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Cayman Islands (State or other jurisdiction of incorporation or organization)

2711 (Primary Standard Industrial Classification Code number)

Not Applicable (I.R.S. Employer Identification No.)

 

 

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TABLE OF CONTENTS

 

		Page
SUMMARY			3
SELECTED FINANCIAL DATA			9
RISK FACTORS			11
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS			23
MARKET AND INDUSTRY DATA			23
USE OF PROCEEDS			23
PRICE RANGE OF SECURITIES AND DIVIDENDS			24
DIVIDEND POLICY			25
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			26
BUSINESS			39
MANAGEMENT			58
ANNUAL COMPENSATION			59
SELLING STOCKHOLDERS			63
SECURITY OWNERSHIP OF CERTAIN  BENEFICIAL OWNERS AND MANAGEMENT			69
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS			70
DESCRIPTION OF SHARE CAPITAL			72
PLAN OF DISTRIBUTION			87
LEGAL MATTERS			88
EXPERTS			88
WHERE YOU CAN FIND MORE INFORMATION			89
CHINA TOPREACH, INC. AND SUBSIDIARIES (FORMERLY CHINAGROWTH ACQUISITION CORPORATION)			F-1
PART II INFORMATION NOT REQUIRED IN PROSPECTUS			90
SIGNATURES			95
POWER OF ATTORNEY			95
EXHIBIT INDEX			96

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PROSPECTUS

 

20,126,972 Ordinary Shares

China TopReach, Inc.

and

900,000

China TopReach, Inc.

Warrants

 

This prospectus relates to the issuance by us of up to 5,013,500 of our ordinary shares, par value of $0.001 per share, that are issuable upon exercise of outstanding warrants originally issued in our initial public offering pursuant to a prospectus dated January 23, 2007.

 

Each warrant entitles the holder to purchase one share of our common stock.  In order to obtain the shares, a holder of warrants must pay an exercise price of $6.00 per share in cash.  We will receive proceeds from the payment of the exercise price in cash.

 

This prospectus relates to the resale of up to an aggregate of 14,213,472 ordinary shares of China TopReach Inc. by the selling stockholders identified in the section entitled “Selling Stockholders” on page 63 of this prospectus.

 

This prospectus relates to the resale of up to an aggregate of 900,000 warrants of China TopReach Inc. by the selling warrantholders identified in the section entitled “Selling Stockholders” on page 63 of this prospectus.

 

This prospectus relates to the issuance by us of up to 900,000 of our ordinary shares, par value of $0.001 per share, that are issuable upon exercise of outstanding warrants originally issued to our founders prior to the consummation of our initial public offering.

 

Each warrant entitles the holder to purchase one share of our common stock.  In order to obtain the shares, a holder of warrants must pay an exercise price of $6.00 per share in cash.  We will receive proceeds from the payment of the exercise price in cash.

 

The selling stockholders may offer and sell any of the shares of common stock from time to time at fixed prices, at market prices or at negotiated prices, and may engage a broker, dealer or underwriter to sell the shares.  For additional information on the possible methods of sale that may be used by the selling stockholders, you should refer to the section entitled “Plan of Distribution” on page 87 of this prospectus.  We will not receive any proceeds from the sale of the shares of common stock by the selling stockholders.  We are contractually obligated to pay all expenses of registration incurred in connection with this offering, except any underwriting discounts and commissions and expenses incurred by the selling stockholders for brokerage, accounting, tax or legal services or any other expenses incurred by the selling stockholders in disposing of the shares.

 

Our common stock is currently quoted on the Over-the-Counter Bulletin Board under the symbol “CGSXF.OB”, our warrants are currently quoted on the Over-the-Counter Bulletin Board under the symbol “CGSQF.OB” and our units are currently quoted on the Over-the-Counter Bulletin Board under the symbol “CGSUF.OB”.  On March 29, 2010, the last reported sale price of our shares was $2.0 per share.  You should rely only on the information contained in this prospectus.  We have not authorized any other person to provide you with different information.  “

 

You should consider carefully the risks that we have described in “Risk Factors” beginning on page 11 before deciding whether to invest in our common stock.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful and complete.  Any representation to the contrary is a criminal offense.

 

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This prospectus is dated ________________, 2010.

You should rely only on the information contained in this prospectus or contained in any free writing prospectus filed with the Securities and Exchange Commission, or SEC.  We have not authorized anyone to provide you with information different from that contained in this prospectus.  The selling stockholders are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted.  The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock.

 

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SUMMARY

 

This summary highlights selected information more fully described elsewhere in this prospectus.  You should read the following summary together with the entire prospectus, including the more detailed information regarding us and the common stock being sold in this offering and our financial statements and the related notes appearing elsewhere in this prospectus.  You should carefully consider, among other things, the matters discussed in the section entitled “Risk Factors” beginning on page 11 before deciding to invest in our common stock.  Unless otherwise stated or the context requires otherwise, references in this prospectus to “we,” “our,” or “us” refer to China TopReach, Inc., Inc. and its subsidiaries.

 

Overview

 

China TopReach, Inc. (“China TopReach” or the “Company”) (formerly known as ChinaGrowth South Acquisition Corporation (“ChinaGrowth”) was a blank check corporation organized under the laws of the Cayman Islands on May 3, 2006.  ChinaGrowth was originally incorporated as “ChinaGrowth South Acquisition Corporation” but changed its name to China TopReach on January 27, 2009.  ChinaGrowth was formed to effect a business combination with an unidentified operating business that had its primary operating facilities located in the People’s Republic of China (“PRC”) in any city or province south of the Yangtze River. On January 29, 2007, ChinaGrowth consummated our initial public offering and approximately US$36,000,000 of the IPO net proceeds was placed in a trust account.  Before its acquisition of all of the outstanding capital stock of Olympia Media Holdings Limited (“OMH”), the prices of ChinaGrowth’s common stock, warrants to purchase common stock and units (each unit consisting of one share of common stock and a warrant to purchase one ordinary share) were quoted on the Over-the-Counter Bulletin Board. Approximately $38 million of the net proceeds of the initial public offering was placed in a trust account and was released to China TopReach upon consummation of its acquisition of OMH, the leading privately owned aggregator and operator of print media businesses in the PRC. Approximately $1.38 million from the net proceeds of initial public offering remained with China TopReach after shareholders redeemed their stocks. Other than its initial public offering and the pursuit of a business combination, ChinaGrowth did not engage in any business.

 

Business Overview of China TopReach

 

China TopReach, following the consummation of the acquisition of all of the outstanding capital stock of OMH, is now the leading privately owned aggregator and operator of print media businesses in the PRC. The Company has established a print media network consisting of 10 newspapers with a circulation of approximately 1.8 million across the PRC, reaching 14 cities covering an aggregate population of 75 million. Together with its on-line newspaper website www.duk.cn, China TopReach provides advertising services to approximately 4,900, 4,000 and 1,700 corporate clients in 2009, 2008 and 2007, respectively. China TopReach usually enters into exclusive contracts for full or partial cooperations with newspapers. Under a fully cooperative contract, China TopReach manages advertising operation and printing of the newspapers, and provides select content and distribution consultative service to the newspapers. Under a partially cooperative contract, China TopReach manages part of advertising operations of the newspapers.

 

In January 2009, China TopReach has entered into full cooperation agreement with Modern Life Daily, the second largest newspaper by circulation in the region covering Nanning, Beihai, Qinzhou and Guilin of Guangxi Province. Prior to January 2009, China TopReach worked with the newspaper under a partial cooperation agreement. Moder Life Daily, with approximately 450,000 readers and 150,000 daily circulations, is a city newspaper that provides news and wide variety of information to people living in the region.  The in-depth cooperation including advertising and content providing enables the Company to capture the fast growing print media market in Southwest China.

 

China TopReach initiated a cooperation model with newspapers located in Fujian Province in 2005, which allows the Company, upon certain deposits to newspapers, to engage in full or partial cooperation with newspapers through exclusive contracts, except final editorial rights which are prohibited by PRC law. Nonetheless, China TopReach obtained the right of first refusal to acquire the editorial rights when PRC law permits. To establish a nationwide print media network, China TopReach only signs up exclusive agreements with either the 2nd or the 3rd largest local newspaper, in terms of circulation, located in more economically developed urban areas, such as Fuzhou, Kunming and Shenyang. This geographic focus enables China TopReach to achieve steady growth in advertising revenues driven primarily by increasing personal wealth and urbanization.

 

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The newspapers with which China TopReach has contracted focus on the daily life and general interests of local residents, who are attracted by the most up-to-date local news, events and related information. Other popular content include international and domestic news, development of key events with in-depth commentary, sports and entertainment news and events and classified advertisements. Due to the wide variety of interests from readers in these newspapers, the Company has been able to provide advertising services to customers from a number of different industries.

 

Recent Developments

 

China TopReach Inc.’s subsidiary, ShiFang Holding Limited (“ShiFang”) has completed a US$35 million equity private placement (the “Private Placement”) effective on February 12, 2010.  Four well-known institutional investors (the “Investors”), namely, CCB International Asset Management Limited, Sinochem Europe Capital Corporation Ltd, Templeton Strategic Emerging Markets Fund III, LDC and New World Strategic Investment Limited, acquired an aggregate 27.16% equity interest in ShiFang in the Private Placement.  China TopReach and certain shareholders provided certain guarantees and agreements to the Investors in order to secure the performance of the obligations of ShiFang under the Private Placement.

 

Prior to the closing of the Private Placement, China TopReach transferred its equity ownership of OMH to ShiFang.  OMH was acquired by China TopReach from its founding shareholders (“OMH Shareholders”) pursuant to a share purchase agreement dated 16 December 2008 (as amended on 13 January 2009) (“OMH Acquisition”) and is the entity which held most of China TopReach’s operations and operating companies.

 

ShiFang was initially established December, 2009 as a wholly owned subsidiary of China TopReach to serve as the holding company of the operating companies of China TopReach group.  ShiFang plans to use the proceeds from the Private Placement to continue to develop relationships with additional metro newspapers in the PRC and to fund its working capital needs.  Please refer to ‘MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS’ for detailed information.  

 

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Corporate Structure

 

ShiFang is a holding company incorporated under the laws of the Cayman Islands, which conducts substantially all of its operations through its operating subsidiaries and affiliates in the PRC.  The following diagram illustrates the corporate structure and the place of formation of ShiFang’s subsidiaries and affiliates: 

 

 

Notes:

(1)	Other subsidiaries consist of various PRC subsidiaries operating advertising and related business in the PRC;
(2)	Fujian Shi Fang Culture Propagation Co., Ltd. (“SF”), has 100% controlled all other subsidiaries except Shen Yang Zhu Qin Shi Fang Media Development Co., Ltd., of which 51% ownership has been owned by SF.

  

BJHXT currently holds a license for the general distribution of books, newspapers and periodicals. Under PRC laws, foreign-invested enterprises are prohibited from engaging in such business. Through the contractual arrangements as described below, one of OMH’s wholly owned subsidiaries, SF, has entered into contractual arrangements with BJHXT and its shareholders, Zhi Chen, Jingui Zhang, Yibin Qiang and Yulin Lin, and such contractual arrangements enable SF to (1) receive a substantial portion of the economic benefits from BJHXT; (2) exercise effective control over BJHXT, and (3) have an exclusive option to purchase all or part of the equity interests in BJHXT when and to the extent permitted by the PRC laws. Accordingly, by virtue of the contractual arrangements, OMH consolidates BJHXT’s results, assets and liabilities in OMH’s financial statements.

 

(1) Services Agreement. SF has entered into a Services Agreement with BJHXT, on July 1, 2008 pursuant to which, SF exclusively provides consulting services to BJHXT in exchange for service fees. This agreement enables the transfer of substantial portions of economic interests from BJHXT to SF.

 

(2) Loan Agreement. SF and BJHXT’s shareholders have entered into a Loan Agreement on July 1, 2008, pursuant to which SF loaned RMB 5.4 million to Jingui Zhang and RMB 3 million to Zhi Chen and RMB 13.5 million to Yibin Qiang and RMB 8.1 million to Yulin Lin, to fund the payment by BJHXT’s shareholders of the acquisition price of all the equity interests in BJHXT.

 

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(3) Equity Pledge Agreement. SF, BJHXT and its shareholders have entered into an Equity Pledge Agreement on July 1, 2008 , pursuant to which, each of the shareholders of BJHXT has pledged all of its equity interests in BJHXT to SF to guarantee the repayment of the loan under the Loan Agreement and the payment of service fees under the Services Agreement.

 

(4) Voting Rights Proxy Agreement. SF, BJHXT and its shareholders have entered into a Voting Rights Proxy Agreement on July 1, 2008, pursuant to which, each of the shareholders of BJHXT has granted to SF and the designee(s) of SF, the power to exercise all voting rights of such shareholder, including but not limited to the power to determine the sale or transfer of all or part of such shareholder’s equity interests in, and appoint and elect the directors and senior officers of BJHXT.

 

(5) Exclusive Purchase Option Agreement. SF, BJHXT and its shareholders have entered into an Exclusive Purchase Option Agreement on July 1, 2008, pursuant to which, each of the shareholders of BJHXT has irrevocably and unconditionally granted SF or its designee(s) an exclusive option to purchase, at any time if and when permitted under PRC laws, all or any portion of the equity interests in BJHXT for the lowest price permissible under PRC laws.

 

Public Stockholders’ Warrants

 

On January 29, 2007, we sold 5,013,500 units in our initial public offering, including 513,500 units issued pursuant to the partial exercise of the underwriters’ over-allotment option. Each unit consists of one share of common stock and one warrant. Each warrant entitles the holder to purchase one share of our common stock. In order to obtain the shares, the holders of the warrants must pay an exercise price of $6.00 per share in cash.

 

The warrants will not be exercisable until the effective date of the registration statement of which this prospectus forms a part, and will expire at 5:00 p.m., New York City time, on January 23, 2011 or earlier upon redemption. Beginning on the effective date of the registration statement of which this prospectus forms a part, we may redeem the warrants at a price of $0.01 per warrant upon a minimum of 30 days’ prior written notice of redemption if, and only if, the last sale price of our common stock equals or exceeds $11.50 per share (subject to adjustment for splits, dividends, recapitalizations and other similar events) for any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption.

 

Corporate Information

 

Our principal executive offices are located at San Shan Tower, No. 59 Dongjie Street, 6th Floor, Fuzhou City, China  350001 and our telephone number is 086-591-88310920.  Our website address is www.ChinaTopReach.com.  The information on, or that can be accessed through, our website is not part of this prospectus.

 

The Offering

 

Ordinary Shares offered by the selling stockholders and warrantholders		Up to 14,213,472 ordinary shares and 900,000 warrants.
Use of Proceeds		Proceeds from the sale of common stock covered by this prospectus will be received by the selling stockholders.  We will not receive any proceeds from the sale of the shares of common stock covered by this prospectus.
Ordinary Shares offered by the Company		5,013,500 of our ordinary shares, par value $0.001 per share, that are issuable upon exercise of outstanding warrants originally issued in our initial public offering pursuant to a prospectus dated January 23, 2007 and 900,000 of our ordinary shares, par value $0.001 per share, that are issuable upon exercise of outstanding warrants issued in a private placement to our founders and 315,000 of our ordinary shares, par value $0.001 per share, that are issuable upon the exercise of units underlying the Representative’s Unit purchase option issued in connection with our initial public offering and 315,000 of our ordinary shares, par value $0.001 per share, that are issuable upon the exercise of warrants included in the Representative’s Unit purchase option.
Warrant Exercisability		Each warrant is exercisable for one ordinary share.

 

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Warrant Exercise Price		$6.00 per share, subject to adjustment.
Warrant Exercise Period		The warrants will not be exercisable until the effective date of the registration statement of which this prospectus forms a part.   The warrants will expire on January 23, 2011 or earlier upon redemption.
Redemption of outstanding Public Warrants		We may redeem the outstanding public warrants:   ·       in whole and not in part;   ·       at a price of $0.01 per warrant at any time after the warrants become exercisable;   ·       upon a minimum of 30 days’ prior written notice of redemption; and   ·       if, and only if, the last sales price of our common stock equals or exceeds $11.50 per share (subject to adjustment for splits, dividends, recapitalizations and other similar events) for any 20 trading days within a 30 day trading period ending three business days before we send the notice of redemption.   In addition, we may not call the warrants unless the warrants and the shares of common stock underlying the warrants are covered by an effective registration statement from the beginning of the measurement period through the date fixed for redemption.   If the foregoing conditions are satisfied and we call the warrants for redemption, each warrant holder shall then be entitled to exercise its warrants prior to the date scheduled for redemption.
Ordinary Shares outstanding as of March 29, 2010		14,391,059 ordinary shares (including ordinary shares of common stock held in our units which have not been separated or detached)
Ordinary Shares to be outstanding assuming exercise of all Public Warrants		19,404,559 ordinary shares
Assuming exercise of all outstanding warrants		20,304,559 ordinary shares, including 900,000 founders’ warrants exercisable for 900,000 shares of common stock at an exercise price of $6.00 per share.
Use of Proceeds		China TopReach will receive an aggregate of $35,481,000 from the exercise of the warrants, if the warrants are exercised in full by payment of the cash exercise price.  China TopReach expects that any net proceeds from the exercise of the warrants will be used for general corporate purposes.
OTC Bulletin Board symbol for our Common Stock		“CGSXF.OB”
OTC Bulletin Board symbol for our Warrants		“CGSQF.OB”
OTC Bulletin Board symbol for our Units		“CGSUF.OB”

 

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As of March 29, 2010, we had 14,391,059 shares of common stock outstanding and 5,913,500 shares of common stock issuable upon the exercise of warrants outstanding.  The amount of our shares of common stock and warrants outstanding includes the shares of common stock and warrants held in our units which have not been detached or separated.

 

We are contractually obligated to pay all expenses of registration incurred in connection with this offering, except any underwriting discounts and commissions and expenses incurred by the selling stockholders for brokerage, accounting, tax or legal services or any other expenses incurred by the selling stockholders in disposing of the shares.

 

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 SELECTED FINANCIAL DATA

 

The following table presents our summary historical consolidated financial information.  The summary consolidated statements of operations data for each of the three fiscal years ended December 31, 2008, December 31, 2007 and December 31, 2006 and the consolidated balance sheet data as of December 31, 2008 and 2007 of Olympia Media Holdings have been derived from our audited consolidated financial statements included elsewhere in this prospectus.  The summary consolidated statements of operations data for nine months ended September 30, 2009 and September 30, 2008 and the consolidated balance sheet data as of September 30, 2009 of China Topreach Inc. have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. These historical results are not necessarily indicative of results to be expected in any future period.

 

		Nine Months Ended (in thousands, except per share data)								Year Ended (in thousands, except per share data)
		September 30, 2009 (Unaudited)				September 30, 2008 (Unaudited)				2008 (Audited)				December 31, 2007 (Audited)				2006 (Audited)
Consolidated Statement of Operations Data
Revenues		$	48,643			$	41,598			$	56,216			$	23,033			$	12,463
Cost of Sales  and business taxes			25,861				26,444				36,336				14,575				8,812
Income from operations			17,302				10,567				13,057				5,233				1,714
Net income		$	14,826			$	8,460			$	11,511			$	4,285			$	1,319
Net income per ordinary share - basic		$	1.94			$	1.21			$	1.53			$	0.57			$	0.18
Net income per ordinary share - diluted		$	1.62			$	1.01			$	1.28			$	0.48			$	0.15
Weighted-average common shares outstanding *
Basic			7,535,803				7,535,803				7,535,803				7,535,803				7,535,803
Diluted			9,006,212				9,006,212				9,006,212				9,006,212				9,006,212

 

* Earnings per share presented for the years ended December 31, 2008, 2007 and 2006 is based on the retroactive shares outstanding after the recapitalization for all presented.

 

						As of December 31 (in thousands)
		September 30, 2009 (Unaudited)				2008 (Audited)				2007 (Audited)
Consolidated Balance Sheet Data
Current Assets		$	35,984			$	23,788			$	10,372
Total Assets			66,309				54,439				33,004
Current Liabilities			35,466				30,920				22,228
Total Liabilities			35,466				30,920				22,228

 

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l

On December 16, 2008, China TopReach entered into a stock purchase agreement with Olympia Media Holdings and Zhi Chen, pursuant to which ChinaGrowth we agreed to acquire all of Olympia Media Holdings’ issued and outstanding capital stock from its stockholders.  The stock purchase agreement was amended on January 13, 2009.  On January 27, 2009, the shareholders voted in favor of the transaction.  Please see “Business” for more detailed information on these transactions.

 

Exchange Rate Information

 

Our functional currency is the RMB, however this report is in U.S. dollars. The financial statements of our foreign subsidiaries have been translated into U.S. dollars in accordance with ASC 830, “Foreign Currency Matters”. All asset and liability accounts have been translated using the exchange rate in effect at the balance sheet date. Equity accounts have been translated at their historical exchange rates when the capital transaction occurred. Statements of operations amounts have been translated using the average exchange rate for the year. At December 31, 2008, our revenues and expenses maintained in Renminbi were translated to U.S. dollars at US$1.00 = RMB 6.9623 and our assets and liabilities maintained in Renminbi were translated to U.S. dollars at US$1.00 = RMB 6.8542. At September 30, 2009 and 2008, our revenues and expenses maintained in Renminbi were translated to U.S. dollars at US$1.00 = RMB6.8425 and US$1.00 = RMB 7.1756 respectively. At September 30, 2009, our assets and liabilities maintained in Renminbi were translated to U.S. dollars at US$1.00 = RMB6.8376. The foreign currency translation adjustment of $ has been reported as accumulated other comprehensive income in the consolidated statement of stockholders’ equity and comprehensive income.

 

We make no representation that any RMB or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or RMB, as the case may be, at any particular rate, the rates stated below, or at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of RMB into foreign exchange and through restrictions on foreign trade.

 

The following table sets forth information concerning 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 periodic reports or any other information to be provided to you. The source of these rates is the Federal Reserve Bank of New York.

 

Period		Period End				Average				Low				High
		(RMB per US$1.00)
2004			8.2765				8.2768				8.2774				8.2764
2005			8.0702				8.1940				8.2765				8.0702
2006			7.8041				7.9723				8.0702				7.8041
2007			7.2946				7.6072				7.8127				7.2946
2008			6.8225				6.9477				7.2946				6.7800
2009			6.8259				6.8307				6.8470				6.8176

(1)	Annual averages are calculated by using the average of the noon buying exchange rates for each trading day during the annual period.

 

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RISK FACTORS

 

You should carefully consider the risks described below before making a decision to buy our common stock.  If any of the following risks actually occurs, our business, financial condition and results of operations could be harmed.  In that case, the trading price of our common stock could decline and you might lose all or part of your investment in our common stock.  You should also refer to the other information set forth in this prospectus, including our financial statements and the related notes.

 

An investment in our securities involves a high degree of risk. You should consider carefully all of the risks described below, together with the other information contained in this Registration Statement on Form F-1 before making a decision to invest in our securities.

 

Risks Related to Our Business

 

Our limited operating history in the media business may not provide an adequate basis to judge our future prospects and results of operations and successful implementation of strategies

 

OMH commenced its media business in 2001 and has expanded its operations substantially in recent years. Although OMH has been profitable in the past years, it frequently encountered risks and difficulties in the PRC’s new and rapidly evolving market. In addition, the successful implementation of its strategies, including its plans to enter into more cities and contract with more newspapers, improve electronic newspapers and on-line advertising, which depends on a number of factors including, among others, changes in the PRC media and advertising markets, the availability of funds, competition, government policies and its ability to retain and recruit employees with the relevant industry knowledge and expertise. Any failure or delay in the implementation of any or all of our strategies may have material adverse effect on our growth.

 

We have provided guarantees in connection with a  private placement financing consummated by ShiFang, one of our subsidiaries, and if we default on such guarantee or do not meet the requisite performance requirementss we may lose control of all of our operating entities.

 

In February 2010, ShiFang Holding Limited, our subsidiary which controls all of our operations and operating entities, completed a US$35 million equity private placement.  Pursuant to such private placement financing four well-known institutional investors, namely, CCB International Asset Management Limited, Sinochem Europe Capital Corporation Ltd, Templeton Strategic Emerging Markets Fund III, LDC and New World Strategic Investment Limited (the ‘Investors’), acquired an aggregate of 27.16% equity interest in ShiFang.  China TopReach and certain of its shareholders provided certain guarantees and agreements to the Investors in order to secure the performance of the obligations of ShiFang pursuant to the Private Placement. If ShiFang fails to meet the requisite performance criteria or obligations contained in such agreement, we may lose control of all of our operations and operating entities.  As a result, our financial condition and results of operations may be adversely affected. 

 

Reliance on the Business Agreements with Newspapers

 

 China TopReach conducts the business of advertising, providing content, printing and distribution consultative service based on the exclusive contracts entered into with 10 newspapers. If China TopReach lost its contractual relationship with some of these newspapers, China TopReach may not be able to find and develop alternative or comparable sources of revenue in a timely manner. Any such event may have a material adverse effect on the operations and financial results. All contracts China TopReach has signed up with newspapers have preferential renewal rights. With the majority of these contracts, such preferential renewal rights can be only achieved when China TopReach has met certain performance criteria. As a result, if China TopReach fails to meet these performance criteria, it may lose its contractual relationship with the newspapers. 

 

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The exclusive contracts entered into with our newspaper partners will require substantial initial capital commitments and may not generate the intended revenue and profits 

 

Upon signing the exclusive contracts with our newspaper partners, we are generally required to place a deposit, which is refundable upon termination of the contract, with our newspaper partners at an amount negotiated between us and them. We will also typically prepay our newspaper partners a portion of a print media fee, which we negotiate with them based on the revenues we expect to generate by selling advertising spaces. There can be no assurance that we will be able to recover such initial capital commitments through our sale of the advertising spaces in the relevant newspapers or from provision of our advertising services. Any such recovery is subject to market conditions, difficulties in our cooperation with our new newspaper partner and other factors beyond our control, and may only happen after several years of operations or not at all. Further, the prepaid amounts and deposits may be forfeited in the event we are unable to fulfill our contractual obligation in respect of actual business volume generated. If we are unable to recover our initial capital commitments under existing or future contracts with our newspaper partners, our business, financial condition and results of operations in the PRC could be materially and adversely affected.

 

The media industry is highly regulated in the PRC, and the administration, interpretation and enforcement of the laws and regulations currently applicable to China TopReach involve uncertainties, which could materially and adversely affect its business and results of operations. 

 

The media industry in the PRC is subject to a number of regulations and restrictions, for example, foreign ownership limitations on editorial right for publication of newspapers. Due to such restrictions, currently China TopReach does not engage in editorial work on newspapers. Although China TopReach provides content to the newspapers and has first right of refusal to acquire all rights, China TopReach cannot control the final content published in the newspapers. The business of newspapers is highly regulated and closely monitored by various government agencies in the PRC. The administration, interpretation and enforcement of the Chinese laws and regulations applicable to China TopReach’s business involve uncertainties that could materially and adversely affect China TopReach’s business and results of operations. Some operating subsidiaries of China TopReach have long-term strategic cooperation relations with newspapers. There is a risk that the business of China TopReach or the strategic partnerships with the newspapers may be deemed as actual involvement in the restricted sections within newspaper operation. There is no assurance that regulatory restrictions will not be strengthened. Unattractive content resulting from such restrictions may adversely affect our prospects and results of operations.

 

Increasing competition in the print media and from other new media advertising 

 

China TopReach faces competition in the market from other newspapers and other types of media such as magazines, television and radio, as well as from the internet and other new types of media. These different media companies in China compete with China TopReach for readers and advertisement sales. Advertising spending on new media such as online advertising has grown rapidly in the past decade. If the growth rate of advertising spending on new media can be sustained going forward, market share of traditional media may be taken away. While China TopReach believes its strengths and market position have enabled it to compete with others so far, China TopReach cannot give any assurance that it will be able to continue to do so as effectively in the future. If China TopReach is unable to compete effectively against those competitors, China TopReach may lose customers and its financial condition and results of operations may be adversely affected. 

 

China TopReach’s future success depends on the continuing efforts of its senior management team and other key personnel, and its business may be harmed if China TopReach loses their services.

 

Mr. Zhi Chen, the Chief Executive Officer (“CEO”) of China TopReach together with other key executives have led China TopReach to achieve success. The operations of China TopReach significantly depend on their business vision, industry expertise, experience with the business operations and management skills. If the CEO or other key executives become unable or unwilling to continue in their present positions, China TopReach may not be able to replace them in a timely manner, which would have a material adverse effect on the business and growth prospects. China TopReach also relies on the performance of a number of other key employees. Although China TopReach believes that it has established a reputation in the industry which assists in attracting talented personnel, China TopReach is still vulnerable to adverse consequences from the loss of key employees due to competition for talented personnel among providers of advertising services.

 

12

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Each of China TopReach’s executive officers and key employees has entered into an employment agreement with China TopReach which contains confidentiality and non-competition provisions. These agreements generally have an initial term of three years, and are automatically extended for successive one-year terms unless terminated earlier pursuant to the terms of the agreements. If any disputes arise between any of its senior executives or key personnel and China TopReach, China TopReach cannot assure you that such executives or key personnel will remain with China TopReach.

 

In addition, we rely on our sales and marketing teams whose market knowledge, experience and established relations with our existing customers are essential to our success and future growth. Although we believe that our corporate culture and business growth will help us to retain our existing employees, and we have established a reputation in the industry that attracts talented personnel, we are vulnerable to the adverse consequences that may result from the loss of key employees and from the intense competition among providers of advertising services for talented and skilled personnel. 

 

Any significant failure in China TopReach’s information technology systems could have a material adverse effect on its business and results of operations. 

 

China TopReach’s business is highly dependent on the ability of its information technology systems, especially its MAITS system, to timely process significant amount of original data related to various industries and advertisers across diversified markets existing in different cities when transaction processes have become increasingly complex and the volume of such transactions is growing rapidly. China TopReach has devoted substantial resources to developing, maintaining and updating its information technology system. These systems enable China TopReach to provide consistent high-quality services and maintain its competitive advantages. If China TopReach fails to identify, develop and incorporate new features or technologies in its information technology systems and operations in a timely and cost-effective manner, China TopReach may lose its competitiveness and demand for its services may decrease, which would have a material and adverse effect on its revenues and profitability.

 

We may not be able to sustain our business growth and high profit margins that we experienced during the Track Record Period

 

Our businesses expanded during the Track Record Period and in order to sustain such growth in our revenues and profit and to maintain our high profit margins, we will need to implement our business plans effectively, retain experienced marketing and service personnel, manage our costs effectively and maintain adequate control and reporting systems in a timely manner.

 

However, there can be no assurance that we will continue to maintain our growth in the future or be able to sustain such high profit margins. The successful implementation of the strategies and plans we have developed to grow our business depend on a number of factors including, among other things, changes in the PRC media and advertising markets, the availability of funds, competition, government policies and our ability to retain and recruit qualified employees with relevant industry knowledge and expertise. Many of these factors are beyond our control and by nature, all of these factors are subject to uncertainty. There can be no assurance that our strategies and future plans can be implemented successfully. Any failure or delay in the implementation of any or all of these strategies and plans may have a material adverse effect on our profitability and prospects.

 

There can be no assurance that we will be able to maintain our past level of growth in the future or be able to maintain our high profit margins. Our ability to maintain our growth and profit margins in the future will depend on, amongst other things, external factors such as the PRC economy and general market trends. As we cannot be sure that our efforts will be successful or that external factors will remain favorable to us in the future, we may not achieve the growth or profitability targets we have set for our Company. Accordingly, investors should not place undue reliance on our past performance.

 

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We are subject to fluctuations in the demand for our customers’ products and services, and their advertising budgets.

 

Our advertising revenues are dependent upon fluctuations in the demand for our customers’ products and services and correspondingly, their advertising budgets. The demand for our customers’ products and services are affected by a number of factors beyond our control, including the PRC economic conditions, industry and market trends, shifts in consumer purchase patterns and changes in the retail environment. If there are any adverse changes in the trends in seasonal shopping or spending patterns or other factors which unexpectedly result in a decrease in the demand for our customers’ products and services and consequently the tightening of their advertising budgets of our customers. In the event this occurs, demand for our advertising services may decrease and our prospects, results of operations and financial condition may be materially and adversely affected.

 

We are dependent on external financing for rapid expansion of our business and other corporate needs

 

We may seek additional financing from various sources, including bank borrowings to provide the capital needed to expand our business at an accelerated pace if cash flow from our operations is insufficient. In particular, we are required to make substantial capital commitments when expanding into new regions and markets and upon signing cooperative contracts with new newspaper partners. Additionally, as it is our usual practice to grant our customers a credit period of three months but we are required to settle the payment of print media fees with our newspaper partners on a monthly basis, we may experience difficulties in meeting our cash flow needs and have to rely on bank borrowings and loans from the Shareholders during the periods between our payment of the print media fees and our receipt of related payments from our customers.

 

We cannot predict with certainty the timing or amount of our future needs for external financing. Our ability to obtain external financing in the future and the cost of such financing are subject to a variety of uncertainties, including our business performance and the condition of financial markets. If such financing is not available on a timely basis or on satisfactory terms, or at all, our business, results of operations and financial condition may be materially and adversely affected.

 

We rely on intellectual property rights protection

 

In the course of conducting our business, we rely on the protection of our intellectual property rights as well as the protection of the intellectual property rights of our PRC newspaper partners. We and our PRC newspaper partners may not be able to protect our respective intellectual property rights.

 

We have developed trademarks, patents, know-how, processes, technologies and other intellectual property rights that are of significant value to us. There can be no assurance that any of our intellectual property rights will not be challenged, misappropriated or circumvented by third parties.  In addition, the legal regime governing intellectual property in the PRC is still evolving and the level of protection of intellectual property rights in the PRC may be weaker than that of other jurisdictions. We also rely on various contractual agreements with our employees, customers, our newspaper partners, business partners and others to protect our intellectual property rights. Despite precautions taken by us, it may be possible for third parties to infringe upon our intellectual property rights by copying or otherwise obtaining and using our intellectual property, including text, typographies, photographs and design layouts.  In the event that the steps we have taken and the protection provided by law do not adequately safeguard our intellectual property rights, our business, results of operations and reputation could be materially and adversely affected.

 

In addition, our advertising business relies on cooperation with and therefore the success of our PRC newspaper partners who rely on the protection of their certain intellectual property rights. There can be no assurance  that our PRC newspaper partners will be able to protect or assert any rights to their intellectual property rights. Any misappropriation or infringement of their intellectual property rights or difficult in enforcing such rights may have a material and adverse impact on their business, which may in turn materially and adversely affect our business and results of operation.

 

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We may infringe on the intellectual property rights of third parties

 

We cannot guarantee that we or our PRC newspaper partners will not be found liable for having infringed upon the rights of third parties, including their intellectual property rights. In the event that we or our PRC newspaper partners are found liable for having infringed upon the rights of third parties, including their intellectual property rights, we or our PRC newspaper partners may be subject to liabilities which might include substantial monetary damages or sanctions. Possible sanctions could include the loss of our rights or the rights of our PRC newspaper partners to all or some of the contents that we provide, or the loss of our rights or the rights of our PRC newspaper partners to engage in all or some part of our respective businesses on a temporary or a permanent basis. Given our reliance upon our PRC newspaper partners, any such liabilities or sanctions levied against them could have a material and adverse effect on the revenues we derive from our contracts with our PRC newspaper partners and, therefore, the business and results of operations of our Group.

 

As of the Latest Practicable Date, we were not aware of any infringement of the rights of any third party by our Group or by any of our PRC newspaper partners.  In addition, so far as we were aware at the Latest Practicable Date, neither our Group nor any of our PRC newspaper partners were involved in any proceedings in respect of, or had received any notice of any claims, threatened or pending, of infringement of any of the intellectual property rights of any third parties by our Group or any of our PRC newspaper partners.

 

We may be involved in litigation, which could be expensive and divert the attention and resources of our management

 

We currently do not maintain any insurance coverage on contingent liabilities arising out of litigation or claims against us. We are exposed to the risk of becoming involved in litigation which could have a material adverse impact on our business. Civil claims may potentially be filed against us for fraud, defamation, negligence, copyright or trademark infringement or for claims relating to the nature and content of the information or articles contained in our customers’ advertisements. There can be no assurance that claims and actions will not be initiated against us or arise out of our business in the future. Litigation expenses, potential losses from lawsuits and delays in proceedings in respect of outstanding and possible future claims may have a material adverse effect on our results of operations and our financial condition in the future. In particular, as our success largely depends on the leadership and day-to-day management of our Directors and senior management, our becoming involved in any litigation could divert the time and attention of our Directors and senior management away from the management of our business, which could materially and adversely affect our results of operation and financial condition.

 

We may not maintain sufficient insurance coverage for the risks associated with our business operations

 

Risks associated with our businesses include risk of damage to our offices, equipment and printing facilities, liability for environmental pollution, transportation accidents and the risks posed by natural disasters, any or all of which may affect our business operations. Notwithstanding that we maintain insurance addressing damage to and destruction to our facilities and equipment, we may experience difficulty in receiving compensation from the insurance companies, or there are delays in receiving such compensation or we may not be able to receive compensation in full or at all. Furthermore, we do not carry any business interruption insurance or insurance addressing damages arising out of natural disasters or other accidents at our production facilities. If we incur losses which are not covered by our insurance policies, or the amount of compensation we receive from our insurer is significantly less than our actual loss, our financial condition and results of operations could be materially and adversely affected. 

 

Risks Relating to China TopReach and the Combined Company

 

Following the Acquisition, we did not receive any funds from the Trust Account which could be used to fund operations and execute our business plan. 

 

Most, if not all, of the funds in the Trust Account were used for repurchases of ordinary shares pursuant to the Private Purchases and the Note Purchase Agreement, to redeem the ordinary shares of members who elect to exercise their conversion rights or to pay other transaction expenses.  Therefore, we did not expect to receive any material funds from the Trust Account.  In order to fund our operations and grow our business, we will require working capital which the Trust Account will not provide.  If we do not obtain equity or debt financing, we will not be able to operate our business or execute our business plan. 

 

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Following the Acquisition, the combined company may not be able to secure financing needed for future operating needs on favorable terms, or on any terms at all. 

 

From time to time, following the Acquisition, we may seek additional financing to provide the capital required to maintain our business if cash flow from operations is insufficient to do so.  China TopReach cannot predict with certainty the timing or amount of any such capital requirements. If such financing is not available on satisfactory terms, China TopReach may be unable to expand its business or to develop new business at the rate desired, and its results of operations may be adversely affected. If China TopReach is able to incur debt, it may be subject to certain restrictions imposed by the terms of the debt and the repayment of such debt may limit its cash flow and its ability to grow. If China TopReach is unable to incur debt, it may be forced to issue additional equity, which could have a dilutive effect on its current shareholders.

 

 

 

 

 

 

 

 

·

Total gross revenue increased by 17%

 

·

Net income increased by 75% from US$8.5 million for the nine months ended September 30, 2008 to US$14.8 million for the nine months ended September 30, 2009.

 

 

·

Total gross revenue increased by 144%

 

·

Net income increased by 169% from US$4.3 million in 2007 to US$11.5 million in 2008.

 

 

·

Total gross revenue increased by 85%

 

·

Net income increased by 225% from US$1.3 million in 2006 to US$4.3 million in 2007.

 

 

 

 

 

 

a)

Equity Transfer: Prior to the closing of the Private Placement, China TopReach transferred its equity ownership of Olympia Media Holdings Limited (“OMH”) to ShiFang.  OMH was acquired by China TopReach from its founding shareholders (“OMH Shareholders”) pursuant to a share purchase agreement dated 16 December 2008 (as amended on 13 January 2009) (“OMH Acquisition”) and is the entity which holds most of China TopReach’s operations and operating companies.

 

b)

Share Exchange: Certain key management shareholders of China TopReach, including TopBig International Development Limited (“Topbig”, controlled by Mr. Chen Zhi, director and CEO of China TopReach), Blazing Sun Holdings Limited (“Blazing Sun”, controlled by Mr. Hong Peifeng, director and Chairman of Board of Directors of China TopReach) and Keep Profit International Capital Limited (“Keep Profit”) were required to exchange a portion of their equity in China TopReach for shares in ShiFang, provide guarantees to, and pledge their shares in China TopReach and ShiFang in favor of the Investors in order to secure the performance of the obligations of China TopReach, OMH and ShiFang. In addition, Mr. Chen Zhi and Mr. Hong Peifeng were required to provide unlimited liability personal guarantees to, and pledge their shares in Topbig and Blazing Sun in favor of, the Investors.  This arrangement was required by the Investors as a condition to their investment to better align the interests of these management shareholders with the Investors.  Pursuant to this arrangement and prior to the consummation of the Private Placement, Topbig, Blazing Sun and Keep Profit transferred 955,748, 352,526 and 469,938 ordinary shares (totalling 1,778,212 ordinary shares) of China TopReach to Dragon Soar Limited (“Dragon Soar”, a wholly-owned subsidiary of China TopReach) in return for an aggregate 20% shareholding in ShiFang.  The terms of this share exchange were determined and agreed among China TopReach, Topbig, Blazing Sun and Keep Profit taking into account, among other things, the additional risk assumed by these three shareholders in providing collateral to facilitate the consummation of the Private Placement and the reduced liquidity of unlisted ShiFang shares as compared to listed China TopReach shares.  Subject to approval by shareholders at an extraordinary general meeting to be convened by China TopReach in due course, the 1,778,212 shares of China TopReach held by Dragon Soar will be repurchased and cancelled.

 

c)

Revised Earn-out Arrangement: Under the terms of the OMH Acquisition, 9,500,000 additional shares of China TopReach (“Earn-out Shares”) were to be issued to OMH Shareholders upon the achievement of 2009, 2010, 2011 and 2012 after-tax profits targets by China TopReach, based on the following schedule:

 

Fiscal year		Profit targets		Earn-out Shares
2009		RMB136 million (approximately US$20 million)			2,000,000
2010		RMB197.2 million (approximately US$29 million)			2,500,000
2011		RMB278.8 million (approximately US$41 million)			2,500,000
2012		RMB394.4 million (approximately US$58 million)			2,500,000

 

 

Fiscal year		Profit targets		Earn-out Shares
2009		RMB136 million (approximately US$20 million)			1,000,000
2010		RMB197.2 million (approximately US$29 million)			1,000,000
2011		RMB278.8 million (approximately US$41 million)			1,000,000
2012		RMB394.4 million (approximately US$58 million)			1,000,000

 

 

 

 

(a)	China TopReach shareholdings

Shareholders		Number of shares				Shareholding
TopBig International Development Limited			3,885,266				27.00	%
Index Asia Pacific Limited			1,680,009				11.67	%
Blazing Sun Holdings Limited			1,540,395				10.70	%
China Science & Kingwing (HK) Investment Management Limited			1,431,004				9.94	%
Keep Profit International Capital Limited			809,713				5.63	%
Luck Smart Limited			355,280				2.47	%
Cypress Capital International Investment Management Limited			297,622				2.07	%
Adoration Management Limited			186,045				1.29	%
Jiangyuan International Development Limited			158,816				1.10	%
Wing Keen Management Limited			118,097				0.82	%
Other shareholders			2,150,600				14.94	%
Dragon Soar Limited			1,778,212				12.36	%
TOTAL			14,391,059				100	%

(b)	ShiFang shareholdings

 

 

Shareholders		Number of shares				Shareholding
China TopReach Inc.			320,000,000				58.27	%
TopBig International Development Limited			42,998,170				7.83	%
Blazing Sun Holdings Limited			15,859,804				2.89	%
Keep Profit International Capital Limited			21,142,026				3.85	%
Investors			149,123,121				27.16	%
TOTAL			549,123,121				100.00	%

 

 

 

 

 

 

 

 

 

 

 

 

		Years
Leasehold improvement			5
Buildings			40
Machinery and equipment			5-10
Office equipments and furniture			5
Motor vehicles			5-10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

		Payment Due by December 31
(in $ millions)		Total				2009					2010-2013			Thereafter
Operating Lease Obligations			2.2				0.1				1.2				0.9

 

 

 

 

 

 

 

 

 

 

 

 

 

·

Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transaction and dispositions of the assets of the company;

 

·

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

 

·

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use of disposition of the company’s assets that could have a material effect on the financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)	Other subsidiaries consist of various PRC subsidiaries operating advertising and related business in China;

 

(2)	Fujain Shi Fang Culture Propagation Co., Ltd. (“SF”) has 100% controlled all other subsidiaries except Shen Yang Zhu Qin Shi Fang Media Development Co., Ltd., of which 51% ownership has been owned by SF.

 

 

 

 

 

 

 

 

 

 

Year Ending December 31,		Achieved After-Tax Profits		Additional Ordinary Shares Issuable (amounts do not accumulate)
2009		RMB 136,000,000 (Approximately US$20 million)		2,000,000
2010		RMB 197,200,000 (Approximately US$29 million)		2,500,000
2011		RMB 278,800,000 (Approximately US$41 million)		2,500,000
2012		RMB394,400,000 (Approximately US$58 million)		2,500,000