|
|
December 31,
2013 |
|
December 31,
2014 |
|
|
|
RMB
|
|
RMB
|
|
Professional fee accruals |
|
|
10,880,372 |
|
|
13,408,151 |
|
Accrued expenses |
|
|
33,384,969 |
|
|
48,246,154 |
|
Payables to employees relating to exercise of options |
|
|
6,673,216 |
|
|
1,899,264 |
|
Other taxes and surcharges |
|
|
3,033,628 |
|
|
3,144,913 |
|
Deposits |
|
|
6,277,082 |
|
|
8,175,481 |
|
Consideration payable for business acquisition (Note 11-(3)) |
|
|
102,000,000 |
|
|
800,000 |
|
Consideration payable for equity investment (Note 9-(5)) |
|
|
20,000,000 |
|
|
|
|
Contingent consideration payable for business acquisition (Note 11-(4)) |
|
|
|
|
|
23,248,000 |
|
Others |
|
|
6,689,920 |
|
|
14,007,167 |
|
|
|
|
|
|
|
|
|
Total |
|
|
188,939,187 |
|
|
112,929,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17. Others, net
The following table summarizes the Group's other income or expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
|
|
2012 |
|
2013 |
|
2014 |
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
Government financial incentives |
|
|
39,993,581 |
|
|
37,707,497 |
|
|
26,052,170 |
|
Exchange gains |
|
|
3,334,352 |
|
|
6,677,643 |
|
|
27,182,781 |
|
Expired game prepaid cards |
|
|
4,428,309 |
|
|
1,555,307 |
|
|
1,656,035 |
|
PRC IIT refunds |
|
|
6,373,716 |
|
|
1,873,323 |
|
|
3,045,780 |
|
Rental income |
|
|
5,230,480 |
|
|
13,744,791 |
|
|
28,041,990 |
|
Platform service fees |
|
|
|
|
|
21,467,065 |
|
|
17,193,261 |
|
Others |
|
|
915,622 |
|
|
654,708 |
|
|
(2,683,895 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
60,276,060 |
|
|
83,680,334 |
|
|
100,488,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
financial incentives are financial benefit granted to certain enterprises by the municipal government to encourage business development in local area. These government
financial incentives are calculated with reference to either the group companies' taxable income or revenue, as the case may be. In order to be eligible for certain government financial incentives,
the Group must meet a number
of criteria, both financial and non-financial. In addition, the Group's qualification is further subject to the discretion of the municipal government to immediately eliminate or reduce these
financial incentives. As there is no further obligation for the Group to perform to encourage companies' business development, government financial incentives are recognized as other income when
received.
Platform
service fees are earned from the technical support service provided to a third party's platform.
F-47
Table of Contents
Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
18. Share-based compensation
On September 6, 2006, the board of directors of the Company approved the Pre-IPO Share Incentive Plan, which was subsequently
supplemented and revised by obtaining the approval from the board of directors of the Company on June 19, 2007. According to the revised Share Incentive Plan, 32,145,000 Class B ordinary
shares were reserved to be issued to any qualified employees, as determined by the Board. On July 4, 2008, the Company's shareholders approved the amendment to the Share Incentive Plan by
changing the option expiry date to the earlier of (i) termination of service with the Company, or (ii) the tenth anniversary of the grant date, unless an
earlier time is set in the option award agreement. The amendment applies to share options granted after July 4, 2008.
On
February 28, 2009, the Company's shareholders approved an amendment to the share incentive plan that effectively increased the number of Class B ordinary shares
authorized for issuance under the share incentive plan by 10,000,000. On November 14, 2009, the Company's shareholders approved a further amendment to the share incentive plan that increased
the number of Class B ordinary shares authorized for issuance under the share incentive plan to 44,645,000. In addition, the option expiry date was changed to the earlier of (i) the
tenth anniversary of the grant date, unless an earlier time is set in the option award agreement, (ii) three months after the termination of service with the Company other than for disability
or death, or (iii) one year after the termination of service with the Company due to disability or death. The amendment applies to share options granted after November 14, 2009.
On
August 14, 2010, the Company's shareholders approved a 2010 Share Incentive Plan, under which 30,000,000 Class B ordinary shares have been reserved for future issuance.
On
November 22, 2013, the Company's shareholders approved a 2013 Share Incentive Plan, under which 2% of the total number of Class B ordinary shares outstanding as of
November 22, 2013, the date when this plan was approved by the Company's board of directors, 5,024,818 shares have been reserved in the award pool for future issuance.
Starting
January 1, 2015, the award pool will be increased by a number on the first day of each year equal to 2% of the then total number of Class B ordinary shares
outstanding, provided that at no time the unissued shares reserved in the award pool immediately after such annual increase shall exceed 5% of the then total number of Class B ordinary shares
outstanding.
The Company granted 4,615,000, 12,700,000 and 200,000 service-based share options to its officers (including directors) and employees
for the years ended December 31, 2012, 2013 and 2014, respectively. These awards generally vest over a four-year term, the vesting schedule of each share option award is determined by the board
of directors.
Share-based
compensation expenses related to service-based share options of RMB60,985,488, RMB69,852,854 and RMB46,382,853 were recognized in the Consolidated Statements of Income and
Comprehensive Income for the years ended December 31, 2012, 2013 and 2014, respectively. The unamortized compensation costs related to unvested awards not yet recognized were RMB57,758,897 as
F-48
Table of Contents
Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
18. Share-based compensation (Continued)
of
December 31, 2014, adjusted for estimated forfeitures, and the weighted average period over which it would be recognized was 2.25 years.
The
summary of service-based share options activities under the Share Incentive Plan as of December 31, 2014, and changes during the year is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Number of
Shares |
|
Weighted
Average
Exercise Price |
|
Weighted
Average
Remaining
Contractual
Term (years) |
|
Aggregate
Intrinsic Value |
|
|
|
|
|
US$
|
|
|
|
US$
|
|
Outstanding as of January 1, 2014 |
|
|
25,927,910 |
|
|
2.96 |
|
|
3.31 |
|
|
24,253,925 |
|
Granted |
|
|
200,000 |
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(1,204,490 |
) |
|
|
|
|
|
|
|
|
|
Forfeited or cancelled |
|
|
(1,723,895 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2014 |
|
|
23,199,525 |
|
|
2.95 |
|
|
2.39 |
|
|
15,242,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest as of December 31, 2014 |
|
|
22,431,529 |
|
|
2.99 |
|
|
2.36 |
|
|
14,534,499 |
|
Exercisable as of December 31, 2014 |
|
|
13,067,655 |
|
|
3.49 |
|
|
1.78 |
|
|
5,904,270 |
|
No
option expired during years ended December 31, 2012, 2013 and 2014.
The
weighted-average grant date fair value of options granted during the years ended December 31, 2012, 2013 and 2014 were RMB4.80 (US$0.76), RMB5.95 (US$0.96) and RMB15.12
(US$2.46) per option, respectively.
The
total intrinsic value of options exercised during the years ended December 31, 2012, 2013 and 2014 were RMB133,116,835, RMB19,681,115 and RMB16,487,975, respectively. The
intrinsic value is calculated as the difference between the closing price of the Company's stock on the date of exercise and the exercise price of the options. The Company expects to issue new
ordinary shares to satisfy share option exercises.
The
estimated fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing method with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
|
|
2012 |
|
2013 |
|
2014 |
|
Risk-free interest rates (%)(1) |
|
|
0.47 |
% |
0.56% - 0.66% |
|
|
1.16 |
% |
Expected life (in years)(2) |
|
|
3.64 |
|
3.63 - 3.64 |
|
|
3.62 |
|
Expected dividend yield (%)(3) |
|
|
3.64 |
% |
3.78% |
|
|
1.67 |
% |
Expected volatility (%)(4) |
|
|
62.61 |
% |
57.11% - 57.71% |
|
|
55.30 |
% |
- (1)
- The
risk-free interest rate is based on the U.S. treasury yield for a term consistent with the expected life of the awards.
F-49
Table of Contents
Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
18. Share-based compensation (Continued)
- (2)
- The
expected life of share options granted with service condition is based on the Company's estimation considering historical exercise patterns, which the
Company believes are representative of future behavior.
- (3)
- The
dividend yield rate is based on historical dividend yield adjusted for management's expectations on future dividend yields.
- (4)
- The
Company estimates the volatility of its common stock at the date of grant based on the historical volatility of the Company's ordinary shares over the
respective expected term preceding the grant date.
Performance-based awards are generally vested over a four-year term. The performance goals and vesting schedule of these awards are
determined by the board of directors. For those awards, an evaluation is made each quarter as to the likelihood of performance criteria being met. Compensation expenses are then adjusted to reflect
the number of shares expected to vest to date. No performance-based options granted during the years ended December 31, 2012, 2013 and 2014.
Share-based
compensation expenses related to performance-based share options of RMB10,159,104, RMB6,040,216 and RMB1,305,230 were recognized in the Consolidated Statements of Income and
Comprehensive Income for the years ended December 31, 2012, 2013 and 2014, respectively. The unamortized compensation costs related to the unvested awards not yet recognized were RMB46,791 as
of December 31, 2014, adjusted for estimated forfeitures and expected to vest performance-based options, and weighted average period over which it would be recognized was 0.39 year.
The
summary of performance-based share options activities under the Share Incentive Plan as of December 31, 2014 and changes during the year is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Number of
Shares |
|
Weighted
Average
Exercise
Price |
|
Weighted
Average
Remaining
Contractual
Term (years) |
|
Aggregate
Intrinsic
Value |
|
|
|
|
|
US$
|
|
|
|
US$
|
|
Outstanding as of January 1, 2014 |
|
|
2,468,905 |
|
|
3.31 |
|
|
0.71 |
|
|
2,243,964 |
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(565,600 |
) |
|
|
|
|
|
|
|
|
|
Forfeited or cancelled |
|
|
(60,110 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2014 |
|
|
1,843,195 |
|
|
3.79 |
|
|
0.49 |
|
|
893,680 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest as of December 31, 2014 |
|
|
1,838,924 |
|
|
3.79 |
|
|
0.49 |
|
|
893,680 |
|
Exercisable as of December 31, 2014 |
|
|
1,804,980 |
|
|
3.76 |
|
|
0.46 |
|
|
918,511 |
|
No
option expired during the years ended December 31, 2012, 2013 and 2014.
F-50
Table of Contents
Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
18. Share-based compensation (Continued)
The total intrinsic value of options exercised during the years ended December 31, 2012, 2013 and 2014 were RMB26,389,075, RMB39,472,482 and RMB8,185,565, respectively. The
intrinsic value is calculated as the difference between the closing price of the Company's stock on the date of exercise and the exercise price of the options.
In 2013, the Company's board of directors approved a grant of restricted shares representing 30% equity interest of a wholly controlled
entity of the Company to the management of the entity as an equity incentive. As of December 31, 2013, the restricted shares were fully vested and the compensation cost amounting to
RMB21,450,000, which was measured at the grant date based on 30% of the fair value of the entity was recorded as expense accordingly. The fair market value of the entity was estimated by using a
combination of the income approach and market approach.
In 2014, the Company's board of directors approved a restructuring plan of its R&D teams, under which five New Entities have been
formed. The Company holds 51% equity interests in these New Entities, and the remaining 49% of each of these five New Entities would be beneficially held by the Company's key R&D employees. The key
R&D employees are required to work for the New Entities during requisite service periods of two or three years.
In
addition to the nominal amount of cash to register the New Entities, the Company contributed extra cash and certain intangible assets to the New Entities, thus effectively granted
share awards of the New Entities to the R&D employees. Given that those entities were newly set up, the fair value of the share awards on grant date approximates 49% of the additionally contributed
cash and intangible assets. The total compensation cost of RMB119.9 million would be amortized over the requisite service periods on a straight-line basis. Accordingly, approximately
RMB3.8 million was recognized as share-based compensation expenses for the year ended December 31, 2014.
19. Taxation
Under the current laws of the Cayman Islands and British Virgin Islands, the Company and its subsidiaries in Cayman Islands and British
Virgin Islands are not subject to tax on their income or capital gain. Additionally, upon payments of dividends by the Company to its shareholders, no Cayman Islands withholding tax will be imposed.
PW USA, Runic Games, Cryptic Studios and Unknown Worlds are generally subject to corporate income tax rates ranging from 15% to 35% at
the federal level and, in some instances, are also subject to tax at the state level. State tax rates vary by jurisdiction. The Group's sales proceeds from online game operation in the State of
Massachusetts and Washington of the U.S. are subject to sales tax at
F-51
Table of Contents
Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
19. Taxation (Continued)
rates
of 6.25% and 6.5%, respectively. For other states where the Group operates its online games, sales tax is not levied according to local tax regulation.
Under the current Hong Kong Inland Revenue Ordinance, the Group's subsidiaries in Hong Kong are subject to 16.5% income tax on their
taxable income generated from operations in Hong Kong. Additionally, payments of dividends from PW Hong Kong to the Company are not subject to any Hong Kong withholding tax. Hong Kong does not levy
turnover tax.
PW Malaysia engages in offshore licensing activity. It is subject to a fix amount corporate income tax of MYR20,000 a year. Perfect
Play engages in onshore business activities, and is subject to a 25% corporate income tax rate. The Group's sales proceeds from online game operation supporting service conducted in Malaysia are
subject to service tax at a rate of 6%.
The Group's subsidiary established in Taiwan is subject to 17% corporate income tax rate (taxable income up to TWD120,000 is exempt).
The Group's sales proceeds from online game operation supporting service conducted in Taiwan are subject to VAT at a rate of 5%.
The fiscal unity PW Universal in Netherlands engages in intra-group licensing and local sales and marketing. The standard corporate
income tax rate is 25%. A lower rate of 20% applies to the first EUR200,000 of taxable income. The Group's sales proceeds from online game operation conducted in the Netherlands are subject to VAT at
a rate of 21%.
The corporate income tax rate applicable to C&C Media and CCO Co., Ltd. is 40.7% in 2012, 38.0% in 2013, 38.0% from
January 1 to March 31, 2014 and 35.6% from April 1 to December 31, 2014. The Group's sales proceeds from online game operation conducted in Japan are subject to consumption
tax at a rate of 5% from January 1 to March 31, 2014 and 8% from April 1 to December 31, 2014.
PW Korea is generally subject to corporate income tax rates ranging from 11.0% to 24.2%. The Group's sales proceeds from online game
operation conducted in Korea are subject to VAT at a rate of 10%.
F-52
Table of Contents
Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
19. Taxation (Continued)
PW Thailand is subject to a corporate income tax rate of 20%. The Group's sales proceeds from online game operation conducted in
Thailand are subject to VAT at a rate of 7%.
For PW Singapore, 75% of the first SGD10,000 of normal chargeable income is exempt from tax, and 50% of the next SGD290,000 is exempt
from tax. The balance of chargeable income is fully taxable at the standard rate of 17%. The Group's sales proceeds from online game operation conducted in Singapore are subject to goods and services
tax at a rate of 7%.
A
Pilot Program for transition from business tax to VAT for revenues from certain industries was launched in Shanghai on January 1, 2012. On
August 1, 2013, all regions in China have launched the pilot program. On June 1, 2014, the pilot program has extended to more industries.
Prior
to the pilot program, the Group's subsidiaries and VIEs incorporated in China were subject to business tax.
After
the launch of the pilot program, the Group's subsidiaries and VIEs incorporated in China are subject to VAT at an effective rate of 6% for revenues from oversea licensing, software
development
and relevant technology consulting services. In addition, according to the applicable tax rules and regulations, being a technology development business and technology export enterprise, an entity may
enjoy VAT exemption for revenues generated from software development and relevant technology consulting services, and oversea licensing, respectively.
For
operation of online games, the tax treatment varies depending on the nature of games and the local tax policies of provinces where the games are operated. In general, the Group's
VIEs incorporated in China are subject to VAT at the rate of 6% or 17% (with refund on the portion of tax payment exceeds an effective tax rate of 3%) or Business Tax at the rate of 5% plus related
surcharges on revenues from online game operations.
On
March 16, 2007, the National People's Congress of PRC enacted a corporate income tax law, under which foreign-invested enterprises and domestic
companies would be subject to corporate income tax at a uniform rate of 25%. There will be a five-year transition period for foreign-invested enterprises, during which foreign-invested enterprises are
allowed to continue to enjoy their existing preferential tax treatments. Preferential tax treatments will continue to be granted to entities which conduct businesses in certain encouraged sectors and
to entities otherwise classified as "software enterprises" and/or "high and new technology enterprises," whether foreign-invested enterprises or domestic companies.
Under
the corporate income tax law, enterprises that were established before March 16, 2007 and already enjoyed preferential tax treatments will continue to enjoy them
(i) in the case of preferential
F-53
Table of Contents
Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
19. Taxation (Continued)
tax
rates, for a period of five years from January 1, 2008 to December 31, 2012, or (ii) in the case of preferential tax exemption or reduction for a specified term, until the
expiration of such term.
PW
Network has been qualified as a "high and new technology enterprise" under the corporate income tax law from 2008 to 2017. Therefore, PW Network enjoyed a preferential tax rate of 15%
from 2012 to 2014 as a "high and new technology enterprise."
PW
Software has been qualified as a "high and new technology enterprise" from 2008 to 2017. Therefore, PW Software was entitled to the tax exemption in 2008 and 2009 and a 50% reduction
of its applicable corporate income tax rate of 15% from 2010 to 2012, and enjoyed a preferential tax rate of 15% in 2013 and 2014 as a "high and new technology enterprise."
Shanghai
PW Network has been qualified as having "software enterprise" status from 2009 to 2013, and "high and new technology enterprise" status from 2014 to 2016. Therefore, Shanghai PW
Network was entitled to the tax exemption in 2009 and 2010 and was subject to a 50% income tax reduction to a rate of 12.5% from 2011 to 2013 as a "software enterprise," and enjoyed a preferential tax
rate of 15% in 2014.
PW
Digital Software and PW Digital have been qualified as having "software enterprise" status from 2010 to 2014. PW Digital Software and PW Digital were entitled to the tax exemption in
2010 and 2011 and were subject to a 50% income tax reduction to a rate of 12.5% in 2012, 2013 and 2014.
PW
Game Software has been qualified as a "software enterprise" from 2010 to 2014. PW Game Software achieved cumulative taxable income for the year ended December 31, 2013, and
therefore was entitled to the tax exemption in 2013 and 2014. PW Game Software will be subject to a 50% income tax reduction to a rate of 12.5% from 2015 to 2017, provided that it continues to be
qualified as a "software enterprise" during such period.
Hefei
PW Network has been qualified as having "software enterprise" status from 2013. Hefei PW Network achieved cumulative taxable income for the year ended December 31, 2013, and
therefore was entitled to the tax exemption in 2013 and 2014 as a "software enterprise." Hefei PW Network will be subject to a 50% income tax reduction to a rate of 12.5% from 2015 to 2017, provided
that it continues to be qualified as a "software enterprise" during such period.
Chengdu
PW Network has been qualified as having "software enterprise" status from 2010. Chengdu PW Network achieved cumulative taxable income for the year ended December 31, 2014,
and therefore was entitled to the tax exemption in 2014. Chengdu PW Network will continue to enjoy the tax exemption in 2015 and be subject to a 50% income tax reduction to a rate of 12.5% from 2016
to 2018, provided that it continues to be qualified as a "software enterprise" during such period.
Except
for PW Network, PW Software, Shanghai PW Network, PW Digital Software, PW Digital, PW Game Software, Hefei PW Network and Chengdu PW Network, the Group's other major China-based
subsidiaries and VIEs are subject to a 25% corporate income tax rate.
Under the PRC corporate income tax law which went into effect on January 1, 2008, dividends attributable to the earnings
generated after January 1, 2008 and payable by a foreign-invested
F-54
Table of Contents
Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
19. Taxation (Continued)
enterprise
in China to its foreign investors are subject to a 10% withholding tax unless any such foreign investor's jurisdiction of incorporation has a tax treaty with China that provides for a
different withholding arrangement. According to the Mainland and Hong Kong Taxation Arrangement, dividends paid by a foreign-invested enterprise in China to its direct holding company in Hong Kong
will be subject to withholding tax at a rate of no more than 5% (if the foreign investor owns directly at least 25% of the shares of the foreign-invested enterprise). As PW Hong Kong, which holds 100%
equity interest of PW Software, Shanghai PW Software and PW Game Software, is a Hong Kong tax resident, dividends declared by the Group's aforesaid PRC subsidiaries to PW Hong Kong should be subject
to the withholding tax at a rate of 5%.
For
the potential distribution of dividends to the Company's shareholders, the Group accrues and records the withholding income tax for all standalone undistributed earnings of the
Group's PRC subsidiaries. For the years ended December 31, 2012, 2013 and 2014, withholding taxes of RMB19,645,562, RMB26,540,876 and RMB21,295,237 were accrued and recorded as deferred tax
liabilities, respectively. For the Group's VIEs, the Group will continue to indefinitely reinvest the remaining undistributed earnings to fulfill working capital needs and non-cancellable contractual
commitments, to fund capital expenditures to expand the Group's business in China. The unrecognized deferred tax liabilities related to the withholding tax on undistributed earnings of the Group's
VIEs at a rate of 5% as of December 31, 2013 and 2014 were approximately RMB69,817,831 and RMB77,909,816, respectively.
The license fees and royalties received from the Group's licensees in various jurisdictions outside of the PRC are subject to
withholding taxes at various tax rates. The
Group recognized RMB9,888,633, RMB8,247,703 and RMB12,525,132 as income tax expenses related to withholding taxes during the years ended December 31, 2012, 2013 and 2014, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
|
|
2012 |
|
2013 |
|
2014 |
|
|
|
Overseas
Entities |
|
PRC
Entities |
|
Overseas
Entities |
|
PRC
Entities |
|
Overseas
Entities |
|
PRC
Entities |
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
|
(Loss) / income from continuing operation before income tax expenses |
|
|
(2,145,798 |
) |
|
695,723,664 |
|
|
(66,339,474 |
) |
|
558,299,323 |
|
|
(80,189,016 |
) |
|
657,408,587 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current income tax expense / (credit) |
|
|
21,940,668 |
|
|
95,772,411 |
|
|
2,752,148 |
|
|
43,179,801 |
|
|
(5,609,205 |
) |
|
39,645,558 |
|
Deferred income tax (credit) / expense |
|
|
(4,623,738 |
) |
|
(26,504,171 |
) |
|
(441,662 |
) |
|
(10,281,072 |
) |
|
60,301,957 |
|
|
(6,664,729 |
) |
Foreign withholding tax expense |
|
|
5,520,677 |
|
|
4,367,956 |
|
|
4,749,961 |
|
|
3,497 ,742 |
|
|
10,842,776 |
|
|
1,682,356 |
|
PRC withholding tax on undistributed earnings |
|
|
19,645,562 |
|
|
|
|
|
26,540,876 |
|
|
|
|
|
21,295,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense from continuing operation |
|
|
42,483,169 |
|
|
73,636,196 |
|
|
33,601,323 |
|
|
36,396,471 |
|
|
86,830,765 |
|
|
34,663,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-55
Table of Contents
Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
19. Taxation (Continued)
Reconciliation
of the difference between PRC statutory income tax rate and the Group's effective income tax rate for the years ended December 31, 2012, 2013 and 2014 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended
December 31, |
|
|
|
2012 |
|
2013 |
|
2014 |
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
Statutory income tax rate |
|
|
25 |
% |
|
25 |
% |
|
25 |
% |
Effect of tax incentive and holiday |
|
|
(15.9 |
)% |
|
(17.2 |
)% |
|
(19.8 |
)% |
Effect of tax-exempt entities |
|
|
0.3 |
% |
|
0.1 |
% |
|
(3.2 |
)% |
Change in valuation allowance |
|
|
6.5 |
% |
|
1.5 |
% |
|
23.5 |
% |
Effect of the overseas withholding taxes |
|
|
1.5 |
% |
|
1.7 |
% |
|
2.2 |
% |
Effect of the PRC withholding tax on undistributed earnings |
|
|
3.0 |
% |
|
5.4 |
% |
|
3.7 |
% |
Effect of permanent difference |
|
|
(1.0 |
)% |
|
1.8 |
% |
|
(6.0 |
)% |
Others |
|
|
(1.9 |
)% |
|
(4.1 |
)% |
|
(4.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate from continuing operation |
|
|
17.5 |
% |
|
14.2 |
% |
|
21.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table sets forth the computation of the effects of the tax incentive and holidays granted to the subsidiaries and VIEs of the Company for the years ended
December 31, 2012, 2013 and 2014, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
|
|
2012 |
|
2013 |
|
2014 |
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
Effect of tax incentive and holiday |
|
|
105,263,201 |
|
|
84,647,199 |
|
|
114,169,921 |
|
Basic net earnings per ordinary share effect |
|
|
0.44 |
|
|
0.35 |
|
|
0.46 |
|
F-56
Table of Contents
Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
19. Taxation (Continued)
|
|
|
|
|
|
|
|
|
|
December 31,
2013 |
|
December 31,
2014 |
|
|
|
RMB
|
|
RMB
|
|
Deferred tax assets: |
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
|
92,659,595 |
|
|
160,956,398 |
|
Current reserves and accruals |
|
|
43,205,785 |
|
|
57,885,594 |
|
Depreciation and amortization |
|
|
10,898,028 |
|
|
14,055,466 |
|
R&D Credit |
|
|
30,024,984 |
|
|
39,799,093 |
|
Others |
|
|
22,863,742 |
|
|
12,076,003 |
|
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
199,652,134 |
|
|
284,772,554 |
|
Less: Valuation allowance |
|
|
(75,093,072 |
) |
|
(220,620,764 |
) |
|
|
|
|
|
|
|
|
Total deferred tax assets net off valuation allowance |
|
|
124,559,062 |
|
|
64,151,790 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
PRC withholding tax on undistributed earnings |
|
|
86,911,299 |
|
|
108,206,536 |
|
Intangible assets arisen from business combination |
|
|
38,695,869 |
|
|
26,987,012 |
|
Others |
|
|
8,316,011 |
|
|
15,155,280 |
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
133,923,179 |
|
|
150,348,828 |
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities |
|
|
(9,364,117 |
) |
|
(86,197,038 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
net operating loss carryforwards are resulting from operating losses of some subsidiaries and VIEs of the Group that had losses at their individual entity level.
As
of December 31, 2014, the Group's U.S. subsidiaries had federal and state net operating loss carryforwards of approximately RMB225,160,024 and RMB155,883,915, respectively, to
offset future taxable income. The federal and state net operating loss carryforwards, if not utilized, will expire beginning in 2030 and 2029, respectively. Federal and California tax laws impose
restrictions on the utilization of net operating loss carryforwards in the event of an ownership change, as defined in Section 382 of the Internal Revenue Code. The Company's ability to utilize
its net operating loss carryforwards are subject to limitations under these provisions.
As
of December 31, 2014, the Group's U.S. subsidiaries, had federal and state R&D credit carryforwards of RMB32,149,195 and RMB32,659,569, respectively, to offset future tax
liability. The federal R&D credit, if not utilized, will expire beginning 2029.
Valuation
allowance assessment is based on the weight of all available evidences, both positive and negative. A valuation allowance is provided when positive evidence is insufficient to
overcome a significant piece of negative evidence such as a cumulative loss in recent years. In considering the relative impact of negative and positive evidence, the Company considered factors
including (i) future reversals of existing taxable temporary differences; (ii) future taxable income exclusive of reversing temporary differences and carryforwards; and (iii) tax
planning strategies. The weight given to the potential effect of negative and positive evidence was commensurate with the extent to which it can be objectively verified. PW USA and its wholly owned
subsidiary filed a combined income tax return, and
F-57
Table of Contents
Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
19. Taxation (Continued)
generated
cumulative losses in recent years. The Company determined that it is more likely than not that the Company would not generate sufficient taxable income in the future to utilize such deferred
tax assets carryforwards. Therefore, the Company provided a full amount of valuation allowance amounting to RMB137,801,919 for the related deferred tax assets as of December 31, 2014.
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
|
|
2012 |
|
2013 |
|
2014 |
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
Balance at beginning of the year |
|
|
51,217,697 |
|
|
86,793,131 |
|
|
75,093,072 |
|
Current year addition |
|
|
45,108,417 |
|
|
16,773,539 |
|
|
162,033,210 |
|
Current year reversal |
|
|
(9,532,983 |
) |
|
(7,836,531 |
) |
|
(16,505,518 |
) |
Disposal of PW Literature |
|
|
|
|
|
(20,637,067 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of the year |
|
|
86,793,131 |
|
|
75,093,072 |
|
|
220,620,764 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table summarizes the activity related to the Group's uncertain tax benefits from January 1, 2012 to December 31, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
|
|
2012 |
|
2013 |
|
2014 |
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
Balance at January 1 |
|
|
10,517,130 |
|
|
12,161,522 |
|
|
14,610,829 |
|
Tax positions related to current year: |
|
|
|
|
|
|
|
|
|
|
Additions |
|
|
798,075 |
|
|
2,342,288 |
|
|
2,687,716 |
|
Tax positions related to prior year: |
|
|
|
|
|
|
|
|
|
|
Additions |
|
|
878,919 |
|
|
967,577 |
|
|
259,253 |
|
Reductions |
|
|
|
|
|
|
|
|
|
|
Settlements |
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
(32,602 |
) |
|
(860,558 |
) |
|
645,457 |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31 |
|
|
12,161,522 |
|
|
14,610,829 |
|
|
18,203,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2012, 2013 and 2014, the Group's U.S. subsidiaries, primary Cryptic Studios, recorded unrecognized tax benefits related to R&D credits. The Group does not
anticipate the uncertain tax positions to significantly increase or decrease within twelve months of December 31, 2014.
F-58
Table of Contents
Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
20. Employee benefits
The Group is required to accrue monthly for staff welfare benefits for the full-time employees of its subsidiaries and the consolidated VIEs incorporated in the PRC and make
contributions to the government and relevant state sponsored pension and medical plans with all the amounts accrued. Such staff welfare benefits include medical care, welfare subsidies, unemployment
insurance, pension benefits and housing fund and are determined based on certain percentages of the employees' respective salaries in accordance with relevant regulations. The amount of such cash
contributions may increase due to the Group's expanding workforce as the Group grows its business or increase wage levels. However, the Group does not expect that such increase will have a material
effect on its liquidity. The total amounts charged to the Consolidated Statements of Income and Comprehensive Income for such employee benefits amounted to approximately RMB140,611,985, RMB168,494,855
and RMB196,560,871 for the years ended December 31, 2012, 2013 and 2014, respectively. The PRC government is responsible for the medical benefits and ultimate pension liability to these
employees and the Group's obligation is limited to the amounts contributed.
21. Net earnings per share
The following table sets forth the computation of basic and diluted earnings per ordinary share for the years ended December 31, 2012, 2013 and 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
|
|
2012 |
|
2013 |
|
2014 |
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
Amount attributable to the Company's shareholders: |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, net of tax |
|
|
570,864,921 |
|
|
420,447,426 |
|
|
471,390,134 |
|
(Loss) / income from discontinued operations, net of tax |
|
|
(30,214,733 |
) |
|
121,966,207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
540,650,188 |
|
|
542,413,633 |
|
|
471,390,134 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
Weighted-average number of ordinary shares outstanding, basic |
|
|
239,119,233 |
|
|
243,958,465 |
|
|
247,943,431 |
|
Effect of dilutive share options |
|
|
3,376,427 |
|
|
3,754,433 |
|
|
4,995,976 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of ordinary shares outstanding, diluted |
|
|
242,495,660 |
|
|
247,712,898 |
|
|
252,939,407 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per ordinary share , basic |
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
|
2.39 |
|
|
1.72 |
|
|
1.90 |
|
Discontinued operations |
|
|
(0.13 |
) |
|
0.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earnings per ordinary share, basic |
|
|
2.26 |
|
|
2.22 |
|
|
1.90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per ordinary share, diluted |
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
|
2.35 |
|
|
1.70 |
|
|
1.86 |
|
Discontinued operations |
|
|
(0.12 |
) |
|
0.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earnings per ordinary share, diluted |
|
|
2.23 |
|
|
2.19 |
|
|
1.86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-59
Table of Contents
Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
21. Net earnings per share (Continued)
For
the years ended December 31, 2012, 2013 and 2014, options to purchase ordinary shares that were anti-dilutive and excluded from the calculation of diluted net income per share
were approximately 13,602,359, 13,864,973 and 9,752,223, respectively.
22. Segment information
The Group has determined that it operates in two principal operating segments: 1) PRC operations and 2) International operations. Information regarding the business
segments provided to the Group's CODM on regular basis is at the revenue level or segment cost and operating expenses level. The Group's CODM currently does not considers: (1) revenues arising
from intercompany transactions between different segments, primarily the intercompany intellectual property rights transfers, or (2) share-based compensation charges, in measuring profit or
loss of the operating segments. In August 2011 and December 2013, the Group sold its film and television business segment to a related party and sold its online reading business, which was included in
the PRC operating segment prior to sale, respectively. Accordingly, the results of operations for film and television business and online reading business have been reclassified as discontinued
operations for all periods presented. The Group currently does not allocate assets to its segments, as its CODM does not use such information to allocate resources to or evaluate the performance of
the operating segments.
The
following table presents summary information by segments for the years ended December 31, 2012, 2013 and 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2012 |
|
|
|
PRC |
|
International |
|
Consolidated |
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
Revenues |
|
|
2,093,057,299 |
|
|
677,528,756 |
|
|
2,770,586,055 |
|
Segment costs and operating expenses |
|
|
(1,472,777,225 |
) |
|
(660,726,950 |
) |
|
(2,133,504,175 |
) |
|
|
|
|
|
|
|
|
|
|
|
Segment operating profit |
|
|
620,280,074 |
|
|
16,801,806 |
|
|
637,081,880 |
|
Share-based compensation costs |
|
|
|
|
|
|
|
|
(71,144,592 |
) |
Total other income |
|
|
|
|
|
|
|
|
127,640,578 |
|
|
|
|
|
|
|
|
|
|
|
|
Income before tax |
|
|
|
|
|
|
|
|
693,577,866 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2013 |
|
|
|
PRC |
|
International |
|
Consolidated |
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
Revenues |
|
|
2,292,571,038 |
|
|
760,091,955 |
|
|
3,052,662,993 |
|
Segment costs and operating expenses |
|
|
(1,829,631,361 |
) |
|
(809,198,909 |
) |
|
(2,638,830,270 |
) |
|
|
|
|
|
|
|
|
|
|
|
Segment operating profit |
|
|
462,939,677 |
|
|
(49,106,954 |
) |
|
413,832,723 |
|
Share-based compensation costs |
|
|
|
|
|
|
|
|
(75,893,070 |
) |
Total other income |
|
|
|
|
|
|
|
|
154,020,196 |
|
|
|
|
|
|
|
|
|
|
|
|
Income before tax |
|
|
|
|
|
|
|
|
491,959,849 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-60
Table of Contents
Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
22. Segment information (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2014 |
|
|
|
PRC |
|
International |
|
Consolidated |
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
Revenues |
|
|
3,225,119,984 |
|
|
618,103,420 |
|
|
3,843,223,404 |
|
Segment costs and operating expenses |
|
|
(2,615,520,256 |
) |
|
(835,277,187 |
) |
|
(3,450,797,443 |
) |
|
|
|
|
|
|
|
|
|
|
|
Segment operating profit |
|
|
609,599,728 |
|
|
(217,173,767 |
) |
|
392,425,961 |
|
Share-based compensation costs |
|
|
|
|
|
|
|
|
(51,494,263 |
) |
Total other income |
|
|
|
|
|
|
|
|
236,287,873 |
|
|
|
|
|
|
|
|
|
|
|
|
Income before tax |
|
|
|
|
|
|
|
|
577,219,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic
information for the years ended December 31, 2012, 2013, and 2014 is based on the location of the customers. Revenues from external customers by geographic areas were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
|
|
2012 |
|
2013 |
|
2014 |
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
Domestic |
|
|
1,925,177,127 |
|
|
2,150,762,144 |
|
|
3,059,627,935 |
|
North America |
|
|
445,908,814 |
|
|
481,099,025 |
|
|
369,968,880 |
|
Other international regions |
|
|
399,500,114 |
|
|
420,801,824 |
|
|
413,626,589 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,770,586,055 |
|
|
3,052,662,993 |
|
|
3,843,223,404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Group's majority long-lived assets are located in the PRC, no geographic information are presented.
23. Dividend
On March 10, 2013, the Company's board of directors declared annual cash dividends to the Company's shareholders of record as of the close of business on April 8, 2013, at
US$0.09 per Class A or Class B ordinary share, or US$0.45 per ADS, each representing five Class B ordinary shares of the Company. On April 15, 2013, the Company distributed
the dividends which amounted to RMB137,138,046.
On
March 8, 2014, the Company's board of directors declared an annual cash dividends in the aggregate amount of approximately US$24 million to its shareholders of record as
of the close of business on April 3, 2014, at US$0.096 per Class A or Class B ordinary share, or US$0.48 per ADS, each representing five Class B ordinary shares of the
Company. On April 15, 2014, the Company distributed the dividends which amounted to RMB146,431,373.
F-61
Table of Contents
Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
24. Related party transactions
The table below sets forth the major related parties and their relationships with the Group as of December 31, 2014:
|
|
|
Company name
|
|
Relationship with the Group |
Beijing Jiuzhou Tianyuan Investment Management Co., Ltd. ("Jiuzhou Tianyuan") |
|
Equity owner of PW Network |
Beijing Ever Joy Pictures Co., Ltd. |
|
Under the control of Mr. Michael Yufeng Chi |
Perfect Pictures and Media Group Co., Ltd. ("PW Pictures"), formerly known as Perfect World (Beijing) Pictures Co., Ltd. |
|
Under the control of Mr. Michael Yufeng Chi |
SB Asia Investment Fund II L.P. ("SAIF") |
|
One of the Company's Independent Directors is the Partner of SAIF |
Zhizhu Network |
|
An investee of the Company |
During
the years ended December 31, 2012, 2013 and 2014, significant related party transactions were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
|
|
2012 |
|
2013 |
|
2014 |
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
Marketing services provided by Zhizhu Network |
|
|
925,000 |
|
|
3,388,750 |
|
|
3,217,275 |
|
Office rental income from PW Pictures |
|
|
680,970 |
|
|
6,261,059 |
|
|
10,230,248 |
|
Copyrights purchased from minor investees |
|
|
|
|
|
|
|
|
9,058,333 |
|
Short-term loans to minor investees |
|
|
|
|
|
|
|
|
2,000,000 |
|
Prepayments to minor investees for game licenses |
|
|
|
|
|
3,000,000 |
|
|
3,800,000 |
|
Marketing services provided by minor investees |
|
|
|
|
|
|
|
|
2,337,942 |
|
As
of December 31, 2013 and 2014, outstanding amount due from/to related parties were as follows:
|
|
|
|
|
|
|
|
|
|
December 31, 2013 |
|
December 31, 2014 |
|
|
|
RMB
|
|
RMB
|
|
Prepayment to Zhizhu Network for marketing service |
|
|
656,136 |
|
|
1,553,200 |
|
Prepayment to minor investees for game licenses |
|
|
2,666,667 |
|
|
3,800,000 |
|
Short-term loans to minor investees |
|
|
|
|
|
2,000,000 |
|
Others |
|
|
70,286 |
|
|
28,212 |
|
|
|
|
|
|
|
|
|
Total |
|
|
3,393,089 |
|
|
7,381,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to Zhizhu Network for marketing service |
|
|
41,750 |
|
|
770,475 |
|
Due to PW Pictures for office rental deposit |
|
|
50,000 |
|
|
50,000 |
|
Investment payable to minor investee |
|
|
|
|
|
1,600,000 |
|
Due to minor investees for marketing service |
|
|
|
|
|
148,400 |
|
Due to minor investee for game licenses |
|
|
|
|
|
300,000 |
|
|
|
|
|
|
|
|
|
Total |
|
|
91,750 |
|
|
2,868,875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-62
Table of Contents
Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
25. Commitments and contingencies
Contractual commitments related to office rental, leases signed for co-location services and server rentals, leasehold improvement,
building renovation and other purchase obligation are presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office Rental |
|
Co-location &
Server Rental |
|
Other Purchase
Obligation |
|
Total |
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
|
2015 |
|
|
72,322,634 |
|
|
24,555,835 |
|
|
125,515,088 |
|
|
222,393,557 |
|
2016 |
|
|
53,169,862 |
|
|
87,680 |
|
|
7,004,852 |
|
|
60,262,394 |
|
2017 |
|
|
40,390,061 |
|
|
|
|
|
7,148,150 |
|
|
47,538,211 |
|
2018 |
|
|
37,477,350 |
|
|
|
|
|
4,301,150 |
|
|
41,778,500 |
|
2019 |
|
|
7,405,490 |
|
|
|
|
|
4,301,150 |
|
|
11,706,640 |
|
Thereafter |
|
|
1,966,094 |
|
|
|
|
|
12,309,400 |
|
|
14,275,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
212,731,491 |
|
|
24,643,515 |
|
|
160,579,790 |
|
|
397,954,796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
rental expenses including server leasing rental and office rental were approximately RMB158,841,427, RMB203,391,941 and RMB205,077,566 for the years ended December 31, 2012,
2013 and 2014, respectively, and were charged to the Consolidated Statements of Income and Comprehensive Income when incurred.
In
2011, the Group entered into a limited partnership agreement to invest up to RMB643.5 million in a VC Fund over a nine-year period as a limited partner. The VC Fund is managed
by one general partner unrelated to the Group and is focusing on companies with high-growth potentials in certain technology, media and telecommunications sectors. In March 2013, the Group increased
its committed capital for an additional RMB396.0 million into the VC Fund, and the investment term was changed to 12 years. As of December 31, 2014, the Group has contributed
RMB615.7 million to the VC Fund. The remaining committed capital of RMB423.8 million will be contributed over the remaining investment term upon the capital call by the general partner.
In
June 2014, the Group entered into an agreement to purchase office premises in Chongqing, China at a total price of approximately RMB104.9 million. The Group prepaid
RMB5.0 million as a deposit as of December 31, 2014. The purchase was completed in April 2015.
The Group is subject to a variety of claims and suits that arise from time to time in the ordinary course of its business.
In
December 2013, Shanghai Xuanting Entertainment Information Technology Co., Ltd., an affiliate of Shanda Interactive Entertainment Limited, filed a complaint against PW
Literature, alleging that software developed by PW Literature infringed its copyright in a number of novels. The case has not gone to trial as of December 31, 2014. The Group believes the case
are without merit and intend to
defend the actions vigorously. Regardless of the outcome of this lawsuit, the Group believes that such proceeding, when finally resolved, is unlikely to have a material adverse effect on the Group's
F-63
Table of Contents
Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
25. Commitments and contingencies (Continued)
results
of operations, financial position and cash flows. The possible range of loss cannot be estimated since the case is still at its early stage.
In
May 2014, Uniloc USA, Inc. and Uniloc Uxembourg S.A. sued PW USA for patent infringement in the United State District Court for the District of Texas. The plaintiffs
alleged that the product activation system and customer software activation/registration process employed by PW USA infringed their patents. The Group believes that the case is without merit and
intend to defend vigorously. The Group does not expect this pending proceeding to have a material adverse effect on the Group's results of operations, financial position and cash flows, even if it is
determined against the Group. The possible range of loss cannot be estimated since the case is still at its early stage.
The
Group did not record any other legal contingencies as of December 31, 2014.
26. Restricted net assets
Relevant PRC laws and regulations permit payments of dividends by the subsidiaries and the VIEs incorporated in PRC only out of their retained earnings, if any, as determined in
accordance with PRC accounting standards and regulations. Additionally, the Company's subsidiaries and VIEs can only distribute dividends upon approval of the shareholders after they have met the PRC
requirements for appropriation to statutory reserve. The general reserve fund and statutory surplus reserve (see
Note 3-(22)) require annual appropriations of 10% of net after-tax income should be set aside prior to payment of any dividends, unless such reserve funds have reached 50% of its respective
registered capital. As a result of these and other restrictions under PRC laws and regulations, the PRC subsidiaries and VIEs are restricted in their ability to transfer a portion of their net assets
to the Company either in the form of dividends, loans or advances. The restricted portion amounted to approximately RMB943.0 million or 19.4% of the Company's total consolidated net assets as
of December 31, 2014. Of the total restricted net assets, RMB764.8 million was attributed to the Company's PRC subsidiaries and RMB178.2 million was attributed to the Company's
VIEs. The Company requires cash resources from its PRC subsidiaries and VIEs to pay dividends to the Company's shareholders. There were immaterial undistributed retained earnings by the equity
accounted investees in the consolidated retained earnings because majority of them have been loss making.
27. Subsequent events
The Company's board of directors received a preliminary non-binding proposal letter dated December 31, 2014 from the Company's founder and chairman of the board of directors,
Mr. Michael Yufeng Chi, to acquire all of the Company's outstanding ordinary shares not already directly or indirectly owned by him in a going private transaction for US$20 per ADS in cash, or
US$4 per ordinary share in cash. The board of directors of the Company formed a special committee of independent directors on January 2, 2015 to consider the proposal.
On
April 26, 2015, the Company entered into a merger agreement with Perfect Peony Holding Company Limited, or Parent (an entity controlled by Mr. Michael Yufeng
Chi), and Perfect World Merger Company Limited, or Merger Sub (a wholly owned subsidiary of the Parent). Subject to satisfaction of the merger agreement's terms and conditions, Merger Sub will
merge with and into the
F-64
Table of Contents
Perfect World Co., Ltd.
Notes to the Consolidated Financial Statements (Continued)
(Amounts expressed in Renminbi Yuan unless otherwise stated)
27. Subsequent events (Continued)
Company,
with the Company continuing as the surviving corporation and a wholly owned subsidiary of Parent (the "Merger"). Each of the Company's ordinary shares or ADSs will be cancelled in
exchange for the right to receive US$4.04 per ordinary share or US$20.20 per ADS in cash without interest, except for shares (including such shares represented by ADSs) already directly or indirectly
owned by Mr. Michael Yufeng Chi, and shares held by shareholders who have validly exercised and not effectively withdrawn or lost their rights to dissent from the Merger. The Company's board of
directors has approved the Merger, which is subject to approval by the Company's shareholders.
F-65
Exhibit 8.1
List of Subsidiaries and Consolidated Entities of Perfect World Co., Ltd.
Wholly Owned Subsidiaries
1. Perfect Online Holding Limited, a Hong Kong company
2. Beijing Perfect World Software Co., Ltd., a PRC company
3. Beijing Perfect World Digital Entertainment Software Co., Ltd., a PRC company
4. Chengdu Perfect World Software Co., Ltd., formerly known as Chengdu InterServ Information and Technology Co., Ltd., a PRC company
5. Shanghai Perfect World Software Co., Ltd., a PRC company
6. Beijing Perfect World Game Software Co., Ltd., a PRC company
7. Perfect Sky Online Co., Limited, a Hong Kong company
8. Global InterServ (Caymans) Inc., a Cayman Islands company
9. InterServ Information and Technology (Shanghai) Co., Ltd., a PRC company
10. Perfect World Interactive Entertainment Co., Ltd., a Cayman Islands company
11. Perfect Entertainment Zone N.V., a Netherlands Antilles company
12. Perfect World Universal Coöperatieve U.A., a Netherlands company
13. Perfect World Europe B.V., a Netherlands company
14. Perfect World Entertainment Inc., a Delaware, United States Corporation
15. Cryptic Studios, Inc., a California, United States Corporation
16. C&C Media Co., Ltd., a Japanese company
17. CCO Co., Ltd., a Japanese company
18. Perfect Game Holding Limited, a British Virgin Islands company
19. Perfect Management Holding Limited, a British Virgin Islands company
20. Happy Moment Holding Limited, a British Virgin Islands company
21. Perfect Star Co., Ltd., a Malaysia company
22. Perfect World Interactive Technology Co., Ltd., a Taiwan company
23. Happy Fantasy Limited, a British Virgin Islands company
24. Perfect World Korea Co., Ltd., formerly known as NGL Co., Ltd., a Korea company
25. Perfect Play SDN. BHD., a Malaysia company
26. Perfect World (Thailand) Co., Ltd., a Thailand company
27. Perfect World Games (Singapore) Pte. Ltd., a Singapore company
28. Zongheng Limited, a Cayman Islands company
29. Perfect World Games Online Limited, formerly known as Zongheng Online LIMITED, a Hong Kong company
1
30. Fedeen Games Limited, a Hong Kong company
31. Huanxiang Zongheng Software Technology Co., Ltd., a PRC company
Majority-Owned Subsidiaries
32. Runic Games, Inc., a Delaware, United States Corporation
33. Unknown Worlds Entertainment, Inc., a California, United States Corporation
Affiliated Entities Consolidated in the Registrants Financial Statement
34. Beijing Perfect World Network Technology Co., Ltd., a PRC company
35. Shanghai Perfect World Network Technology Co., Ltd., a PRC company
36. Chengdu Perfect World Network Technology Co., Ltd., a PRC company
37. Beijing Perfect World Digital Entertainment Co., Ltd., a PRC company
38. Chengdu Ye Net Science and Technology Development Co., Ltd., a PRC company
39. Hefei Perfect World Network Technology Co., Ltd., a PRC company
40. Beijing Perfect Moment Network Technology Co., Ltd., formerly known as Beijing Perfect Moment Pictures Co., Ltd., a PRC company
41. Tianjin Trendsters Investment Co., Ltd., a PRC company
42. Beijing Perfect World Digital Technology Co., Ltd., a PRC company
43. Wuhu Huitian Shengshi Network Technology Co., Ltd., a PRC company
44. Guangdong Perfect World Educational Investment Co., Ltd., a PRC company
45. Chongqing Perfect World Interactive Technology Co., Ltd., a PRC company
46. Fuzhou Online Game Information Technology Co., Ltd., a PRC company
47. Fedeen Games (Shanghai) Co., Ltd., a PRC company
48. Chongqing MeiQi Interactive Technology Co., Ltd., a PRC company
49. Chongqing Star Entertainment Co., Ltd., a PRC company
50. Beijing Perfect World Software Technology Development Co., Ltd., a PRC company
51. Freejoy Technology (Chongqing) Co., Ltd., a PRC company
52. Chongqing Enlightron Games Technology Co., Ltd., a PRC company
53. Tianjin Ledo Interactive Technology Co., Ltd., a PRC company
54. Chongqing Zulong Entertainment Technology Co., Ltd., a PRC company
55. Chongqing Superpop Interactive Technology Co., Ltd., a PRC company
56. Arc Games Co., Ltd., a PRC company
57. Tianjin Ledo Interactive Software Technology Co., Ltd., a PRC company
2
Exhibit 12.1
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Robert Hong Xiao, certify that:
1. I have reviewed this annual report on Form 20-F of Perfect World Co., Ltd.;
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 companys other certifying officer(s) 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 companys 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 companys 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 companys internal control over financial reporting; and
5. The companys other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the companys auditors and the audit committee of the companys board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the companys 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 companys internal control over financial reporting.
Date: April 30, 2015
By: |
/s/ Robert Hong Xiao |
|
Name: |
Robert Hong Xiao |
|
Title: |
Chief Executive Officer |
|
Exhibit 12.2
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Kelvin Wing Kee Lau, certify that:
1. I have reviewed this annual report on Form 20-F of Perfect World Co., Ltd.;
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 companys other certifying officer(s) 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 companys 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 companys 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 companys internal control over financial reporting; and
5. The companys other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the companys auditors and the audit committee of the companys board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the companys 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 companys internal control over financial reporting.
Date: April 30, 2015
By: |
/s/ Kelvin Wing Kee Lau |
|
Name: |
Kelvin Wing Kee Lau |
|
Title: |
Chief Financial Officer |
|
Exhibit 13.1
Certification by the Chief Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of Perfect World Co., Ltd. (the Company) on Form 20-F for the year ended December 31, 2014 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Robert Hong Xiao, Chief Executive Officer of the Company, hereby 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: April 30, 2015
By: |
/s/ Robert Hong Xiao |
|
Name: |
Robert Hong Xiao |
|
Title: |
Chief Executive Officer |
|
Exhibit 13.2
Certification by the Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of Perfect World Co., Ltd. (the Company) on Form 20-F for the year ended December 31, 2014 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Kelvin Wing Kee Lau, 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: April 30, 2015
By: |
/s/ Kelvin Wing Kee Lau |
|
Name: |
Kelvin Wing Kee Lau |
|
Title: |
Chief Financial Officer |
|
Exhibit 15.1
[Letterhead of Maples and Calder]
Perfect World Co., Ltd.
Perfect World Plaza, Tower 306, 86 Beiyuan Road,
Chaoyang District
Beijing 100101,
Peoples Republic of China
April 30, 2015
Dear Sirs:
Perfect World Co., Ltd.
We consent to the reference to our firm under the heading Item 10. Additional InformationE. TaxationCayman Islands Taxation in Perfect World Co., Ltd.s annual report on Form 20-F for the year ended December 31, 2014 (the Annual Report), which will be filed with the United States Securities and Exchange Commission (the SEC) in the month of April 2015 and further consent to the incorporation by reference into the Registration Statements on Form S-8 (No. 333-169333, No. 333-169332, No. 333-161193 and No. 333-146562) of Perfect World Co., Ltd. of the summary of our opinion under the heading Item 10. Additional InformationE. TaxationCayman Islands Taxation in the Annual Report. We also consent to the filing with the SEC of this consent letter as an exhibit to the Annual Report.
In giving such consent, we do not thereby admit that we come within the category of persons whose consent is required under Section 7 of the Securities Act of 1933, or under the Securities Exchange Act of 1934, in each case, as amended, or the regulations promulgated thereunder.
Yours faithfully
/s/ Maples and Calder |
|
Maples and Calder |
|
Exhibit 15.2
[Letterhead of King & Wood Mallesons]
April 30, 2015
Perfect World Co., Ltd.
Perfect World Plaza, Tower 306, 86 Beiyuan Road,
Chaoyang District
Beijing 100101,
The Peoples Republic of China
Dear Sirs:
We have acted as legal advisors as to the Peoples Republic of China law to Perfect World Co., Ltd., an exempted limited liability company incorporated in the Cayman Islands (the Company), in connection with the filing by the Company with the United States Securities and Exchange Commission (the SEC) of an annual report on Form 20-F for the year ended December 31, 2014 (the Annual Report).
We hereby consent to the reference of our firm under the headings Item 3 Key InformationD. Risk Factors and Item 4. Information on the CompanyB. Business OverviewGovernment Regulations in the Annual Report and further consent to the incorporation by reference into the Registration Statements on Form S-8 (No. 333-169333, No. 333-169332, No. 333-161193 and No. 333-146562) of Perfect World Co., Ltd. of the summary of our opinion under the headings Item 3 Key InformationD. Risk Factors and Item 4. Information on the CompanyB. Business OverviewGovernment Regulations in the Annual Report. We also consent to the filing with the SEC of this consent letter as an exhibit to the Annual Report.
In giving such consent, we do not thereby admit that we come within the category of persons whose consent is required under Section 7 of the Securities Act of 1933, or under the Securities Exchange Act of 1934, in each case, as amended, or the regulations promulgated thereunder.
Sincerely,
/s/ King & Wood Mallesons |
|
King & Wood Mallesons |
|
Exhibit 15.3
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-169333, No. 333-169332, No. 333-161193 and No. 333-146562) of Perfect World Co., Ltd. of our report dated April 30, 2015 relating to the consolidated financial statements and the effectiveness of internal control over financial reporting, which appears in this Form 20-F.
/s/ PricewaterhouseCoopers Zhong Tian LLP |
|
PricewaterhouseCoopers Zhong Tian LLP |
|
Beijing, Peoples Republic of China
April 30, 2015
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