e20vf
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
|
|
|
o |
|
Registration statement pursuant to Section 12(b) or 12(g) of the Securities
Exchange Act of 1934 |
or
|
|
|
þ |
|
Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For
the fiscal year ended December 31, 2010. |
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: 031-34869
Country Style Cooking Restaurant Chain Co., Ltd.
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrants name into English)
Cayman Islands
(Jurisdiction of incorporation or organization)
18-1 Guojishangwu Center
178 Zhonghua Road
Yuzhong District, Chongqing
Peoples Republic of China
(Address of principal executive offices)
Roy Shengwen Rong, Chief Financial Officer
Telephone: +86-23-8866-8866
Email: ir@csc100.com
Facsimile: +86-23-8687-3700
18-1 Guojishangwu Center
178 Zhonghua Road
Yuzhong District, Chongqing
Peoples Republic of China
(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
|
|
|
Title of Each Class |
|
Name of Each Exchange on Which Registered |
Ordinary shares, par value US$0.001 per share
|
|
The New York Stock Exchange* |
|
|
|
* |
|
Not for trading, but only in connection with the listing on The New York Stock Exchange of
American depositary shares (ADSs). Currently, each ADS represents four ordinary shares. |
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)
Indicate the number of outstanding shares of each of the Issuers classes of capital or common
stock as of the close of the period covered by the annual report.
103,080,000 ordinary shares, par value US$0.001 per share, as of December 31, 2010.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
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. Yes o No þ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
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). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer o Non-accelerated filer þ
Indicate by check mark which basis of accounting the registrant has used to prepare the
financial statements included in this filing:
International Financial Reporting Standards as issued by the International Accounting
Standards
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.
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). Yes o No þ
(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. Yes o No o
INTRODUCTION
In this annual report, except where the context otherwise requires and for purposes of this
annual report only:
|
|
|
China or PRC refers to the Peoples Republic of China, excluding Taiwan, Hong
Kong and Macau; |
|
|
|
|
CSC Cayman refers to Country Style Cooking Restaurant Chain Co., Ltd.; |
|
|
|
|
CSC China refers to Country Style Cooking (Chongqing) Investment Co., Ltd.; |
|
|
|
|
CSC Hong Kong refers to Country Style Cooking International Restaurant Chain
Group, Ltd.; |
|
|
|
|
we, us, our company, our and Country Style Cooking refer to CSC Cayman
and its subsidiaries; |
|
|
|
|
shares or ordinary shares refers to our ordinary shares, par value $0.001 per
share, and Series A preferred shares refers to our Series A convertible preferred
shares, par value $0.001 per share, which were automatically converted into ordinary
shares upon the completion of our companys initial public offering in September 2010; |
|
|
|
|
ADSs refers to our American depositary shares, each of which represents four
ordinary shares; |
|
|
|
|
U.S. GAAP refers to accounting principles generally accepted in the United
States; |
|
|
|
|
average table turnover per day refers to the total number of receipts provided by
our restaurants upon sales, divided by the product of the total number of tables at
these restaurants and the number of days such restaurants are open for business in a
given period; |
|
|
|
|
RMB or Renminbi refers to the legal currency of China; $, dollars, US$
and U.S. dollars refers to the legal currency of the United States; and |
|
|
|
|
all discrepancies in any table between the amounts identified as total amounts and
the sum of the amounts listed therein are due to rounding. |
FORWARD-LOOKING STATEMENTS
This annual report contains forward-looking statements that reflect our current expectations
and views of future events. These forward looking statements are made under the safe-harbor
provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements involve
known and unknown risks, uncertainties and other factors that may
4
cause our actual results, performance or achievements to be materially different from those
expressed or implied by these forward-looking statements.
You can identify some of these forward-looking statements by words or phrases such as may,
will, expect, anticipate, aim, estimate, intend, plan, believe, is/are likely to
or other similar expressions. We have based these forward-looking statements largely on our current
expectations and projections about future events and financial trends that we believe may affect
our financial condition, results of operations, business strategy and financial needs. These
forward-looking statements include statements relating to:
|
|
|
our business and operating strategies and prospects; |
|
|
|
|
our expansion and capital expenditure plans; |
|
|
|
|
market acceptance of our food and services; |
|
|
|
|
our planned use of proceeds; |
|
|
|
|
our financial condition and results of operations; |
|
|
|
|
our ability to enhance and maintain our brand name; |
|
|
|
|
competition in the quick service restaurant sector; |
|
|
|
|
the industry regulatory environment as well as the industry outlook generally; and |
|
|
|
|
fluctuations in general economic and business conditions in China. |
You should read thoroughly this annual report and the documents that we refer to herein with
the understanding that our actual future results may be materially different from and/or worse than
what we expect. We qualify all of our forward-looking statements by these cautionary statements.
Other sections of this annual report include additional factors which could adversely impact our
business and financial performance. Moreover, we operate in an evolving environment. New risk
factors emerge from time to time and it is not possible 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 to differ materially from those
contained in any forward-looking statements.
This annual report also contains third-party data relating to the consumer food services
industry and the quick service restaurant sector in China that includes projections based on a
number of assumptions. The consumer food services industry and the quick service restaurant sector
may not grow at the rates projected by market data, or at all. The failure of these industries to
grow at the projected rates may have a material adverse effect on
5
our business and the market price
of our ADSs. Furthermore, if any one or more of the assumptions underlying the market data turns
out to be incorrect, actual results may differ from the projections based on these assumptions.
Although we believe that these third-party data are accurate, you should not place undue reliance on these
forward-looking statements.
The forward-looking statements made in this annual report relate only to events or information
as of the date on which the statements are made in this annual report. Except as required by U.S.
federal securities law, we undertake no obligation to update or revise publicly any forward-looking
statements, whether as a result of new information, future events or otherwise, after the date on
which the statements are made or to reflect the occurrence of unanticipated events. You should read
this annual report and the documents that we reference in this annual report and have filed as
exhibits to this annual report, completely and with the understanding that our actual future
results may be materially different from what we expect.
PART I
Not applicable.
Not applicable.
A. Selected Financial Data
The following selected consolidated statements of operations for our company for the three
years ended December 31, 2008, 2009 and 2010 and the selected consolidated balance sheet as of
December 31, 2009 and 2010 are derived from our audited consolidated financial statements included
elsewhere in this annual report. The selected consolidated balance sheet as of December 31, 2008 is
derived from our audited consolidated financial statements not included in this annual report. The
selected consolidated statements of operations for our company for the year ended December 31, 2007
and the selected consolidated balance sheet as of December 31, 2007 are derived from our unaudited
consolidated financial statements not included in this annual report. We have not included
financial information for the year ended December 31, 2006 as such information is not available on
a basis that is consistent with the consolidated financial information for the years ended December
31, 2007, 2008, 2009 and 2010 and cannot be obtained without unreasonable effort or expense.
6
The selected consolidated financial data should be read in conjunction with, and are qualified
in their entirety by reference to, our consolidated financial statements and related notes and
Item 5Operating and Financial Review and Prospects included elsewhere in this annual report.
Our consolidated financial statements are prepared and
presented in accordance with accounting principles generally accepted in the United States of
America, or U.S. GAAP.
Our historical results are not necessarily indicative of results to be expected in any future
period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2007 |
|
2008 |
|
2009 |
|
2010 |
|
|
RMB |
|
RMB |
|
RMB |
|
RMB |
|
$ |
|
|
(In thousands, except shares, per share, ADS and per ADS data) |
Consolidated Statements of
Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenuerestaurant sales |
|
|
44,195 |
|
|
|
231,463 |
|
|
|
494,459 |
|
|
|
745,939 |
|
|
|
113,021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Food and paper |
|
|
21,810 |
|
|
|
115,071 |
|
|
|
239,357 |
|
|
|
351,422 |
|
|
|
53,246 |
|
Restaurant wages and related
expenses (1) |
|
|
7,492 |
|
|
|
33,076 |
|
|
|
76,890 |
|
|
|
119,052 |
|
|
|
18,038 |
|
Restaurant rent expenses |
|
|
3,275 |
|
|
|
17,945 |
|
|
|
38,546 |
|
|
|
64,284 |
|
|
|
9,740 |
|
Restaurant utilities expenses |
|
|
3,771 |
|
|
|
13,773 |
|
|
|
31,073 |
|
|
|
46,746 |
|
|
|
7,083 |
|
Pre-opening expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,906 |
|
|
|
895 |
|
Other restaurant operating
expenses |
|
|
2,381 |
|
|
|
12,455 |
|
|
|
28,774 |
|
|
|
33,106 |
|
|
|
5,016 |
|
Selling, general and
administrative expenses
(1) |
|
|
38,168 |
|
|
|
3,955 |
|
|
|
13,360 |
|
|
|
32,330 |
|
|
|
4,898 |
|
Depreciation |
|
|
968 |
|
|
|
2,855 |
|
|
|
10,999 |
|
|
|
21,288 |
|
|
|
3,225 |
|
Impairment and other lease
charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,087 |
|
|
|
316 |
|
Total operating expenses |
|
|
77,865 |
|
|
|
199,130 |
|
|
|
438,999 |
|
|
|
676,221 |
|
|
|
102,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
(33,670 |
) |
|
|
32,333 |
|
|
|
55,460 |
|
|
|
69,718 |
|
|
|
10,564 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
|
|
|
|
1,083 |
|
|
|
758 |
|
|
|
3,465 |
|
|
|
525 |
|
Foreign exchange gain (loss) |
|
|
|
|
|
|
(1,347 |
) |
|
|
3 |
|
|
|
(2,715 |
) |
|
|
(411 |
) |
Other income (loss) |
|
|
493 |
|
|
|
(12 |
) |
|
|
490 |
|
|
|
6,893 |
|
|
|
1,044 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income
taxes |
|
|
(33,177 |
) |
|
|
32,057 |
|
|
|
56,711 |
|
|
|
77,361 |
|
|
|
11,722 |
|
Income tax expenses |
|
|
(336 |
) |
|
|
(5,440 |
) |
|
|
(11,632 |
) |
|
|
(14,551 |
) |
|
|
(2,205 |
) |
Net income (loss) |
|
|
(33,543 |
) |
|
|
26,617 |
|
|
|
45,079 |
|
|
|
62,810 |
|
|
|
9,517 |
|
Dividend on Series A
convertible preferred shares |
|
|
|
|
|
|
|
|
|
|
(3,946 |
) |
|
|
|
|
|
|
|
|
Distribution to the founder |
|
|
(1,744 |
) |
|
|
(2,436 |
) |
|
|
(3,454 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable
to ordinary shareholders |
|
|
(35,287 |
) |
|
|
24,181 |
|
|
|
37,679 |
|
|
|
62,810 |
|
|
|
9,517 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per
share |
|
|
(0.48 |
) |
|
|
0.30 |
|
|
|
0.47 |
|
|
|
0.73 |
|
|
|
0.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per
ADS (2) |
|
|
(1.92 |
) |
|
|
1.21 |
|
|
|
1.88 |
|
|
|
2.92 |
|
|
|
0.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per
share |
|
|
(0.48 |
) |
|
|
0.30 |
|
|
|
0.47 |
|
|
|
0.71 |
|
|
|
0.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per
ADS (2) |
|
|
(1.92 |
) |
|
|
1.21 |
|
|
|
1.88 |
|
|
|
2.84 |
|
|
|
0.43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average
ordinary shares outstanding |
|
|
56,000,000 |
|
|
|
56,000,000 |
|
|
|
56,000,000 |
|
|
|
68,124,712 |
|
|
|
68,124,712 |
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2007 |
|
2008 |
|
2009 |
|
2010 |
|
|
RMB |
|
RMB |
|
RMB |
|
RMB |
|
$ |
|
|
(In thousands, except shares, per share, ADS and per ADS data) |
Diluted weighted average
ordinary shares outstanding |
|
|
80,000,000 |
|
|
|
80,000,000 |
|
|
|
80,000,000 |
|
|
|
70,503,794 |
|
|
|
70,503,794 |
|
|
|
|
Notes: |
|
|
|
(1) |
|
Includes share-based compensation expenses of RMB5.7 million ($0.9 million) for the year
ended December 31, 2010. |
|
(2) |
|
Each ADS represents four ordinary shares. |
The following table presents a summary of our consolidated balance sheet data as of December
31, 2007, 2008, 2009 and 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
2007 |
|
2008 |
|
2009 |
|
2010 |
|
|
RMB |
|
RMB |
|
RMB |
|
RMB |
|
$ |
|
|
in thousands |
Current Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
59,573 |
|
|
|
52,378 |
|
|
|
70,695 |
|
|
|
612,583 |
|
|
|
92,816 |
|
Total current assets |
|
|
67,427 |
|
|
|
75,439 |
|
|
|
105,913 |
|
|
|
661,731 |
|
|
|
100,262 |
|
Total assets |
|
|
72,035 |
|
|
|
130,909 |
|
|
|
215,068 |
|
|
|
869,803 |
|
|
|
131,788 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
5,732 |
|
|
|
38,686 |
|
|
|
82,193 |
|
|
|
90,419 |
|
|
|
13,698 |
|
Total liabilities |
|
|
5,732 |
|
|
|
40,818 |
|
|
|
87,301 |
|
|
|
103,711 |
|
|
|
15,712 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mezzanine equity |
|
|
96,949 |
|
|
|
96,949 |
|
|
|
96,949 |
|
|
|
|
|
|
|
|
|
Total equity (deficit) |
|
|
(30,646 |
) |
|
|
(6,858 |
) |
|
|
30,818 |
|
|
|
766,092 |
|
|
|
116,076 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, mezzanine
equity and equity (deficit) |
|
|
72,035 |
|
|
|
130,909 |
|
|
|
215,068 |
|
|
|
869,803 |
|
|
|
131,788 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange Rate Information
Our business is primarily conducted in China and all of our revenues are denominated in
Renminbi. This annual report contains translations of RMB amounts into U.S. dollars at specific
rates solely for the convenience of the reader. The conversion of RMB into U.S. dollars in this
annual report is based on the noon buying rate in The City of New York for cable transfers of RMB
as certified for customs purposes by the Federal Reserve Bank of New York. 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 RMB6.6 to $1.00, the noon buying rate in effect as of December 30, 2010 (the rate
for December 31, 2010 was not available). 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 Chinese 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. On April 15, 2011, the noon buying rate
was RMB6.5317 to $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 periodic reports or any other information to be provided to you.
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noon Buying Rate |
Period |
|
Period End |
|
Average(1) |
|
Low |
|
High |
|
|
(RMB Per $1.00) |
2006 |
|
|
7.8041 |
|
|
|
7.9579 |
|
|
|
8.0702 |
|
|
|
7.8041 |
|
2007 |
|
|
7.2946 |
|
|
|
7.5806 |
|
|
|
7.8127 |
|
|
|
7.2946 |
|
2008 |
|
|
6.8225 |
|
|
|
6.9193 |
|
|
|
7.2946 |
|
|
|
6.7800 |
|
2009 |
|
|
6.8259 |
|
|
|
6.8295 |
|
|
|
6.8470 |
|
|
|
6.8176 |
|
2010 |
|
|
6.6000 |
|
|
|
6.7603 |
|
|
|
6.8305 |
|
|
|
6.6000 |
|
October |
|
|
6.6705 |
|
|
|
6.6675 |
|
|
|
6.6912 |
|
|
|
6.6397 |
|
November |
|
|
6.6670 |
|
|
|
6.6538 |
|
|
|
6.6892 |
|
|
|
6.6330 |
|
December |
|
|
6.6000 |
|
|
|
6.6497 |
|
|
|
6.6745 |
|
|
|
6.6000 |
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January |
|
|
6.6017 |
|
|
|
6.5964 |
|
|
|
6.6364 |
|
|
|
6.5809 |
|
February |
|
|
6.5713 |
|
|
|
6.5761 |
|
|
|
6.5965 |
|
|
|
6.5520 |
|
March |
|
|
6.5483 |
|
|
|
6.5645 |
|
|
|
6.5743 |
|
|
|
6.5483 |
|
April (through April 15) |
|
|
6.5317 |
|
|
|
6.5382 |
|
|
|
6.5477 |
|
|
|
6.5310 |
|
|
|
|
Source: Federal Reserve Statistical Release |
|
|
|
(1) |
|
Annual averages were calculated by using the average of the exchange rates on the last day of
each month during the relevant year. Monthly averages are calculated by using the average of
the daily rates during the relevant month. |
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
Risks Relating to Our Industry and Business
|
Our future growth depends on our ability to open and profitably operate new restaurants. |
Our future growth depends on our ability to open and profitably operate new restaurants. We
opened 38 and 50 new restaurants in 2009 and 2010, respectively, and plan to increase the number of
our restaurants to approximately 200 by the end of 2011. We may not be able to open new restaurants
as quickly as planned. Delays or failures in opening new restaurants could materially and adversely
affect our growth strategy and our expected results. In researching new restaurant sites, we may be
faced with intense competition for new restaurant sites in our target markets and increased lease
costs. Even if we open additional restaurants as planned, these new restaurants may neither be
profitable nor have results comparable to our existing restaurants for a period of time. This
growth strategy and the substantial investment associated with the development of each additional
restaurant may cause our operating results and profits to fluctuate. In addition, if we open new
restaurants in our existing geographic markets, the sales performance and customer traffic of our
existing restaurants near new restaurants may decline as a result. This may in turn adversely affect our
9
ability to achieve the anticipated growth in
revenue and profitability of our entire restaurant chain.
|
Our future growth also depends on our ability to increase existing restaurant sales. |
While future sales growth will depend in part on our plans for new restaurant openings, deeper
penetration into existing geographic markets and the sales of existing restaurants will also affect
our sales growth and will continue to be critical factors affecting our revenue and profit. Our
ability to increase existing restaurant sales depends in part on our ability to successfully
implement our initiatives to increase throughput, such as increasing the number of food deliveries
and the number of menu selections. Our ability to penetrate further into the existing geographic
markets where we already have a presence depends in part on our ability to successfully market
ourselves and our ability to expand the range of our services by making breakfast options and
delivery services available in our restaurants. It is possible that we will not achieve our
targeted existing restaurant sales growth or that existing restaurant sales could decrease, or that
we will not achieve our targeted level of expansion within existing geographic markets. If any of
this were to happen, sales and profits growth may be materially and adversely affected.
|
Our historical financial and operating results are not indicative of future performance; our
financial and operating results are difficult to forecast. |
Although our founders owned and operated restaurants prior to our establishment in August
2007, we have experienced significant growth only since 2008, after we raised funds through the
issuance of Series A preferred shares to two international private equity investors in September
2007. Therefore, we have a relatively short operating history as a corporation and our historical
results may not be indicative of our future performance. Our financial and operating results may
not meet the expectations of public market analysts or investors, which could cause the future
price of our ADSs to decline. Our revenues, expenses and operating results may vary from period to
period in response to a variety of factors beyond our control, including general economic
conditions, regulations or actions pertaining to quick service restaurants in China and our ability
to control the cost of revenues and operating expenses. Therefore, we believe that period-to-period
comparisons of our operating results may not be indicative of our future performance and you should
not rely on them to predict the future performance of our ADSs.
|
Our results of operations may fluctuate significantly due to seasonality and other factors. |
Our overall results of operations may fluctuate significantly from period to period because of
several factors, including: the timing of new restaurant openings and the amounts of associated
pre-opening costs and expenses; operating costs for our newly opened restaurants, which are often
substantially greater during the first few months of operations; revenue loss and renovation
expenses associated with the temporary closure of existing restaurants for refurbishment;
impairment of long-lived assets, including goodwill, and any losses incurred on restaurant
closures; and fluctuations in food and commodity prices. As a result, our results of operations may fluctuate significantly from
period to period and
10
comparison of different periods may not be meaningful. Our results for a given
fiscal period are not necessarily indicative of results to be expected for any other fiscal period.
|
Our expansion into new markets may present increased risks. |
We plan to open new restaurants in markets where we have little or no operating experience.
Those markets may have different competitive conditions, consumer tastes and discretionary spending
patterns from our existing markets. As a result, any new restaurants we open in those markets may
be less successful than restaurants in our existing markets. Consumers in a new market may not be
familiar with our brand and we may need to build brand awareness in that market through greater
investments in advertising and promotional activities than we originally planned. We may find it
more difficult in new markets to hire, motivate and keep qualified employees who share our business
philosophy and culture. Restaurants opened in new markets may also have lower average sales or
higher construction, occupancy or operating costs than restaurants in existing markets. In
addition, we may have difficulty in finding reliable suppliers or distributors with adequate
supplies of ingredients meeting our quality standards in the new markets. Sales at restaurants
opened in new markets may take longer than expected to ramp up and reach, or may never reach,
expected sales and profit levels, thereby affecting our overall profitability.
|
If we are unable to manage our growth effectively, we may not be able to capitalize on new
business opportunities and our business and financial results may be materially and adversely
affected. |
We have experienced rapid growth, and further expansion may place significant strain on our
management and resources. We have increased the number of our restaurants in China from 9 as of
December 31, 2007 to 131 as of December 31, 2010, and we plan to continue to expand our operations
in different geographic locations in China. This further expansion may place substantial demands on
our management and our operational, technological and other resources. Our planned expansion will
also place significant demands on us to maintain consistent food and service quality and preserve
our corporate culture to ensure that our brand does not suffer as a result of any deterioration,
whether actual or perceived, in the quality of our food or service. To manage and support our
growth, we must improve our existing operational and administrative systems as well as our
financial and management controls. Our continued success also depends on our ability to recruit,
train and retain additional qualified management personnel as well as other administrative and
sales and marketing personnel, particularly as we expand into new markets. To accommodate our
growth, we anticipate that we will need to implement a variety of new and upgraded operational and
financial systems, procedures and controls, including the improvement of our accounting and other
internal management systems. We also need to continue to manage our relationships with our
suppliers and customers. All of these endeavors will require substantial management attention and
efforts and require significant additional expenditures. We cannot assure you that we will be able
to manage any future growth effectively and efficiently, and any failure to do so may materially
and adversely affect our ability to capitalize on new business
opportunities, which in turn may have a material adverse effect on our business and financial
results.
11
Our business is affected by changes in consumer taste and discretionary spending.
The consumer food services industry is affected by consumer taste and perceptions. Although we
have a dedicated product development team who constantly updates our menu to adapt to changes in
seasons, dining trends and shifts in consumer taste and nutritional trends, we cannot assure you
that we would continue to be able to maintain our menu to suit changing popular taste, nutritional
trends and general customer demands in China. In addition, if prevailing health or dietary
preferences and perceptions cause consumers to avoid our products in favor of alternative foods,
our business could suffer. Our success also depends, to a significant extent, on discretionary
customer spending, which is influenced by general economic conditions. Accordingly, we may
experience declines in sales during economic downturns or prolonged periods of high unemployment
rates. Any material decline in the amount of discretionary spending in China may have a material
adverse effect on our business, results of operations and financial conditions.
Our restaurants are susceptible to risks in relation to rental increases and fluctuations,
inflexible long-term lease agreements and unexpected land acquisitions, building closures or
demolitions.
As we lease the property for substantially all of our restaurants, we have significant
exposure to the retail rental market in China. For the years ended December 31, 2008, 2009 and
2010, our restaurant rental expenses amounted to approximately RMB17.9 million, RMB38.5 million and
RMB64.3 million, respectively, representing 7.8%, 7.8% and 8.6% of our total revenues during the
respective periods. Since rental expenses represent a significant portion of our total operating
expenses, our profitability may be adversely affected by any substantial increase in the rental
expenses of our restaurant premises.
The majority of our lease agreements for our restaurant sites have an initial lease term of
between 5 to 10 years and may contain an option to extend; a number of these lease agreements
expire each year. A large number of lease agreements provide that the rent will increase at a fixed
rate or by a fixed amount and certain leases require contingent rent, determined as a percentage of
sales, as defined by the terms of the applicable lease agreement, which could result in rents being
above fair market value. When a lease agreement expires, the lessor has the right to review and
modify the terms and conditions of the lease agreement and we have to negotiate the terms of
renewal with that lessor. There is no assurance that we would be able to renew the relevant lease
agreements on terms acceptable to us or to lease premises at prime locations on comparable and
favorable terms, particularly in respect of rental charges. In the event that we need to close down
a restaurant at the end of a lease, our business may be disrupted and we may incur extra costs to
relocate, and our business operations and financial performance may be materially and adversely
affected.
Because our lease agreements have fixed lease terms, these lease agreements expose us to the
risk of having to make rental payments for fixed periods of time in spite of failure of business or
other unforeseen events that may occur before each lease term expires. In the event that we need to
close down a restaurant before the end of a lease, we may be obligated to continue paying rent for
the rest of the lease term and our business operations and financial performance may be materially and adversely affected.
In addition, the PRC government has
12
the statutory power to acquire any land in the PRC. In the event of any compulsory acquisition of any
of the properties in which our restaurants or facilities are situated for redevelopment, the amount
of compensation to be awarded to us may not be based on the fair market value of such property but
may be assessed on the basis prescribed in the relevant legislation. In such event, we will be
forced to relocate to other locations, thus affecting our business operations.
Our business depends significantly on the market recognition of our
CSC brand, and if
we are not able to maintain or enhance our brand recognition, our business, financial condition
and results of operations may be materially and adversely affected.
Since 2008, we have successfully built up our
![(CHINESE GRAPHICS)](h05022h0502201.gif)
CSC brand to represent delicious,
everyday Chinese food. We believe that maintaining and enhancing the
![(CHINESE GRAPHICS)](h05022h0502201.gif)
CSC brand is
important to maintaining our competitive advantage. However, our ability to maintain our brand
recognition depends on a number of factors, some of which are beyond our control. Our continued
success in maintaining and enhancing our brand and image depends to a large extent on our ability
to further develop and maintain our distinctive combination of delicious menu offerings, affordable
prices and clean dining environments throughout our restaurant chain, as well as on our ability to
respond to competitive pressures. If we are unable to do so, the value of our brand or image will
be diminished and our business and results of operations may be materially and adversely affected.
As we continue to grow in size, expand our food offerings and services and extend our geographic
reach, maintaining quality and consistency may be more difficult and we cannot assure you that
customers confidence in our brand name will not be diminished.
In addition, unauthorized use of our trademarks, trade name and trade secrets by unrelated
third parties may damage our reputation and brand. However, preventing trademark and trade name
infringement, particularly in China, is difficult, costly and time-consuming. The measures we take
to protect our trademarks, copyrights and other intellectual property rights, which presently
include relying on a combination of trademark, copyright and trade secret laws and may potentially
include taking court action against anyone that infringes on our trademark and trade name, may not
be adequate to prevent unauthorized use by third parties. Furthermore, the application of laws
governing intellectual property rights in China is uncertain and evolving, and could involve
substantial risks to us. If we are unable to adequately protect our trademarks, copyrights and
other intellectual property rights, we may lose these rights, our brand name may be harmed, and our
business may suffer materially.
We generate a majority of our revenues from Chongqing municipality and Sichuan Province in
China. Any event negatively affecting the consumer food services industry in these markets could
have a material adverse effect on our overall business and results of operations.
We generated 94.8%, 93.4% and 92.3% of our revenues in 2008, 2009 and 2010, respectively, from
our restaurants in Chongqing municipality and Sichuan province in China. We expect these markets to
continue to account for a substantial portion of our revenues in the near future. If either
Chongqing municipality or Sichuan Province experiences an event negatively affecting its consumer food services industry, such as a local economic downturn,
13
a natural disaster, a contagious disease outbreak or a terrorist attack, or if the local authorities
adopt regulations that place additional restrictions or burdens on us or on our industry in
general, our overall business and results of operations may be materially and adversely affected.
We face risks related to instances of food-borne illnesses, health epidemics and other
outbreaks.
Our business is susceptible to food-borne illnesses, health epidemics and other outbreaks. We
cannot guarantee that our internal controls and training will be fully effective in preventing all
food-borne illnesses. Furthermore, our reliance on third-party food suppliers and distributors
increases the risk that food-borne illness incidents could be caused by third-party food suppliers
and distributors outside of our control and the risk of multiple locations instead of a single
restaurant being affected. New illnesses resistant to any precautions may develop in the future, or
diseases with long incubation periods could arise, such as mad-cow disease, that could give rise to
claims or allegations on a retroactive basis. Reports in the media of instances of food-borne
illnesses could, if highly publicized, negatively affect our industry overall and us in particular,
impacting our restaurant sales, forcing the closure of some of our restaurants and conceivably
having significant impact on our results of operations. This risk exists even if it were later
determined that the illness in fact were not spread by our restaurants. Furthermore, other
illnesses, such as hand, foot and mouth disease or avian influenza, could adversely affect the
supply of some of our food products and significantly increase our costs.
We also face risks related to health epidemics. Past occurrences of epidemics or pandemics,
depending on their scale of occurrence, have caused different degrees of damage to the national and
local economies in China. In June 2009, the World Health Organization declared the outbreak of H1N1
influenza to be a pandemic. An outbreak of any epidemics or pandemics in China, especially in the
areas where we have restaurants, may result in quarantines, temporary closures of our restaurants,
travel restrictions or the sickness or death of key personnel and our customers. Any of the above
may cause material disruptions to our operations, which in turn may materially and adversely affect
our financial condition and results of operations.
Our success depends on the continuing efforts of our senior management team and other key
personnel and our business may be harmed if we lose their services.
Our future success depends heavily upon the continuing services of our senior management team,
in particular one of our founders, Ms. Hong Li, who has been our leader since our inception. Ms. Li
currently serves as our chairman and chief executive officer. If one or more of our senior
executives or other key personnel are unable or unwilling to continue in their present positions,
we may not be able to replace them easily or at all, and our business may be disrupted and our
business and results of operations may be materially and adversely affected. Our Vice President of
Operations resigned in December 2010 and our Chief Information Officer resigned in March 2011.
While their duties are being carried out by acting replacements from within our company, we cannot
assure you that other senior executives will not be unable or unwilling to continue in their
present positions. Competition for experienced management personnel in the quick service restaurant sector is intense, the
14
pool of qualified candidates is limited, and we may not be able to retain the services of our
senior executives or key personnel or attract and retain high-quality senior executives or key
personnel in the future. In addition, if any member of our senior management team or any of our
other key personnel joins a competitor or forms a competing company, we may lose trade secrets and
know-how as a result. Furthermore, if other businesses affiliated with our founders compete with us
for qualified restaurant managers and employees, potential premises for restaurant operations and
other resources, it could materially and adversely affect our business operations and expansion
plans. Any actual or perceived competition from our founders outside businesses could have a
material adverse effect on our business operations and investors confidence in us. Our founders
and executive officers have entered into confidentiality and non-competition agreements with us. If
any disputes arise between any of our founders and executive officers and us, it may be difficult
to enforce these agreements against these individuals.
Events that disrupt the operations of any of our restaurants, such as fires, floods, earthquakes
or other natural or man-made disasters, may materially and adversely affect our business
operations.
Our operations are vulnerable to interruption by fires, floods, earthquakes, power failures
and power shortages, hardware and software failures, computer viruses, terrorist attacks and other
events beyond our control. Fires, floods, earthquakes and terrorist attacks may lead to evacuations
and other disruptions in our restaurant operations, which may prevent us from providing quality
food and service to customers, thereby affecting our business and damaging our reputation. Any such
event could materially and adversely affect our business operations.
Reports of incidents of food tampering could materially damage our reputation and reduce our
restaurant sales.
The consumer food services industry has long been subject to the threat of food tampering by
suppliers, employees or customers, such as the addition of foreign objects into the food that we
sell. Reports, whether true or not, of injuries caused by food tampering have in the past severely
injured the reputations of restaurants, including restaurant chains like us, and could affect us in
the future as well. Instances of food tampering, even those occurring solely at restaurants of our
competitors, could result in negative publicity about the overall consumer food services industry
and adversely affect our sales on a local, regional or national basis. A decrease in customer
traffic as a result of health concerns or negative publicity could materially harm our business,
results of operations and financial condition.
Increases in the cost of ingredients used in our restaurants may lead to declines in our margins
and operating results.
The founding philosophy of our business is to offer delicious, everyday Chinese food to
average Chinese consumers for an affordable price. Any rise in our costs, particularly a rise in
the cost of the ingredients we use, may lead to declines in our margins and operating costs.
15
The cost of ingredients we use in our restaurants depends on a variety of factors, many of
which are beyond our control. Food ingredients represented approximately 46.1%, 44.7% and 44.2% of
our restaurant revenues for the years ended December 31, 2008, 2009 and 2010, respectively.
Fluctuations in weather, supply and demand and economic conditions could adversely affect the cost,
availability and quality of our critical food ingredients. If we are not able to obtain requisite
quantities of quality ingredients at commercially reasonable prices, our ability to provide the
menu items that are central to our business would be adversely affected. In addition, the PRC food
price index increased by 9.6% from December 2009 to December 2010, which partially contributed the
increase in our costs in food ingredients. If the cost of ingredients that we use in our
restaurants increases in the future and we cannot pass these cost increases onto our customers, our
operating margins may decrease.
In addition, the Chinese government has promulgated price intervention regulations under which
temporary measures may be taken to control price increase or decrease of certain material
commodities which include a number of ingredients, such as grain, food oil, pork and eggs, that are
important to our business. Such price control measures will have direct effects on our cost of
relevant ingredients. The measures that prevent the prices of ingredients from falling will keep
our cost of relevant ingredients at a higher level than it would be under free market conditions.
Although generally we may benefit from the measures that control price increases, which keep our
ingredients cost from rising, there is no guarantee for how long and to what extent such measures
may be implemented, or whether such measures will effectively control price increases in the long
run. For example, there is a possibility that measures controlling price increases may frustrate
the relevant suppliers and discourage production, in which case the supply of the affected
ingredients may decrease and our business may be materially and adversely affected.
Our current restaurant locations may become unattractive, and attractive new restaurant
locations may not be available for a reasonable price, if at all.
The success of any restaurant depends substantially on its location. Given the rate of urban
construction in China, there can be no assurance that our current restaurant locations will
continue to be attractive as neighborhoods or demographic patterns change. Neighborhood or economic
conditions where restaurants are located could deteriorate in the future, thus resulting in
potentially reduced sales in these locations. If we cannot obtain desirable locations at reasonable
prices, our ability to effect our growth strategy will be adversely affected.
In addition, some of our less profitable or unsuccessful restaurants may be subject to
long-term non-cancelable leases, so that even if we decide to close such restaurants, we may
nonetheless be required to perform our obligations under such leases or pay penalties for
terminating the leases, which will increase our operating costs.
Our success depends on our ability to compete with our major competitors.
The consumer food services industry is intensely competitive and we compete in China with many
well established food services companies on the basis of price, service, location and food quality.
Our competitors include a large and diverse group of individual
16
restaurants and restaurant chains that range from independent local operators to
well-capitalized Chinese and international quick service restaurant companies, including
international restaurant chains such as McDonalds and Kentucky Fried Chicken, or KFC, all of which
have significant presence in many parts of China. As our competitors expand their operations,
through acquisitions or otherwise, we expect competition to intensify. Some of our competitors have
substantially greater financial and other resources than we do, which may allow them to react to
changes in pricing, marketing and the consumer food services industry in general better than we
can.
The consumer food services industry has few non-economic barriers to entry, and therefore new
competitors, especially small local restaurant operators, may emerge at any time. If our existing
or future competitors offer items that are better priced or more appealing to local customer tastes
or if a competitor increases the number of restaurants it operates in one of our key markets, our
customers will be diverted. In addition, if our competitors offer financial incentives to
personnel, ingredients suppliers or prospective sellers of real estate in excess of what we offer,
it could have a material adverse effect on our financial condition and results of operations. We
also compete with other restaurant chains and other retail businesses for quality site locations
and hourly employees.
Failure to comply with government regulations relating to the consumer food services industry,
fire safety, food hygiene and environmental protection could materially and adversely affect our
business and operating results.
Our business is subject to various compliance and operational requirements under PRC laws. The
failure of any of our restaurants to comply with applicable laws and regulations, including laws
governing our relationship with our employees, may incur substantial fines and penalties from the
relevant PRC government authorities. Each restaurant in our chain must hold a basic business
license issued by the local government authorities and must have restaurant operations within the
business scope of its business license. Under PRC regulations, any business operating without a
valid business license may be subject to fines of up to RMB100,000 ($15,000), confiscation of gains
from the business and/or closure of the business. Our business is also subject to various
regulations that affect various aspects of our business in the cities in which we operate,
including fire safety, food hygiene and environmental protection. Our restaurants must obtain
various licenses and permits under these regulations. Some of our restaurants have not obtained all
the requisite licenses and permits. We are making diligent efforts to obtain as many of the
missing permits as possible. Although we have not been subject to any material fines or other
penalties in relation to any non-compliance in the past, if we fail to cure such non-compliance in
a timely manner, we may be subject to fines, confiscation of the gains derived from the related
restaurants or the suspension of operations of the restaurants that do not have all the requisite
licenses and permits, which could materially and adversely affect our business and results of
operations. See also Item 4B Business Overview RegulationRegulations on the Food Safety and
Licensing Requirements for Consumer Food Services and
Item 4B Business Overview
RegulationRegulations on Fire Prevention.
17
We depend on our dedicated and capable employees, and if we are not able to continue to hire,
train and retain qualified employees or if labor costs increase, our business and results of
operations could be materially and adversely affected.
Our continued success depends in part upon our ability to attract, motivate and retain a
sufficient number of qualified employees for our chain restaurant operations, including restaurant
managers, cooks and kitchen assistants. We cannot assure you that we would be able to recruit or
retain a sufficient number of qualified employees for our business. Any material increase in
employee turnover rates in our existing restaurants and any failure to recruit skilled personnel
and to retain key staff due to factors such as failure to keep up with market average employee
salary levels may make our growth strategy difficult to implement. Any increased labor costs due to
factors like competition, increased minimum wage requirements and employee benefits would adversely
impact our operating costs. Any of the above would materially and adversely affect our business and
results of operations.
We have granted and will continue to grant restricted shares, stock options and other
share-based compensation, which may materially impact our results of operations.
We adopted our 2009 share incentive plan in December 2009. The 2009 share incentive plan
permits us to grant stock options, restricted shares and restricted share units to our employees,
directors and consultants representing the right to acquire up to a total of 7,720,000 ordinary
shares. As of April 1, 2011, options to purchase 4,397,544 ordinary shares and 413,750 restricted
shares are outstanding under this plan. As a result of these option grants and potential future
grants under the plan, we have incurred and expect to continue to incur share-based compensation
expenses. We have adopted FASB Accounting Standards Codification (ASC) 718 (previously Statement
of Financial Accounting Standards No. 123(R)), for the accounting treatment of our 2009 share
incentive plan. We had share-based compensation expenses of RMB5.7 million ($0.9 million) for the
year ended December 31, 2010. As of December 31, 2010, there was RMB25.1 million ($3.8 million) in
total unrecognized compensation expenses related to unvested share-based compensation arrangements
granted under our share incentive plan. The additional expenses associated with share-based
compensation awards granted under our share incentive plan may materially impact our future results
of operations. However, if we limit the size or number of grants under our share incentive plan to
minimize the additional expenses associated with share-based compensation, we may not be able to
attract or retain key personnel.
Our corporate actions are substantially controlled by our officers, directors and principal
shareholders and their affiliated entities.
Our executive officers, directors and principal shareholders and their affiliated entities
beneficially own approximately 74.8% of our outstanding shares as of April 1, 2010. These
shareholders, if they acted together, would control matters requiring approval by our shareholders,
including the election of directors and the approval of mergers or other business combination
transactions, and they may not act in the best interests of our minority shareholders. This
concentration of ownership may also discourage, delay or prevent a change in control of our
company, which could deprive our shareholders of an opportunity to receive a premium for their
shares as part of a sale of our company and might reduce the price of our ADSs. These actions may
be taken even if they are opposed by our other shareholders.
18
We have limited insurance coverage.
As of December 31, 2010, we have obtained insurance policies that we believe are customary for
similar companies in China. We currently have in place property insurance, business interruption
insurance, third-party liability insurance and money insurance for many of our restaurants
currently in operation. For more details, see Item 4D Property, Plants and Equipment
Insurance. However, our insurance coverage may not be adequate to cover all losses that may occur,
particularly with respect to loss of business and reputation. If we were held liable for amounts
and claims exceeding the limits of our insurance coverage or outside the scope of our insurance
coverage, our business and results of operations may be materially and adversely affected.
Our legal right to lease certain properties could be challenged by third parties.
We do not own most of the properties on which we operate our restaurants. Instead, our
business model relies on leases or subleases from third parties. Some of the properties we lease
from third parties have been subject to mortgages which were created at the time the leases were
signed. In such circumstances, and where consent to the lease was not obtained from the mortgage
holder, the lease may not be binding on the transferee of the property if the mortgage holders
foreclose on the mortgage and transfer the property. For instance, in September 2009, the new
owners of a restaurant premise who obtained the ownership of the premise from a mortgage
foreclosure challenged the lease agreement we had with the previous lessor in a local court. The
restaurant in dispute contributed less than 1% of our total net revenues for year ended December
31, 2010. We are monitoring the litigation and may negotiate a new lease with the new owners or the
lessor, depending on the outcome of the litigation. Although we do not believe that this dispute
will have a material adverse effect on our operations, there may be similar events in the future
that could materially and adversely affect our results of operations.
In addition, some of our lessors have not provided us their title certificates for the
properties we lease or proof of authorizations from the property owners to sublease the properties
to us. If third parties who purport to be property owners challenge our right to lease these
properties, we could be subject to potential disputes with them. Such disputes, whether resolved in
our favor or not, may divert management attention or disrupt our business operations.
Failure to comply with lease registration and other compliance requirements under PRC law may
subject our lessors or us to fines or other penalties that may negatively affect our ability to
operate our restaurants.
We and those from whom we lease properties are subject to a number of land- and
property-related legal requirements. For instance, under PRC law, all lease agreements are required
to be registered with the local housing bureau. However, we and our lessors had not obtained
registrations from the relevant authorities for the majority of our leased restaurant properties.
Although the lack of registration with a governmental authority will not invalidate a lease
agreement in a PRC court, it may expose both our lessors and us to monetary fines. Such fines may,
in the aggregate, have an adverse effect on our financial condition. In addition, based on the
specific land use right certificates and property ownership certificates
19
currently held by some of our lessors, one property we lease is not designated for commercial
service purpose and the legal status of two other properties designated usage is unclear. Failure
to ensure that the properties we lease are operated in compliance with their designated use may
subject our lessors or us to various administrative actions, including fines or suspension of our
restaurant operations. Before entering into any new lease agreement, we normally conduct legal and
regulatory due diligence investigations to confirm that our intended use of the property is
consistent with the land-use regulations and the lease arrangement is in compliance with applicable
PRC regulations. Also, we intend to require our lessors to indemnify us for related losses arising
from any non-compliance on the part of our lessors in any of our future new lease agreements.
However, if we are not adequately indemnified by the lessors for our losses or the fines or other
penalties imposed on us for non-compliance with land- and property-related PRC laws and
regulations, our business and financial condition may be materially and adversely affected.
We may need additional capital, and our ability to obtain additional capital is subject to
uncertainties.
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 may, however, require
additional cash resources to finance our continued growth or other future developments, including
any investments we may decide to pursue. The amount and timing of such additional financing needs
will vary depending on the timing of our new restaurant openings, investments in or acquisitions of
new restaurants from third parties and the amount of cash flow from our operations. If our
resources are insufficient to satisfy our cash requirements, we may seek additional financing by
selling additional equity or debt securities or obtaining a credit facility. The sale of additional
equity securities could result in additional dilution to our shareholders. The incurrence of
indebtedness would result in increased debt service obligations and could result in operating and
financing covenants that may, among other things, restrict our operations or our ability to pay
dividends. Servicing such debt obligations could also be burdensome to our operations. If we fail
to service the debt obligations or are unable to comply with such debt covenants, we could be in
default under the relevant debt obligations and our liquidity and financial conditions may be
materially and adversely affected. Our ability to obtain additional capital on acceptable terms is
subject to a variety of uncertainties, including:
|
|
|
investors perception of, and demand for, securities of businesses in the consumer
food services industry; |
|
|
|
|
conditions of the U.S. and other capital markets in which we may seek to raise
funds; |
|
|
|
|
our future results of operations, financial condition and cash flows; |
|
|
|
|
PRC governmental regulation of foreign investment in the consumer food services
industry in China; |
|
|
|
|
economic, political and other conditions in China; and |
|
|
|
|
PRC governmental policies relating to foreign currency borrowings. |
20
We cannot assure you that future financing will be available in amounts or on terms acceptable
to us, if at all. If we fail to raise additional funds, we may need to sell debt or additional
equity securities, reduce our growth to a level that can be supported by our cash flow or defer
planned expenditures.
Risks Related to Doing Business in China
Adverse changes in economic and political policies of the PRC government could have a material
adverse effect on the overall economic growth of China, which could adversely affect our
business.
Substantially all of our business operations are conducted in China. Accordingly, our results
of operations, financial condition and prospects are affected by economic, political and legal
developments in China. Chinas economy differs from the economies of most developed countries in
many respects, including with respect to the amount of government involvement, level of
development, growth rate, control of foreign exchange and allocation of resources. While the PRC
economy has experienced significant growth in the past three decades, growth has been uneven across
different regions and among various economic sectors of China. The PRC government has implemented
various measures to encourage economic development and guide the allocation of resources. Some of
these measures benefit the overall PRC economy, but may also have a negative effect on us. For
example, our financial condition and results of operations may be adversely affected by government
control over capital investments or changes in tax regulations that are applicable to us. Measures
to control the pace of economic growth may cause a decrease in the level of economic activity in
China, which in turn could adversely affect our results of operations and financial condition. In
addition, stimulus measures designed to help China weather the recent global financial crisis may
contribute to higher inflation, which could adversely affect our results of operations and
financial condition. For example, certain operating costs and expenses, such as employee
compensation and office operating expenses, may increase as a result of higher inflation. In
August 2010, November 2010 and March 2011, we raised the wages of our restaurant staff and
management. Such wage raises have had and will continue to exert pressure on our operating margin.
Further, because a substantial portion of our assets consists of cash and cash equivalents and
short-term investments, high inflation could significantly reduce the value and purchasing power of
these assets. In addition, high inflation may reduce the disposable income of our customers or
dampen their willingness to dine at restaurants.
Uncertainties with respect to the PRC legal system could materially and adversely affect us.
We conduct our business primarily through our subsidiaries in China. Our operations in China
are governed by PRC laws and regulations. Our subsidiaries are generally subject to laws and
regulations applicable to foreign investments in China and, in particular, laws applicable to
wholly foreign-owned enterprises. 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, China has
21
not developed a fully
integrated legal system and recently enacted laws and regulations may not sufficiently cover all
aspects of economic activities in China. In particular, because these laws and regulations are
relatively new, and because of the limited volume of published decisions and their nonbinding
nature, the interpretation and enforcement of these laws and regulations involve uncertainties. In
addition, the PRC legal system is based in part on government policies and internal rules (some of
which are not published on a timely basis or at all) that may have a retroactive effect. As a
result, we may not be aware of our violation of these policies and rules until some time after the
violation. In addition, any litigation in China may be protracted and result in substantial costs
and diversion of resources and management attention.
If our preferential tax treatments become unavailable or if the calculation of our tax liability
is successfully challenged by the PRC tax authorities, our results of operations would be
materially and adversely affected.
The Chinese government has provided various tax incentives to our subsidiaries in China. These
incentives include reduced enterprise income tax rates. For example, under the PRC Enterprise
Income Tax Law, or the EIT Law, which became effective on January 1, 2008, the statutory enterprise
income tax rate is 25%. However, Chongqing Xinghong Growing Rich Management Co., Ltd., the
Chongqing subsidiary of CSC China, enjoys a preferential enterprise income tax rate of 15% from
2008 through 2010 due to an approval it received from the local tax authority in Chongqing. Tax
policies for 2011 have not yet been made public and it is unclear whether our preferential tax rate
will be extended. If it is not extended, our 2011 income may be taxed at a rate of 25%, or ten
percentage points higher than the applicable rate in 2010. Any increase in the enterprise income
tax rate applicable to our Chinese subsidiaries, or discontinuation or reduction of any of the
preferential tax treatments currently enjoyed by our subsidiaries in China, could adversely affect
our business, operating results and financial condition. In addition, in the ordinary course of our
business, we are subject to complex income tax and other tax regulations and significant judgment
is required in the determination of a provision for income taxes. Although we believe our tax
provisions are reasonable, if the PRC tax authorities successfully challenge our positions and we
are required to pay tax, interests and penalties in excess of our tax provisions, our results of
operations and financial condition would be materially and adversely affected.
You may experience difficulties in effecting service of legal process, enforcing foreign
judgments or bringing original actions in China against us or our management named in the annual
report.
We conduct substantially all of our operations in China and substantially all of our assets
are located in China. In addition, all of our senior executive officers reside within China and
most of them are PRC nationals. As a result, it may not be possible to effect service of process
within the United States or elsewhere outside China upon our senior executive officers. It may also
be difficult for you to enforce in PRC courts judgments obtained in U.S. courts based on the civil
liability provisions of the U.S. federal securities laws or applicable state securities laws
against us and our officers and directors, most of whom are not residents of the United States and
the substantial majority of whose assets are located outside of the United States. In addition, there is uncertainty as to whether the
courts of the PRC would recognize or enforce judgments of U.S. courts against us or such persons
22
predicated upon the civil liability provisions of the securities laws of the United States or any
state and it is uncertain whether such PRC courts would be competent to hear original actions
brought in the PRC against us or such persons predicated upon the securities laws of the United
States or any state. Our PRC counsel has advised us that the PRC does not have treaties with the
United States or many other countries providing for the reciprocal recognition and enforcement of
judgment of courts. In addition, since we are incorporated under the laws of the Cayman Islands and
our corporate affairs are governed by the laws of the Cayman Islands, it may not be possible for
you to bring an action against us or against our directors or officers based upon PRC laws in the
event that you believe that your rights as a shareholder have been infringed.
Governmental control of currency conversion may affect the value of your investment.
The PRC government imposes controls on the convertibility of the RMB into foreign currencies
and, in certain cases, the remittance of currency out of China. We receive substantially all of our
revenues in RMB. Under our current corporate structure, our income is primarily derived from
dividend payments from our PRC subsidiaries. Shortages in the availability of foreign currency may
restrict the ability of our PRC subsidiaries to remit sufficient foreign currency to pay dividends
or other payments to us, or otherwise satisfy their foreign currency denominated obligations. Under
existing PRC foreign exchange regulations, payments of current account items, including profit
distributions, interest payments and expenditures from trade-related transactions, can be made in
foreign currencies without prior approval from the PRC State Administration of Foreign Exchange,
(the SAFE), by complying with certain procedural requirements. However, approval from appropriate
government authorities is required where RMB is to be converted into foreign currency and remitted
out of China to pay capital expenses such as the repayment of loans denominated in foreign
currencies. The PRC government may also, at its discretion, restrict access in the future to
foreign currencies for current account transactions. If the foreign exchange control system
prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not
be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs.
In addition, we have substantial cash and cash equivalents denominated in U.S. dollars, as a result
of our 2010 initial public offering. We intend to convert a significant amount of these cash and
cash equivalents into RMB. Prior to such conversion, we are exposed to foreign exchange risk.
PRC regulations relating to the establishment of offshore special purpose companies by PRC
residents may subject our PRC resident shareholders to personal liability and limit our ability
to inject capital into our PRC subsidiaries, limit our PRC subsidiaries ability to distribute
profits to us, or otherwise adversely affect us.
SAFE issued a public notice in October 2005, the Circular on Issues Relating to the
Administration of Foreign Exchange in Fund-raising and Reverse Investment Activities of Domestic
Residents Conducted through Offshore Special Purpose Companies, or SAFE Circular No. 75, requiring
PRC residents to register with the local SAFE branch before establishing or controlling any company
outside of China for the purpose of capital financing with assets or equities of PRC companies
which are also established or controlled by such PRC residents, referred to in the notice as an
offshore special purpose company. PRC residents that are shareholders of offshore special purpose companies established before
November 1, 2005 were required to register with the local SAFE branch before March 31,
23
2006. In
addition, any PRC resident that is a shareholder of an offshore special purpose entity is required
to amend his or her SAFE registration with respect to that offshore special purpose entity in
connection with any increase or decrease of capital, transfer of shares, merger, division, equity
investment, creation of any security interest over any assets located in China or any other
material changes in share capital.
Our shareholders who are PRC residents and acquired our shares prior to our listing have
completed their initial registration with the local SAFE branch as required under SAFE Circular No.
75. However, we may not be fully informed of the identities of the beneficial owners of our
company in the future and we cannot assure you that all of our Chinese resident beneficial owners
will comply with the SAFE regulations. The failure of our beneficial owners who are Chinese
residents to make or amend any required registrations may subject these Chinese residents to fines
and legal sanctions, and may also limit our ability to contribute additional capital into our PRC
subsidiaries and limit our PRC subsidiaries ability to make distributions or pay dividends to us,
as a result of which our business operations and our ability to distribute profits to you may be
materially and adversely affected.
All participants of our existing share incentive plan who are PRC citizens are required to
register with SAFE, and the failure to so comply could subject us and such participants to
penalties.
On March 28, 2007, SAFE issued the Operating Procedures for Administration of Domestic
Individuals Participating in the Employee Stock Ownership Plan or Stock Option Plan of an Overseas
Listed Company, (the Stock Option Rules). On May 29, 2007, SAFE issued the Notice on Printing and
Distributing the Operating Rules for the Notice of the State Administration of Foreign Exchange on
the Relevant Issues about Foreign Exchange Control over the Financing and Return Investment of
Domestic Residents through Overseas Special Purpose Companies, or Circular 106. According to these
regulations, PRC citizens who participate in an employee stock ownership plan or a stock option
plan in an overseas publicly-listed company are required to register with SAFE and complete certain
other procedures. These participants should retain a PRC agent, which can be a subsidiary of the
overseas listed company in China, to handle various foreign exchange matters associated with these
plans. In the case of an employee stock ownership plan, an overseas custodian bank should be
retained by the PRC agent to hold in trusteeship all overseas assets held by such participants
under the employee stock ownership plan. In the case of a stock option plan, a financial
institution qualified in the listing jurisdiction as a stock brokerage or a qualified institution
designated by the overseas publicly-listed company is required to be retained by the PRC agent to
handle matters in connection with the exercise or sale of stock options for the stock option plan
participants. The PRC agents or employers should, on behalf of the PRC citizens, apply annually to
SAFE or its competent local branches for a quota for the conversion and/or payment of foreign
currencies in connection with the PRC citizens exercise of the employee stock options. The foreign
exchange proceeds received by the PRC citizens from sale of shares under the stock option plans
granted by the overseas listed companies must be remitted into the bank accounts in China opened by
their employers or PRC agents.
24
We and our employees, directors and consultants who are PRC residents and who have
participated in the share incentive plan have applied to the local SAFE branch for registration
under the Stock Option Rules. However, we cannot assure you that we can successfully complete the
registrations under the Stock Option Rules in the future. If we or our employees, directors and
consultants who are PRC residents fail to complete these registrations, we or such persons may be
subject to fines and legal sanctions. Any failure to comply with such regulations may subject us
and the participants of our share incentive plan who are PRC citizens to fines and legal sanctions
and prevent us from being able to grant share incentive to our personnel which is currently a
significant component of the compensation of many of our PRC employees, as a result of which our
business operations may be adversely affected.
Our current employment practices may be adversely impacted under the labor contract law of the
PRC.
The PRC National Peoples Congress promulgated the Labor Contract Law, which became effective
on January 1, 2008. Compared to previous labor laws, the Labor Contract Law provides stronger
protection for employees and imposes more obligations on employers. According to the Labor Contract
Law, employers have the obligation to enter into written labor contracts with employees to specify
the key terms of the employment relationship. The law also stipulates, among other things, (i) that
all written labor contracts shall contain certain requisite terms; (ii) that the length of trial
employment periods must be in proportion to the terms of the relevant labor contracts, which in any
event shall be no longer than six months; (iii) that in certain circumstances, a labor contract
shall be deemed to be without a fixed term and thus an employee can only be terminated with cause;
and (iv) that there shall be certain restrictions on the circumstances under which employers may
terminate labor contracts as well as the economic compensations to employees upon termination of
the employees employment. A significant number of our employees are contracted through Chongqing
Investment Promotion Human Resources Management Services Co., Ltd. (formerly known as Chongqing
Investment Promotion Association), a third-party human resources company, that is responsible for
managing, among others, payrolls, social insurance contributions and local residency permits of
these employees. We may be held jointly liable if Chongqing Investment Promotion Association fails
to pay such employees their wages and other benefits or otherwise become liable to these employees
for labor law violations. In addition, in the event we decide to significantly change or downsize
our workforce, the Labor Contract Law could restrict our ability to terminate employee contracts
and adversely affect our ability to make such changes to our workforce in a manner that is most
favorable to our business or in a timely and cost effective manner, which in turn may materially
and adversely affect our financial condition and results of operations. We cannot assure you that
our employment practices do not, or will not, violate the Labor Contract Law. If we are subject to
severe penalties or incur significant legal fees in connection with labor law disputes or
investigations, our business, financial condition and results of operations may be adversely
affected.
Fluctuations in exchange rates may result in foreign currency exchange losses and may have a
material adverse effect on your investment.
The change in value of the Renminbi against the U.S. dollar and other currencies may fluctuate
and is affected by, among other things, changes in Chinas political and economic
25
conditions. From 1995 until July 2005, the Peoples Bank of China intervened in the foreign
exchange market to maintain an exchange rate of approximately RMB8.30 per U.S. dollar. On July 21,
2005, the Chinese government changed this policy and began allowing modest appreciation of the
Renminbi versus the U.S. dollar. Under the new policy, the Renminbi was permitted to fluctuate
within a narrow and managed band against a basket of certain foreign currencies. This change in
policy caused the Renminbi to appreciate approximately 21.5% 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. Since June 2010, the
PRC government has allowed the Renminbi to appreciate slowly against the U.S. dollar again. 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. Our revenues and costs are mostly
denominated in RMB, and a portion of our assets are also denominated in RMB. We rely entirely on
dividends and other fees paid to us by our wholly owned subsidiaries in China. Any significant
revaluation of the RMB may materially and adversely affect our cash flows, revenues, earnings and
financial position, and the value of, and any dividends payable on, our ADSs in U.S. dollars. For
example, a further appreciation of the RMB against the U.S. dollar would make any new
RMB-denominated investments or expenditures more costly to us, to the extent that we need to
convert U.S. dollars into the RMB for such purposes. An appreciation of the RMB against the U.S.
dollar would also result in foreign currency translation losses for financial reporting purposes
when we translate our U.S. dollar denominated financial assets into the RMB, as the RMB is our
reporting currency. Conversely, if we decide to convert our Renminbi into U.S. dollars for the
purpose of making payments for dividends on our ordinary 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. Significant revaluation of the Renminbi may have a material
adverse effect on your investment.
PRC regulation of loans and direct investment by offshore holding companies to PRC entities may
delay or prevent us from making loans or additional capital contributions to our PRC operating
subsidiaries, which could materially and adversely affect our liquidity and our ability to fund
and expand our business.
As an offshore holding company of our PRC operating subsidiaries, we may make loans to our PRC
subsidiaries, or we may make additional capital contributions to our PRC subsidiaries. Any loans to
our PRC subsidiaries are subject to PRC regulations and approvals. For example, loans by us to our
wholly owned subsidiaries in China, each of which is a foreign-invested enterprise, to finance
their activities cannot exceed statutory limits and must be registered with SAFE or its local
counterpart.
In addition, any capital contributions to our PRC wholly owned subsidiaries must be approved by the
Ministry of Commerce or its local counterpart. We cannot assure you that we will be able to obtain
these government registrations or approvals on a timely basis, if at all, with respect to future
loans or capital contributions by us to our subsidiaries. If we fail to receive such registrations
or approvals, our ability to capitalize our PRC operations may be negatively affected, which could
adversely and materially affect our liquidity and our ability to fund and expand our business.
26
We rely principally on dividends and other distributions paid by our wholly owned operating
subsidiaries in China to fund any cash and financing requirements we may have, and any
limitation on the ability of our operating subsidiaries to pay dividends to us could have a
material adverse effect on our ability to borrow money or pay dividends to holders of our ADSs.
As a holding company, we rely principally on dividends and other payments from our wholly
owned operating subsidiaries in China for our cash requirements, including funds necessary to
service any debt we may incur, to pay dividends and other cash distributions to our shareholders
and to pay our operating expenses. If our Chinese subsidiaries incur debt on their own behalf in
the future, the instruments governing the debt may restrict their ability to make payments or
distributions to us. Furthermore, relevant Chinese laws and regulations permit payments of
dividends by Chinese subsidiaries only out of their retained earnings, if any, as determined in
accordance with Chinese accounting standards and regulations.
Under Chinese laws and regulations, each of our Chinese subsidiaries is required to set aside
a portion of its net income based on PRC accounting standards each year to fund a statutory surplus
reserve, until the accumulated amount of such reserve has exceeded 50% of its registered capital.
The reserve funds amounted to RMB26.8million ($4.1 million) as of December 31, 2010. This reserve
is not distributable as dividends except in the event of liquidation of these subsidiaries. As a
result, our Chinese subsidiaries are restricted in their ability to transfer a portion of their net
assets to us or any of our other subsidiaries in the form of dividends, loans or advances.
Limitation on the ability of our Chinese subsidiaries to pay dividends to us or any of our other
subsidiaries could materially and adversely limit our ability to borrow money outside of China or
pay dividends to holders of our ADSs. See also Risks Relating to Doing Business in ChinaThe
dividends we receive from our Chinese subsidiaries and our global income may be subject to Chinese
tax under the EIT Law, which would have a material adverse effect on our results of operations; our
foreign ADS holders will be subject to a Chinese withholding tax upon the dividends payable by us
and gains on the sale of ADSs or ordinary shares may be subject to taxes under PRC tax laws, if we
are classified as a Chinese resident enterprise.
The dividends we receive from our Chinese subsidiaries and our global income may be subject to
Chinese tax under the EIT Law, which would have a material adverse effect on our results of
operations; our foreign ADS holders will be subject to a Chinese withholding tax upon the
dividends payable by us and gains on the sale of ADSs or ordinary shares may be subject to taxes
under PRC tax laws, if we are classified as a Chinese resident enterprise.
Under the EIT Law, dividends, interests, rent, royalties and gains on transfers of property
payable by a foreign-invested enterprise in China to its foreign investor who is a non-resident
enterprise will be subject to a 10% withholding tax, unless such non-resident enterprises
jurisdiction of incorporation has a tax treaty with China that provides for a reduced rate of
withholding tax. Under the arrangement for avoidance of double taxation between mainland China and
Hong Kong, the effective withholding tax applicable to a Hong Kong non-resident company is
currently 5% if it directly owns no less than 25% stake in the Chinese foreign-invested enterprise.
27
Under the EIT Law, an enterprise established outside China with its de facto management body
within China is considered a resident enterprise in China and is subject to the Chinese
enterprise income tax at the rate of 25% on its worldwide income. We cannot assure you that our
Cayman Islands holding company, CSC Cayman will not be deemed to be a PRC resident enterprise under
the EIT Law and be subject to the PRC enterprise income tax at the rate of 25% on our worldwide
income. It is also unclear whether the dividends CSC Cayman receives from our CSC China will
constitute dividends between qualified resident enterprises and therefore qualify for exemption
from withholding tax, even if CSC Cayman is deemed to be a resident enterprise for PRC enterprise
income tax purposes. If the Chinese tax authorities subsequently determine that CSC Cayman should
be classified as a resident enterprise, foreign ADS holders will be subject to a 10% withholding
tax upon dividends payable by us and gains on the sale of ADSs may also be subject to tax under the
EIT Law. Any such tax may reduce the returns on your investment in our ADSs.
Risks Related to Our ADSs
The market price for our ADSs may be volatile.
The closing trading prices of our ADSs ranged from US$21.76 to US$34.96 in 2010. The market
price for our ADSs may be volatile and subject to wide fluctuations in response to factors such as
actual or anticipated fluctuations in our quarterly operating results, changes in financial
estimates by securities research analysts, changes in the economic performance or market valuations
of other companies in the industry, announcements by us or our competitions of material
acquisitions, strategic partnerships, joint ventures or capital commitments, addition or departure
of our executive officers and key personnel, fluctuations of exchange rates between RMB and the
Canadian dollar or the U.S. dollar, intellectual property litigation, release of lock-up or other
transfer restrictions on our outstanding shares or ADSs, and economic or political conditions in
China. In addition, the performance, and fluctuation in market prices, of other companies with
business operations located mainly in China that have listed their securities in the United States
may affect the volatility in the price of and trading volumes of our ADSs. Furthermore, the
securities market has from time to time experienced significant price and volume fluctuations that
are not related to the operating performance of particular companies. These market fluctuations may
also materially and adversely affect the market price of our ADSs.
Substantial future sales or the expectation of substantial sales of our ADSs in the public
market could cause the price of our ADSs to decline.
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. Our ADSs are freely transferable
without restriction or additional registration under the Securities Act of 1933, as amended, or the
Securities Act, subject to volume and other restrictions as applicable under Rule 144 and Rule 701
under the Securities Act. Any or all of these shares (other than those held by certain option
holders) may be released prior to expiration of the lock-up period at the discretion of the
underwriter. To the extent shares are released before the expiration of the lock-up period, and
these shares are sold into the market, the market price of our ADSs could decline.
28
In addition, several of our shareholders have the right to cause us to register the sale of
their shares under the Securities Act upon the occurrence of certain circumstances. Registration of
these shares under the Securities Act would result in these shares becoming freely tradable without
restriction under the Securities Act immediately upon the effectiveness of the registration of
these shares. Sales of these registered shares in the public market could cause the price of our
ADSs to decline.
If securities or industry analysts publish negative reports about our business, the price and
trading volume of our securities could decline.
The trading market for our securities depends, in part, on the research reports and ratings
that securities or industry analysts or ratings agencies publish about us, our business and the
food services industry in China in general. We do not have any control over these analysts or
agencies. If one or more of the analysts or agencies who cover us downgrades us or our securities,
the price of our securities may decline. If one or more of these analysts cease coverage of our
company or fail to regularly publish reports on us, we could lose visibility in the financial
markets, which could cause the price of our securities or trading volume to decline.
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 and in the deposit agreement, 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. When
a general meeting is convened, 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 with
respect to any specific matter. Upon our written request, the depositary will mail to you a
shareholder meeting notice which contains, among other things, a statement as to the manner in
which your voting instructions may be given, including an express indication that such instructions
may be given or deemed given to the depositary to give a discretionary proxy to a person designated
by us if no instructions are received by the depositary from you on or before the response date
established by the depositary. However, no voting instruction shall be deemed given and no such
discretionary proxy shall be given with respect to any matter as to which we inform the depositary
that (i) we do not wish such proxy given, (ii) substantial opposition exists, or (iii) such matter
materially and adversely affects the rights of shareholders. In addition, the depositary and its
agents may not be able to send voting instructions to you or carry out your voting instructions in
a timely manner. We will make all reasonable efforts to cause the depositary to extend voting
rights to you in a timely manner, but we cannot assure you that you will receive the voting
materials in time to ensure that you can instruct the depositary to vote your ADSs. Furthermore,
the depositary and its agents will not be responsible for any failure to carry out any instructions
to vote, for the manner in which any vote is cast or for the effect of any such vote. As a result,
you may not be able to exercise your right to vote and you may lack recourse if your ADSs are not
voted as you requested. In addition, in your capacity as an ADS holder, you will not be able to
call a shareholders meeting.
29
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, 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. 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 deem it advisable to do so because of any requirement of law or
of any government or governmental body, or under any provision of the deposit agreement, or for any
other reason.
Certain judgments obtained against us by our shareholders may not be enforceable.
We are incorporated in the Cayman Islands, and conduct substantially all of our operations in
China through our wholly owned subsidiaries in China. All of our directors and officers reside
outside the United States and some or all of the assets of those persons are located outside of the
United States. As a result, it may be difficult or impossible for you to bring an action against us
or against these individuals in the United States in the event that you believe that your rights
have been infringed under United States federal securities laws or otherwise. Even if you are
successful in bringing an action of this kind, the respective laws of the Cayman Islands and China
may render you unable to enforce a judgment against our assets or the assets of our directors and
officers. There is no statutory recognition in the Cayman Islands of judgments obtained in the
United States, although the courts of the Cayman Islands will generally recognize and enforce a
non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits. For
more information regarding the relevant laws of the Cayman Islands and China, see Enforceability
of Civil Liabilities.
We are a Cayman Islands company and, because judicial precedent regarding the rights of
shareholders is more limited under Cayman Islands law than under U.S. law, you may have less
protection of your shareholder rights than you would under U.S. law.
Our corporate affairs are governed by our memorandum and articles of association and by the
Companies Law of the Cayman Islands and the common law of the Cayman Islands. The rights of
shareholders to take legal action against our directors and us, actions by
30
minority shareholders and the fiduciary responsibilities of our directors to us under Cayman
Islands law are to a large extent governed by the common law of the Cayman Islands. The common law
of the Cayman Islands is derived in part from comparatively limited judicial precedent in the
Cayman Islands as well as from English common law, which has persuasive, but not binding, authority
on courts 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. Some U.S. states, such as Delaware, have more fully developed and
judicially interpreted bodies of corporate law than the Cayman Islands does. In addition, Cayman
Islands companies may not have standing to initiate a shareholder derivative action before the
federal courts of the United States. As a result 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.
Our articles of association contain anti-takeover provisions that could have a material adverse
effect on the rights of holders of our ordinary shares and ADSs.
We have adopted amended and restated articles of association that contain provisions which
could limit the ability of others to acquire control of our company or cause us to engage in
change-of-control transactions. These provisions could have the effect of depriving our
shareholders of an opportunity to sell their shares at a premium over prevailing market prices by
discouraging third parties from seeking to obtain control of our company in a tender offer or
similar transaction. For example, our board of directors has the authority, without further action
by our shareholders, to issue preferred shares in one or more series and to fix their designations,
powers, preferences, privileges, and relative participating, optional or special rights and the
qualifications, limitations or restrictions, including dividend rights, conversion rights, voting
rights, terms of redemption and liquidation preferences, any or all of which may be greater than
the rights associated with our ordinary shares, in the form of ADS or otherwise. Preferred shares
may have better voting rights than our ordinary shares, in the form of ADSs or otherwise, and could
be issued quickly with terms calculated to delay or prevent a change in control of our company or
make removal of management more difficult. If our board of directors decides to issue preferred
shares, the price of our ADSs may fall and the voting and other rights of the holders of our
ordinary shares and ADSs may be materially and adversely affected.
We incur increased costs as a result of being a public company.
As a public company, we incur significant accounting, legal and other expenses that we did not
incur as a private company. The Sarbanes-Oxley Act, as well as new rules subsequently implemented
by the SEC and the New York Stock Exchange, have detailed requirements concerning corporate
governance practices of public companies including Section 404 relating to internal controls over
financial reporting. These new rules and regulations have increased our accounting, legal and
financial compliance costs and made certain corporate activities more time-consuming and costly. In
addition, we incur additional costs associated with our public company reporting requirements. We
are currently
31
evaluating and monitoring developments with respect to these new rules, and we cannot predict
or estimate the amount of additional costs we may incur or the timing of such costs.
If we fail to maintain an effective system of internal controls over financial reporting, we may
not be able to accurately report our financial results or prevent fraud.
We are subject to reporting obligations under the U.S. securities laws, including the
Sarbanes-Oxley Act. Section 404 of the Sarbanes-Oxley Act, or Section 404, will require that we
include a report from management on our internal control over financial reporting in our annual
report on Form 20-F beginning with our annual report for the fiscal year ending December 31, 2011.
In addition, our independent registered public accounting firm must report on the effectiveness of
our internal control over financial reporting. Our management or our independent registered public
accounting firm may conclude that our internal controls are not effective. Moreover, even if our
management concludes that our internal control over financial reporting is effective, our
independent registered public accounting firm may issue a report that is qualified if it is not
satisfied with our internal controls or the level at which our controls are documented, designed,
operated or reviewed, or if it interprets the relevant requirements differently from us. Either of
these possible outcomes could result in an adverse reaction in the financial marketplace due to a
loss of investor confidence in the reliability of our reporting processes, which could materially
and adversely affect the trading price of our ADSs. In addition, our reporting obligations as a
public company will place a significant strain on our management, operational and financial
resources and systems for the foreseeable future. Prior to our initial public offering, we were a
private company with limited accounting personnel and other resources for addressing our internal
control over financial reporting.
In connection with the audit of our consolidated financial statements as of and for the year
ended December 31, 2009, we and our independent registered public accounting firm identified one
material weakness and several significant deficiencies in our internal control over financial
reporting. The material weakness identified related to our inventory management and recording. In
2010, we undertook certain remedial steps to address this material weakness, including implementing
policies and systems to prevent internal transfer of inventory among individual restaurants. We
periodically perform inventory checks and resolve and reconcile any resulting discrepancies in a
timely manner.
In connection with the audit of our consolidated financial statements as of and for the year
ended December 31, 2010, we and our independent registered public accounting firm identified
several significant deficiencies in our internal control over financial reporting, but none of
these control deficiencies amounted to a material weakness. We have implemented prompt reporting
requirements relating to the acquisition, transfer and disposition of fixed assets. We have also
reallocated current financial personnel and begun recruiting new qualified financial staff to
better meet the requirements of a U.S. public company.
If we fail to maintain effective internal control over financial reporting in the future, we
and our independent registered public accounting firm may not be able to conclude that we have
effective internal control over financial reporting at a reasonable assurance level.
32
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 might be subject to sanctions or investigation
by the SEC, the New York Stock Exchange or other regulatory authorities. Any such action could
adversely affect our financial results and the market price of our ADSs.
We may be classified as a passive foreign investment company, or PFIC, which could result in
adverse U.S. federal income tax consequences to U.S. Holders of our ADSs or ordinary shares.
We do not expect to be classified as a PFIC (as defined for U.S. federal income tax purposes
and as described below) for our current taxable year ending December 31, 2010. However, the
application of the PFIC rules is subject to ambiguity in several respects, and, in addition, we
will make a separate determination for each taxable year as to whether we are a PFIC (after the
close of each taxable year).
Accordingly, we cannot assure you that we will not be a PFIC for our current taxable year
ending December 31, 2010 or any future taxable year. A non-U.S. corporation will be considered as a
PFIC for U.S. federal income tax purposes for any taxable year if either (1) 75% or more of its
gross income for such year consists of certain types of passive income, or (2) 50% or more of the
value of its assets is attributable to assets that produce or are held for the production of
passive income. For this purpose, passive income means any income which would be considered foreign
personal holding company income under the Internal Revenue Code of 1986, as amended, including,
without limitation, dividends, interest, royalties, rent, annuities, net gains from the sale or
exchange of property producing such income, net gains from commodity transactions, net foreign
currency gains and income from notional principal contracts. The market value of our assets will be
determined based on the market price of our ADSs and ordinary shares, which is likely to fluctuate.
Depending upon the value of our assets based on the market value of our ordinary shares and
ADSs and the nature of our assets and income over time, we could be classified as a passive foreign
investment company or PFIC, for U.S. federal income tax purposes. Based on our current income and
assets and projections as to the value of our ordinary shares and ADSs, we do not expect to be
classified as a PFIC for the current taxable year or the foreseeable future. While we do not
anticipate becoming a PFIC, fluctuations in the market price of our ADSs or ordinary shares may
cause us to become a PFIC for the current or any subsequent taxable year.
If we were to be or become classified as a PFIC, a U.S. Holder (as defined in
TaxationMaterial United States Federal Income Tax ConsiderationsGeneral) may incur
significantly increased United States income tax on gain recognized on the sale or other
disposition of the ADSs or ordinary shares and on the receipt of distributions on the ADSs or
ordinary shares to the extent such gain or distribution is treated as an excess distribution
33
under the United States federal income tax rules. Further, if we were a PFIC for any year
during which a U.S. Holder held our ADSs or ordinary shares, we generally would continue to be
treated as a PFIC for all succeeding years during which such U.S. Holder held our ADSs or ordinary
shares. Each U.S. Holder is urged to consult its tax advisor regarding the United States federal
income tax consequences of acquiring, holding, and disposing of ADSs or ordinary shares if we are
or become classified as a PFIC. For more information see TaxationMaterial United States Federal
Income Tax ConsiderationsPassive Foreign Investment Company Considerations.
A. History and Development of the Company
Our holding company, CSC Cayman, was incorporated in the Cayman Islands in August 2007. CSC
Cayman directly and wholly owns CSC Hong Kong, which was incorporated in Hong Kong in August 2007.
CSC Hong Kong directly owns all the equity interests in our wholly-owned subsidiary in China, CSC
China, which was incorporated in China in September 2007.
Our principal executive offices are located at 18-1 Guojishangwu Center, 178 Zhonghua Road,
Yuzhong District, Chongqing, Peoples Republic of China, and our telephone number at that location
is (86-23) 8671 2610. Our registered office in the Cayman Islands is located at Maples Corporate
Services Limited, P.O. Box 309, Ugland House, Grand Cayman, KY1-1104 Cayman Islands. Our agent for
service of process in the United States is Law Debenture Corporate Services Inc., located at 400
Madison Avenue, 4th Floor, New York, New York 10017.
Our founders, Ms. Hong Li and Mr. Xingqiang Zhang, owned and operated nine restaurants prior
to the establishment of CSC Cayman. Since the establishment of CSC China in September 2007, these
nine restaurants have been directly operated by us. We purchased the operating assets of these nine
restaurants in a series of transactions from our founders in 2008 and 2009 for an aggregate amount
of RMB3.4 million ($0.5 million). As these nine restaurants were under the common control of our
founders, we consolidated the results of operations of these nine restaurants in our financial
statements throughout the periods presented in our financial statements.
In September 2007, CSC Cayman issued 24,000,000 Series A preferred shares to two international
private equity funds for an aggregated amount of $13.0 million. Among these $13.0 million, $5.0
million were paid to our founders in 2007 in consideration of their past services to our company
and their agreement not to compete with us.
We substantially increased the number of our restaurants in 2008 and 2009 in order to increase
our market share in our principal markets. As part of such growth strategy at the time, in addition
to opening new restaurants, we purchased operating assets of 24 and 8 restaurants that were owned
and operated by self-employed owners who were not affiliated with us at the time in 2008 and 2009,
respectively. Such assets primarily consisted of used kitchen equipment and miscellaneous furniture
and fixtures. Although we only purchased
34
operating assets and we changed the restaurant management and upgraded the renovations and
services subsequent to these transactions, we accounted for such purchases as business combinations
under the U.S. GAAP due to the continuity of the revenue generating activities. Total consideration
for the purchase of the 32 restaurant operating assets as described above included cash paid to the
self-employed owners in the amount of RMB9.2 million ($1.4 million) and 2,800,000 shares of our
ordinary shares. The excess of the total cash and share-based consideration over the fair value of
the assets purchased was recorded as goodwill. By acquiring the operating assets of these
restaurants, we also obtain various intangible benefits such as strategic business locations with
close proximity to major office buildings and shopping centers, ideal traffic flow patterns, and
further expansion of our restaurants chain coverage in a given geographic area.
We and certain selling shareholders completed an initial public offering of 5,750,000 ADSs in
September 2010. On September 28, we listed our ADSs on the New York Stock Exchange under the
symbol CCSC.
B. Business Overview
We are a quick service restaurant chain in China. We offer delicious, everyday Chinese food to
customers who desire fast and affordable quality meals. Our restaurant chain grew from 9
restaurants as of January 1, 2008 to 131 restaurants as of December 31, 2010, including 69
restaurants in Chongqing municipality and 45 restaurants in Sichuan province. Chongqing
municipality and Sichuan province cover a region of 110 million people in Southwest China that is
home to Sichuan cuisine, one of the best-known Chinese regional cuisines. We directly operate all
of our restaurants for effective quality control and operational efficiency. We plan to further
expand our geographic coverage and increase our chain to approximately 200 restaurants in China by
the end of 2011.
Since 2008, we have successfully built up our
![(CHINESE CHARACTERS)](h05022h0502201.gif)
CSC brand to represent delicious,
everyday Chinese food. Our standard menu features our most popular main dishes prepared in the
Sichuan style as well as a wide selection of other dishes, appetizers, desserts and beverages. We
periodically offer new dishes and seasonal menu selections to attract more customer visits. The
appeal of our restaurants and the food we offer is evidenced by average traffic per restaurant per
day of approximately 1,600 customers and an average table turnover per day of approximately 16
times for our restaurant chain for the year ended December 31, 2010.
We believe that the following four factors contribute to the quality of the food we offer:
quality ingredients, proprietary sauce packages, on-site food preparation and effective quality
monitoring. We purchase ingredients from suppliers carefully selected based on the quality of their
sample ingredients and their understanding of our business and requirements. For each dish, we
develop and prepare a proprietary sauce package based on the recipe we have developed to cater to
popular customer tastes in China. Each dish is then freshly prepared in batches on stovetops in
each restaurant kitchen by our well-trained cooks. To ensure that food quality is consistently
maintained in all of our restaurants, we have a food safety and quality assurance program in place
to maintain uniform standards for our food supply and preparation procedures.
35
Our revenues increased by 113.6% from RMB231.5 million in 2008 to RMB494.5 million in 2009 and
by 50.9% from RMB494.5 million in 2009 to RMB745.9 million ($113.0 million) in 2010. We added 34
and 38 new restaurants, respectively, in 2008 and 2009, which contributed RMB152.0 million and
RMB124.5 million revenues in 2008 and 2009, respectively. We further added 50 new restaurants in
2010, which contributed RMB107.8 million ($16.3 million) revenue in 2010. Our net income increased
by 69.4% from RMB26.6 million in 2008 to RMB45.1 million in 2009 and by 39.3% from RMB45.1 million
in 2009 to RMB62.8 million ($9.5 million) in 2010.
Our highly standardized and efficient operations have enabled us to establish a scalable
business model, as evidenced by our growth to date. Our restaurant chain grew from 9 restaurants as
of January 1, 2008 to 131 restaurants as of December 31, 2010. Due to the large number of
ingredients, spices and seasonings required and the complex steps involved in the preparation of
each Chinese dish, the standardization of Chinese dishes among different restaurants has always
remained a major challenge to Chinese food restaurant chains. To overcome this difficulty and
ensure the consistent quality of our dishes across different restaurants, we employ a standardized
food preparation process that combines on-site food preparation by trained cooks with centralized
supply of proprietary pre-mixed sauce packages, systematic provision of quality ingredients and a
well-established cook-training program. For each dish, we develop a proprietary mix of seasonings,
make the mixture into sauces in our central facility in Chongqing, and then put these sauces into
sauce packages to be delivered to different cities and municipalities. Generally, we deliver our
sauce packages to ingredients suppliers in each city or municipality who then combine our sauces
with quality ingredients as required by each of our menu item recipes. We source quality
ingredients from selected suppliers that meet our quality standards and intend to build regional
logistic centers to streamline our supply chain. We maintain an effective cook-training program
that enables us to systematically train new hires to become our expert cooks in three to six
months.
We estimate that our restaurants had approximately 55 million customer visits in 2010. One of
the greatest contributors to our success has been word-of-mouth referrals by our customers.
Beginning with each customers experience in our restaurants, the clean, streamlined look and
friendly feel of our restaurants, the efficient service of our staff members, the affordable prices
of our dishes and above all, our carefully designed menu offering a variety of delicious dishes,
have all increased customers attraction to our restaurants and resulted in frequent visits by many
of our repeat customers. We estimate that 77% of our customers visit our restaurants at least three
times per month. Some of our loyal customers have devoted significant time to writing positive
reviews of our restaurants in online discussion boards and food-related web logs to spread good
words about us. The support of our loyal customers has in turn helped us attract new customers and
build a market reputation that our offerings fit into the fast-paced lifestyles of average working
people in China and provide an affordable and convenient alternative to home cooking. Our average
traffic per restaurant per day is approximately 1,600 customers and our average table turnover per
day is approximately 16 times for our restaurant chain for the year ended December 31, 2010.
36
Industry Background
The consumer food services industry in China has grown rapidly in recent years, driven
primarily by the growth of the Chinese economy, particularly from accelerating urbanization and the
increase in disposable income in China. This recent growth, although not indicative of future
growth, has in turn led to changes in consumption patterns including a growing number of consumers
dining out for convenience or the dining experience. According to Euromonitor, the Chinese consumer
food services market has grown from RMB1,106.0 billion in 2004 to RMB1,996.6 billion ($294.4
billion) in 2009, representing a CAGR of 12.5% over the five-year period. Euromonitor estimated
that this market is expected to reach RMB3,047.0 billion ($449.3 billion) in 2014, representing a
CAGR of 8.8% from 2009.
The quick service restaurant sector, characterized by provision of speedy service and
convenience, has also experienced tremendous growth in China. According to Euromonitor, total
revenue of the quick service restaurant sector in China has grown from RMB253.8 billion in 2004 to
RMB470.6 billion ($69.4 billion) in 2009, representing a CAGR of 13.1% over the five-year period.
Euromonitor estimated that the Chinese quick service restaurant market would grow to RMB766.7
billion ($113.1 billion) in 2014, representing a CAGR of 10.3% from 2009.
Our Food
Our founding philosophy and core values are to provide delicious and affordable everyday
Chinese food of consistent quality that serves as alternatives to cooking at home for Chinese
customers. Our target customer is an ordinary consumer looking for a fresh, home-cooked style meal
served in a clean, pleasant setting for an affordable price. We believe this philosophy has, since
our inception, contributed to our past growth, our large customer base, frequent repeat customer
visits to our restaurants and our potential for expansion.
Due to the large number of ingredients, spices and seasonings required and the complex steps
involved in the preparation of each Chinese dish, the standardization of Chinese dishes among
different restaurants has always remained a major challenge to Chinese food restaurant chains. To
overcome this challenge, standardize the delicious tastes and guarantee the quality of our dishes
across all of our restaurants, we combine on-site restaurant preparation by trained cooks with
centralized supply of our proprietary pre-mixed sauce packages and systematic provision of quality
ingredients.
Simple but Diversified Menu
Our menu is intentionally limited to what can be easily presented on a one-page menu sheet. We
serve a limited number of dishes or combination meals on each of our restaurant menus at any given
point in time. Our staples include popular entrees such as spicy sautéed pork, Taiwanese-style
braised pork over rice, honey-roasted spicy chicken wings, mushroom chicken, shredded pepper steak,
shredded quick-fried ginger duck and kung pao chicken, in addition to a selection of appetizers,
desserts and beverages. Each entree on our menu is
37
prepared with proprietary pre-mixed sauce packages delivered from our central facility in
Chongqing which, combined with quality ingredients delivered from our national and local network of
suppliers, is designed to maximally embody everyday Chinese home cooking and to appeal to the
tastes and nutritional needs of Chinese customers.
As a quick service restaurant, we believe it is important to keep our menu to a manageable
number of options that are popular with our customers to facilitate a more efficient ordering
process, and to update our menu from time to time to reflect shifting customer tastes or the
changing of seasons. Occasionally, we also slightly tweak the recipe of a menu item to accommodate
specific customer tastes in different locales to enhance local sales. Our product development team
periodically reviews and adjusts our menu to suit the tastes of local customers in different
geographic regions while maintaining the overall character and style of our menu offerings. During
the summer months, we offer crushed ice drinks as part of our menu, while during the winter, we may
offer more heavily spiced items.
Quality Ingredients
Close Relationship with Suppliers. Maintaining food quality in our restaurants most
significantly depends on our ability to procure quality ingredients and other necessary supplies
that meet our specifications from reliable suppliers. We purchase from suppliers carefully selected
based on quality of sample ingredients and the suppliers understanding of our business and
requirements, and we seek to develop mutually beneficial long-term relationships with each quality
supplier we find. We work closely with our suppliers and use a mixture of fixed and formula pricing
protocols. We typically maintain a long-term supply framework purchase arrangement with each key
supplier, with specific prices to be negotiated periodically. We maintain a number of suppliers for
each of our key ingredients such as pork, chicken, beef and rice, which we believe can help
mitigate pricing volatility.
We do not purchase raw ingredients directly from local farmers or butchers. Instead, we use
suppliers to purchase ingredients for us based upon our terms, specifications and requirements,
contributing to higher operating efficiency and better quality control. We estimate that we have 80
key food suppliers for our meats, vegetables, fruits, eggs and beverages. Purchases made from our
ten largest suppliers in 2008, 2009 and 2010 were equal to approximately 30.5%, 32.0% and 36.5 % of
our total purchase costs for these items in each of these periods, respectively.
Careful Selection of Suppliers. The suppliers for our meat products as well as rice,
material spices and seasonings are selected by and dealt directly with our national supply chain
office. The purchasing department of each of our operating subsidiaries is responsible for
selecting local suppliers for other ingredients such as vegetables pursuant to quality standards
set by the national office. Each subsidiarys purchasing department first determines what
ingredients to purchase from ingredients request lists submitted by relevant departments,
specifying the quality and quantity of ingredients needed. After internal review and approval at
the subsidiary level, the subsidiarys purchasing department then contacts local suppliers
regarding items on the ingredient lists and examines sample deliveries, tests the samples in
selected restaurants and finally negotiates the price and terms of the purchase contract if it is
satisfied with the quality of ingredients and service provided by the supplier.
38
Close Monitoring of Suppliers. The performance of each of our suppliers is closely monitored
by our national supply office and evaluated based on feedback from our operating subsidiaries,
which obtain timely feedback on ingredient quality from the individual restaurants to which these
ingredients are delivered. The purchasing department of each subsidiary also monitors the quality
of supplier deliveries in accordance with a written manual for the selection and monitoring of our
ingredient suppliers.
Distribution Arrangements. Certain ingredients such as meat and certain seasonings are
delivered directly to our central warehouse in each city, then distributed to each of our
individual restaurants through our own distribution network. Other ingredients are delivered
directly to our restaurants by each suppliers own distribution networks.
Proprietary Sauce Packages
For each dish, we first develop a proprietary recipe for the mixing of seasonings. This recipe
results from our product development efforts devoted to studying and replicating flavors that
appeal to popular customer tastes in China. We then process these seasonings into sauces in our
central facility in Chongqing. Subsequently, these sauce packages are delivered to our restaurants
and, once there, combined with quality ingredients from our suppliers. Thus we ensure that every
one of our restaurants offers the same delicious taste for every dish on our menu. In Chongqing, we
have a central kitchen that combines ingredients such as meats and vegetables with our proprietary
pre-mixed sauce packages and regularly delivers these ingredients to each of our Chongqing
restaurants to be stored in refrigerated facilities. This way, each restaurant kitchen only needs
to prepare and serve the food to customers close to the time of ordering. In other regions, we
deliver our proprietary pre-mixed sauce packages, for each dish to each of our restaurants, where
the quality ingredients are combined with our sauce packages. Our centralized network for the
preparation and distribution of our proprietary pre-mixed sauce packages and our strong supply
network which provides quality ingredients for each of our restaurants both help to ensure the
consistent quality of our food offerings.
Product Development
We have a dedicated product development department in Chongqing that is constantly researching
customer taste preferences, shifting food trends, nutrition trends and regional tastes in China. We
believe the development of new menu items is important to our long-term success and is a
significant factor behind the popularity of our restaurants and the high sales volume of our menu
offerings.
We repeatedly test and perfect new dishes before adding them onto our menus and introducing
them to the general public, which we believe helps us align our menus with the popular food
preferences of our target customer base. Innovation of each new menu item includes the following
steps:
39
|
|
|
we gather monthly market information updates from head cooks in each of our restaurants,
including news and analysis of popular food trends, sales figures of any new products and
any new menu items being offered by competitors; |
|
|
|
|
we send monthly market information updates to our marketing department for further
study; |
|
|
|
|
our marketing department conducts focus group tests to gauge customer taste preferences
and passes the results onto our product development team; |
|
|
|
|
our product development team studies potential new menu items and submits new menu item
development plans to our product development committee, including our chief executive
officer, for review and approval; |
|
|
|
|
we determine the recipe for a new menu item and compile a standardized list setting
forth the quality of the seasonings, spices and ingredients needed for the menu item; |
|
|
|
|
our purchase department appoints the appropriate suppliers for the item, while our
accounting department calculates basic ingredients costs and our marketing department
designs the appropriate container for the item; and |
|
|
|
|
our product development committee, including our chief executive officer, approves the
new menu item. |
On-site Food Preparation
Our dishes are freshly prepared on stovetops in batches by our well-trained cooks in each
restaurant kitchen. Our ingredients and sauce packages are conveniently pre-mixed and stored in our
restaurants and stand ready to be stir-fried or otherwise cooked by our cooks at any time. Our
cooks then prepare a batch of each menu item at a time on our restaurant stovetops, making the
dishes ready to be served. The timing of stovetop preparation is closely aligned with studied
customer consumption patterns to minimize the time lapse between stovetop preparation and serving
of food to customers; the preparation of every batch of each item is carefully timed. We have a
web-based information system that allows us to monitor daily revenues from our restaurants. In
addition, we are implementing a system that will enable us to predict how many dishes of each menu
item are expected to be sold per hour per restaurant, based on historical actual number of menu
items sold; this system will allow us to calculate the preparation time and quantity of every batch
of each menu item for maximum freshness. For example, when we determine the quantity and
preparation schedule of each menu item for a certain day of the week, we take into account sales
data of the same menu item for the same week day during the last three weeks so as to estimate how
much of each menu item should be cooked and at what time intervals. On average, we allow each
prepared dish to spend no more than 60 minutes on our state-of-the-art food warmer system before we
40
replace it with a freshly cooked batch. This ensures that our customers enjoy the type of
freshly cooked, hot dishes associated with everyday home cooking.
Quality Monitoring
We have a food safety and quality assurance program in place to maintain high standards for
our food supply and food preparation procedures. Each of our operating subsidiaries in China
performs periodic checkups for restaurants and suppliers to evaluate food quality and identify any
potential food safety risks. We regularly inspect our suppliers to ensure that the ingredients we
buy conform to our stringent quality standards. We also rely on recipes, specifications and
protocols to ensure that our food quality when served, including a physical examination of the
ingredients when they arrive at our restaurants and unannounced visits by our headquarters
personnel to each restaurant from time to time. Area managers of our operating subsidiaries
periodically visit and inspect each restaurant in their region. We also train our employees to pay
close attention to food quality at every stage of the food preparation cycle. We have developed a
checklist that our employees use to assess the freshness and quality of the perishable food
supplies delivered to our restaurants, especially ingredients such as vegetables from local food
suppliers.
Our Services and Customer Experience
Our Services
Our food takes hours to prepare off-site, but once the quality ingredients for our dishes are
combined with our sauce packages and delivered to each individual restaurant, each dish can be
cooked and become ready to serve in a very short amount of time. When customers come into our
restaurants, they select items from our menu, and we typically deliver the finished dish to the
customer within 60 seconds. We believe that the speed we serve our customers, along with the
consistent quality of the food we offerin terms of both freshness and tastecontributes
significantly to our popularity.
We believe that our restaurant staff helps to differentiate our restaurants from other chains.
We recruit employees who conform to a standard of efficiency and friendly service. This is
important because as part of our standardized preparation approach, we need well-trained,
professional cooks who consistently conform to the standards of uniformity, quality and efficiency
taught in our food-preparation courses, and we need front-line cashier operators who understand the
importance of friendly customer interaction as well as speedy service to provide customers with the
most freshly prepared food possible within the shortest possible time from the moment of ordering.
Customer Experience
We take great care to provide each of our customers with an enjoyable and superior overall
experience. In each of our restaurants, we offer each customer a well-lit, clean, streamlined look
and friendly restaurant environment, efficient service from our staff members, affordable prices
and, above all, a carefully designed menu with time-tested
41
customer favorites. We believe our success has been due in large part to word-of-mouth
advertising by our customers, with our customers learning about us, learning to appreciate our food
and telling others about us. Some of our customers have devoted considerable time and energy to
writing enthusiastic, extensive reviews of our restaurants in online discussion boards and
food-related web logs, introducing more potential customers to our restaurants. These online
platforms also provide a new way for our customers to interact with each other and share their
stories. We believe customers who dine in our restaurants understand and appreciate our philosophy
of providing a delicious and affordable alternative to everyday Chinese cooking at home.
Our Restaurants
CSC Restaurants
As of December 31, 2010, we directly owned and operated 131 restaurants in China, all of which
are operated under our
![(CHINESE CHARACATERS)](h05022h0502201.gif)
CSC brand.
We own all of our restaurants and operate them through operating subsidiaries located in seven
geographic areas. We currently intend to continue expanding through wholly owned restaurants as
opposed to franchise restaurants. We believe that our current business model allows us to have
effective control over the quality of our food offerings and customer service.
The following table shows the number of our restaurants in China as of December 31, 2010,
based on a breakdown by province, municipality, city or town:
|
|
|
|
|
|
|
Number of |
|
|
Restaurants |
Chongqing Municipality |
|
|
69 |
|
Sichuan Province |
|
|
45 |
|
Shaanxi Province |
|
|
8 |
|
Hunan Province |
|
|
4 |
|
Shanghai Municipality |
|
|
3 |
|
Hubei Province |
|
|
1 |
|
Guizhou Province |
|
|
1 |
|
|
|
|
|
|
Total |
|
|
131 |
|
We do not own the real property on which, or the buildings in which, most of our restaurants
are operated, other than for four of our existing restaurants, three in Chongqing and one in
Chengdu. We also own the underlying properties for three of our restaurants in Chongqing that are
currently under development. We intend to continue to primarily use rental properties for our
restaurants. Nonetheless, we may purchase property on which our restaurants are located or
properties where we have particular interest in opening a restaurant, if such property becomes
available at a reasonable price.
We plan to further expand our geographic coverage and expect to increase the number of our
restaurants to approximately 200 by the end of 2011.
42
Restaurant Locations
We established our first restaurant in Chongqing and steadily expanded our restaurant chain
within that municipality and the surrounding regions. Since then, we have continued our expansion
efforts by targeting the cities of Chengdu, Xian and Changsha as well as other cities and
municipalities. When we enter a new geographic market, our goal is to open multiple restaurants to
achieve meaningful market share, local brand recognition, critical mass and economies of scale,
while at the same time ensuring consistency in the quality of our foods and services. Once we
achieve adequate scale of operations in a particular metropolitan area, we seek to leverage our
brand to expand into nearby markets.
We follow a disciplined and systematic expansion process with respect to our new restaurants.
Our selection of new potential locations for our restaurants is based on various factors, including
existing market competition, the size of potential customer base and the economic conditions of
each particular region. Our centralized project management team focuses on identifying potential
new locations in existing geographic markets or new geographic markets entirely, while our regional
development teams from our different operating subsidiaries have the primary responsibility of
researching and evaluating new markets and locations, conducting feasibility studies for proposed
locations, identifying management personnel for these new restaurants and negotiating the
commercial terms of our leases. We also rely on our regional development teams to help us establish
and coordinate relationships with local governments, supervise construction contractors, and
monitor the performance of our restaurants, which help influence future market and location
selections.
The key components of our disciplined and systematic new restaurant opening process are set
forth below:
Planning and site identification. Our new restaurant opening process starts with planning
and site evaluation by our regional subsidiaries development teams in accordance with development
plans and potential local sites provided by our project management team from central headquarters.
The regional development teams perform comprehensive studies of each new market or location by
carrying out site visits, gathering economic and other data, and conducting feasibility assessments
using a standardized criteria to select qualified restaurant locations in the chosen market. Once a
site has been selected, the regional development team submits a proposal to our central project
management team for approval.
In selecting new markets and locations for our restaurants, we consider the following
criteria:
|
|
|
General market criteria. General market criteria include local average disposable
income per household, concentration of competitors, and other economic factors. Our
experience has proven that locations in our current geographic markets generally meet our
general market criteria for the operating of our restaurants. We have identified certain
cities meeting our general market criteria that we believe generally have the
potential for sustainable economic growth and the ability to support multiple restaurants
for us. We refer to these cities as our key target cities.
|
43
|
|
|
Specific location criteria. Specific location criteria include rental price and
proximity to major office buildings and shopping centers, universities, convention and
exhibition centers and transportation hubs. We also consider automobile and foot traffic
flow patterns. In addition, we generally open restaurants in storefronts visible from the
street in urban areas. So far we have mostly succeeded in choosing restaurant locations
that provide sufficient customer flow to make our restaurants profitable. |
In addition to current cities where we have restaurants, we have identified Guiyang, Kunming,
and several other cities as our key target cities for our expansion in 2011 and beyond. Each of
these key target cities has a population of over 3 million and is a regional commercial center.
Lease negotiation. Once a site has been approved by our centralized project management team
for a new restaurant, we negotiate with the property owner or lessor while concurrently conducting
legal and regulatory due diligence investigations. Lease negotiations are led by our regional
development teams and are guided by a comprehensive set of criteria, including certain financial
return requirements, and we use our own standardized lease forms in many cases. All new leases are
subject to the final approval of our chief executive officer. Part of our due diligence
investigation is designed to ensure that property owners and lessors have the legal title to their
properties and the legal right to lease or sublease their properties to us, and that our intended
use is consistent with local land-use regulations. If property owners are not able to provide title
certificates, we seek alternative proofs of ownership.
Material rental terms. We lease substantially all of the properties on which we operate our
restaurants. Generally, most of our leases have lease initial lease terms of five to ten years,
with some granting us an option to renew such lease terms upon re-negotiation of rental prices and
other rental terms. A large number of leases set initial rent prices and provide that the rent will
increase at a fixed rate or by a fixed amount within the lease term, and certain lease agreements
have contingent rent arrangement in place whereby rent is determined as a percentage of sales as
defined by the terms of the applicable lease agreement. In addition, rents under certain leases are
calculated exclusive of management fees for the relevant property, which would be paid by us on a
monthly or quarterly basis. We are also obligated to pay occupancy-related costs for each of our
restaurants, including payment of insurance and utilities for certain lease agreements.
Pre-opening activities. Before opening a new restaurant, we carry out a series of
pre-opening and completion activities, such as conducting necessary constructions, painting and
decorating the restaurant premises, applying for relevant permits and approvals, identifying and
appointing members of the management team, and hiring and training staff in anticipation of the
opening.
Restaurant Design
The design of our restaurants conforms to our business philosophysimple, clean, friendly and
ideal for a home-cooked style meal for our customers, whether they come as individuals or with
their friends or family. We employ uniform decor standards for all of our
44
restaurants in order to
create a uniform brand image. The restaurants reflect the same philosophy as our menu offering: a
streamlined number of colors and sparingly designed space that is nonetheless intended to maximize
customer appeal and offer a pleasant, comfortable experience for our customers. Our restaurant
design and construction emphasize efficiency in layout and functionality, maximizing usable space,
construction costs management and safety requirements.
Restaurant Management
We employ a management structure designed to promote efficiency in supervising, directing and
supporting our operations, quality assurance systems, recruitment processes and training programs
in different geographic regions.
Headquarters management. The central management of our overall business and operations is
currently located in our central headquarters in Chongqing. Our headquarters in Chongqing are both
responsible for the corporate and administrative oversight of our organization and operational
management and supervision, such as financial planning and analysis, IT systems development, new
restaurant openings, management-level recruitment, central procurement and sales and marketing.
Regional management. On a regional level, our existing restaurant operations in the PRC are
divided into seven geographic regionsChongqing and Shanghai municipalities and Sichuan, Hunan,
Shaanxi, Hubei and Guizhou provincesall under the general management and oversight of our
operational headquarters in Chongqing. Our operations in each geographical region are headed by a
regional operating subsidiary located in Chongqing, Shanghai, Chengdu, Changsha, Xian, Wuhan and
Guiyang, respectively. Our regional management team typically comprises a general manager, an
operational director and a finance manager. Our regional management team is responsible for
proposing sites for new restaurants, recommending pricing policies in that region for headquarters
approval, reviewing applications for procurement from local suppliers, providing training to our
employees and conducting regional level marketing activities. In addition, in large sites we have
district management teams within regions that are in charge of overseeing restaurants in each
particular district under its management on a more day-to-day basis.
Restaurant-level management. Our restaurants are each run by its own restaurant management
team. The number of employees we have for each restaurant corresponds to the sales volume of that
particular restaurant. We delegate certain decisions to our restaurant-level management teams, so
that they have the flexibility to respond quickly to changing market demands and improve business
performance.
Marketing and Promotion
We try to keep our customers coming back to our restaurants based on the experience we create
for them. We believe the best and most successful businesses are not built through advertising or
promotional campaigns alone, but rather through deeply held business
45
philosophies evident in the
way the business is run, which inspire positive word-of-mouth from happy customers.
Our website at www.csc100.com is furnished with a customer-friendly interface designed to
provide the customer with our corporate and restaurant news as well as information on our food
offerings.
From time to time, we conduct promotional activities designed to raise customer awareness of
our brand. Such activities include issuing products containing our brand name and logo, advertising
through various media and conducting in-store promotional activities such as distribution of
in-store coupons. We currently spend our promotional budget primarily on print media in markets
where we already have some existing market presence, but we also intend to pursue focused marketing
activities to reach out to areas with large potential customer populations, including handing out
fliers in schools and placing advertisements in residential communities and office buildings. We
spent approximately RMB1.0 million, RMB3.2 million and RMB6.7 million ($1.0 million) on marketing
activities and promotional campaigns in the years ended December 31, 2008, 2009 and 2010,
respectively.
Since our first restaurant opened, we have received numerous awards from various local
governments and other sources in recognition of our business success. Some of these awards are:
|
|
|
China Up and Comers 2009 award granted in 2009 by Forbes magazine; |
|
|
|
|
Recommended Delicious Cuisine Brand award granted in 2009 by the Chongqing Commercial
Press; and |
|
|
|
|
Ten Most Popular Brand award granted in 2007 by the Chongqing Morning Post. |
Our approach to food has captured the attention of prominent news media in China, leading to
reports on Forbes magazine, Chongqing Morning Post, Phoenix Television and EBC Television from
Taiwan. A large number of publications have written favorably and extensively about our food,
restaurant concept, business model and development history. These media reports focus on our
innovative business model and menu offerings and report popular customer satisfaction with our
foods and our business expansion.
Competition
The quick service segment of the consumer food services industry in China is highly
competitive and fragmented. In addition, we compete against other segments of the consumer food
services industry, including in particular casual dining restaurants. The number, size and strength
of competitors vary by region. All of these restaurants compete based on a number of factors,
including taste, quickness of service, value, name recognition, restaurant location and customer
service quality. Competition within the quick service restaurant segment, however,
46
focuses
primarily on price, taste, quality and the freshness of the menu items and the ambiance and
condition of each restaurant.
We compete with national and regional quick service restaurants, including foreign competitors
such as McDonalds, KFC and Yoshinoya and various domestic competitors. Our market presence in
other cities is less significant but we believe that we can compete effectively in our targeted
geographic markets.
We believe that the principal competitive factors in our relevant markets include the
following:
|
|
|
quality and taste of our food offerings; |
|
|
|
|
affordability of our food offerings; |
|
|
|
|
clean and pleasant dining atmosphere; |
|
|
|
|
overall customer satisfaction; |
|
|
|
|
broad, loyal customer base; |
|
|
|
|
brand recognition; |
|
|
|
|
ability to attract and retain qualified employees; and |
|
|
|
|
efficient, highly scalable business model. |
Our business benefits from our delicious and affordable food offerings and our well-known
![(CHINESE CHARACTERS)](h05022h0502201.gif)
CSC brand in our existing markets. However, some of our existing and potential competitors
may have more resources than we do, and may be able to devote greater resources than we can to the
development, promotion and sale of their services and products and respond more quickly than we can
to changes in customer preferences or market trends. In addition, we face competition from a
variety of smaller-sized companies that focus on some of our targeted geographical markets, and
they may be able to respond more promptly to changes in customer needs and preferences in these
markets.
Technology
We use information technology systems to help us operate efficiently, increase the scalability
of our business and accommodate future growth. We currently use a combination of commercially
available and custom-developed software and hardware systems, including enterprise resource
planning software and point of sale tracking software. We are in the process of undergoing a
systems upgrade to provide us with increased capacity to analyze up-
47
to-date financial and operating
information from restaurants directly delivered to our management throughout each day, as well as
to expand our capacity to effectively manage inventory and supplies by systematically tracking food
served and ingredients needed for restaurants and timely transmit such information to our
subsidiaries and headquarters. Our technology system has several key benefits: it simplifies the
storage and processing of large amounts of data, facilitates the deployment and operation of
large-scale programs and services and automates of much of the administration of our business. Our
upgraded system will enhance such benefits and help us remain up-to-date in the efficient
management of our business operations.
Intellectual Property
Given the importance of the
![(CHINESE CHARACTERS)](h05022h0502201.gif)
brand to our business, our intellectual property is
an important element of our business. We rely on copyrights, trademarks, trade secrets and other
intellectual property laws, as well as non-competition and confidentiality agreements with our
employees, business partners and other third parties, to protect our intellectual property rights.
For risks and uncertainties associated with our intellectual property, see Item 3D Risk
FactorsRisks Related to Our Industry and BusinessOur business depends significantly on the
market recognition of our
![(CHINESE CHARACTERS)](h05022h0502201.gif)
brand, and if we are not able to maintain or enhance our
brand recognition, our business, financial condition and results of operations may be materially
and adversely affected.
Insurance
We believe that we are covered by adequate property and liability insurance policies with
coverage features and insured limits that we believe are customary for similar companies in China.
We currently have the following types of insurance, with certain deductibles and limitations of
liability in place for our operating restaurants: (1) property insurance covering all risks of
physical loss of, or damage to, our property; (2) business interruption insurance; (3) third-party
liability insurance indemnifying us for damages for which we may become legally liable arising out
of our business operations; and (4) money insurance which covers money in restaurants or in transit
accompanied by our authorized employees during business hours between our restaurants or offices
and banks, customers premises or post offices. However, our insurance coverage may not be adequate
to cover all losses that may occur. See Item 3D Risk FactorsRisks Relating to Our Industry and
BusinessWe have limited insurance coverage.
PRC Regulation
This section sets forth a summary of the most significant laws and regulations that affect our
business activities in China and our shareholders right to receive dividends and other
distributions from us.
48
Regulations on the Consumer Food Services Industry
We operate a quick service restaurant chain in the PRC, which are subject to the following
laws and regulations:
Regulations on the Food Safety and Licensing Requirements for Consumer Food Services
The PRC legal framework governing food safety was set up under the Food Safety Law, which came
into effect on June 1, 2009. The law applies to the production and business operation of food
additives, packing materials, containers, detergents and disinfectants for food and utensils and
the equipment for food production and business operation.
The Food Safety Law sets out the requirements and standards for food safety, food production
and business operations and the relevant supervising and administrative measures to ensure food
safety. Under the Food Safety Law, the following material requirements must be met in food
production and related business:
|
|
|
having adequate places for treating raw materials and food processing, packaging and
storage; keeping the environment of the said places tidy and clean, and ensuring that they
are at a prescribed distance from toxic and hazardous sites and other pollution sources; |
|
|
|
|
having adequate production or business operation equipment or facilities and having the
adequate equipment or facilities for disinfection, changing clothes, toilet, day-lighting,
illumination, ventilation, anti-corrosion, anti-dust, anti-fly, rat proof, mothproof,
washing, sewage discharge, and storage of garbage and waste; |
|
|
|
|
having professional food safety technicians and managerial personnel, and rules and
regulations to ensure food safety; |
|
|
|
|
having reasonable equipment layout and technical flowchart to prevent cross pollution
between the food to be processed and ready-to-eat food and between raw materials and
finished products, and to prevent the food from coming into contact with toxic substances
or unclean articles; |
|
|
|
|
ensuring that the cutlery, drinking sets and containers for ready-to-eat food are washed
clean or disinfected prior to use, the kitchenware and utensils are washed clean after use
and kept clean; |
|
|
|
|
ensuring that the containers, utensils and equipment for storing, transporting, loading
and unloading food are safe, are kept clean and meet other special requirements; |
49
|
|
|
ensuring that the persons engaging in the production of food or related business
operations shall keep personal hygiene, wash their hands clean and wear clean clothes and
hats during the process of food production or related business operations; |
|
|
|
|
using water which conforms to the national hygiene standards for drinking water; and |
|
|
|
|
using detergent or disinfectant which are safe and not harmful to the human body. |
Pursuant to the Food Safety Law, the state shall adopt a licensing system for food production
and related business operation. The entities and individuals which intend to engage in food
production, food circulation or food service businesses shall obtain licenses or permits for such
businesses. A food producer that has obtained a food production license is not required to obtain a
food circulation license when selling self-produced food at its production place. A food service
provider that has obtained a food service operating permit is not required to obtain food
production and circulation licenses when selling self-made or self-processed food at its food
service place.
The Food Safety Law sets out, as penalties for violation, various legal liabilities, in the
form of warnings, orders to rectify, confiscations of illegal gains, confiscations of utensils,
equipment, raw materials and other articles used for illegal production and operation, fines,
recalls and destructions of food in violation of laws and regulations, orders to suspend production
and/or operation, revocations of production and/or operation license, and even criminal punishment.
A restaurant which does not have a food service operating permit may be subject to confiscation of
gains and other restaurant assets, or fines ranging from RMB2,000 ($300) to ten times of the value
of food sold at the restaurant.
The Implementation Rules of the Food Safety Law, as effective on July 20, 2009, further
specify the detailed measures to be taken and conformed to by food producers and business operators
in order to ensure food safety as well as the penalties that shall be imposed should these required
measures not be implemented.
Pursuant to the Administrative Measures on License of Consumer Food Service and the
Administrative Measures on the Supervision of Food Safety on Consumer Food Service, as both
effective on May 1, 2010, a licensing system will be implemented for consumer food services
industry. Those engaged in the consumer food services industry should obtain the food service
operating permit, and assume the responsibilities of the food safety by adopting the food safety
administrative measures and having the personnel in charge of the food safety in place. The said
Measures also specify the requirements and procedures to apply for the food service operating
permit and the administration and supervision measures of the related authorities in respect of the
food service operating permit.
Each of our restaurants is required to obtain a food service operating permit in order to
offer food services. We must also follow the requirements set forth in the Food Safety Law, the
Implementation Rules of the Food Safety Law, the Administrative Measures on
50
License of Consumer
Food Service and the Administrative Measures on the Supervision of Food Safety on Consumer Food
Service.
Regulations on Fire Prevention
Our restaurants are subject to regulations on fire prevention. The PRC legal framework
governing fire prevention is set forth in the Fire Prevention Law which was adopted on April 29,
1998 and amended on October 28, 2008. According to the Fire Prevention Law and other relevant laws
and regulations of the PRC, the Ministry of Public Security and its local counterparts at or above
county level shall monitor and administer the fire prevention affairs. The fire prevention units of
such public security departments are responsible for implementation.
The Fire Prevention Law provides that the fire prevention design or construction of a
construction project must conform to the national fire prevention technical standards. For a
construction project that needs a fire prevention design under the national fire protection
technical standards for project construction, the construction entity shall submit the fire
prevention design documents to the fire prevention department of the public security authority for
approval or filing purposes (as the case may be). The filing procedure shall be done within 7
working days from the day when it obtains the construction license. No construction permit shall be
given for the construction projects for which the fire prevention design has not been approved or
are considered unqualified after the review, nor shall such construction entity commence their
construction.
Upon completion of a construction project to which a fire prevention design has been applied
according to the requirements of the Fire Prevention Law, such project must go through acceptance
check on fire prevention by, or filed with, the relevant fire prevention departments of public
security authorities. No construction may be put into use before it is accepted by the relevant
fire prevention units of public security authorities. For each public assembly venue, the
construction entity or entity using such venue shall, prior to use and operation of any business
thereof, apply for a safety check on fire prevention with the relevant fire prevention department
under the public security authority at or above the county level where the venue is located, and
such place could not be put into use and operation if it fails to pass the safety check on fire
prevention or fails to conform to the safety requirements for fire prevention after such check. The
Fire Prevention Law also provides legal liabilities for violation thereof. Any entity which has not
passed a fire safety check is required to improve the condition of the premise to meet the safe
requirements for fire prevention, and if the entity fails to cure as requested, it may be subject
to fines of up to RMB300,000 ($45,000) and, in the worst possible scenario, may be ordered to
suspend operations on the premise until the fire safety permit is obtained.
Our operations are subject to regulations on the consumer food services industry, as discussed
above, and our restaurants are required to obtain various licenses and permits under these
regulations. Some of our restaurants have not obtained all the requisite licenses and
permits. See Item 3D Risk FactorsRisks Relating to Our Industry and Our BusinessFailure
to comply with government regulations relating to the consumer food services
51
industry, fire safety,
food hygiene and environmental protection could materially and adversely affect our business and
operating results.
Regulations on Environmental Protection
The PRC legal framework governing environmental protection is set forth in the Environmental
Protection Law, which was promulgated on, and came into effect, as of December 26, 1989. The
protection, improvement, administration and supervision of environment are provided for in the
Environmental Protection Law. Detailed and specific legal liabilities for violation thereof are
also set out therein. According to the provisions of the Environmental Protection Law and other
relevant laws and regulations of the PRC, the Ministry of Environmental Protection and its local
counterparts take charge of the administration of supervision on the said environmental protection
matters.
According to the provisions of the Environmental Protection Law, the Law of the Peoples
Republic of China on Environmental Impact Assessment which came into effect as of September 1, 2003
and other relevant laws and regulations of the PRC, environmental impact assessment documents
estimating and evaluating the pollution generated by constructions and their impact on the
environment and prevention measures should be prepared by the project owners and be approved by the
Ministry of Environmental Protection or its local counterparts. A construction project shall only
be put into operation and use after passing the inspection and acceptance by the Ministry of
Environmental Protection or its competent local counterparts.
The Water Pollution Prevention Law first came into effect as of November 1, 1984 and was
subsequently amended on May 15, 1996 and February 28, 2008, respectively. The law applies to the
prevention and control of pollution of rivers, lakes, canals, irrigation channels, reservoirs and
other surface water bodies and groundwater within the PRC. According to the provisions of the Water
Pollution Prevention Law and other relevant laws and regulations of the PRC, the Ministry of
Environmental Protection and its local counterparts at or above county level shall take charge of
the administration and supervision on the matters of prevention and control of water pollution.
The Water Pollution Prevention Law provides that environmental impact assessment should be
conducted in accordance with the relevant laws and regulations for new construction projects and
expansion or reconstruction projects and other facilities on water that directly or indirectly
discharge pollutants to water bodies. Facilities for the prevention and control of water pollution
at a construction project shall be designed, built and put into use along with the main structure
of the construction project. The construction project shall only be used after facilities for the
prevention and control of water pollution pass the inspection and acceptance by the Ministry of
Environmental Protection and its competent local counterparts. Dismantling or putting off operation
of such installations shall be subject to prior approval of the local counterpart of the Ministry
of Environmental Protection at or above the county level.
52
Under the Provisions on the Inspection and Acceptance of Environmental Protection of
Construction Projects, promulgated on December 27, 2001, each construction project is subject to
the inspection and acceptance of the Ministry of Environmental Protection or its local counterparts
upon the completion of construction, and only after the construction project has passed the
inspection and acceptance and acquired the approval thereon can it be put into production or use.
Our restaurants discharge waste water and other waste in the ordinary course of business.
Accordingly, we are subject to regulations on environmental protection. We are required to prepare
environmental impact assessment reports for our restaurants and obtain the approval for such
reports from relevant environmental protection authorities. Our construction projects shall only be
put into operation and use after passing the inspection of and obtain acceptance by environmental
protection authorities.
Foreign Currency Exchange
The principal regulations governing foreign currency exchange in China are the Foreign
Exchange Administration Regulations, most recently amended on August 5, 2008. Under these
regulations, the RMB is freely convertible for current account items, including the distribution of
dividends, interest payments, and trade and service-related foreign exchange transactions, but not
for capital account items, such as direct investments, loans, repatriation of investments, and
investments in securities outside of China, unless the prior approval of SAFE is obtained and prior
registration with SAFE is completed.
On August 29, 2008, SAFE issued a circular regulating the conversion of foreign currency into
RMB by a foreign-invested company by restricting how the converted RMB may be used. The circular
requires that the registered capital of a foreign-invested enterprise settled in RMB that is
converted from foreign currencies may only be used for purposes within the business scope approved
by the applicable governmental authority and may not be used for equity investments within the PRC.
In addition, SAFE strengthened its oversight of the flow and use of the registered capital of
foreign-invested enterprises settled in RMB converted from foreign currencies. The use of such RMB
capital may not be changed without SAFEs approval, and may not in any case be used to repay RMB
loans if the proceeds of such loans have not been used. Violations may result in severe penalties,
such as heavy fines.
In addition, under the Regulations of Settlement, Sale and Payment of Foreign Exchange,
foreign invested enterprises may only buy, sell and remit foreign currencies at authorized banks
and must comply with certain procedural requirements, such as providing valid commercial documents
and, in the case of capital account item transactions, obtaining approval from the SAFE or its
local branches.
We receive substantially all of our revenues in RMB. Our income is primarily derived from
dividend payments from our PRC subsidiaries. Shortages in the availability of foreign currency may
restrict the ability of our PRC subsidiaries to remit sufficient foreign currency to pay dividends
or other payments to us, or otherwise satisfy their foreign currency
53
denominated obligations. See Risk FactorsRisks Related to Doing Business in
ChinaGovernmental control of currency conversion may affect the value of your investment.
SAFE Circular No. 75
On October 21, 2005, SAFE issued SAFE Circular No. 75, which became effective as of November
1, 2005, and requires Chinese residents, including both legal persons and natural persons, to
register with their local SAFE branch before establishing or acquiring control of any company
outside of China with assets or equity interests in Chinese companies for the purpose of capital
financing. Such a company outside of China is referred to as an offshore special purpose company.
Chinese residents must also file amendments to their registrations if their offshore companies
experience capital variation, such as changes in share capital, share transfers, mergers and
acquisitions, long-term equity or debt investments or creation of any security interest over any
assets for the benefits of third parties or any other material change in share capital. Failure to
comply with the registration procedures may result in restrictions being imposed on the foreign
exchange activities of the relevant Chinese entity. See Item 3D Risk FactorsRisks Related to
Doing Business in ChinaPRC regulations relating to the establishment of offshore special purpose
companies by PRC residents may subject our PRC resident shareholders to personal liability and
limit our ability to inject capital into our PRC subsidiaries, limit our PRC subsidiaries ability
to distribute profits to us, or otherwise adversely affect us.
Regulations on Employee Stock Options Plans
In December 2006, the Peoples Bank of China promulgated the Administrative Measures of
Foreign Exchange Matters for Individuals, setting forth the respective requirements for foreign
exchange transactions by individuals (both PRC or non-PRC citizens) under either the current
account or the capital account. In January 2007, the SAFE issued implementing rules for the
Administrative Measures of Foreign Exchange Matters for Individuals, which, among other things,
specified approval requirements for certain capital account transactions, such as a PRC citizens
participation in employee stock ownership plans or share option plans of an overseas
publicly-listed company. On March 28, 2007, the SAFE promulgated the Operating Procedures for
Administration of Domestic Individuals Participating in the Employee Stock Ownership Plan or Stock
Option Plan of an Overseas Listed Company, (the Stock Option Rules). The purpose of the Stock
Option Rules is to regulate the foreign exchange administration of PRC domestic individuals who
participate in employee stock ownership plans and share option plans of overseas listed companies.
According to the Stock Option Rules, if a PRC domestic individual participates in any employee
stock ownership plan or share option plan of an overseas listed company, a PRC domestic qualified
agent or the PRC subsidiary of such overseas listed company must, among other things, file on
behalf of such individual an application with the SAFE or its local counterpart to obtain approval
for an annual allowance with respect to the purchase of foreign exchange in connection with stock
ownership or share option exercises as PRC domestic individuals may not directly use overseas funds
to purchase shares or exercise share options. Concurrent with the filing of such application with
the SAFE or its local counterpart, the PRC domestic qualified agent or the PRC subsidiary shall
obtain approval from the SAFE or its
54
local counterpart to open a special foreign exchange account at a PRC domestic bank to hold
the funds required in connection with the stock purchase or option exercise, any returned principal
or profits upon sales of shares, any dividends issued on the stock and any other income or
expenditures approved by the SAFE or its local counterpart. The PRC domestic qualified agent or the
PRC subsidiary is also required to obtain approval from the SAFE or its local counterpart to open
an overseas special foreign exchange account at an overseas trust bank with custody qualifications
to hold overseas funds used in connection with any shares purchase.
Under the Foreign Exchange Administration Regulations, as amended in 2008, the foreign
exchange proceeds of domestic entities and individuals can be remitted into China or deposited
abroad, subject to the terms and conditions to be issued by the SAFE. However, the implementing
rules in respect of depositing the foreign exchange proceeds abroad have not been issued by the
SAFE. The foreign exchange proceeds from the sales of shares can be converted into RMB or
transferred to such individuals foreign exchange savings account after the proceeds have been
remitted back to the special foreign exchange account opened at the PRC domestic bank. If share
options are exercised in a cashless exercise, the PRC domestic individuals are required to remit
the proceeds to special foreign exchange accounts.
We and our employees, directors and consultants who are PRC residents and who have
participated in the share incentive plan have applied to the local SAFE branch for registration
under the Stock Option Rules. However, we cannot assure you that we can successfully complete the
registrations under the Stock Option Rules in the future. If we or our employees, directors and
consultants who are PRC residents fail to complete these registrations, we or such persons may be
subject to fines and legal sanctions. See Item 3.D. Risk FactorsRisks related to Doing Business
in ChinaAll participants of our existing share incentive plan who are PRC citizens are required
to register with the SAFE, and the failure to so comply could subject us and such participants to
penalties.
In addition, the State Administration of Taxation has issued a few circulars concerning
employee share options. Under these circulars, our employees working in China who exercise share
options will be subject to PRC individual income tax. Our PRC subsidiaries have obligations to file
documents related to employee share options with relevant tax authorities and withhold the
individual income taxes of employees who exercise their share options. If our employees fail to pay
and we fail to withhold their income taxes, we may face sanctions imposed by tax authorities or any
other PRC government authorities.
Legal Restrictions on Dividend Distributions
The principal regulations governing distribution of dividends paid by wholly foreign-owned
enterprises is the Corporate Law, as amended on October 27, 2006. Under the Corporate Law, our
subsidiaries in China may pay dividends only out of their accumulated profits, if any, as
determined in accordance with PRC accounting standards and regulations. In addition, Chinese
companies 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 except in the
event these subsidiaries are liquidated. See Item 3D Risk
55
FactorsRisk Related to Doing Business in ChinaWe rely principally on dividends and other
distributions paid by our wholly owned operating subsidiaries in China to fund any cash and
financing requirements we may have, and any limitation on the ability of our operating subsidiaries
to pay dividends to us could have a material adverse effect on our ability to borrow money or pay
dividends to holders of our ADSs.
56
C. Organizational Structure
We conduct substantially all of our restaurant operations through CSC China and its
subsidiaries. The following diagram illustrates our corporate structure:
For a complete list of subsidiaries, see Exhibit 8.1.
D. Property, Plants and Equipment
Facilities
The following table shows the area of our owned and leased facilities, including office and
restaurant space, as of December 31, 2010, based on a breakdown by province and municipality:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned |
|
Leased |
|
|
|
|
Restaurant |
|
Office |
|
Restaurant |
|
|
Office Space |
|
Space |
|
Space |
|
Space |
|
|
(square meters) |
Chongqing Municipality |
|
|
1,344 |
|
|
|
3,396 |
|
|
|
140 |
|
|
|
39,083 |
|
Sichuan Province |
|
|
|
|
|
|
650 |
|
|
|
504 |
|
|
|
22,249 |
|
Shaanxi Province |
|
|
|
|
|
|
|
|
|
|
120 |
|
|
|
3,965 |
|
Shanghai Municipality |
|
|
|
|
|
|
|
|
|
|
75 |
|
|
|
1,252 |
|
Hunan Province |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,844 |
|
Hubei Province |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
500 |
|
Guizhou Province |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
756 |
|
|
|
|
Total |
|
|
1,344 |
|
|
|
4,046 |
|
|
|
839 |
|
|
|
69,649 |
|
During the fiscal years 2008, 2009 and 2010, we incurred approximately RMB17.9 million,
RMB38.5 million and RMB 64.3 million ($9.7 million), respectively, in rental expenses under the
leases for our restaurant properties. For more details as to the
57
location and usage of these
facilities, please also see Item 4.B. Business OverviewOur Restaurants.
None.
You should read the following discussion and analysis of our financial condition and results
of operations in conjunction with the consolidated financial statements and the related notes
included elsewhere in this annual report. This discussion contains forward-looking statements that
involve risks and uncertainties. Our actual results and the timing of selected events could differ
materially from those anticipated in these forward-looking statements as a result of various
factors, including those set forth under Item 3.D. Key InformationRisk Factors and elsewhere
in this annual report.
A. Operating Results
Overview
Our restaurant chain grew from 9 restaurants as of January 1, 2008 to 131 restaurants as of
December 31, 2010, including 69 restaurants in Chongqing municipality and 45 restaurants in Sichuan
province. Our revenues increased by 113.6% from RMB231.5 million in 2008 to RMB494.5 million in
2009 and by 50.9% from RMB494.5 million in 2009 to RMB745.9 million ($113.0 million) in 2010. We
added 34 and 38 new restaurants respectively in 2008 and 2009, which contributed revenues of
RMB152.0 million and RMB124.5 million in 2008 and 2009, respectively. We further added 50 new
restaurants in 2010, which contributed revenues of RMB107.8 million ($16.3 million) in 2010. Our
net income increased by 69.4% from RMB26.6 million in 2008 to RMB45.1 million in 2009 and by 39.3%
from RMB45.1 million in 2009 to RMB62.8 million ($9.5 million) in 2010. We plan to increase the
number of our restaurants to approximately 200 by the end of 2011.
Key Factors Affecting our Results of Operations
Our financial condition and results of operations are mainly affected by the following
factors:
Number of restaurants in operation
Our revenues are affected to a significant extent by the number of restaurants we have in
operation. We generated substantially all of our revenues from sales at our restaurants.
Accordingly, new restaurants have contributed substantially to our revenue growth. The table below
shows the number of restaurants in operation as of the dates indicated:
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
2008 |
|
2009 |
|
2010 |
Number of Restaurants: |
|
|
|
|
|
|
|
|
|
|
|
|
Chongqing Municipality |
|
|
31 |
|
|
|
48 |
|
|
|
69 |
|
Sichuan Province |
|
|
8 |
|
|
|
22 |
|
|
|
45 |
|
Other Regions |
|
|
4 |
|
|
|
11 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
43 |
|
|
|
81 |
|
|
|
131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurants incur various costs and expenses before they open, and newly opened restaurants
typically incur materially greater operating costs during the first few months of their operations.
Therefore, opening new restaurants may temporarily lower results of operations on a per restaurant
basis, and the proportion of new restaurants we have in operation during any period may affect our
overall results of operations.
Comparable restaurant sales
We believe that comparable restaurant sales are an important benchmark of our operations. As
we continue to add new restaurants to our chain each year, we believe that comparable restaurant
sales provide a meaningful period-to-period comparison of restaurant performance because they
exclude increases that are due to the opening of new restaurants. We define comparable
restaurants in comparable periods as restaurants that were open throughout the periods under
comparison. For example, our comparable restaurants for years 2008 and 2009 are restaurants that
were open throughout both 2008 and 2009.
The table below shows our comparable restaurant sales for the period indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
For the year ended December 31, |
|
|
2008 |
|
2009 |
|
2009 |
|
2010 |
Number of comparable restaurants |
|
|
9 |
|
|
|
9 |
|
|
|
43 |
|
|
|
43 |
|
Revenues for comparable
restaurants (in RMB thousands) |
|
|
79,422 |
|
|
|
87,795 |
|
|
|
369,429 |
|
|
|
394,719 |
|
Percentage increase during
comparable periods |
|
10.5% |
|
6.8% |
We are highly focused on increasing comparable restaurant sales through a variety of measures,
including continuously expanding and updating our menu offerings to generate repeat business and
attract new customers and carefully selecting restaurant sites in areas with high customer traffic.
In addition, our restaurants regularly offer promotional discounts to attract more business. We
believe that these efforts have had a positive impact on our revenues.
Food and paper costs
Food and paper costs are the largest component of our operating expenses, representing 49.7%,
48.4% and 47.1% of our revenues in 2008, 2009 and 2010, respectively. The following table shows the
breakdown of our food and paper costs in 2008, 2009 and 2010:
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31 |
|
|
2008 |
|
2009 |
|
2010 |
|
|
Cost |
|
% of revenue |
|
Cost |
|
% of revenue |
|
Cost |
|
% of revenue |
|
|
(In thousands of RMB, except percentages) |
Food and beverage |
|
|
106,761 |
|
|
|
46.1 |
% |
|
|
221,227 |
|
|
|
44.7 |
% |
|
|
329,728 |
|
|
|
44.2 |
% |
Paper |
|
|
8,310 |
|
|
|
3.6 |
% |
|
|
18,130 |
|
|
|
3.7 |
% |
|
|
21,694 |
|
|
|
2.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Food and Paper |
|
|
115,071 |
|
|
|
49.7 |
% |
|
|
239,357 |
|
|
|
48.4 |
% |
|
|
351,422 |
|
|
|
47.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our food and beverage purchases are generally determined by prevailing market prices in China.
The prices of food in China rose significantly in 2007 and 2008. According to the National Bureau
of Statistic of China, the PRC food price index, its food inflation indicator, experienced
year-on-year increases of 12.3% and 14.3% in 2007 and 2008, respectively. Despite these rising
costs, we have been able to pass the increased costs onto our customers by increasing prices and
introducing food items with higher margin. In addition, with an increased number of restaurants, we
stepped up our efforts to centralize supply and thus enhanced our bargaining power on pricing with
vendors. The PRC food price index increased by 9.6% from December 2009 to December 2010, and we
expect that the rate of increase will remain significant in 2011. We increased prices of our menu
items in September 2010 to address the increase in costs of food in China. As a result of the
expansion of our operations and the inflation pressure in China, we expect the food and paper costs
to continue to increase in the future.
Restaurant wages and related expenses
Restaurant operations are highly service-oriented, and therefore our success, to a
considerable extent, depends upon our ability to attract, motivate and retain a sufficient number
of qualified employees, including restaurant managers and restaurant staff. We offer competitive
wages and benefits to our restaurant employees to manage employee attrition. Restaurant wages and
related expenses include wages, salaries and bonuses paid to employees of our restaurants and
production facilities, as well as pension scheme costs and social welfare.
The salary level of employees in the consumer food services industry in China has been rising
in recent years. In addition, when we open new restaurants, we have to hire staff before
restaurants are opened and thus we normally incur wages for those restaurants before they begin to
generate revenue. As a result, our restaurant wages and related expenses increased as a percentage
of revenue from 14.3% in 2008 to 15.6% in 2009 and further to 16.0% in 2010. We expect our
restaurant staff wages and related expenses to continue to increase as inflationary pressures in
China drive up wages and as we continue to increase the number of our restaurants.
Rental expenses
We lease substantially all of the properties on which we operate our restaurants. Generally,
most of our leases have initial lease terms of 5 to 10 years, with some granting us
60
an option to renew such lease terms upon re-negotiation of rental prices and other rental terms. Certain leases
require contingent rent, determined as a percentage of sales as defined by the terms of the applicable
lease agreement. Property rental prices in China have generally been rising since 2007, particularly in the
larger and more developed cities where a majority of our restaurants are located. Our rental expenses were 7.8% of our revenues in 2008 and
2009 and increased to 8.6% in 2010. With the expansion of our operations, we expect our rental
expenses to continue to increase in the future.
We intend to continue to rely on leasing properties for our restaurants. Nonetheless, should
appropriate opportunities arise, such as if the real estate on which some of our more mature and
profitable restaurants become available, we may strategically purchase these properties to hedge
against potential rises in rental costs.
Critical Accounting Policies and Estimates
We prepare our financial statements in conformity with U.S. GAAP, which requires us to make
judgments, estimates and assumptions. We continually evaluate these estimates and assumptions based
on the most recently available information, our own historical experience and various other
assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is
an integral component of the financial reporting process, actual results could differ from our
expectations as a result of changes in our estimates.
An accounting policy is considered critical if it requires an accounting estimate to be made
based on assumptions about matters that are highly uncertain at the time such estimate is made, and
if different accounting estimates that reasonably could have been used, or changes in the
accounting estimates that are reasonably likely to occur periodically, could materially impact the
consolidated financial statements. The selection of critical accounting policies, the judgments and
other uncertainties affecting application of those policies, and the sensitivity of reported
results to changes in conditions and assumptions are factors that should be considered when
reviewing our consolidated financial statements. We believe that the following accounting policies
involve a higher degree of judgment and complexity in their application and require us to make
significant accounting estimates. The following descriptions of critical accounting policies,
judgments and estimates should be read in conjunction with our consolidated financial statements
and other disclosures included in this annual report.
Lease Accounting
Judgments made by management for our lease obligations include the length of the lease term,
which includes the determination of renewal options that are reasonably assured. The lease term can
affect the classification of a lease as capital or operating for accounting purposes, the term over
which related leasehold improvements for each restaurant are amortized, and any rent holidays
and/or changes in rental amounts for recognizing rent expense over the term of the lease.
61
These judgments may produce materially different amounts of depreciation, amortization and
rent expense than would be reported if different assumed lease terms were used.
Long-lived Assets
We review our long-lived asses, particularly property and equipment, for impairment at the
restaurant level. We use one year of operating losses as the primary indicator of potential
impairment testing of these restaurant assets. If an indicator of impairment exists for any of the
assets, an estimate of the undiscounted future cash flows over the life of the primary asset for
each restaurant is compared to that long-lived assets carrying value. If the carrying value is
greater than the undiscounted cash flow, we then determine the fair value of the asset and if an
asset is determined to be impaired the loss is measured by the excess of the carrying amount of the
asset over its fair value.
Inherent in reviewing the carrying amounts of the long-lived assets is the use of various
estimates. First, our management must determine the usage of the asset. Impairment of an asset is
more likely to be recognized where and to the extent our management decides that such asset may be
disposed of or sold. Assets must be tested at the lowest level, generally the individual
restaurant, for which identifiable cash flows exist. If the expected undiscounted future cash flows
are less than the net book value of the assets, the excess of the net book value over the estimated
fair value is charged to current earnings. Fair value is based upon discounted cash flows of the
assets at a rate deemed reasonable for the type of asset and prevailing market conditions,
appraisals and, if appropriate, current estimated net sales proceeds from pending offers. Future
cash flow estimates are, by their nature, subjective and actual results may differ materially from
our estimates. If our ongoing estimates of future cash flows are not met, we may have to record
additional impairment charges in future accounting periods. Our estimates of cash flow are based on
the current regulatory, social and economic climates where we conduct our operations as well as
recent operating information and budgets for our business. These estimates could be negatively
impacted by changes in laws and regulations, economic downturns, or other events affecting various
forms of consumer spending and access to our restaurants.
Goodwill Impairment
Goodwill is required to be tested for impairment at least annually or more frequently if
events or changes in circumstances indicate that these assets might be impaired. If we determine
that the carrying value of our goodwill has been impaired, the carrying value will be written down.
To assess potential impairment of goodwill, we perform an assessment of the carrying value of each
individual restaurant at least on an annual basis or when events and changes in circumstances occur
that would more likely than not reduce the fair value of each individual restaurant below its
carrying value. If the carrying value of an individual restaurant exceeds its fair value, we would
perform the second step in our assessment process and record an impairment loss to earnings to the
extent the carrying amount of the individual restaurants goodwill exceeds its implied fair value.
We estimate the fair value of each individual restaurant through internal analysis and external
valuations, which utilize income and market valuation approaches through the application of
capitalized earnings and
62
discounted cash flow. These valuation techniques are based on a number of
estimates and assumptions, including the projected future operating results of the individual
restaurant, appropriate discount rates and long-term growth rates. The significant assumptions regarding our future operating performance are
revenue growth rates, discount rates and terminal values. If any of these assumptions changes, the
estimated fair value of our individual restaurant will change, which could affect the amount of
goodwill impairment charges, if any. We have not recognized any impairment charge on goodwill for
the periods presented. We are currently not aware of any impairment charge of the goodwill.
Share-Based Compensation
We adopted our 2009 share incentive plan in December 2009. The 2009 share incentive plan
permits us to grant stock options, restricted shares and restricted share units to our employees,
directors and consultants representing the right to acquire up to 7,720,000 ordinary shares. As of
April 1, 2011, options to purchase 4,397,544 ordinary shares and 413,750 restricted shares are
outstanding under this plan.
We recognize share-based compensation expenses based on the fair value of equity awards on the
date of the grant, with compensation expense recognized using a straight-line vesting method over
the requisite service periods of the awards, which is generally the vesting period.
The options we grant may contain early exercise feature, pursuant to which a grantee may
exercise the option before it has vested. However, so long as an option remains unvested, all
shares purchased upon early exercise remain subject to repurchase by us at the option exercise
price if the grantees service with us terminates. Early exercised options are not considered to
have been exercised, or to be exercisable, until this repurchase right has lapsed. We record the
proceeds received from grantees on early exercise as a liability on the consolidated balance sheet,
which will be reversed when the underlying non-vested restricted shares vest.
We have performed contemporaneous valuation of the options and restricted shares issued in
2010. The fair value of restricted shares is estimated based on the fair value of the ordinary
shares on the grant date. The options are priced using a binomial option pricing model. The
binomial model requires the input of highly subjective assumptions including the fair value of our
ordinary shares on the grant date, expected stock price volatility, forfeiture rate, risk-free rate
and expected price multiple at which employees are likely to exercise stock options. We have used
historical data to estimate the forfeiture rate. Expected volatilities are estimated based on the
average volatility of comparable companies over a time period commensurate with the expected life
of the options. The risk-free rate for periods within the contractual life of the option is based
on the U.S. Treasury yield curve in effect at the time of grant.
In determining the fair value of our ordinary shares in each of the grant dates, we relied in
part on valuation reports prepared by an independent appraiser based on data we
63
provided. These valuation reports provided us with guidelines in determining the fair value, but the determination
was made by us.
Determining the fair values of our ordinary shares requires making complex and subjective
judgments regarding projected financial and operating results, our unique
business risks, the liquidity of the ordinary shares and our operating history and prospects
at the time of grant. Therefore, these fair values are inherently uncertain and highly subjective.
The assumptions used to derive the fair values of the ordinary shares include:
|
|
|
no material changes in the existing political, legal, fiscal and economic conditions in
China; |
|
|
|
no major changes in tax law in China or the tax rates applicable to our subsidiaries in
China; |
|
|
|
no material changes in the exchange rates and interest rates from the presently
prevailing rates; |
|
|
|
availability of finance not a constraint on our future growth; |
|
|
|
our ability to retain competent management, key personnel and technical staff to
support our ongoing operations; and |
|
|
|
no material deviation in market conditions from economic forecasts. |
These assumptions are inherently uncertain. Different assumptions and judgments would affect
our calculation of the fair value of the underlying ordinary shares for the options granted, and
the valuation results and the amount of share-based compensation would also vary accordingly.
We also estimate expected forfeitures and recognize compensation cost only for those
share-based awards expected to vest. Amortization of Share-based compensation is presented in the
same line item in the consolidated statements of operations as the cash compensation of those
employees receiving the award.
Income Taxes
The provision for income taxes has been determined using the asset and liability approach of
accounting for income taxes. Under this approach, we recognize deferred tax assets and liabilities
based on the differences between the financial statement carrying amounts and tax basis of assets
and liabilities. A valuation allowance is required to reduce the carrying amounts of deferred tax
assets if, based on the available evidence, it is more likely than not that such assets will not be
realized. Accordingly, the need to establish valuation allowances for deferred tax assets is
assessed periodically based on a more-likely-than-not
64
realization threshold. This assessment
considers, among other matters, the nature, frequency and severity of current and cumulative
losses, forecasts of future profitability, the duration of statutory carry forward periods, our
experience with operating loss in the China fast food industry, tax planning strategy implemented
and other tax planning alternatives. As of December 31, 2010, we had deferred tax assets of RMB4.8
million ($0.7 million) generated from net loss carryforward before valuation allowance. We expect
many of our restaurants that were put in operation during 2008, 2009 and 2010 will become mature
and generate sufficient taxable profit to utilize the substantial portion of the net loss
carryforward.
The provision for income taxes represents income taxes paid or payable for the current year
plus the change in deferred taxes during the year. Our tax rate is based on expected income,
statutory tax rates and tax planning opportunities available in the various jurisdictions in which
we operate. For interim financial reporting, we estimate the annual tax rate based on projected
taxable income for the full year and record a quarterly income tax provision in accordance with the
anticipated annual rate. As the year progresses, we refine the estimates of the years taxable
income as new information becomes available, including year-to-date financial results. This
continual estimation process often results in a change to our expected effective tax rate for the
year. When this occurs, we adjust the income tax provision during the quarter in which the change
in estimate occurs so that the year-to-date provision reflects the expected annual tax rate.
Significant judgment is required in determining our effective tax rate and in evaluating its tax
positions.
We recognize a tax benefit associated with an uncertain tax position when, in our judgment, it
is more likely than not that the position will be sustained upon examination by a taxing authority.
For a tax position that meets the more-likely-than-not recognition threshold, we initially and
subsequently measure the tax benefit as the largest amount that we judge to have a greater than 50%
likelihood of being realized upon ultimate settlement with a taxing authority. Our liability
associated with unrecognized tax benefits is adjusted periodically due to changing circumstances,
such as the progress of tax audits, case law developments and new or emerging legislation. Such
adjustments are recognized entirely in the period in which they are identified. Our effective tax
rate includes the net impact of changes in the liability for unrecognized tax benefits and
subsequent adjustments as considered appropriate by management. We classify interest and penalties
recognized on the liability for unrecognized tax benefits as income tax expense.
Results of Operations
The following table sets forth a summary of our consolidated results of operations for the
periods indicated. This information should be read together with our consolidated financial
statements and related notes included elsewhere in this annual report. The results of operations in
any period are not necessarily indicative of the results that may be expected for any future
period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Year Ended December 31, |
|
|
2008 |
|
2009 |
|
2010 |
|
|
RMB |
|
RMB |
|
RMB |
|
$ |
|
|
(In thousands) |
Revenuerestaurant sales |
|
|
231,463 |
|
|
|
494,459 |
|
|
|
745,939 |
|
|
|
113,021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Year Ended December 31, |
|
|
2008 |
|
2009 |
|
2010 |
|
|
RMB |
|
RMB |
|
RMB |
|
$ |
|
|
(In thousands) |
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Food and paper |
|
|
115,071 |
|
|
|
239,357 |
|
|
|
351,422 |
|
|
|
53,246 |
|
Restaurant wages and related
expenses |
|
|
33,076 |
|
|
|
76,890 |
|
|
|
119,052 |
|
|
|
18,038 |
|
Restaurant rent expenses |
|
|
17,945 |
|
|
|
38,546 |
|
|
|
64,284 |
|
|
|
9,740 |
|
Restaurant utilities expenses |
|
|
13,773 |
|
|
|
31,073 |
|
|
|
46,746 |
|
|
|
7,083 |
|
Pre opening expenses |
|
|
|
|
|
|
|
|
|
|
5,906 |
|
|
|
895 |
|
Other restaurant operating
expenses |
|
|
12,455 |
|
|
|
28,774 |
|
|
|
33,106 |
|
|
|
5,016 |
|
Selling, general and
administrative expenses |
|
|
3,955 |
|
|
|
13,360 |
|
|
|
32,330 |
|
|
|
4,898 |
|
Depreciation |
|
|
2,855 |
|
|
|
10,999 |
|
|
|
21,288 |
|
|
|
3,225 |
|
Impairment and other lease
charges |
|
|
|
|
|
|
|
|
|
|
2,087 |
|
|
|
316 |
|
Total operating expenses |
|
|
199,130 |
|
|
|
438,999 |
|
|
|
676,221 |
|
|
|
102,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
32,333 |
|
|
|
55,460 |
|
|
|
69,718 |
|
|
|
10,564 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
1,083 |
|
|
|
758 |
|
|
|
3,465 |
|
|
|
525 |
|
Foreign exchange gain (loss) |
|
|
(1,347 |
) |
|
|
3 |
|
|
|
(2,715 |
) |
|
|
(411 |
) |
Other income (loss) |
|
|
(12 |
) |
|
|
490 |
|
|
|
6,893 |
|
|
|
1,044 |
|
Income before income taxes |
|
|
32,057 |
|
|
|
56,711 |
|
|
|
77,361 |
|
|
|
11,722 |
|
Income tax expenses |
|
|
(5,440 |
) |
|
|
(11,632 |
) |
|
|
(14,551 |
) |
|
|
(2,205 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
26,617 |
|
|
|
45,079 |
|
|
|
62,810 |
|
|
|
9,517 |
|
Results of Operations
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
Revenues
Our revenues increased by RMB251.4 million ($38.1 million), or 50.9%, from RMB494.5 million in
2009 to RMB745.9 million ($113.0 million) in 2010. This increase was due to:
|
|
|
an RMB24.2 million ($3.7 million) increase in revenues contributed by 43 restaurants
opened prior to December 31, 2008; |
|
|
|
an RMB119.4 million ($18.1 million) increase in revenues contributed by 38 restaurants
added during 2009; and |
|
|
|
an RMB107.8 million ($16.3 million) in revenues contributed by 50 restaurants added in
2010. |
We increased the number of our restaurants from 81 as of December 31, 2009 to 131 as of
December 31, 2010.
66
Food and paper
Our cost of food and paper increased by 46.8% from RMB239.4 million in 2009 to RMB351.4
million ($53.2 million) in 2010, primarily as a result of the expansion of our restaurant chain.
The increase in cost of food and paper was attributable to an increase in cost associated with food
from RMB221.2 million in 2009 to RMB329.7 million ($50.0 million) in 2010, and an increase of cost
associated with paper and other food packaging materials from RMB18.2 million in 2009 to RMB21.7
million ($3.3 million) in 2010. As a percentage of revenues, cost of food and paper decreased from 48.4% in
2009 to 47.1% in 2010.
Restaurant wages and related expenses
Our restaurant wages and related expenses costs increased by 54.8% from RMB76.9 million in
2009 to RMB119.1 million ($18.0 million) in 2010. The increase in restaurant wages and related
expenses resulted from an increase in headcount due to the additional restaurants opened during
2010 and, to a lesser extent, from share-based compensation expenses of RMB1.5 million and an
overall increase in the levels of salaries and other employee benefits in 2010. As a percentage of
our revenues, restaurant wages and related expenses increased from 15.6% in 2009 to 16.0% in 2010,
primarily due to new restaurants opened in the period as it took time for the new restaurants to
ramp up sales while restaurant wages and related expenses were incurred during the ramp-up period.
Restaurant rental expenses
Restaurant rental expenses increased by 66.8% from RMB38.5 million in 2009 to RMB64.3 million
($9.7 million) in 2010, primarily as a result of the expansion of our restaurant chain and, to a
lesser degree, the overall average rental increase in the markets in which we operated during the
period. As a percentage of our revenues, restaurant rental expenses increased from 7.8% in 2009 to
8.6% in 2010, primarily because it took time for the new restaurants opened during the period to
ramp up sales.
Restaurant utility expenses
Restaurant utility expenses increased by 50.4% from RMB31.1 million in 2009 to RMB46.7 million
($7.1 million) in 2010. Restaurant utility expenses were equal to 6.3% of our revenues in both 2009
and 2010.
Pre-opening expenses
Pre-opening expenses are expenses incurred prior to restaurant opening. Pre-opening expenses
were RMB5.9 million ($0.9 million) in 2010. Management started to track these expenses during the
third quarter of 2010, prior to which these expenses were recorded in other restaurant operating
expenses.
67
Other restaurant operating expenses
Other restaurant operating expenses increased by 15.1% from RMB28.8 million in 2009 to RMB33.1
million ($5.0 million) in 2010 (not including pre-opening expenses). As a percentage of revenues,
other restaurant operating expenses decreased from 5.8% in 2009 to 4.4% in 2010. Were pre-opening
expenses to be included in other restaurant operating expenses as was the case in 2009, other
restaurant operating expenses would have been RMB 39.0 million ($5.9 million) in 2010.
Selling, general and administrative expenses
Selling, general and administrative expenses increased by 142.0% from RMB13.4 million in 2009
to RMB32.3 million ($4.9 million) in 2010. Such increase was primarily due to an increase in the
size of our operations, the increase in promotion and marketing expenses and, to a lesser extent,
share-based compensation expenses. In particular, we continued to increase our headcount at the
corporate headquarters level in 2010 to support our operations and manage our supply chain. As a
result, the salaries, wages and other compensation expenses increased. We had share-based
compensation expenses that were allocated to selling, general and administrative expenses in the
amount of RMB4.2 million ($0.6 million) in 2010, as compared to nil in 2009. As a percentage of
revenues, our selling, general and administrative expenses increased from 2.7% in 2009 to 4.3% in
2010.
Depreciation
Depreciation in 2010 amounted to RMB21.3 million ($3.2 million), representing an increase of
93.5% as compared to RMB11.0 million in 2009. Such increase in depreciation was primarily
attributable to the increase in our total fixed assets as a result of the increase in the number of
our restaurants and, to a lesser degree, the renovations undertaken at certain existing
restaurants. As a percentage of revenues, depreciation increased from 2.2% in 2009 to 2.9% in 2010.
Impairment and other lease charges
Impairment and other lease charges are expenses incurred as a result of asset impairment and
the closure of a restaurant and the processing facility. Impairment and other lease charges were
RMB2.1 million ($0.3 million) in 2010 and nil in 2009, respectively.
Income tax expenses
Our income tax expenses increased by 25.1% from RMB11.6 million in 2009 to RMB14.6 million
($2.2 million) in 2010. The increase in our income tax expenses was primarily due to the increase
in income before taxes. Our effective income tax rate decreased from 20.5% in 2009 to 18.8% in
2010, the higher effective tax rate in 2009 attributable to withholding tax paid on dividends.
There were no such dividends paid in 2010.
68
Net income
As a result of the above, our net income increased by 39.3% from RMB45.1 million in 2009 to
RMB62.8 million ($9.5 million) in 2010.
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
Revenues
Our revenues increased by RMB263.0 million, or 113.6%, from RMB231.5 million in 2008 to
RMB494.5 million in 2009. This increase was due to:
|
|
|
an RMB8.4 million increase in revenues contributed by 9 restaurants opened prior to
December 31, 2007; |
|
|
|
an RMB130.2 million increase in revenues contributed by 34 restaurants added during
2008; and |
|
|
|
an RMB124.4 million in revenues contributed by 38 new restaurants added during 2009. |
We increased the number of our restaurants from 43 as of December 31, 2008 to 81 as of
December 31, 2009.
Food and paper
Our costs of food and paper increased by 108.0%, from RMB115.1 million in 2008 to RMB239.4
million in 2009, primarily as a result of the expansion of our restaurant chain and, to a lesser
degree, the overall average food price increase in China in 2009. The increase in cost of food and
paper was attributable to an increase of RMB114.4 million in cost associated with food from
RMB106.8 million in 2008 to RMB221.2 million in 2009, or an increase of 107.1%, and an increase of
cost associated with paper and other food packaging materials from RMB8.3 million in 2008 to
RMB18.2 million in 2009, or an increase of 118.2%. As a percentage of revenue, costs of food and
paper decreased from 49.7% in 2008 to 48.4% in 2009.
Restaurant wages and related expenses
Our restaurant wages and related expenses costs increased by 132.5% from RMB33.1 million in
2008 to RMB76.9 million in 2009. The increase in restaurant wages and related expenses resulted
both from an increase in headcount resulting from the additional restaurants opened during the year
and, to a lesser extent, from an overall increase in the levels of salaries and other employee
benefits. As a percentage of our revenues, restaurant wages and related expenses increased from
14.3% in 2008 to 15.6% in 2009, because it took
69
time for new restaurants to ramp up sales while
restaurant wages and related expenses were incurred at a level similar to existing restaurants.
Restaurant rental expenses
Restaurant rental expenses increased by 114.8% from RMB17.9 million in 2008 to RMB38.5 million
in 2009, which increased in line with the growth in our revenues. Restaurant rental expenses were
equal to 7.8% of our revenues in both 2008 and 2009.
Restaurant utility expenses
Restaurant utility expenses increased by 125.6% from RMB13.8 million in 2008 to RMB31.1
million in 2009, mainly due to the increase in the number of restaurants in 2009. As a percentage
of revenues, restaurant utility expense increased from 6.0% in 2008 to 6.3% in 2009.
Other restaurant operating expenses
Other restaurant operating expenses increased by 131.0% from RMB12.5 million in 2008 to
RMB28.8 million in 2009. Such increase was primarily due to the increase in pre-opening expenses as
a result of the opening of new restaurants, which caused increases in expenses for low-value
consumables and other miscellaneous expenses. As a percentage of revenues, other restaurant
operating expenses increased from 5.4% in 2008 to 5.8% in 2009.
Selling, general and administrative expenses
Selling, general and administrative expenses increased by 237.8% from RMB4.0 million in 2008
to RMB13.4 million in 2009. Such increase was primarily due to an increase in the size of our
operations. In particular, we increased our headcount at the corporate headquarters level in 2009
to support our operations and manage our supply chain. As a result, the salaries and wages as well
as travel cost increased. As a percentage of revenues, our selling, general and administrative
expenses increased from 1.7% in 2008 to 2.7% in 2009.
Depreciation
Depreciation for 2009 amounted to RMB11.0 million, representing an increase of 285.3% as
compared to RMB2.9 million in 2008. Such increase in depreciation was primarily attributable to the
increase in our total fixture assets as a result of the increase in the number of our restaurants
and the renovations undertaken at certain existing restaurants. As a percentage of revenues,
depreciation increased from 1.2% in 2008 to 2.2% in 2009.
70
Income tax expenses
Our income tax expenses increased by 113.8% from RMB5.4 million in 2008 to RMB11.6 million in
2009, which was in line with the growth in our operating income. Our income tax expenses for 2008
resulted from our income before tax of RMB32.1 million, which was subject to an effective income
tax rate of 17.0%, reconciled from the EIT Law tax rate of 25.0% by a tax holiday of 6.5% and the
effect of different tax rate of our operating entities operating in other geographic regions
amounting to 3.2%, which is offset by, among other items: (i) the net tax effect of non-deductible
expenses amounting to 1.0% and (ii) the effect of change in valuation allowance amounting to 0.9%.
Our income tax expenses for 2009 resulted from our income before tax of RMB56.7 million, which was
subject to an effective income tax rate of 20.5%, reconciled from the EIT Law tax rate of 25.0% by
a tax holiday of 11.9% which is offset by, among other items: (i) the effect of change in valuation allowance
amounting to 3.0% and (ii) the effect of different tax
rate of our operating entities operating in other geographic regions amounting to 2.8%.
Net income
As a result of the above, our net income increased by 69.4% from RMB26.6 million in 2008 to
RMB45.1 million in 2009.
Inflation
Inflation in China affected our results of operations in 2008 and 2010 in the form of rising
food prices. According to the National Bureau of Statistics of China, the annual average percent
changes in the consumer price index in China for 2008, 2009 and 2010 were an increase of 5.9%, a
decrease of 0.7% and an increase of 3.3%, respectively. The year-over-year percent changes in the
consumer price index for February 2009, 2010 and 2011 were decrease of 0.7% and increases of 2.1%
and 4.9%, respectively. Although we have not been materially affected by inflation in the past, we
can provide no assurance that we will not be affected in the future by higher rates of inflation in
China. For example, certain operating costs and expenses, such as food material, personnel
expenses, real estate leasing expenses, travel expenses and office operating expenses, may increase
as a result of higher inflation. As of December 31, 2010, cash and cash equivalents accounted for
approximately 70.4% of our assets. High inflation could significantly reduce the value and
purchasing power of these assets. We are not able to hedge our exposure to higher inflation in
China.
Recent Accounting Pronouncements
In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic
820) Improving Disclosures about Fair Value Measurements. The ASU amends ASC 820 (formerly SFAS
157) to add new requirements for disclosures about (1) the different classes of assets and
liabilities measured at fair value, (2) the valuation techniques and inputs used, (3) the activity
in Level 3 fair value measurements, and (4) the transfers between Levels 1, 2, and 3. The guidance
in the ASU is effective for the first reporting period beginning after December 15, 2009, except
for the requirement to provide the Level 3 activity of purchases, sales, issuances, and settlements
on a gross basis, which is
71
effective for fiscal years beginning after December 15, 2010, and for
interim periods within those fiscal years. In the period of initial adoption, entities will not be
required to provide the amended disclosures for any previous periods presented for comparative
purposes. However, those disclosures are required for periods ending after initial adoption. Early
adoption is permitted. Management believes the adoption of ASC 820 does not materially impact us.
In April 2010, the FASB issued ASU 2010-13, Compensation Stock Compensation (Topic 718);
Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the
Market in Which the Underlying Equity Security Trades. The objective of this ASU is to address the
classification of an employee share-based payment award with an exercise price denominated in the
currency of a market in which the underlying equity security trades. FASB Accounting Standards Codification Topic 718,
CompensationStock Compensation, provides guidance on the classification of a share-based payment
award as either equity or a liability. A share-based payment award that contains a condition that
is not a market, performance, or service condition is required to be classified as a liability.
Under Topic 718, awards of equity share options granted to an employee of an entitys foreign
operation that provide a fixed exercise price denominated in (1) the foreign operations functional
currency or (2) the currency in which the employees pay is denominated should not be considered to
contain a condition that is not a market, performance, or service condition. However, U.S. GAAP do
not specify whether a share-based payment award with an exercise price denominated in the currency
of a market in which the underlying equity security trades has a market, performance, or service
condition. Diversity in practice has developed on the interpretation of whether such an award
should be classified as a liability when the exercise price is not denominated in either the
foreign operations functional currency or the currency in which the employees pay is denominated.
ASU 2010-13 clarifies that an employee share-based payment award with an exercise price denominated
in the currency of a market in which a substantial portion of the entitys equity securities trades
should not be considered to contain a condition that is not a market, performance or service
condition. Therefore, an entity would not classify such an award as a liability if it otherwise
qualifies as equity. This ASU is effective for fiscal years and interim periods within those
fiscal years, beginning on or after December 15, 2010. Management believes the adoption of ASC 817
will not materially impact us.
In December 2010, the FASB issued ASU 2010-28, which (1) does not prescribe a specific method
of calculating the carrying value of a reporting unit in the performance of step 1 of the goodwill
impairment test and (2) requires entities with a zero or negative carrying value to assess,
considering qualitative factors such as those listed in ASC 350-20-35-30 (these factors are not
all-inclusive), whether it is more likely than not that a goodwill impairment exists. If an entity
concludes that it is more likely than not a goodwill impairment exists, the entity must perform
step 2 of the goodwill impairment test. For public entities, the ASU is effective for impairment
tests performed during entities fiscal years (and interim periods within those years) that begin
after December 15, 2010. Early application will not be permitted. Upon adoption (i.e., beginning of
the entitys fiscal year), an entity that has a reporting unit with a zero or negative carrying
value must assess, on the basis of current facts and circumstances, whether it is more likely than
not that a goodwill impairment exists. If so, the entity must perform step 2 of the goodwill
impairment test on the day of adoption and record the impairment charge, if any, as a
cumulative-effect adjustment through beginning retained earnings. Management believes the adoption
of ASC 350 will not materially impact us.
72
On December 21, 2010, the FASB issued ASU 2010-29 to address differences in the ways entities
have interpreted ASC 805s requirements for disclosures about pro forma revenue and earnings in a
business combination. The ASU states that if a public entity presents comparative financial
statements, the entity should disclose revenue and earnings of the combined entity as though the
business combination(s) that occurred during the current year had occurred as of the beginning of
the comparable prior annual reporting period only. In addition, the ASU expand(s) the
supplemental pro forma disclosures under ASC 805 to include a description of the nature and amount of material,
nonrecurring pro forma adjustments directly attributable to the business combination included in
the reported pro forma revenue and earnings. The ASU is effective prospectively for business
combinations whose acquisition date is at or after the beginning of the first annual reporting
period beginning on or after December 15, 2010. Early adoption is permitted. Management believes
the adoption of ASC 805 will not materially impact us.
There are no other recent accounting pronouncements that have had or are expected to have a
material impact on our consolidated financial statements as of the date of this report.
B. Liquidity and Capital Resources
Cash Flows and Working Capital
To date, we have financed our operations and expansions primarily through cash flows from
operations and proceeds from the issuance and sale of Series A preferred shares to investors and,
more recently, the proceeds of our initial public offering in September 2010. As of December 31,
2010, we had RMB612.6 million ($92.8 million) in cash and cash equivalents and we had no bank
borrowings. Our cash and cash equivalents consist of cash on hand and bank deposits that are placed
with banks and other financial institutions and which are either unrestricted as to withdrawal or
use or have maturities of three months or less.
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. The following table sets
forth a summary of our cash flows for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, |
|
|
2008 |
|
2009 |
|
2010 |
|
|
(In thousands of RMB) |
Net cash provided by operating activities |
|
|
39,539 |
|
|
|
72,169 |
|
|
|
89,798 |
|
Net cash used in investing activities |
|
|
(43,904 |
) |
|
|
(50,395 |
) |
|
|
(116,792 |
) |
Net cash used in financing activities |
|
|
(2,436 |
) |
|
|
(3,454 |
) |
|
|
571,654 |
|
Effect of exchange rate on cash and cash
equivalents |
|
|
(394 |
) |
|
|
(3 |
) |
|
|
(2,772 |
) |
Net increase (decrease) in cash and cash
equivalents |
|
|
(7,195 |
) |
|
|
18,317 |
|
|
|
541,888 |
|
Cash and cash equivalents at beginning
of the period |
|
|
59,573 |
|
|
|
52,378 |
|
|
|
70,695 |
|
Cash and cash equivalents at end of the
period |
|
|
52,378 |
|
|
|
70,695 |
|
|
|
612,583 |
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, |
|
|
2008 |
|
2009 |
|
2010 |
|
|
(In thousands of RMB) |
Supplemental
disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Payable for purchase of properties and
equipment |
|
|
3,911 |
|
|
|
13,490 |
|
|
|
12,317 |
|
Income tax paid, net |
|
|
1,892 |
|
|
|
9,264 |
|
|
|
17,762 |
|
Payable for offering expenses |
|
|
|
|
|
|
|
|
|
|
891 |
|
Operating Activities
Net cash provided by operating activities was RMB89.8 million ($13.6 million) in 2010,
compared to RMB72.2 million in 2009. The net cash provided by operating activities in 2010 included
a net income of RMB62.8 million ($9.5 million), adjusted by non-cash charges from operating
activities of RMB27.4 million ($4.2 million), which primarily included depreciation of property and
equipment of RMB21.3 million ($3.2 million) and share-based compensation of RMB5.7 million ($0.9
million). Additional major factors that affected operating cash flow in 2010 include the fact that
amount due from related parties decreased by RMB8.9 million ($1.4 million) and accrued payroll
expenses increased by RMB5.4 million ($0.8 million) in line with the increase in headcount in our
restaurant operations.
Net cash provided by operating activities was RMB72.2 million in 2009, compared to RMB39.5
million in 2008. The net cash provided by operating activities in 2009 included a net income of
RMB45.1 million, adjusted by non-cash charges from operating activities of RMB10.3 million, which
primarily included depreciation of property and equipment of RMB11.0 million partially offset by
deferred income taxes of RMB0.9 million. Additional major factors that affected operating cash flow
in 2009 include: (i) accounts payable increased by RMB18.8 million due to the substantial increase
in our procurement volume in food and other supply; (ii) inventories increased by RMB8.4 million in
line with our revenues growth; (iii) accrued payroll increased by RMB5.1 million in line with our
increase in headcount in our restaurant operations; and (iv) accrued expenses and other current
liability increased by RMB4.0 million in line with the growth of our operations.
The net cash provided by operating activities in 2008 included a net income of RMB26.6
million, adjusted by non-cash charges from operating activities of RMB2.3 million, which primarily
included depreciation of property and equipment of RMB2.9 million partially offset by deferred
income taxes of RMB0.6 million. Additional major factors that affected operating cash flow in 2008
included: (i) accounts payable increased by RMB12.5 million due to the substantial increase in our
procurement volume in food and other supply; (ii) due from related parties increased by RMB9.6
million; (iii) accrued expenses and other current liability increased by RMB11.7 million primarily
due to the increase of RMB5.6 million in business tax accrual, and RMB2.0 million in security
deposits; (iv) inventories increased by RMB6.1 million in line with our revenues growth; and (v)
accrued payroll increased by RMB4.8 million in line with our increase in headcount in our
restaurant operations.
74
Investing Activities
Net cash used in investing activities increased to RMB116.8 million ($17.7 million) in 2010
from RMB50.4 million in 2009. Net cash used in investing activities in 2010 represented the
restaurant and office space capital expenditures to acquire equipment, real properties for
restaurant operations and office space and to renovate existing or planned new restaurants.
Net cash used in investing activities increased to RMB50.4 million in 2009 from RMB43.9
million in 2008. Net cash used in investing activities in 2009 resulted from (i) the restaurant and
office space capital expenditures of RMB45.8 million to acquire real properties for restaurant
operations and to renovate the new restaurants we opened in the period; and (ii) payments for the
purchase of restaurant equipment in an amount of RMB4.6 million.
Net cash used in investing activities in 2008 resulted from (i) the restaurant and office
space capital expenditures we made in the amount of RMB40.7 million to acquire real properties for
restaurant operation and office space, and to renovate the new restaurants we opened in the period;
(ii) payments for the purchase of restaurant equipment in an amount of RMB3.2 million.
Financing Activities
Net cash provided by financing activities was RMB571.7 million ($86.6 million) in 2010,
compared to net cash used in financing activities of RMB3.5 million in 2009. Net cash provided by
financing activities in 2010 resulted from Net IPO proceeds of RMB572.8 million ($86.8 million) and
proceeds from early exercise of employee stock options in an amount of RMB2.8 million ($0.4
million), partially offset by dividends of RMB3.9 million ($0.6 million) paid to Series A preferred
shareholders in the period declared in 2009. Net cash used in financing activities was RMB3.5
million in 2009, compared to RMB2.4 million in 2008. Net cash used in financing activities in both
2008 and 2009 was the result of the distribution to our founders of retained earnings of the nine
restaurants owned by our founders.
Capital Expenditures
We made capital expenditures of RMB43.9 million, RMB50.4 million and RMB116.8 million ($17.7
million) in 2008, 2009 and 2010, respectively, representing 19.0%, 10.2% and 15.7% of our total
revenues in each of these periods, respectively. Our capital expenditures were made primarily to
renovate restaurants, purchase restaurant equipment and strategically purchase selected real
property. Our capital expenditures have been primarily funded by net cash provided from cash
generated by our operations, and to a lesser degree, from our financing activities.
75
We expect our capital expenditures to be approximately RMB150 million ($22.7 million) in 2011.
Our capital expenditures in 2011 will be used primarily to open new restaurants. We expect to incur
a total of approximately RMB100 million ($15.2 million) in capital expenditures in connection with
the leasehold improvements and investments in
equipment in relation to the opening of between 65 and 75 new restaurants in 2010. The
remaining capital expenditures in 2011 will be made to purchase selected real properties for our
national sauce package production facility and the central kitchen for Chongqing.
C. Research and Development
We do not have significant research and development policies and expenditures. For general
information about our product development, see Item 4.B. Business OverviewOur FoodProduct
Development.
D. Trend Information
Other than as disclosed elsewhere in this annual report, we are not aware of any trends,
uncertainties, demands, commitments or events for the year ended December 31, 2010 that are
reasonably likely to have a material adverse 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 have not entered into any financial guarantees or other commitments to guarantee the
payment obligations of any third parties. We have not entered into any derivative contracts that
are indexed to our shares and classified as shareholders 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. Moreover, we do not have any variable interest in any unconsolidated entity
that provides financing, liquidity, market risk or credit support to us or 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, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by December 31, |
|
|
Total |
|
2011 |
|
2012 |
|
2013 |
|
2014 |
|
2015 |
|
Thereafter |
|
|
(In thousands of RMB) |
Operating lease
obligations |
|
|
430,455 |
|
|
|
70,319 |
|
|
|
68,222 |
|
|
|
64,228 |
|
|
|
60,302 |
|
|
|
52,851 |
|
|
|
114,533 |
|
G. Safe Harbor
See Forward Looking Statements on page 4 of this annual report.
76
A. Directors and Senior Management
The following table sets forth information regarding our directors and executive officers as
of the date of this annual report.
|
|
|
|
|
|
|
Directors and Executive Officers |
|
Age |
|
Position/Title |
Hong Li
|
|
|
43 |
|
|
Chairman of the Board of Directors and Chief Executive Officer |
Xingqiang Zhang
|
|
|
45 |
|
|
Director |
Tim T. Gong
|
|
|
47 |
|
|
Director |
Steve Yue Ji
|
|
|
39 |
|
|
Director |
Chao Sun
|
|
|
34 |
|
|
Director, Chief Operating Officer |
Li-Lan Cheng
|
|
|
46 |
|
|
Independent Director |
May Wu
|
|
|
43 |
|
|
Independent Director |
Caimin Zhong
|
|
|
42 |
|
|
Independent Director |
Roy Shengwen Rong
|
|
|
42 |
|
|
Chief Financial Officer |
Shengshun Li
|
|
|
34 |
|
|
Vice President for Corporate Development & Logistics |
Cheng Xiao
|
|
|
36 |
|
|
Vice President for Product Development |
Hong Li is one of our founders and has served as our chairman and chief executive officer
since our inception. Ms. Li has been instrumental to the development and success of our business.
From 1996 to August 2007, Ms. Li established and operated nine restaurants which are now part of
our consolidated group. Ms. Li is primarily responsible for our overall management, major
decision-making, strategic planning including marketing and investment planning, development and
visions. From 1992 to 1996, Ms. Li served as the manager of an international quick service
restaurant chain in Chongqing. Ms. Li studied cooking technique in Chongqing Business and
Technology College from 1984 to 1986 and received a degree in cooking technique from Chongqing
Business and Technology College in 1986, a degree in Chinese languages from Sichuan Normal
University in 1988 and an executive MBA workshop certificate from Beijing University in 2007. Ms.
Li is the wife of Mr. Xingqiang Zhang, our co-founder and director.
Xingqiang Zhang is one of our founders and has served as one of our directors since our
inception. From 1996 to August 2007, Mr. Zhang, together with Hong Li, established and operated
nine restaurants which are now part of our consolidated group. Mr. Zhang has valuable experience
and knowledge in terms of the daily operations of quick service chain restaurants, which
contributed greatly to our successful development. From 1992 to 1995, Mr. Zhang served as the
manager of two international quick service restaurant chains in Chongqing. Mr. Zhang received a
bachelors degree in economics from Nankai University in 1988. Mr. Zhang is the husband of Ms. Hong
Li, our co-founder, chairman and chief executive officer.
77
Tim T. Gong has served as our director since September 2007. Mr. Gong joined SIG China
Investments One, Ltd. in January 2006 and now leads a group that invests in companies operating
mainly in China. Mr. Gong has over a decade of experience in terms of managing and overseeing the
management and development of various companies. Prior to joining SIG China Investments One, Ltd.,
Mr. Gong was a managing partner of PreIPO Capital from 2003 to 2005, serving as a merchant banker
and angel investor for many start-ups. From 1999 to 2002, Mr. Gong founded and served as the
president of Hotvoice Communications International, a Silicon Valley venture capital backed company
that was considered to be an early runner in VoIP, IM and UMS technologies. From 1996 to 1999, he
was the general manager of StarCom Products Inc. and also served as a senior management consultant
for UT StarCom. Mr. Gong received a bachelors degree in applied physics from Shanghai Jiao Tong
University in 1984 and a Ph.D. degree in Electrical Engineering from Princeton University in 1991.
Steve Yue Ji has served as our director since September 2007. From 2005 to now, Mr. Ji has
served as a managing director of Sequoia Capital China. Prior to joining Sequoia, Mr. Ji worked at
Walden International, Vertex Management, and CIV Venture Capital, where he contributed to
investments in numerous wirelesses, internet and semiconductor companies in China. From 1995 to
1998, Mr. Ji held various managerial roles at Seagate Technology China. Mr. Ji received a
bachelors degree in engineering from Nanjing University of Aeronautics & Astronautics in 1995 and
an MBA degree from China Europe International Business School in 1999.
Chao Sun has served as our chief operating officer since our inception, has served as our
director since September 2007.
His primary responsibilities currently include supervising market development, overall operations
and daily management of our group operations. From 2003 to 2006, Mr. Sun worked for our founders to
manage restaurants which are now part of our consolidated group. From 2002 to 2003, Mr. Sun served
as the restaurant manager of Dicos, a Chinese fried chicken restaurant chain, in Chongqing. From
1998 to 2000, he was an employee training manager for KFC in Chengdu. Mr. Sun received an associate
degree in computer management from Sichuan University in 1999.
Li-Lan Cheng has served as our independent director since September 2010. Mr. Cheng has served
as the chief financial officer of E-House (China) Holdings Limited, a real estate service company
based in China and listed on the New York Stock Exchange, since November 2006. From 2005 to 2006,
Mr. Cheng served as the chief financial officer of SouFun Holdings Limited, a real estate Internet
company in China. From 2002 to 2004, Mr. Cheng served as an executive director and the chief
financial officer of SOHO China Limited, a real estate developer in Beijing. Mr. Cheng was an
assistant director and the head of the Asian transportation sector investment banking group of ABN
AMRO Asia from 1997 to 2002. Mr. Cheng received a bachelors degree in economics from Swarthmore
College in 1989 and a Ph.D. degree in economics from the Massachusetts Institute of Technology in
1995. Mr. Cheng is a chartered financial analyst (CFA).
May Wu has served as our independent director since October 27, 2010. Ms. Wu has served as the
chief strategy officer of Home Inns & Hotels Management Inc., an economy
78
hotel chain based in China
and listed on the Nasdaq Global Market, since April 2010. Ms. Wu was the chief financial officer of
Home Inns from July 2006 to April 2010. She has served as an independent director and chairwoman of
the audit committee of E-House (China) Holdings Limited, a real estate service company based in
China and listed on the New York Stock Exchange, since August 2008. From January 2005 to March
2006, Ms. Wu was first vice president at Schroder Investment Management North America Inc., and a
vice president from January 2003 to December 2004, and was responsible for investment research and
management for various funds, specializing in consumer and services sectors. From 1998 to 2002, Ms.
Wu was an equity research analyst at JP Morgan Asset Management, where she also served as a vice
president from 2000 to 2002. Ms. Wu holds a bachelors degree from Fudan University in China, a
masters degree from Brooklyn College at the City University of New York and an MBA degree from the
J.L. Kellogg Graduate School of Management at Northwestern University.
Caimin Zhong has served as our independent director since October 27, 2010. Mr. Zhong has been
a professor teaching MBA and Executive MBA courses at the Tsinghua University School of Continuing
Education since 2005. In 2003, Mr. Zhong founded Beijing Huangjihuang Food Management Co., Ltd.,
where he served as general manager until 2005. From 1999 to 2003, Mr. Zhong served as the head of
training and operation development in north Asia for McDonalds China Development Company. Mr.
Zhong received a bachelors degree in veterinary science from Beijing Agriculture University in
1990.
Roy Shengwen Rong has served as our chief financial officer since April 2010. Prior to joining
us, he was the chief financial officer of two privately held education companies in China since
April 2008. From 2000 to 2008, Mr. Rong held multiple financial management positions at Google,
Inc., Solectron Corp., and Siebel Systems, Inc. Mr. Rong obtained a bachelors degree from Renmin
University of China in 1991, a masters degree in professional accountancy from West Virginia
University in 1996 and an MBA degree from the Booth School of Business at the University of Chicago
in 2000. Mr. Rong is qualified as U.S. Certified Public Accountant.
Shengshun Li has served as our vice president for corporate development and logistics since
August 2009. Mr. Li is primarily responsible for the formulation and implementation of our
operational strategies, division of functions and responsibilities among various departments as
well as reviewing and analyzing operation reports, and has been instrumental in helping us smooth
our process of rapid expansion. Prior to joining us, Mr. Li served as the manager trainee of Xiamen
Zhenli Food Co., Ltd. from 2000 to 2001. Mr. Li received an associate degree in economics and
management from Chongqing Municipal Party College in 2010. Mr. Li and our chairman, Ms. Hong Li,
are not related.
Cheng Xiao has served as our vice president for product development since our inception.
Before September 2007, he had been assisting our founders in building up and operating the CSC restaurants which are now part of our consolidated group. Mr. Xiaos
primarily responsibilities include conducting extensive research regarding customer tastes and
popular trends in the food services industry and overseeing the development of new and updated menu
items to reflect changing tastes and trends. Mr. Xiao has invaluable experience as a composer of
popular dishes and has insight into the needs and preferences of our
79
customers, and has been
instrumental to our success in developing a menu filled with customer favorites. Prior to joining
us, Mr. Xiao was the executive chef of Chongqing Wudu Hotel from 2002 to 2005. Mr. Xiao began
taking courses in Chongqing Normal University in September 2009 to obtain a bachelors degree in
Human Resources.
B. Compensation
In 2010, our aggregate payments of cash to directors and executive officers was approximately
RMB1.5 million ($0.2 million). In 2010, our then-directors and executive officers received options
and restricted shares under our 2009 share incentive plan.
Share Incentive Plan
In December 2009, we adopted the 2009 share incentive plan to attract and retain valued
personnel, provide additional incentives to employees, directors and consultants, and promote the
success of our business. Our board of directors has authorized the issuance of up to 7,720,000
ordinary shares pursuant to awards granted under our plan. As of April 1, 2011, options to purchase
a total of 4,397,544 of our ordinary shares as well as 413,750 restricted shares are outstanding.
The following paragraphs summarize the terms of our 2009 share incentive plan.
Plan Administration. The plan will be administered by a committee of one or more directors
to whom the board shall delegate the authority to grant or amend awards to participants other than
any of the committee members. The committee will determine the provisions and terms and conditions
of each award grant.
Award Agreement. Awards granted under our plan are evidenced by award agreements that set
forth the terms, conditions and limitations for each award, which may include the term of an award,
the provisions applicable in the event the participants employment or service terminates, and our
authority to unilaterally or bilaterally amend, modify, suspend, cancel or rescind an award.
Exercise Price. The exercise price subject to an option shall be determined by the plan
administrator and set forth in the award agreement which may be a fixed or variable price related
to the fair market value of the shares, to the extent not prohibited by applicable laws. Subject to
certain limits set forth in the plan, the exercise price may be amended or adjusted in the absolute
discretion of the plan administrator, the determination of which shall be final, binding and
conclusive. To the extent not prohibited by applicable laws or any exchange rule, a downward
adjustment of the exercise prices of options shall be effective without the approval of the
shareholders or the approval of the affected participants.
Eligibility. We may grant awards to our employees, directors and consultants or those of any
of our related entities, which include our subsidiaries or any entities in which we hold a
substantial ownership interest, as determined by our plan administrator. Awards other
80
than
Incentive Share Options may be granted to our employees, directors and consultants. Incentive Share
Options may be granted only to employees of our company or a parent or a subsidiary of our company.
Term of the Options. The term of each award grant shall be determined by our plan
administrator, provided that the term shall not exceed 10 years from the date of the grant.
Vesting Schedule. In general, the plan administrator determines, or the award agreement
specifies, the vesting schedule. Options granted under our 2009 share incentive plan are subject to
vesting schedules between four to five years. For restricted shares granted under our 2009 share
incentive plan, we have the right to repurchase the restricted shares until vested, and 25% of the
restricted shares will vest one year following the grant date and the remaining 75% of the
restricted shares will vest in 36 equal installments over the next three years.
Transfer Restrictions. Except as otherwise provided by our plan administrator, award may not
be transferred or otherwise disposed of by a participant other than by will or the laws of descent
and distribution. Our plan administrator by express provision in the award or an amendment may
permit an award (other than an incentive share option) to be transferred to or exercised by certain
persons related to the participant.
Corporate Transactions. Except as may provided otherwise in an individual award agreement or
any other written agreement entered into by a participant and us, in the event of a
change-of-control or other corporate transactions, our plan administrator may determine to provide
for one or more of the following: (i) each award outstanding under the plan to terminate at a
specific time in the future and give each participant the right to exercise the vested portion of
the awards during a period of time as determined by our plan administrator; or (ii) termination of
any award in exchange for an amount of cash equal to the amount that could have been attained upon
the exercise of the awards; or (iii) the replacement of such award with other rights or property
selected by the our plan administrator or the assumption of or substitution of such award by the
successor or a parent or subsidiary of such company, with appropriate adjustments; or (iv) payment
of award in cash based on the value of shares on the date of the corporate transaction plus
reasonable interest on the award.
Amendment and Termination of the Plan. With the approval of our board, our plan
administrator may, at any time and from time to time, amend, modify or terminate the plan,
provided, however, that no such amendment shall be made without the approval of the our
shareholders to the extent such approval is required by applicable laws, or in the event that any
amendment that increases the number of shares available under our plan, permits our plan
administrator to extend the term of our plan or the exercise period for an option beyond ten years
from the date of grant, or results in material increase in benefits or a change in eligibility requirements, unless we decides to follow home country
practice.
Early Exercise. The options contain an early exercise feature, pursuant to which the grantee
may exercise the option before it has vested. However, so long as an option remains unvested, all
shares purchased upon early exercise remain subject to repurchase by us at the
81
option exercise
price if the grantees service with us terminates. Early exercise options are not considered to
have been exercised, or to be exercisable, until this repurchase right has lapsed. As of April 1,
2011, we have issued a net of 161,750 ordinary shares upon early exercise of stock options and
recorded the proceeds received as a liability which will be reversed when such non-vested
restrictive shares vest.
The following table summarizes, as of April 1, 2011, the options and restricted shares granted
to our executive officers, director and to other individuals as a group:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary Shares |
|
Restricted |
|
|
|
|
Name |
|
Underlying Options |
|
Shares |
|
Exercise Price |
|
Date of Grant |
Li-Lan Cheng |
|
|
* |
|
|
|
|
|
|
$ |
3.08 |
|
|
July 30, 2010 |
May Wu |
|
|
* |
|
|
|
|
|
|
$ |
4.13 |
|
|
September 27, 2010 |
Caimin Zhong |
|
|
* |
|
|
|
|
|
|
$ |
4.13 |
|
|
September 27, 2010 |
Roy Shengwen Rong |
|
|
* |
|
|
|
|
|
|
$ |
2.50 |
|
|
May 20, 2010 |
Roy Shengwen Rong |
|
|
|
|
|
|
* |
|
|
|
|
|
|
May 20, 2010 |
Shengshun Li |
|
|
* |
|
|
|
|
|
|
$ |
1.00 |
|
|
January 1, 2010 |
Shengshun Li |
|
|
* |
|
|
|
|
|
|
$ |
5.38 |
|
|
January 25, 2011 |
Shengshun Li |
|
|
|
|
|
|
* |
|
|
|
|
|
|
February 25, 2011 |
Cheng Xiao |
|
|
* |
|
|
|
|
|
|
$ |
1.00 |
|
|
January 1, 2010 |
Chao Sun |
|
|
* |
|
|
|
|
|
|
$ |
1.00 |
|
|
January 1, 2010 |
Chao Sun |
|
|
* |
|
|
|
|
|
|
$ |
5.38 |
|
|
January 25, 2011 |
Other individuals
as a group |
|
|
3,618,000 |
|
|
|
|
|
|
$ |
1.00 |
|
|
January 1, July 9, and August 23, 2010 |
Other individuals
as a group |
|
|
745,000 |
|
|
|
|
|
|
$ |
5.38 |
|
|
January 25, 2011 |
Other individuals
as a group |
|
|
|
|
|
|
12,000 |
|
|
|
|
|
|
February 24, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
5,320,000 |
|
|
|
304,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C. Board Practices
Composition of Board of Directors
Our board of directors consists of eight directors. A director is not required to hold any
shares in our company by way of qualification. A director may vote with respect to any contract or
transaction in which he or she is materially interested, provided the nature of the interest is
disclosed prior to its consideration. Subject to our Memorandum and Articles of
82
Association, the
directors may exercise all the powers of our company to borrow money, mortgage his or her
undertaking, property and uncalled capital, and issue debentures or other securities whether
outright or as security for any debt, liability or obligation of our company or of any third party.
We intend to have a majority of independent directors serving on our board of directors by
September 28, 2011.
Code of Business Conduct and Ethics
Our code of business conduct and ethics provides that our directors and officers are expected
to avoid any action, position or interest that conflicts with the interests of our company or gives
the appearance of a conflict. Directors and officers have an obligation under our code of business
conduct and ethics to advance our companys interests when the opportunity to do so arises.
Duties of Directors
Under Cayman Islands law, our directors have a fiduciary duty to act honestly, in good faith
and with a view to our best interests. Our directors also have a duty to exercise the skill they
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, as amended and restated from time to time. Our company
has the right to seek damages if a duty owed by our directors is breached.
The functions and powers of our board of directors include, among other things:
|
|
|
convening shareholders annual general meetings and reporting its work to shareholders
at such meetings; |
|
|
|
|
declaring dividends and distributions; |
|
|
|
|
appointing officers and determining the term of office of officers; |
|
|
|
|
subject to our Memorandum and Articles of Association, exercising the borrowing powers
of our company and mortgaging the property of our company; and |
|
|
|
|
approving the transfer of shares of our company, including
the registering of such shares in our share register. |
Terms of Directors and Executive 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 in accordance with our Memorandum and Articles of Association. A
83
director will be
removed from office automatically if, among other things, the director becomes bankrupt or makes
any arrangement or composition with his creditors, or dies or becomes of unsound mind.
Committees of the Board of Directors
Audit Committee
Our audit committee consists of Mr. Li-Lan Cheng, Ms. May Wu and Mr. Caimin Zhong, and is
chaired by Mr. Li-Lan Cheng. Mr. Li-Lan Cheng and Ms. May Wu satisfy the independence
requirements of Section 303A of the Corporate Governance Rules of the New York Stock Exchange and
meet the independence standards under Rule 10A-3 under the Securities Exchange Act of 1934, as
amended, or the Exchange Act. We have determined that Mr. Li-Lan Cheng qualifies as an audit
committee financial expert. The audit committee will oversee our accounting and financial
reporting processes and the audits of the financial statements of our company. The audit committee
will be responsible for, among other things:
|
|
|
selecting our independent auditors and pre-approving all auditing and non-auditing
services permitted to be performed by our independent auditors; |
|
|
|
|
reviewing with our independent auditors any audit problems or difficulties and
managements response to such audit problems or difficulties; |
|
|
|
|
reviewing and approving all proposed related party transactions, as defined in Item 404
of Regulation S-K under the Securities Act; |
|
|
|
|
discussing the annual audited financial statements with management and our independent
auditors; |
|
|
|
|
reviewing major issues as to the adequacy of our internal controls and any special
audit steps adopted in light of material control deficiencies; |
|
|
|
|
annually reviewing and reassessing the adequacy of our audit committee charter; |
|
|
|
|
such other matters that are specifically delegated to our audit committee by our board
of directors from time to time; |
|
|
|
|
meeting separately and periodically with management and our internal and independent
auditors; and |
|
|
|
|
reporting regularly to the full board of directors. |
84
Compensation Committee
Our compensation committee consists of Mr. Tim T. Gong, Mr. Li-Lan Cheng and Mr. Caimin Zhong,
and is chaired by Mr. Tim T. Gong. Mr. Cheng and Mr. Zhong satisfy the independence requirements
of Section 303A of the Corporate Governance Rules of the New York Stock Exchange. Our compensation
committee assists the board of directors in reviewing and approving the compensation structure of
our directors and executive officers, including all forms of compensation to be provided to our
directors and executive officers. Members of the compensation committee are not prohibited from
direct involvement in determining their own compensation. Our chief executive officer may not be
present at any committee meeting during which his compensation is deliberated. The compensation
committee will be responsible for, among other things:
|
|
|
approving and overseeing the compensation package for our executive officers; |
|
|
|
|
reviewing and making recommendations to the board of directors with respect to the
compensation of our directors; |
|
|
|
|
reviewing and approving corporate goals and objectives relevant to the compensation of
our chief executive officer, evaluating the performance of our chief executive officer in
light of those goals and objectives, and setting the compensation level of our chief
executive officer based on this evaluation; and |
|
|
|
|
reviewing periodically and making recommendations to the board of directors regarding
any long-term incentive compensation or equity plans, programs or similar arrangements,
annual bonuses, employee pension and welfare benefit plans. |
Corporate Governance and Nominating Committee
Our corporate governance and nominating committee consists of Mr. Steve Yue Ji, Mr. Li-Lan
Cheng and Ms. May Wu, and is chaired by Mr. Steve Yue Ji. Mr. Cheng and Ms. Wu satisfy the
independence requirements of Section 303A of the Corporate Governance Rules of the New York Stock
Exchange. The corporate governance and nominating committee will assist the board of directors in
identifying individuals qualified to become our directors and in determining the composition of the
board of directors and its committees. The corporate governance and nominating committee will be
responsible for, among other things:
|
|
|
identifying and recommending to the board nominees for election or re-election to the
board of directors, or for appointment to fill any vacancy; |
|
|
|
|
reviewing annually with the board the current composition of the board of directors in
light of the characteristics of independence, age, skills, experience and availability of
service to us; |
85
|
|
|
identifying and recommending to the board the directors to serve as members of the
committees of the board of directors; |
|
|
|
|
advising the board of directors periodically with respect to significant developments
in the law and practice of corporate governance as well as our compliance with applicable
laws and regulations, and making recommendations to the board on all matters of corporate
governance and on any corrective action to be taken; and |
|
|
|
|
monitoring compliance with our code of business conduct and ethics, including reviewing
the adequacy and effectiveness of our procedures to ensure proper compliance. |
Interested Transactions
A director may vote in respect of any contract or transaction in which he or she is
interested, provided that the nature of the interest of any directors in such contract or
transaction is disclosed by him or her at or prior to its consideration and any vote on that
matter.
Remuneration and Borrowing
The directors may determine remuneration to be paid to the directors. The compensation
committee will assist the directors in reviewing and approving the compensation structure for the
directors. Subject to our Second Amended and Restated Memorandum and Articles of Association, the
directors may exercise all the powers of our company to borrow money and to mortgage or charge its
undertaking, property and uncalled capital, and to issue debentures or other securities whether
outright or as security for any debt obligations of our company or of any third party.
Qualification
There is no shareholding qualification for directors.
Employment Agreements
We have entered into an employment agreement with each of our executive officers. Under these
agreements, each of our executive officers is employed for a specific time period. The terms of the
employment agreements are substantially similar for each executive officer, except as noted below.
The term of employment for each of our executive officers, as stated under their respective
existing employment agreements, is from April 2010 to April 2013 and will be automatically extended
for successive one-year terms unless either we or the executive officer gives prior written notice
to terminate. We may terminate an executive officers employment for cause, at any time, without
notice or remuneration, for certain acts of the officer including, but not limited to, a serious
criminal act, willful misconduct to our detriment or a failure to perform agreed duties. The
executive office may resign at any time if
86
such resignation is approved by the board of directors
or an alternative arrangement with respect to the employment is agreed by the board of directors.
Each executive officer has agreed to hold, both during and after the termination of his or her
employment agreement, in strict confidence and not to use, except as required in the performance of his or her duties in connection with the employment or as compelled by
law, any of our or our customers confidential information or any of our trade secrets. Each
executive officer also agrees to comply with all material applicable laws and regulations related
to his or her responsibilities at our company as well as all material written corporate and
business policies and procedures of our company.
Each executive officer has agreed to be bound by non-competition restrictions during the term
of his or her employment and for two years following the termination of such employment agreement.
Specifically, each executive officer has agreed not to (1) assume employment with, or provide
services as a director for, any of our competitors who operate in a restricted area; (2) solicit or
seek any business orders from our customers; or (3) seek, directly or indirectly, to solicit the
services of any of our employees.
D. Employees
We had a total of 2,524, 4,579 and 5,456 full time employees as of December 31, 2008, 2009 and
2010. The following table sets forth the numbers of our employees categorized by their respective
functions as of December 31, 2010:
|
|
|
|
|
|
|
Number of |
Types of Employees |
|
Employees |
Management and Corporate-level Staff |
|
|
498 |
|
Cooks |
|
|
1,101 |
|
Restaurant Staff |
|
|
3,857 |
|
Total |
|
|
5,456 |
(1) |
|
|
|
(1) |
|
Includes 4,958 employees that are hired through, and maintain employment contracts with a
third-party human resource service provider. |
As required by regulations in China, we participate in various employee social security plans
that are administered by municipal and provincial governments, including housing, pension, medical
insurance and unemployment insurance. We are required under relevant PRC laws to make contributions
to employee benefit plans at specified percentages of the total salaries, bonuses and certain
allowance of our employees, up to a maximum amount specified by the relevant local governments from
time to time.
We seek to hire motivated and customer service-oriented managerial and other employees,
preferably with background and experience in the restaurant and service industries. We source
potential management candidates through hiring agents as well as newspaper advertisements and
website postings.
87
We believe we maintain a good working relationship with our employees, and we have not
experienced any major labor disputes or any difficulty in recruiting staff for our operations.
E. Share Ownership
The following table sets forth information with respect to the beneficial ownership of our
ordinary shares, as of April 1, 2011, by:
|
|
|
each of our directors and executive officers; and |
|
|
|
|
each person known to us to own beneficially more than 5% of our ordinary shares. |
The calculations in the table below is based on 103,476,906 ordinary shares outstanding as of
April 1, 2011.
Beneficial ownership is determined in accordance with the rules and regulations of the SEC. In
computing the number of shares beneficially owned by a person and the percentage ownership of that
person, we have included shares that the person has the right to acquire within 60 days, including
through the exercise of any option, warrant or other right or the conversion of any other security.
These shares, however, are not included in the computation of the percentage ownership of any other
person.
|
|
|
|
|
|
|
|
|
|
|
Ordinary Shares Beneficially Owned |
|
|
Number |
|
% |
Directors and Executive Officers: |
|
|
|
|
|
|
|
|
Hong Li (1) |
|
|
53,200,000 |
|
|
|
51.41 |
|
Xingqiang Zhang (1) |
|
|
53,200,000 |
|
|
|
51.41 |
|
Tim T. Gong (2) |
|
|
12,000,000 |
|
|
|
11.60 |
|
Steven Yue Ji (3) |
|
|
12,000,000 |
|
|
|
11.60 |
|
Chao Sun |
|
|
* |
|
|
|
* |
|
Li-Lan Cheng |
|
|
|
|
|
|
|
|
May Wu |
|
|
|
|
|
|
|
|
Caimin Zhong |
|
|
|
|
|
|
|
|
Roy Shengwen Rong (4) |
|
|
* |
|
|
|
* |
|
Shengshun Li |
|
|
* |
|
|
|
* |
|
Cheng Xiao |
|
|
* |
|
|
|
* |
|
All directors and executive
officers as a group |
|
|
77,353,750 |
|
|
|
74.75 |
|
Principal Shareholders: |
|
|
|
|
|
|
|
|
Regal Fair Holdings Limited (1) |
|
|
53,200,000 |
|
|
|
51.41 |
|
Sequoia Capital China II, L.P. and
affiliated funds (3) |
|
|
12,000,000 |
|
|
|
11.60 |
|
SIG China Investments One, Ltd. (2) |
|
|
12,000,000 |
|
|
|
11.60 |
|
|
|
|
* |
|
Less than 1%. |
|
(1) |
|
Consists of 53,200,000 ordinary shares held by Regal Fair Holdings Limited, a British Virgin
Islands company. Regal Fair Holdings Limited is jointly owned by Ms. Li and Mr. Zhang and Ms.
Li and |
88
|
|
|
|
|
Mr. Zhang share voting and dispositive power over the shares held by Regal Fair
Holdings Limited. The registered address of Regal Fair Holdings Limited is Portcullis TrustNet
Chambers, P.O. Box 3444, Road Town, Tortola, British Virgin Islands. Ms. Li and Mr. Zhang are
husband and wife. The business address for Ms. Li and Mr. Zhang is 18-1 Guojishangwu Center,
178 Zhonghua Road, Yuzhong District, Chongqing, Peoples Republic of China. |
|
(2) |
|
Consists of ordinary shares issuable upon conversion of 12,000,000 Series A preferred shares
held by SIG China Investments One Ltd. SIG Asia Investment, LLLP, the authorized agent of SIG
China Investments One, Ltd., has the discretionary authority to vote and dispose of the shares
held by SIG China Investments One, Ltd. Mr. Arthur Dantchik, in his capacity as president of
SIG Asia Investment, LLLP, may also be deemed as having investment discretion and voting power
over the shares held by SIG China Investments One, Ltd. Messrs. Dantchik and Gong each
disclaims beneficial ownership with respect to the shares owned by SIG China Investments One
Ltd. except to the extent of his pecuniary interest therein. The business address for Mr. Gong
and SIG China Investments One Ltd. is c/o SIG Asia Investment, LLLP, 101 California Street
Suite 3250, San Francisco, CA 94111, U.S.A. |
|
(3) |
|
Consists of ordinary shares issuable upon conversion of (i) 10,059,600 Series A preferred
shares held by Sequoia Capital China II, L.P., (ii) 250,800 Series A preferred shares held by
Sequoia Capital China Partners Fund II, L.P., and (iii) 1,689,600 Series A preferred shares
held by Sequoia Capital China Principals Fund II, L.P. Sequoia Capital China II, L.P., Sequoia
Capital China Partners Fund II, L.P. and Sequoia Capital China Principals Fund II. L.P are
managed by Sequoia Capital China Advisors Limited, a company incorporated in the Cayman
Islands. The general partner of Sequoia Capital China II, L.P., Sequoia Capital China Partners
Fund II, L.P. and Sequoia Capital China Principals Fund II. L.P. is Sequoia Capital China
Management II, L.P., whose general partner is SC China Holding Limited, a company incorporated
in the Cayman Islands. SC China Holding Limited is wholly owned by Max Wealth Enterprises
Limited, a company wholly owned by Neil Nanpeng Shen. Mr. Ji is a managing director of Sequoia
Capital China. Messrs. Shen and Ji each disclaims beneficial ownership with respect to the
shares held by Sequoia Capital China II, L.P., Sequoia Capital China Partners Fund II, L.P.
and Sequoia Capital China Principals Fund II. L.P. except to the extent of his pecuniary
interest therein. The business address of Sequoia Capital China II, L.P., Sequoia Capital
China Partners Fund II, L.P. and Sequoia Capital China Principals Fund II. L.P. is Suite 2215,
Two Pacific Place, 88 Queensway, Hong Kong. The business address of Mr. Ji is Room 4603, Plaza
66, Tower 2, 1366 Nanjing West Road, Shanghai, China. |
|
(4) |
|
The business address for Messrs. Sun, Rong, Li and Xiao is 18-1 Guojishangwu Center, 178
Zhonghua Road, Yuzhong District, Chongqing, Peoples Republic of China. |
None of our existing shareholders has different voting rights from other shareholders. We are
not aware of any arrangement that may, at a subsequent date, result in a change of control of our
company.
A. Major Shareholders
Please refer to Item 6.E. Directors, Senior Management and EmployeesShare Ownership.
B. Related Party Transactions
Transactions with Certain Directors, Shareholders, Affiliates and Key Management Personnel
Our founders, Ms. Hong Li and Mr. Xingqiang Zhang, owned and operated nine restaurants prior
to the establishment of CSC Cayman. Since the establishment of CSC China in September 2007, these
nine restaurants have been directly operated by us. We purchased the operating assets of these nine
restaurants in a series of transactions from our founders in
89
2008 and 2009 for an aggregated price of RMB3.4 million. As these nine restaurants were under the common control of our founders, we
consolidated the results of operations of these nine restaurants in our financial statements throughout the periods
presented in our financial statements.
In 2009, we purchased food ingredients in the amounts of RMB3.3 million from Mr. Dehong Chen,
one of our shareholders. As of December 31, 2010, we had no outstanding cash balance due to Mr.
Chen.
In 2009 and 2010, we leased certain properties from Ms. Hong Li, our chairman and chief
executive officer, and Mr. Xingqiang Zhang, one of our directors, for RMB1.5 million and RMB1.0
million, respectively. These properties were used for office space and restaurant operations. As
of December 31, 2010, we had no material cash balance due to Ms. Li or Mr. Zhang in relation to
these leases.
In 2009, we purchased commercial property from Mr. Xingqiang Zhang in the amount of RMB12.0
million. The purchased property is now used for office space and restaurant operations. As of
December 31, 2010, we had no outstanding cash balance due to Mr. Zhang in relation to the purchase
of commercial property.
In 2009, we purchased restaurant operating assets from 8 restaurants that were owned and
operated by self-employed owners who were not affiliated with us at the time. We purchased
operating assets for some of these restaurants from Chen Dehong, Li Wenge, Du Jing and Du Qiurong,
who became our shareholders as a part of these transactions. Before such purchases were completed,
we provided employee training services for such restaurants, the cost of which were to be
reimbursed to us by the respective owners of these restaurants. In 2009, we earned a total RMB1.0
million with respect to the reimbursement of such employee training costs to which we are entitled.
Such balances are unsecured and interest free and have no fixed repayment terms.
Due to the limited banking services to corporate accounts over weekends and public holidays in
China, we have historically utilized certain transitional personal bank accounts held by certain
employees designated by us, for over-the-weekend or public holiday deposits. As of December 31,
2009, we had a cash balance of RMB2.6 million due from related parties, representing the restaurant
operating cash held in these personal bank accounts. There were no outstanding balances as of
December 31, 2010.
Share Incentives
Option Grants. We have granted options and restricted shares to certain of our directors,
officers, employees and consultants. As of April 1, 2011, options to purchase an aggregate of
4,397,544 ordinary shares and 413,750 restricted shares of our company were outstanding.
90
See ManagementShare Incentive Plan for a description of share options and stock purchase
rights we have granted to our directors, officers and other individuals as a group.
Our audit committee reviews and approve all related party transactions on an ongoing basis.
See Item 6CBoard PracticesCommittees of the Board of DirectorsAudit committee.
Our code of business conduct and ethics provides for mechanisms to avoid conflicts between the
personal interests of our directors and officers and our companys interests. See Item 6CBoard
PracticesCode of Business Conduct and Ethics for more details.
Private Placement
In September 2007, we issued as part of a private placement transaction an aggregate of
24,000,000 Series A preferred shares at a total price of $13,000,000 at $0.541667 per share to SIG
China Investments One, Ltd. and Sequoia Capital China Growth Fund II, L.P.
C. Interests of Experts and Counsel
Not applicable.
A. Consolidated Statements and Other Financial Information
See Item 18. Financial Statements.
Legal Proceedings
From time to time, we are subject to legal proceedings, investigations and claims incidental
to the conduct of our business. We are currently not a party to any material legal or
administrative proceedings and we are not aware of any material legal or administrative proceedings
threatened against us. We may from time to time be subject to various legal or administrative
proceedings arising in the ordinary course of business.
Dividend Policy
We have no present plan to declare and pay any dividends on our ordinary shares or ADSs for
the foreseeable future. We currently intend to retain our available funds and any earnings for the
foreseeable future to operate and expand our business.
We are a holding company incorporated in the Cayman Islands. We rely principally on dividends
from our subsidiaries in China for our cash needs. Current PRC regulations
91
restrict the ability of
our subsidiaries to pay dividends to us; for example, PRC regulations permit our subsidiaries to
pay dividends to us only out of their accumulated profits, if any, determined in accordance with
PRC accounting standard and regulations. For further details of such restrictions, see Item 4 D -
Risk FactorsRisks Related to Doing Business in ChinaWe rely principally on dividends and other distributions paid by our wholly owned operating subsidiaries in China to fund any cash and
financing requirements we may have, and any limitation on the ability of our operating subsidiaries
to pay dividends to us could have a material adverse effect on our ability to borrow money or pay
dividends to holders of our ADSs.
Subject to our Memorandum and Articles of Association and applicable laws, our board of
directors has complete discretion as to whether to declare a distribution of dividends to
shareholders. Even if our board of directors decides to recommend dividends, the form, frequency
and amount will depend upon our future operations and earnings, capital requirements and surplus,
general financial condition, contractual restrictions and other factors that our board of directors
may deem relevant. If we pay dividends, we will pay our ADS holders to the same extent as holders
of our ordinary shares, subject to the terms of the deposit agreement, including the fees and
expenses payable thereunder. See Item 12.D.American Depositary Shares. Cash dividends on our
ADSs and ordinary shares, if any, will be paid in U.S. dollars.
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.
A. Offering and Listing Details
See C. Markets and Item 12.D.American Depositary Shares.
B. Plan of Distribution
Not applicable.
C. Markets
Our ADSs, each representing four ordinary shares, have been listed on the New York Stock
Exchange since September 28, 2010 and trade under the symbol CCSC. The following table provides
the high and low trading prices for our ADSs on the New York Stock Exchange for the periods
indicated.
92
|
|
|
|
|
|
|
|
|
|
|
Trading Price |
|
|
High |
|
Low |
|
|
US$ |
|
US$ |
Annual High and Low |
|
|
|
|
|
|
|
|
Fiscal Year 2010 |
|
$ |
34.96 |
|
|
$ |
21.76 |
|
|
|
|
|
|
|
|
|
|
Quarterly Highs and Lows |
|
|
|
|
|
|
|
|
Fourth Fiscal Quarter of 2010 |
|
$ |
34.96 |
|
|
$ |
21.76 |
|
First Fiscal of 2011 |
|
$ |
24.97 |
|
|
$ |
15.97 |
|
Monthly Highs and Lows |
|
|
|
|
|
|
|
|
October 2010 |
|
$ |
34.96 |
|
|
$ |
25.75 |
|
November 2010 |
|
$ |
31.40 |
|
|
$ |
21.97 |
|
December 2010 |
|
$ |
26.70 |
|
|
$ |
21.76 |
|
January 2011 |
|
$ |
24.97 |
|
|
$ |
21.51 |
|
February 2011 |
|
$ |
24.13 |
|
|
$ |
21.28 |
|
March 2011 |
|
$ |
21.33 |
|
|
$ |
15.97 |
|
April 2011 (through April 19 2011) |
|
$ |
17.99 |
|
|
$ |
16.50 |
|
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
We are a Cayman Islands company and our affairs are governed by our memorandum and articles of
association, as amended from time to time, and the Companies Law (2010 Revision) of the Cayman
Islands, which is referred to below as the Companies Law.
The following are summaries of material provisions of our Second Amended and Restated
Memorandum and Articles of Association and the Companies Law insofar as they relate to the material
terms of our ordinary shares.
Registered Office and Objects
93
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 within the
Cayman Islands 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 (2010 Revision), as amended from time to time, or any other law of the Cayman
Islands.
Board of Directors
See Item 6.C. Board PracticesBoard of Directors.
Ordinary Shares
General
All of our outstanding ordinary shares are fully paid and non-assessable. Certificates
representing the ordinary shares are issued in registered form. Our shareholders who are
non-residents of the Cayman Islands may freely hold and vote their shares.
Dividend Rights
The holders of our ordinary shares are entitled to such dividends as may be declared by our
board of directors subject to the Companies Law.
Voting Rights
Each ordinary share is entitled to one vote on all matters upon which the ordinary shares are
entitled to vote. Voting at any meeting of shareholders is by show of hands unless a poll is
demanded. A poll may be demanded by the chairman of our board of directors or any other shareholder
holding at least ten percent of the shares given a right to vote at the meeting, present in person
or by proxy.
A quorum required for a meeting of shareholders consists of at least two shareholders holding
not less than an aggregate of one-tenth of all voting share capital of our company in issue present
in person or by proxy and entitled to vote. Although not required to do so by the Companies Law or
our Second Amended and Restated Memorandum and Articles of Association, we will hold an annual
shareholders meeting during each fiscal year, as required by the rules of the New York Stock
Exchange. In addition, an extraordinary meeting of shareholders may be convened by our board of
directors on its own initiative or upon a request to the directors by shareholders holding in
aggregate not less than one-third of our share capital as at that date carries the right of voting
at general meeting of our company. Advance notice of at least ten 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,
94
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 or amendments to our memorandum and articles of association. Holders of the ordinary
shares may effect certain changes by ordinary resolution, including alter the amount of our
authorized share capital, consolidate and divide all or any of our share capital into shares of
larger amount than our existing share capital, and cancel any shares which have not been taken or agreed to be taken
by any person.
Transfer of Shares
Subject to the restrictions of our Second Amended and Restated 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 the usual or common form or any other form approved by our
board.
Our board of directors may, in its absolute discretion, decline to register any transfer of
any ordinary share which is not fully paid up or on which we have a lien. Our directors may also
decline to register any transfer of any ordinary share unless (a) the instrument of transfer is
lodged with us, accompanied by the certificate for the ordinary shares to which it relates and such
other evidence as our board of directors may reasonably require to show the right of the transferor
to make the transfer; (b) the instrument of transfer is in respect of only one class of shares; (c)
the instrument of transfer is properly stamped, if required; (d) in the case of a transfer to joint
holders, the number of joint holders to whom the share is to be transferred does not exceed four;
(e) the shares transferred are free of any lien in favor of us; or (f) a fee of such maximum sum as
the New York Stock Exchange may determine to be payable, or such lesser sum as our board of
directors may from time to time require, is paid to us in respect thereof.
If our directors refuse to register a transfer, they shall, within two months after the date
on which the instrument of transfer was lodged, send to each of the transferor and the transferee
notice of such refusal. The registration of transfers may, on 14 days notice being given by
advertisement in such one or more newspapers or by electronic means, be suspended and the register
closed at such times 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 nor the
register closed for more than 30 days.
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.
95
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, before the issue of such shares, by either our board of directors or by our
shareholders by special resolution.
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
three-fourths 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
Holders of our ordinary shares will have no general right under Cayman Islands law to inspect
or obtain copies of our list of shareholders or our corporate records. However, we will provide our
shareholders with annual audited financial statements. See H. Documents on Display.
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.B. Information on the CompanyBusiness OverviewPRC RegulationForeign
Exchange.
E. Taxation
The following discussion of the material Cayman Islands, PRC and United States federal tax
consequences of an investment in the ordinary shares or ADSs is based upon laws and relevant
interpretations thereof in effect as of the date of this annual report, all of which are subject to
change. This discussion does not deal with all possible tax consequences relating to an investment
in the shares or ADSs, such as the tax consequences under U.S. state, local and other tax laws.
Cayman Islands
We are an exempted company incorporated in the Cayman Islands. 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.
96
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.
Hong Kong
Our subsidiary in Hong Kong, CSC Hong Kong, is subject to a corporate income tax of 16.5% on
the estimated assessable profit derived from its Hong Kong operation. CSC Hong Kong had no
assessable profits during the years ended December 31, 2007, 2008, 2009 and 2010, and accordingly
we have made no provision for its income tax.
PRC
Our subsidiaries in China are companies incorporated under PRC law and, as such, are subject
to PRC enterprise income tax on their taxable income in accordance with the relevant PRC income tax
laws.
Pursuant to the EIT Law, which became effective on January 1, 2008, a uniform 25% enterprise
income tax rate is generally applied to both foreign-invested enterprises and domestic enterprises,
except where a special preferential rate applies. Our subsidiaries in China are generally subject
to enterprise income tax at a statutory rate of 25%, with one exceptionChongqing Xinghong Growing
Rich Management Co., Ltd., the Chongqing subsidiary of CSC China, enjoys a preferential enterprise
income tax rate at 15% from 2008 through 2010 due to an approval it received from the local tax
authority in Chongqing.
Under the EIT Law, dividends from our PRC companies to their immediate holding company out of
China that are attributable to profits earned on or after January 1, 2008 are subject to a 10%
withholding tax, if such immediate holding company is considered a non-resident enterprise
without any establishment or place within China or if the received dividends have no connection
with the establishment or place of such immediate holding company within China, unless such
immediate holding companys jurisdiction of incorporation has a tax treaty with China that provides
for a reduced rate of withholding tax. Under the detailed implementation rules promulgated by the
PRC tax authorities, the effective withholding tax applicable to a Hong Kong holding company is
currently 5% if the Hong Kong holding company directly owns no less than a 25% stake in a Chinese
foreign-invested enterprise due to the arrangement for avoidance of double taxation between
mainland China and Hong Kong.
Under the EIT Law, enterprises that are established under the laws of foreign countries or
regions and whose de facto management bodies are located within the PRC territory are considered
PRC resident enterprises and will be subject to the PRC enterprise income tax at the rate of 25% on
their worldwide income. Under the implementation rules of the EIT Law, de facto management bodies
are defined as the bodies that have material and overall management and control over the
manufacturing and business operations, personnel
97
and human resources, finances and treasury, and
acquisition and disposition of properties and other assets of an enterprise. See Item 3.D. Risk
FactorsRisks Related to Doing Business in ChinaThe dividends we receive from our Chinese
subsidiaries and our global income may be subject to Chinese tax under the EIT Law, which would
have a material adverse effect on our results of operations; our foreign ADS holders will be
subject to a Chinese withholding tax upon the dividends payable by us and gains on the sale of ADSs
or ordinary shares may be subject to taxes under PRC tax laws, if we are classified as a Chinese
resident enterprise.
Material United States Federal Income Tax Considerations
The following is a summary of the material United States federal income tax considerations
relating to the acquisition, ownership, and disposition of our ADSs or ordinary shares by a U.S.
Holder described below that will hold our ADSs or ordinary shares as capital assets (generally,
property held for investment) under the United States Internal Revenue Code. This summary is based
upon applicable provisions of the Internal Revenue Code of 1986, as amended, (the U.S. Tax Code)
Treasury regulations (proposed, temporary and final) promulgated thereunder, pertinent judicial
decisions, interpretive rulings of the Internal Revenue Service and such other authorities as we
have considered relevant, which are subject to differing interpretation or change, possibly with
retroactive effect. This summary does not discuss all aspects of United States federal income
taxation that may be important to particular investors in light of their individual investment
circumstances, including investors subject to special tax rules (for example, financial
institutions, insurance companies, broker-dealers, traders in securities that elect mark-to-market
treatment, partnerships and their partners, and tax-exempt organizations (including private
foundations)), holders who are not U.S. Holders, holders who own (directly, indirectly, or
constructively) 10% or more of our voting stock, investors that will hold their ADSs or ordinary
shares as part of a straddle, hedge, conversion, constructive sale, or other integrated transaction
for United States federal income tax purposes, or investors that have a functional currency other
than the United States dollar, all of whom may be subject to tax rules that differ significantly
from those summarized below. In addition, this summary does not discuss any non-United States,
state, or local tax considerations. Each U.S. Holder is urged to consult its tax advisor regarding
the United States federal, state, local, and non-United States income and other tax considerations
of an investment in our ADSs or ordinary shares.
General
For purposes of this summary, a U.S. Holder is a beneficial owner of our ADSs or ordinary
shares that is, for United States federal income tax purposes, (i) an individual who is a citizen
or resident of the United States, (ii) a corporation (or other entity treated as a corporation for
United States federal income tax purposes) created in, or organized under the law of the United
States or any state thereof or the District of Columbia, (iii) an estate the income of which is
includible in gross income for United States federal income tax purposes regardless of its source,
or (iv) a trust (A) the administration of which is subject to the primary supervision of a United
States court and which has one or more United States persons who have the authority to control all
substantial decisions of the trust or (B) that has otherwise elected to be treated as a United
States person under the United States Internal Revenue Code.
98
If a partnership is a beneficial owner of our ADSs or ordinary shares, the tax treatment of a
partner in the partnership will generally depend upon the status of the partner and the activities
of the partnership. If a U.S. Holder is a partner of a partnership holding our ADSs or ordinary
shares, each U.S. Holder is urged to consult its tax advisor regarding an investment in our ADSs or
ordinary shares.
For United States federal income tax purposes, a U.S. Holder of ADSs will be treated as the
beneficial owners of the underlying shares represented by the ADSs.
Passive Foreign Investment Company Considerations
A non-United States corporation, such as our company, will be classified as a passive foreign
investment company, or PFIC, for United States federal income tax purposes for any taxable year,
if either (i) 75% or more of its gross income for such year consists of certain types of passive
income or (ii) 50% or more of the value of its assets (determined on the basis of a quarterly
average) during such year produce or are held for the production of passive income. For this
purpose, passive income means any income which would be foreign personal holding company income
under the U.S. Tax Code, including, without limitation, dividends, interest, royalties, rent,
annuities, net gains from the sale or exchange of property producing such income, net gains from
commodity transactions, net foreign currency gains and income from notional principal contracts.
For this purpose, cash is categorized as a passive asset and our unbooked intangibles are taken
into account for determining the value of its assets. We will be treated as owning a proportionate
share of the assets and earning a proportionate share of the income of any other corporation in
which we own, directly or indirectly, more than 25% (by value) of the stock.
Based on our current income and assets and projections as to the value of our assets based on
the market value of our ADSs and outstanding ordinary shares, we do not expect to be classified as
a PFIC for the current taxable year or the foreseeable future. If our market capitalization
declines, we may be classified as a PFIC for the current or one or more future taxable years. The
composition of our income and our assets will also be affected by how, and how quickly, we spend
our liquid assets and the cash raised in our initial public offering. Under circumstances where we
determine not to deploy significant amounts of cash for working capital or other purposes, our risk
of becoming classified as a PFIC may substantially increase.
Because there are uncertainties in the application of the relevant rules, it is possible that
the Internal Revenue Service may successfully challenge our classification of certain income and
assets as non-passive or our valuation of our tangible and intangible assets, each of which may
result in our company becoming classified as a PFIC for the current or subsequent taxable years.
Because PFIC status is a fact-intensive determination made on an annual basis and will depend upon
the composition of our assets and income and the value of our tangible and intangible assets from
time to time, no assurance can be given that we are not or will not become classified as a PFIC. If
we are classified as a PFIC for any taxable year during which a U.S. Holder holds our ADSs or
ordinary shares, the PFIC tax rules discussed below under Passive Foreign Investment Company
Rules generally will apply for such taxable year and will apply in future years even if we cease
to be a PFIC in subsequent
99
years, unless we cease to be a PFIC and the U.S. Holder makes a deemed
sale election with respect to the ADSs or ordinary shares.
The discussion below under Dividends and Sale or Other Disposition of ADSs or ordinary
shares assumes that we will not be classified as a PFIC for United States federal income tax
purposes. The U.S. federal income tax rules that apply if we are classified as a PFIC for 2010 or
any subsequent taxable year are generally discussed below under Passive Foreign Investment Company
Rules.
Dividends
Subject to the PFIC rules discussed below, any cash distributions (including the amount of any
PRC tax withheld) paid on our ADSs or ordinary shares out of our current or
accumulated earnings and profits, as determined under United States federal income tax
principles, will generally be includible in the gross income of a U.S. Holder as dividend income on
the day actually or constructively received by the U.S. Holder, in the case of ordinary shares, or
by the Depositary, in the case of ADSs. Because we do not intend to determine our earnings and
profits on the basis of United States federal income tax principles, any distribution paid will
generally be treated as a dividend for United States federal income tax purposes. For taxable
years beginning before January 1, 2013, a non-corporate recipient of dividend income generally will
be subject to tax on dividend income from a qualified foreign corporation at a maximum United
States federal tax rate of 15% rather than the marginal tax rates generally applicable to ordinary
income provided that certain holding period requirements are met. A non-United States corporation
(other than a corporation that is classified as a PFIC for the taxable year in which the dividend
is paid or the preceding taxable year) generally will be considered to be a qualified foreign
corporation (i) if it is eligible for the benefits of a comprehensive tax treaty with the United
States which the Secretary of Treasury of the United States determines is satisfactory for purposes
of this provision and which includes an exchange of information program, or (ii) with respect to
any dividend it pays on stock (or ADSs in respect of such stock) which is readily tradable on an
established securities market in the United States.
The U.S. Treasury Department has determined that the Agreement Between the Government of the
United States of America and the Government of the Peoples Republic of China for the Avoidance of
Double Taxation and the Prevention of Tax Evasion with respect to Taxes on Income, or the Treaty,
meets the requirements described above. Our ADSs are listed on the New York Stock Exchange and we
believe that we are a qualified foreign corporation for United States federal income tax purposes
because the ADSs are readily tradable on the New York Stock Exchange, which is an established
securities market in the United States. Therefore, we believe that we will qualify for the benefits
under the Treaty and that we are not currently and are not likely to become in the near future, a
PFIC. However, the eligibility requirements for foreign corporations are technical and uncertain
and therefore, each U.S. Holder is urged to consult its tax advisor regarding the impact of these
provisions and the availability of the preferential rate in their particular circumstances.
In the event that we are deemed to be a PRC resident enterprise under the EIT Law, we believe
that we would be eligible for benefits under the Treaty. See Chinese
100
Taxation. If we are
eligible for such benefits, dividends we pay on our ordinary shares, regardless of whether such
shares are represented by our ADSs, would be eligible for the reduced rates of taxation applicable
to qualified dividend income, as discussed above. In the event that we are deemed to be a PRC
resident enterprise under the EIT Law, a U.S. Holder may be subject to PRC withholding taxes on
dividends paid on our ADSs. Each U.S. Holder is urged to consult its tax advisors regarding the
availability under the Treaty of a reduced tax rate on dividends, which depending on the U.S.
Holders particular circumstances, would be no higher than 10%. Dividends received on our ADSs or
ordinary shares will not be eligible for the dividends received deduction allowed to corporations
under the U.S. Tax Code.
Dividends generally will be treated as income from foreign sources for United States foreign
tax credit purposes and generally will constitute passive category income. Depending on its
particular circumstances, a U.S. Holder may be eligible, subject to a number of complex
limitations, to claim a 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, is permitted instead to claim a
deduction, for United States federal income tax purposes, in respect of such withholdings, but
only for a year in which such holder elects to do so for all creditable foreign income taxes. The
rules governing the foreign tax credit are complex. Each U.S. Holder is urged to consult its tax
advisor regarding the availability of the foreign tax credit under their particular circumstances.
Sale or Other Disposition of ADSs or Ordinary Shares
Subject to the PFIC rules discussed below, a U.S. Holder will generally recognize capital gain
or loss upon the sale or other disposition of our ADSs or ordinary shares in an amount equal to the
difference between the amount realized upon the disposition and the U.S. Holders adjusted tax
basis in such ADSs or ordinary shares. Any capital gain or loss will be long-term if our ADSs or
ordinary shares have been held for more than one year and will generally be United States source
gain or loss for United States foreign tax credit purposes. In the event that we are deemed to be a
PRC resident enterprise under the PRC EIT Law and gain from the disposition of our ADSs or ordinary
shares is subject to tax in the PRC, such gain will be treated as PRC source gain for foreign tax
credit purposes under the Treaty. If such gain is not treated as PRC source gain, however, a U.S.
Holder generally will not be able to obtain a United States foreign tax credit for any PRC tax
withheld or imposed unless such U.S. Holder has other foreign source income in the appropriate
category for the applicable tax year. For taxable years beginning before January 1, 2013, net
long-term capital gains of non-corporate U.S. Holders currently are eligible for a maximum United
States federal tax rate of 15%. The deductibility of a capital loss may be subject to limitations.
Each U.S. Holder is urged to consult its tax advisor regarding the tax consequences if a foreign
tax is imposed on a disposition of our ADSs or ordinary shares, including the availability of the
foreign tax credit under their particular circumstances.
Passive Foreign Investment Company Rules
If we are classified as a PFIC for any taxable year during which a U.S. Holder holds our ADSs
or ordinary shares, unless the U.S. Holder makes a mark-to-market election (as
101
described below),
the U.S. Holder will generally be subject to special tax rules that have a penalizing effect,
regardless of whether we remain a PFIC, on (i) any excess distribution that we make to the U.S.
Holder (which generally means any distribution paid during a taxable year to a U.S. Holder that is
greater than 125 percent of the average annual distributions paid in the three preceding taxable
years or, if shorter, the U.S. Holders holding period for the ADSs or ordinary shares), and (ii)
any gain realized on the sale or other disposition, including, under certain circumstances, a
pledge, of ADSs or ordinary shares. Under the PFIC rules the:
|
|
|
excess distribution and/or gain will be allocated ratably over the U.S. Holders holding
period for our ADSs or ordinary shares; |
|
|
|
amount allocated to the current taxable year and any taxable years in the U.S. Holders
holding period prior to the first taxable year in which we are classified as a PFIC, or
pre-PFIC year, will be taxable as ordinary income; |
|
|
|
amount allocated to each prior taxable year, other than the current taxable year or a
pre-PFIC year, will be subject to tax at the highest tax rate in effect applicable to you
for that year; and |
|
|
|
interest charge generally applicable to underpayments of tax will be imposed on the tax
attributable to each prior taxable year, other than the current taxable year or a pre-PFIC
year. |
If we are a PFIC for any taxable year during which a U.S. Holder holds our ADSs or ordinary
shares and any of our non-United States subsidiaries is also a PFIC, such U.S. Holder would be
treated as owning a proportionate amount (by value) of the shares of the lower-tier PFIC and would
be subject to the rules described above on certain distributions by a lower-tier PFIC and a
disposition of shares of a lower-tier PFIC even though such U.S. Holder would not receive the
proceeds of those distributions or dispositions. Each U.S. Holder is urged to consult its tax
advisor regarding the application of the PFIC rules to any of our subsidiaries.
As an alternative to the foregoing rules, a U.S. Holder of marketable stock in a PFIC is
permitted to make a mark-to-market election with respect to our ADSs, but not our ordinary shares,
provided that our ADSs are, as expected, listed on the New York Stock Exchange and that our ADSs
are regularly traded. We anticipate that our ADSs will qualify as being regularly traded, but no
assurances may be given in this regard. If a U.S. Holder makes this election, the U.S. Holder will
generally (i) include as ordinary income for each taxable year that we are a PFIC the excess, if
any, of the fair market value of our ADSs held at the end of the taxable year over the adjusted tax
basis of such ADSs and (ii) deduct as an ordinary loss the excess, if any, of the adjusted tax
basis of our ADSs over the fair market value of such ADSs held at the end of the taxable year, but
only to the extent of the net amount previously included in income as a result of the
mark-to-market election. The U.S. Holders adjusted tax basis in our ADSs would be adjusted to
reflect any income or loss resulting from the mark-to-market election. If a U.S. Holder makes a
mark-to-market election in respect of a corporation classified as
102
a PFIC and such corporation
ceases to be classified as a PFIC, the U.S. Holder 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. If a U.S. Holder makes a mark-to-market election, any gain such U.S. Holder
recognizes upon the sale or other disposition of our ADSs in a year when we are a PFIC will be
treated as ordinary income and any loss will be treated as ordinary loss, but only to the extent of
the net amount previously included in income as a result of the mark-to-market election.
Because a mark-to-market election cannot be made for any lower-tier PFICs that we may own, a
U.S. Holder will continue to be subject to the PFIC rules with respect to such U.S. Holders
indirect interest in any investments held by us that are treated as an equity interest in a PFIC
for United States federal income tax purposes.
Under the U.S. Tax Code, if it were available, a qualified electing fund election, or a QEF
election, could also ameliorate certain of the tax consequences referred to above. However,
because we do not expect to make available the information necessary for U.S. Holders to report
income and gain in a manner consistent with the requirements for the QEF election, U.S. Holders
will not be able to make a valid QEF election with respect to us or our Subsidiaries.
If a U.S. Holder owns our ADSs or ordinary shares during any taxable year that we are a PFIC,
the U.S. Holder must file an annual report with the U.S. Internal Revenue Service. In the case of a
U.S. Holder who has held ADSs during any taxable year in respect of which we were classified as a
PFIC 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. Each U.S. Holder is urged to consult its tax advisor regarding the
United States federal income tax consequences of purchasing, holding, and disposing ADSs or
ordinary shares if we are or become classified as a PFIC, including the possibility of making a
mark-to-market election and the unavailability of the QEF election.
Information Reporting and Backup Withholding
Pursuant to the Hiring Incentives to Restore Employment Act enacted on March 18, 2010, an
individual U.S. Holder may be required to submit to the Internal Revenue Service certain
information reporting with respect to his or her beneficial ownership of the ADSs or ordinary
shares, unless such ADSs were held on his or her behalf by a U.S. financial institution. This new
law also imposes penalties if an individual U.S. Holder is required to submit such information to
the Internal Revenue Service and fails to do so.
In addition, dividend payments with respect to our ADSs or ordinary shares and proceeds from
the sale, exchange or redemption of our ADSs or ordinary shares may be subject to information
reporting to the Internal Revenue Service and United States backup withholding at a rate of 28%.
Backup withholding will not apply, however, to a U.S. Holder who furnishes a correct taxpayer
identification number and makes any other required certification, or who is otherwise exempt from
backup withholding. We will make, or cause to be made, all withholdings to the extent required by
applicable law. Each U.S. Holder is
103
urged to consult its tax advisor regarding the application of
the United States information reporting and backup withholding rules. Backup withholding is not an
additional tax. Amounts withheld as backup withholding may be credited against a U.S. Holders
United States federal income tax liability, and a U.S. Holder generally may obtain a refund of any
excess amounts withheld under the backup withholding rules by filing the appropriate claim for
refund with the Internal Revenue Service and furnishing any required information.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
We previously filed with the SEC a registration statement on Form F-1 under the Securities
Act with respect to our initial public offering of our ordinary shares represented by ADSs.
We are subject to the periodic reporting and other informational requirements of the
Securities Exchange Act of 1934 or the Exchange Act. 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. The SEC 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. Copies of reports and other
information, when filed, may also be inspected without charge and may be obtained at prescribed
rates at the public reference facilities maintained by the SEC at 100 F Street, N.E., Room 1580,
Washington, D.C. 20549. The public may obtain information regarding the Washington, D.C. Public
Reference Room by calling the SEC at 1-800-SEC-0330. 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.
We will furnish Citibank, N.A., 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.
104
I. Subsidiary Information
For a listing of our subsidiaries, see Item 4. Information on the Company C.
Organizational Structure.
Interest Rate Risk
Our exposure to interest rate risk primarily relates to the interest income generated by
excess cash, which is mostly held in interest-bearing bank deposits. As of December 31, 2009,
substantially all of our cash and cash equivalent was held in major financial institutions located
in China. Interest earning instruments carry a degree of interest rate risk. We have not used
derivative financial instruments to hedge interest rate risk. We have not been exposed to, nor do
we anticipate being exposed to, material risks due to changes in market interest rates. However,
our future interest income may fall short of expectations due to changes in market interest rates.
Foreign Exchange Risk
Our financial statements are expressed in RMB, which is our reporting currency. CSC China and
its seven subsidiaries determine their functional currency to be RMB, while CSC Cayman and CSC Hong
Kong determine their functional currency to be the U.S. dollars. However, substantially all of our
businesses are transacted in RMB. We earn substantially all of our revenues and incur most of our
expenses in RMB. Our exposure to foreign exchange risk primarily relates to cash and cash
equivalents denominated in U.S. dollars as a result of our past issuances of preferred shares
through private placements and initial public offering. We do not believe that we currently have
any significant direct foreign exchange risk and have not used any derivative financial instruments
to hedge our exposure to such risk. 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 exchange rate
between the U.S. dollar and the RMB because the value of our business is denominated in RMB, while the ADSs will be
traded in U.S. dollars.
The conversion of Renminbi into foreign currencies, including U.S. dollars, is based on rates
set by the Peoples Bank of China. The PRC government allowed the Renminbi to appreciate by more
than 20% against the U.S. dollar between July 2005 and July 2008. 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. Since June 2010, the PRC government has allowed the Renminbi to appreciate
slowly against the U.S. dollar again. 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.
To the extent that we need to convert U.S. dollars into RMB for our operations, appreciation
of the RMB against the U.S. dollar would have an adverse effect on the RMB amount we receive from
the conversion. Conversely, if we decide to convert RMB into U.S. dollars for the purpose of making
payments for dividends on our ordinary shares or ADSs or
105
for other business purposes, appreciation
of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amounts
available to us.
A. Debt Securities
Not applicable.
B. Warrants and Rights
Not applicable.
C. Other Securities
Not applicable.
D. American Depositary Shares
Fees and Charges
As an ADS holder, you will be required to pay the following service fees to the depositary:
|
|
|
|
|
Service |
|
Fees |
|
|
Issuance of ADSs
|
|
Up to U.S. 5¢ per ADS issued |
|
|
Cancellation of ADSs
|
|
Up to U.S. 5¢ per ADS canceled |
|
|
Distribution of cash
dividends or other cash
distributions
|
|
Up to U.S. 5¢ per ADS held |
|
|
Distribution of ADSs
pursuant to stock dividends, free stock distributions or exercise of
rights
|
|
Up to U.S. 5¢ per ADS held |
|
|
Distribution of securities
other than ADSs or rights to
purchase additional ADSs
|
|
Up to U.S. 5¢ per ADS held |
|
|
Depositary Services
|
|
Up to U.S. 5¢ per ADS held on the
applicable record date(s) established
by the Depositary |
|
|
Transfer of ADRs
|
|
U.S. $1.50 per certificate presented
for transfer |
As an ADS holder you will also be responsible to pay certain fees and expenses incurred by the
depositary and certain taxes and governmental charges such as:
|
|
|
fees for the transfer and registration of ordinary shares charged by the registrar and
transfer agent for the ordinary shares in the Cayman Islands ( i.e., upon deposit and
withdrawal of ordinary shares);
|
106
|
|
|
expenses incurred for converting foreign currency into U.S. dollars; |
|
|
|
expenses for cable, telex and fax transmissions and for delivery of securities; |
|
|
|
taxes and duties upon the transfer of securities ( i.e., when ordinary shares are
deposited or withdrawn from deposit); and |
|
|
|
fees and expenses incurred in connection with the delivery or servicing of ordinary
shares on deposit. |
Depositary fees payable upon the issuance and cancellation of ADSs are typically paid to the
depositary bank by the brokers (on behalf of their clients) receiving the newly issued ADSs from
the depositary bank and by the brokers (on behalf of their clients) delivering the ADSs to the
depositary bank for cancellation. The brokers in turn charge these fees to their clients.
Depositary fees payable in connection with distributions of cash or securities to ADS holders and
the depositary services fee are charged by the depositary bank to the holders of record of ADSs as
of the applicable ADS record date.
The Depositary fees payable for cash distributions are generally deducted from the cash being
distributed. In the case of distributions other than cash ( i.e., stock dividend, rights), the
depositary bank charges the applicable fee to the ADS record date holders concurrent with the
distribution. In the case of ADSs registered in the name of the investor (whether certificated or
uncertificated in direct registration), the depositary bank sends invoices to the applicable record
date ADS holders. In the case of ADSs held in brokerage and custodian accounts (via DTC), the
depositary bank generally collects its fees through the systems provided by DTC (whose nominee is
the registered holder of the ADSs held in DTC) from the brokers and custodians holding ADSs in
their DTC accounts. The brokers and custodians who hold their clients ADSs in DTC accounts in turn
charge their clients accounts the amount of the fees paid to the depositary banks.
In the event of refusal to pay the depositary fees, the depositary bank may, under the terms
of the deposit agreement, refuse the requested service until payment is received or may set off the
amount of the depositary fees from any distribution to be made to the ADS holder.
Note that the fees and charges you may be required to pay may vary over time and may be
changed by us and by the depositary. You will receive prior notice of such changes.
The depositary bank may reimburse us for certain expenses incurred by us in respect of the ADR
program established pursuant to the deposit agreement, by making available a
portion of the depositary fees charged in respect of the ADR program or otherwise, upon such
terms and conditions as our company and the Depositary may agree from time to time.
107
From September 2010 to March 31, 2011 we received a reimbursement of $747,500, with no taxes
withheld, from the depositary for investor relations expenses and other program related expenses,
in connection with the ADR facility.
PART II
None.
None. See Item 10. Additional Information for a description of the rights of securities
holders, which remain unchanged.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial
officer, has performed an evaluation of the effectiveness of our disclosure controls and procedures
(as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this
report, as required by Rule 13a-15(b) under the Exchange Act.
Based upon that evaluation, our management has concluded that, as of December 31, 2010, our
disclosure controls and procedures were effective in ensuring that the information required to be
disclosed by us in the reports that we file and furnish under the Exchange Act was recorded,
processed, summarized and reported, within the time periods specified in the SECs rules and forms,
and that the information required to be disclosed by us in the reports that we file or submit under
the Exchange Act is accumulated and communicated to our management, including our chief executive
officer and chief financial officer, to allow timely decisions regarding required disclosure.
Managements Annual Report on Internal Control over Financial Reporting
This annual report does not include a report of managements assessment regarding internal
control over financial reporting or an attestation report of our companys registered public
accounting firm due to a transition period established by rules of the SEC for newly public
companies.
Changes in Internal Control over Financial Reporting
During 2010, to address the material weakness and control deficiencies identified by our
independent registered public accounting firm in connection with the audit of our consolidated
financial statements as of and for the years ended December 31, 2009:
108
|
|
|
we implemented policies and systems to prevent internal transfer of inventory among
individual restaurants; |
|
|
|
we reduced the number of related party transactions and established policies and
systems governing related party transactions and the proper recording of such
transactions; |
|
|
|
we implemented a new POS system and revised existing internal policies regarding
fixed assets; and |
|
|
|
we hired new financial personnel increased training regarding U.S. GAAP. |
Our board of directors has determined that Mr. Li-Lan Cheng, an independent director (under
the standards set forth in Section 303A of the Corporate Governance Rules of the New York Stock
Exchange and Rule 10A-3 under the Securities Exchange Act of 1934, as amended) qualifies as an
audit committee financial expert.
Our board has adopted a code of business conduct and ethics that provides that our directors
and officers are expected to avoid any action, position or interest that conflicts with the
interests of our company or gives the appearance of a conflict. Directors and officers have an
obligation under our code of business conduct and ethics to advance our companys interests when
the opportunity to do so arises. We have posted a copy of our code of business conduct and ethics
on our website at http://ir.csc100.com.
The following table sets forth the aggregate fees by categories specified below in connection
with certain professional services rendered by Deloitte Touche Tohmatsu CPA Ltd., our principal
external auditors, for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2010 |
Audit fees (1) |
|
|
304 |
|
|
|
5,504 |
|
Audit-related fees |
|
|
|
|
|
|
|
|
|
|
|
(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. In 2009 and 2010, the audit refers to integrated audit, including financial audit
and audit pursuant to Section 404 of the Sarbanes-Oxley Act of 2002. |
All audit and non-audit services provided by our independent auditors must be pre-approved by
our audit committee. Our audit committee has adopted a combination of two approaches in
pre-approving proposed services: general pre-approval and specific pre-approval. With general
approval, proposed services are pre-approved without consideration of specific case-by-case
services; with specific approval, proposed services require the
109
specific pre-approval of the audit
committee. Unless a type of service has received general pre-approval, it will require specific
pre-approval by our audit committee. Any proposed services exceeding pre-approved cost levels or
budgeted amounts will also require specific pre-approval by our audit committee.
All requests or applications for services to be provided by our independent auditors that do
not require specific approval by our audit committee will be submitted to our chief financial
officer and must include a detailed description of the services to be rendered. The chief
financial officer will determine whether such services are included within the list of services
that have received the general pre-approval of the audit committee. The audit committee will be
informed on a timely basis of any such services. Requests or applications to provide services that
require specific approval by our audit committee will be submitted to the audit committee by both
our independent auditors and our chief financial officer and must include a joint statement as to
whether, in their view, the request or application is consistent with the SECs rules on auditor
independence.
Not applicable.
None.
Not applicable.
Certain corporate governance practices in the Cayman Islands, which is our home country,
differ significantly from the New York Stock Exchange corporate governance listing standards. For
example, neither the Companies Law of the Cayman Islands nor our memorandum and articles of
association requires a majority of our directors to be independent and we could include
non-independent directors as members of our compensation committee and nominating committee, and
our independent directors would not necessarily hold regularly scheduled meetings at which only
independent directors are present. Currently, we do not plan to rely on home country practice with
respect to our corporate governance. However, if we choose to follow home country practice in the
future, our shareholders may be afforded less protection than they otherwise would under the New
York Stock Exchange corporate governance listing standards applicable to U.S. domestic issuers.
110
PART III
We have elected to provide financial statements pursuant to Item 18.
The consolidated financial statements of Country Style Cooking Restaurant Chain Co., Ltd. and
its subsidiaries are included at the end of this annual report.
|
|
|
Exhibit Number |
|
Description of Document |
1.1
|
|
Second Amended and Restated Memorandum of Association of
the Registrant (incorporated by reference to Exhibit 4.2 of
Form F-1 (file no. 333-169248) furnished to the Securities
and Exchange Commission on September 7, 2010) |
|
|
|
2.1
|
|
Registrants Specimen Certificate for Ordinary Shares
(incorporated by reference to Exhibit 4.1 to our Amendment
to Form F-1 Registration Statement (file no. 333-169248)
filed with the Securities and Exchange Commission on
September 14, 2010) |
|
|
|
2.2*
|
|
Deposit Agreement among the Registrant, the depositary and
holder of the American Depositary Receipts |
|
|
|
2.3
|
|
Registrants Specimen American Depositary Receipt
(incorporated by reference to Exhibit 4.4 to our Amendment
to Form F-1 Registration Statement (file no. 333-169248)
filed with the Securities and Exchange Commission on
September 14, 2010) |
|
|
|
4.1
|
|
2009 Share Incentive Plan (incorporated by reference to
Exhibit 10.1 of Form F-1 (file no. 333-169248) furnished to
the Securities and Exchange Commission on September 7,
2010) |
|
|
|
4.2
|
|
Form of Indemnification Agreement with the Registrants
directors and officers (incorporated by reference to
Exhibit 10.2 of Form F-1 (file no. 333-169248) furnished to
the Securities and Exchange Commission on September 7,
2010) |
|
|
|
4.3
|
|
Form of Employment Agreement with the Registrants officers
(incorporated by reference to Exhibit 10.2 of Form F-1
(file no. 333- 169248) furnished to the Securities and
Exchange Commission on September 7, 2010) |
|
|
|
8.1*
|
|
List of Subsidiaries |
|
|
|
11.1
|
|
Code of Business Conduct and Ethics (incorporated by
reference to Exhibit 99.1 of our Registration Statement on
Form F-1 (file no. 333-169248) filed with the Securities
and Exchange Commission on September 7, 2010) |
|
|
|
12.1*
|
|
Certification by Principal Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
12.2*
|
|
Certification by Principal Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
13.1*
|
|
Certification by Principal Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
111
|
|
|
Exhibit Number |
|
Description of Document |
13.2*
|
|
Certification by Principal Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
15.1*
|
|
Consent of Maples and Calder |
|
|
|
15.2*
|
|
Consent of Jingtian & Gongcheng |
|
|
|
15.3*
|
|
Consent of Deloitte Touche Tohmatsu, CPA Ltd. |
112
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.
|
|
|
|
|
|
Country Style Cooking Restaurant Chain Co., Ltd.
|
|
|
By: |
/s/ Hong Li
|
|
|
|
Name: |
Hong Li |
|
|
|
Title: |
Chairman and Chief Executive Officer |
|
|
Date: April 20 , 2011
COUNTRY STYLE COOKING RESTAURANT CHAIN CO., LTD.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
F-2 |
|
|
F-3 |
|
|
F-4 |
|
|
F-5 |
|
|
F-6 |
|
|
F-7 |
|
|
F-24 |
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Country Style Cooking Restaurant Chain Co., Ltd.
We have audited the accompanying consolidated balance sheets of Country Style Cooking
Restaurant Chain Co., Ltd. and its subsidiaries (the Group) as of December 31, 2009 and 2010, and
the related consolidated statements of operations, changes in equity (deficit) and comprehensive
income, and cash flows for each of three years ended December 31, 2010 and the related financial
statement schedule. These financial statements and financial statement schedule are the
responsibility of the Groups management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. The Group is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Groups
internal control over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of Country Style Cooking Restaurant Chain Co., Ltd. and its
subsidiaries as of December 31, 2009 and 2010, and the results of its operations and its cash flows
for each of the three years ended December 31, 2010, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic financial statements taken as a whole, present
fairly in all material respects, the information set forth therein.
Our audits also comprehended the translation of Renminbi amounts into United States dollar
amounts and, in our opinion, such translation has been made in conformity with the basis stated in
Note 2. Such United States dollar amounts are presented solely for the convenience of readers in
the United States of America.
/s/ Deloitte Touche Tohmatsu CPA Ltd.
Shanghai, China
April 20, 2011
F-2
COUNTRY STYLE COOKING RESTAURANT CHAIN CO., LTD.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2009 AND 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
|
2009 |
|
|
2010 |
|
|
2010 |
|
|
|
(In thousands of RMB except |
|
|
US$ 000s |
|
|
|
share and per share amounts) |
|
|
(Note 2) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
70,695 |
|
|
|
612,583 |
|
|
|
92,816 |
|
Due from related parties |
|
|
9,012 |
|
|
|
100 |
|
|
|
15 |
|
Inventories |
|
|
14,929 |
|
|
|
24,951 |
|
|
|
3,780 |
|
Prepaid rent |
|
|
3,857 |
|
|
|
6,569 |
|
|
|
995 |
|
Prepaid expenses and other current assets |
|
|
6,902 |
|
|
|
16,889 |
|
|
|
2,559 |
|
Deferred income taxescurrent |
|
|
518 |
|
|
|
639 |
|
|
|
97 |
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
105,913 |
|
|
|
661,731 |
|
|
|
100,262 |
|
Property and equipment, net |
|
|
95,961 |
|
|
|
188,699 |
|
|
|
28,591 |
|
Goodwill |
|
|
6,286 |
|
|
|
6,286 |
|
|
|
952 |
|
Deferred income taxesnon current |
|
|
959 |
|
|
|
3,067 |
|
|
|
465 |
|
Deposits for leases |
|
|
5,949 |
|
|
|
10,020 |
|
|
|
1,518 |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
215,068 |
|
|
|
869,803 |
|
|
|
131,788 |
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, MEZZANINE EQUITY AND EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
|
31,306 |
|
|
|
34,204 |
|
|
|
5,182 |
|
Deferred revenue |
|
|
1,257 |
|
|
|
2,824 |
|
|
|
428 |
|
Due to related parties |
|
|
11,031 |
|
|
|
560 |
|
|
|
85 |
|
Accrued payroll |
|
|
9,889 |
|
|
|
15,292 |
|
|
|
2,317 |
|
Income taxes payable |
|
|
7,691 |
|
|
|
6,526 |
|
|
|
989 |
|
Dividend payable |
|
|
3,946 |
|
|
|
|
|
|
|
|
|
Other current liabilities |
|
|
17,073 |
|
|
|
31,013 |
|
|
|
4,697 |
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
82,193 |
|
|
|
90,419 |
|
|
|
13,698 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred rentnon current |
|
|
5,108 |
|
|
|
8,871 |
|
|
|
1,344 |
|
Prepaid subscription |
|
|
|
|
|
|
678 |
|
|
|
103 |
|
Advance receipts from depositary bank |
|
|
|
|
|
|
3,743 |
|
|
|
567 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
87,301 |
|
|
|
103,711 |
|
|
|
15,712 |
|
|
|
|
|
|
|
|
|
|
|
Mezzanine equity: |
|
|
|
|
|
|
|
|
|
|
|
|
Series A convertible preferred shares, par
value $0.001, 24,000,000 shares issued and
outstanding as of December 31, 2009 |
|
|
96,949 |
|
|
|
|
|
|
|
|
|
Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares, par value $0.001, 96,000,000
and 1,000,000,000 shares authorized as of
December 31, 2009 and 2010, respectively,
56,000,000 and 103,080,000 shares issued and
outstanding as of December 31, 2009 and 2010,
respectively |
|
|
420 |
|
|
|
736 |
|
|
|
112 |
|
Additional paid in capital |
|
|
5,866 |
|
|
|
682,577 |
|
|
|
103,421 |
|
Retained earnings |
|
|
26,572 |
|
|
|
89,382 |
|
|
|
13,543 |
|
Accumulated other comprehensive loss |
|
|
(2,040 |
) |
|
|
(6,603 |
) |
|
|
(1,000 |
) |
|
|
|
|
|
|
|
|
|
|
Total equity |
|
|
30,818 |
|
|
|
766,092 |
|
|
|
116,076 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, mezzanine equity and equity |
|
|
215,068 |
|
|
|
869,803 |
|
|
|
131,788 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-3
COUNTRY STYLE COOKING RESTAURANT CHAIN CO., LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
2010 |
|
|
|
(In thousands of RMB except |
|
|
US$ 000s |
|
|
|
share and per share amounts) |
|
|
(Note 2) |
|
Revenue restaurant sales |
|
|
231,463 |
|
|
|
494,459 |
|
|
|
745,939 |
|
|
|
113,021 |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Food and paper |
|
|
115,071 |
|
|
|
239,357 |
|
|
|
351,422 |
|
|
|
53,246 |
|
Restaurant wages and related expenses |
|
|
33,076 |
|
|
|
76,890 |
|
|
|
119,052 |
|
|
|
18,038 |
|
Restaurant rent expense |
|
|
17,945 |
|
|
|
38,546 |
|
|
|
64,284 |
|
|
|
9,740 |
|
Restaurant utilities expense |
|
|
13,773 |
|
|
|
31,073 |
|
|
|
46,746 |
|
|
|
7,083 |
|
Pre-opening expenses |
|
|
|
|
|
|
|
|
|
|
5,906 |
|
|
|
895 |
|
Other restaurant operating expenses |
|
|
12,455 |
|
|
|
28,774 |
|
|
|
33,106 |
|
|
|
5,016 |
|
Selling, general and administrative |
|
|
3,955 |
|
|
|
13,360 |
|
|
|
32,330 |
|
|
|
4,898 |
|
Depreciation |
|
|
2,855 |
|
|
|
10,999 |
|
|
|
21,288 |
|
|
|
3,225 |
|
Impairment and other lease charges |
|
|
|
|
|
|
|
|
|
|
2,087 |
|
|
|
316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
199,130 |
|
|
|
438,999 |
|
|
|
676,221 |
|
|
|
102,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
32,333 |
|
|
|
55,460 |
|
|
|
69,718 |
|
|
|
10,564 |
|
Interest income |
|
|
1,083 |
|
|
|
758 |
|
|
|
3,465 |
|
|
|
525 |
|
Foreign exchange gain (loss) |
|
|
(1,347 |
) |
|
|
3 |
|
|
|
(2,715 |
) |
|
|
(411 |
) |
Other income (loss) |
|
|
(12 |
) |
|
|
490 |
|
|
|
6,893 |
|
|
|
1,044 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
32,057 |
|
|
|
56,711 |
|
|
|
77,361 |
|
|
|
11,722 |
|
Income tax expenses |
|
|
(5,440 |
) |
|
|
(11,632 |
) |
|
|
(14,551 |
) |
|
|
(2,205 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
26,617 |
|
|
|
45,079 |
|
|
|
62,810 |
|
|
|
9,517 |
|
Dividend on Series A convertible preferred shares |
|
|
|
|
|
|
(3,946 |
) |
|
|
|
|
|
|
|
|
Distribution to Founders |
|
|
(2,436 |
) |
|
|
(3,454 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to ordinary shareholders |
|
|
24,181 |
|
|
|
37,679 |
|
|
|
62,810 |
|
|
|
9,517 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share |
|
|
0.30 |
|
|
|
0.47 |
|
|
|
0.73 |
|
|
|
0.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share |
|
|
0.30 |
|
|
|
0.47 |
|
|
|
0.71 |
|
|
|
0.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average ordinary shares outstanding |
|
|
56,000,000 |
|
|
|
56,000,000 |
|
|
|
68,124,712 |
|
|
|
68,124,712 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average ordinary shares outstanding |
|
|
80,000,000 |
|
|
|
80,000,000 |
|
|
|
70,503,794 |
|
|
|
70,503,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-4
COUNTRY STYLE COOKING RESTAURANT CHAIN CO., LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (DEFICIT)
AND
COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained |
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Earnings |
|
|
Other |
|
|
|
|
|
|
|
|
|
Ordinary Shares |
|
|
Paid in |
|
|
(Accumulated |
|
|
Comprehensive |
|
|
Total Equity |
|
|
Comprehensive |
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit) |
|
|
Loss |
|
|
(Deficit) |
|
|
Income |
|
|
|
(In thousands of RMB except share amounts) |
|
Balance at January
1, 2008 |
|
|
56,000,000 |
|
|
|
420 |
|
|
|
5,866 |
|
|
|
(35,288 |
) |
|
|
(1,643 |
) |
|
|
(30,645 |
) |
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,617 |
|
|
|
|
|
|
|
26,617 |
|
|
|
26,617 |
|
Distribution to Founders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,436 |
) |
|
|
|
|
|
|
(2,436 |
) |
|
|
|
|
Foreign currency
translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(394 |
) |
|
|
(394 |
) |
|
|
(394 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2008 |
|
|
56,000,000 |
|
|
|
420 |
|
|
|
5,866 |
|
|
|
(11,107 |
) |
|
|
(2,037 |
) |
|
|
(6,858 |
) |
|
|
26,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,079 |
|
|
|
|
|
|
|
45,079 |
|
|
|
45,079 |
|
Distribution to Founders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,454 |
) |
|
|
|
|
|
|
(3,454 |
) |
|
|
|
|
Dividend declared on
Series A convertible
preferred shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,946 |
) |
|
|
|
|
|
|
(3,946 |
) |
|
|
|
|
Foreign currency
translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3 |
) |
|
|
(3 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2009 |
|
|
56,000,000 |
|
|
|
420 |
|
|
|
5,866 |
|
|
|
26,572 |
|
|
|
(2,040 |
) |
|
|
30,818 |
|
|
|
45,076 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,810 |
|
|
|
|
|
|
|
62,810 |
|
|
|
62,810 |
|
Conversion of Series A
convertible preferred
shares |
|
|
24,000,000 |
|
|
|
161 |
|
|
|
96,788 |
|
|
|
|
|
|
|
|
|
|
|
96,949 |
|
|
|
|
|
Issuance of ordinary
shares upon completion
of initial public
offering |
|
|
23,000,000 |
|
|
|
154 |
|
|
|
573,666 |
|
|
|
|
|
|
|
|
|
|
|
573,820 |
|
|
|
|
|
Issuance of ordinary
shares upon exercise of
options |
|
|
80,000 |
|
|
|
1 |
|
|
|
537 |
|
|
|
|
|
|
|
|
|
|
|
538 |
|
|
|
|
|
Share-based
compensation |
|
|
|
|
|
|
|
|
|
|
5,720 |
|
|
|
|
|
|
|
|
|
|
|
5,720 |
|
|
|
|
|
Foreign currency
translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,563 |
) |
|
|
(4,563 |
) |
|
|
(4,563 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2010 |
|
|
103,080,000 |
|
|
|
736 |
|
|
|
682,577 |
|
|
|
89,382 |
|
|
|
(6,603 |
) |
|
|
766,092 |
|
|
|
58,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-5
COUNTRY STYLE COOKING RESTAURANT CHAIN CO., LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
2010 |
|
|
|
(In thousands of RMB) |
|
|
US$ 000s |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Note 2) |
|
Cash flows provided from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
26,617 |
|
|
|
45,079 |
|
|
|
62,810 |
|
|
|
9,517 |
|
Adjustments to reconcile net income to net cash provided from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on disposals of property and equipment |
|
|
4 |
|
|
|
180 |
|
|
|
358 |
|
|
|
54 |
|
Impairment and other lease charges |
|
|
|
|
|
|
|
|
|
|
2,087 |
|
|
|
316 |
|
Depreciation |
|
|
2,855 |
|
|
|
10,999 |
|
|
|
21,288 |
|
|
|
3,225 |
|
Deferred income taxes |
|
|
(552 |
) |
|
|
(925 |
) |
|
|
(2,046 |
) |
|
|
(310 |
) |
Share-based compensation |
|
|
|
|
|
|
|
|
|
|
5,720 |
|
|
|
867 |
|
Changes in other operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due from related parties |
|
|
(9,567 |
) |
|
|
851 |
|
|
|
8,912 |
|
|
|
1,350 |
|
Inventories |
|
|
(6,093 |
) |
|
|
(8,382 |
) |
|
|
(10,022 |
) |
|
|
(1,518 |
) |
Prepaid rent |
|
|
(1,890 |
) |
|
|
(1,967 |
) |
|
|
(2,712 |
) |
|
|
(411 |
) |
Prepaid expense and other current assets |
|
|
(2,328 |
) |
|
|
(3,756 |
) |
|
|
(9,987 |
) |
|
|
(1,513 |
) |
Deposits for leases |
|
|
(2,172 |
) |
|
|
(3,777 |
) |
|
|
(4,071 |
) |
|
|
(617 |
) |
Accounts payable |
|
|
12,546 |
|
|
|
18,760 |
|
|
|
2,898 |
|
|
|
439 |
|
Deferred revenue |
|
|
103 |
|
|
|
1,154 |
|
|
|
1,567 |
|
|
|
237 |
|
Due to related parties |
|
|
(2,707 |
) |
|
|
(1,806 |
) |
|
|
355 |
|
|
|
54 |
|
Accrued payroll |
|
|
4,761 |
|
|
|
5,102 |
|
|
|
5,403 |
|
|
|
819 |
|
Income taxes payable |
|
|
4,078 |
|
|
|
3,272 |
|
|
|
(1,165 |
) |
|
|
(177 |
) |
Deferred rent |
|
|
2,166 |
|
|
|
3,360 |
|
|
|
3,763 |
|
|
|
570 |
|
Other liabilities |
|
|
11,718 |
|
|
|
4,025 |
|
|
|
4,640 |
|
|
|
705 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
39,539 |
|
|
|
72,169 |
|
|
|
89,798 |
|
|
|
13,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows used in investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant and office space capital expenditures |
|
|
(40,662 |
) |
|
|
(45,820 |
) |
|
|
(116,792 |
) |
|
|
(17,696 |
) |
Purchase of restaurant operating assets |
|
|
(3,242 |
) |
|
|
(4,575 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(43,904 |
) |
|
|
(50,395 |
) |
|
|
(116,792 |
) |
|
|
(17,696 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows (used in) provided by financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution to Founders |
|
|
(2,436 |
) |
|
|
(3,454 |
) |
|
|
|
|
|
|
|
|
Dividend paid to Series A convertible preferred shares |
|
|
|
|
|
|
|
|
|
|
(3,946 |
) |
|
|
(598 |
) |
Proceeds from early exercise of employee stock options |
|
|
|
|
|
|
|
|
|
|
2,833 |
|
|
|
429 |
|
Gross IPO proceeds |
|
|
|
|
|
|
|
|
|
|
589,672 |
|
|
|
89,344 |
|
Offering expense |
|
|
|
|
|
|
|
|
|
|
(16,905 |
) |
|
|
(2,561 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used for) provided by financing activities: |
|
|
(2,436 |
) |
|
|
(3,454 |
) |
|
|
571,654 |
|
|
|
86,614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate on cash and cash equivalents |
|
|
(394 |
) |
|
|
(3 |
) |
|
|
(2,772 |
) |
|
|
(420 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
(7,195 |
) |
|
|
18,317 |
|
|
|
541,888 |
|
|
|
82,105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of year |
|
|
59,573 |
|
|
|
52,378 |
|
|
|
70,695 |
|
|
|
10,711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
|
52,378 |
|
|
|
70,695 |
|
|
|
612,583 |
|
|
|
92,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid |
|
|
1,892 |
|
|
|
9,264 |
|
|
|
17,762 |
|
|
|
2,691 |
|
Supplemental schedule of non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payable for purchase of property and equipment |
|
|
3,911 |
|
|
|
13,490 |
|
|
|
12,317 |
|
|
|
1,866 |
|
Payable of offering expenses |
|
|
|
|
|
|
|
|
|
|
891 |
|
|
|
135 |
|
The accompanying notes are an integral part of these consolidated financial statements.
F-6
COUNTRY STYLE COOKING RESTAURANT CHAIN CO., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(in thousands, except share and per share amounts)
1. Organization and Principal Activities
Country Style Cooking Restaurant Chain Co., Ltd. (the Company or CSC Cayman) was
registered as an exempted company under the Companies Law of the Cayman Islands on August 14, 2007.
The authorized share capital of the Company is $120,000 divided into 120,000,000 shares of par
value of $0.001, of which 96,000,000 shares are designated as ordinary shares (Ordinary Shares)
and 24,000,000 are designated as Series A preferred shares. 53,200,000 Ordinary Shares were issued
to Ms. Hong Li and Mr. Xingqiang Zhang (collectively the Founders) and 2,800,000 Ordinary Shares
were issued to certain minority shareholders. On September 26, 2007, the Company issued 24,000,000
Series A preferred shares to two venture capital investors (collectively the VC or Investors)
for total consideration of RMB 96,949 ($13 million), which accounts for 30% of the total
outstanding equity of the Company.
On September 28, 2010, the Companys ADSs became listed on the New York Stock Exchange under
the ticker symbol CCSC and issued 23,000,000 ordinary shares to public. The Company specializes
in serving tasty Sichuan-style fast food over the counter in the Peoples Republic of China (the
PRC).
The Companys consolidated financial statements presented herein include the accounts of the
Company and its subsidiaries. In addition, the Founders also owned and operated nine restaurants
prior to the establishment of the Company (the Owned-and-Operated Restaurants). The Company
subsequently purchased the operating assets of these nine restaurants in a series of transactions
from the Founders in 2008 and 2009 and such purchases were accounted for as transfer of assets
under common control. As the nine Owned-and-Operated restaurants were under common control of the
Founders throughout the periods presented, the consolidated financial statements for the periods
prior to the acquisition of those nine restaurants were retrospectively restated to incorporate the
operating results of the restaurants as if the acquisitions were completed as of the earliest
period presented in the consolidated financial statements. The nine Owned-and-Operated restaurants
and the Company and its subsidiaries are referred to as the Group hereafter.
The consolidated financial statement have been prepared in accordance with the recognition,
measurement, disclosure and presentation criteria of accounting principles generally accepted in
the United States of America (U.S. GAAP). All intercompany transactions and balances have been
eliminated. As of December 31, 2010, the Companys subsidiaries are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
Place of Incorporation |
|
Date of Incorporation |
|
of Ownership (%) |
Country Style Cooking International Restaurant Chain Group Ltd.
|
|
Hong Kong
|
|
August 23, 2007
|
|
|
100 |
|
Country Style Cooking (Chongqing) Investment Co., Ltd.
|
|
Chongqing, PRC
|
|
September 24, 2007
|
|
|
100 |
|
Chongqing Xinghong Growing Rich Management Co., Ltd.
|
|
Chongqing, PRC
|
|
March 25, 2008
|
|
|
100 |
|
Sichuan Country Style Cooking Restaurant Co., Ltd.
|
|
Chengdu, PRC
|
|
October 4, 2008
|
|
|
100 |
|
Xian Country Style Cooking Restaurant Co., Ltd.
|
|
Xian, PRC
|
|
May 19, 2008
|
|
|
100 |
|
Changsha Country Style Cooking Restaurant Co., Ltd.
|
|
Changsha, PRC
|
|
October 4, 2009
|
|
|
100 |
|
Shanghai Growing Rich Country Style Cooking Restaurant Co., Ltd.
|
|
Shanghai, PRC
|
|
September 1, 2009
|
|
|
100 |
|
Wuhan Country Style Cooking Restaurant Co., Ltd.
|
|
Wuhan, PRC
|
|
December 21, 2009
|
|
|
100 |
|
Guizhou Country Style Cooking Restaurant Co., Ltd.
|
|
Guizhou, PRC
|
|
September 26, 2010
|
|
|
100 |
|
2. Summary of Significant Accounting Policies
Use of Estimates. The preparation of the consolidated financial statements in conformity with
U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities and long lived assets
and liabilities at the dates of the financial statements. Estimates also affect the reported
amounts of revenues and expenses during the reporting periods.
F-7
The Group bases its estimates on historical experience and various other factors believed to
be reasonable under the circumstances, the results of which form the basis for making judgments
about the carrying value of assets and liabilities that are not readily apparent from other
sources. Significant items subject to such estimates and assumptions include: useful lives of and
impairment of property and equipment, impairment of goodwill or long-lived assets, valuation
allowance of deferred tax assets, valuation of financial instruments, valuation of share-based
compensation including forfeiture rates of stock options, and lease accounting matters. Actual
results could differ from those estimates.
Foreign Currency Translation. The reporting currency of the Group is RMB.
The functional currency of CSC Cayman and Country Style Cooking International Restaurant Chain
Group Ltd. (Hong Kong) is the United States dollar (U.S. dollar). Monetary assets and liabilities
denominated in currencies other than the U.S. dollar are translated into US dollar at the rates of
exchange ruling at the balance sheet date. The financial records of the Companys PRC subsidiaries
are maintained in local currencies, RMB, which is the functional currency.
Transactions in currencies other than RMB during the year are converted at the applicable
rates of exchange prevailing on the day transactions occurred. Transaction gains and losses are
recognized in the statements of operations. Assets and liabilities are translated into RMB at the
exchange rates at the balance sheet date, equity accounts are translated at historical exchange
rates and revenues, expenses, gains and losses are translated using the average rate for the year.
Translation adjustments are reported as cumulative translation adjustments and are shown as a
separate component of other comprehensive loss in the statement of changes in equity (deficit) and
comprehensive income.
Reclassifications. Amounts in the prior years consolidated financial statements are
reclassified whenever necessary to conform to the current years presentation.
Cash and Cash Equivalents. Cash and cash equivalents represent cash on hand and highly-liquid
investments with an original maturities of three months or less. At December 31, 2009 and 2010,
cash equivalents were comprised primarily of bank deposits.
Inventories. Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventories are primarily comprised of food and paper.
Property and Equipment. The Group capitalizes all direct costs incurred to construct and
substantially improve its restaurants. These costs are depreciated and charged to expense based
upon their property classification when placed in service. Property and equipment is recorded at
cost less accumulated depreciation. Costs for repair and maintenance activities are expensed as
incurred. Depreciation is provided using the straight-line method over the following estimated
useful lives:
|
|
|
Buildings |
|
20 years |
Equipment |
|
3 to 5 years |
Office furniture and fixtures
|
|
3 to 5 years |
Leasehold improvements |
|
Shorter of estimated useful life of 5 years or lease term |
Leasehold improvements are depreciated over the shorter of their estimated useful lives or the
underlying lease term. In circumstances where an economic penalty would be presumed by the
non-exercise of one or more renewal options under the lease, the Group includes those renewal
option periods when determining the lease term. For significant leasehold improvements made during
the latter part of the lease term, the Group amortizes those improvements over the shorter of their
useful life or an extended lease term. The extended lease term would consider the exercise of
renewal options if the value of the improvements would imply that an economic penalty would be
incurred without the renewal of the option.
Business Combinations. For acquisitions made before December 31, 2008, the acquired assets
are recorded at their fair value at the date of acquisition. Any excess of acquisition cost over
the fair value of the acquired assets is recorded as goodwill.
On January 1, 2009, the Group adopted Accounting Standards Codification (ASC) 805 (formerly
referred to as Statement of Financial Accounting Standards (SFAS) No. 141 (revised 2007),
Business combinations). Following the adoption, the consideration transferred in a business
combination is measured at fair value, which is calculated as the sum of the acquisition-date
F-8
fair values of the assets transferred by the acquirer and equity instruments issued by
acquirer. The costs directly attributable to the acquisition are expensed as incurred. Identifiable
assets are measured separately at their fair value as of the acquisition date. The excess of the
total of cost of acquisition over the fair value of the identifiable net assets of the acquiree is
recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of
the subsidiary acquired, the difference is recognized directly in the consolidated statements of
operations.
Goodwill. Goodwill represents the excess of the cost of an acquisition over the fair value of
the identifiable assets less liabilities acquired. Goodwill is tested for impairment annually or
more frequently if events or changes in circumstances indicate that it might be impaired. The Group
completes a two-step goodwill impairment test. The first step compares the fair values of each
reporting unit to its carrying amount, including goodwill. If the fair value of a reporting unit
exceeds its carrying amount, goodwill is not considered to be impaired and the second step will not
be required. If the carrying amount of a reporting unit exceeds its fair value, the second step
compares the implied fair value of goodwill to the carrying value of a reporting units goodwill.
The implied fair value of goodwill is determined in a manner similar to accounting for a business
combination with the allocation of the assessed fair value determined in the first step to the
assets and liabilities of the reporting unit.
The excess of the fair value of the reporting unit over the amounts assigned to the assets and
liabilities is the implied fair value of goodwill. This allocation process is only performed for
purposes of evaluating goodwill impairment and does not result in an entry to adjust the value of
any assets or liabilities. An impairment loss is recognized for any excess in the carrying value of
goodwill over the implied fair value of goodwill. There was no goodwill impairment recorded during
the years ended December 31, 2008, 2009 and 2010.
Impairment of Long-Lived Assets. The Group assesses the recoverability of property and
equipment by determining whether the carrying value of these assets, over their respective
remaining lives, can be recovered through undiscounted future operating cash flows. If the sum of
the expected undiscounted cash flows is less than the carrying amount of the assets, the Group
would recognize an impairment loss based on the fair value of the assets. Impairment is reviewed
whenever events or changes in circumstances indicate the carrying amounts of these assets may not
be fully recoverable. The impairment loss of long-lived assets recorded were zero, zero and RMB
2,087 ($0.3 million) during the years ended December 31, 2008, 2009 and 2010, respectively.
Leases. All leases are reviewed for capital or operating classification at their inception.
All of the Groups leases are operating leases. Many of the lease agreements contain rent holidays
granted by the landlords for pre-operating renovations, rent escalation clauses and/or contingent
rent provisions. Rent expense for leases that contain scheduled rent increases is recognized on a
straight-line basis over the lease term, including any option period as well as the rent holidays
included in the determination of the lease term. Contingent rentals are generally based upon a
percentage of sales or a percentage of sales in excess of stipulated amounts and are generally not
considered minimum rent payments but are recognized when specified levels have been achieved or
when management determines that achieving the specified levels during the fiscal year is probable.
Revenue Recognition. Revenues from Group operated restaurants are recognized when payment is
tendered at the time of sale. The Group presents sales net of discounts and other sales related
taxes.
Income Taxes. Current income taxes are provided for in accordance with the relevant statutory
tax laws and regulations. Deferred tax assets and liabilities are based on the difference between
the financial statement and tax bases of assets and liabilities as measured by the tax rates that
are anticipated to be in effect when those differences reverse. The deferred tax provision
generally represents the net change in deferred tax assets and liabilities during the period. The
effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results
of operations in the period that includes the enactment date. A valuation allowance is established
when it is necessary to reduce deferred tax assets to amounts for which realization is more likely
than not. The Group recognizes the tax benefit from an uncertain tax position only if it is more
likely than not that the tax position will be sustained on examination by the taxing authorities,
based on the technical merits of the position.
Pre-opening expenses. The Groups pre-opening expenses are expensed as incurred and generally
include payroll costs associated with opening the new restaurant and other miscellaneous expenses
prior to the openings. The Group started to separately monitor and record pre-opening expenses in
2010, prior to which such expenses were recorded in other restaurant expenses.
F-9
Fair Value of Financial Instruments. Fair value is defined as the price that would be
received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants on the measurement date. In determining fair value, a three level hierarchy is
established for inputs used in measuring fair value as follows: Level 1 inputs are quoted prices in
active markets for identical assets or liabilities; Level 2 inputs are observable for the asset or
liability, either directly or indirectly, including quoted prices in active markets for similar
assets or liabilities; and Level 3 inputs are unobservable and reflect significant assumptions. The
Groups financial instruments mainly consist of cash and cash equivalents, due from related
parties, accounts payable, due to related parties, and foreign-currency forward exchange contracts.
The Group purchases foreign-currency forward exchange contracts with contract terms expiring within
one year to protect against the adverse effect that exchange rate fluctuations may have on the US
dollar denominated IPO proceeds. The foreign-currency forward exchange contracts do not qualify for
hedge accounting. They are recorded at fair value at each period end within other current assets,
with change in fair value recorded in other income in the consolidated statements of operations.
The fair value measurement of foreign-currency forward exchange contracts is considered Level 2 in
the fair value hierarchy as major inputs including foreign exchange rates are observable in active
markets. The remaining other current assets approximate fair value because of the short maturity of
those instruments.
Net Income per Share. The Group has determined that Series A convertible preferred shares are
participating securities as they participated in the undistributed earnings on the same basis as
the ordinary shares. Accordingly, the Group has used the two-class method of computing earnings per
share. Under this method, net income applicable to holders of ordinary shares is allocated on a
pro-rata basis to the ordinary and preferred shares to the extent that each class may share in
income for the period. Losses are not allocated to the participating securities. A diluted earnings
per share is computed using the more dilutive of the two-class method or the if-converted method.
Segment Reporting. ASC Topic 280, Segment Reporting, establishes standards for companies to
report information about operating segments in their financial statements. The method of
determining what information to report is based on the way the chief operating decision maker
(CODM) organizes the Groups operating segments for making operating decisions and assessing
financial performance. The CODM is the chief executive officer (CEO) of the Group. Information
reported to the CEO for the purpose of the resources allocation and performance assessment focuses
on the nature of the Groups business activities. Each restaurant is an operating segment and is
aggregated into one reportable segment as these restaurants exhibit similar long-term financial
performance and have similar economic characteristics. The Group primarily generates its revenues
from customers in the PRC. Accordingly, no geographical segments are presented. Substantially all
of the Groups long-lived assets are located in the PRC.
Comprehensive Income. Comprehensive income includes all changes in equity except those
resulting from investment by owners and distribution to owner and is comprised of net income and
foreign currency translation adjustments.
Deferred Revenue and Sales Coupon. The Group sells prepaid vouchers to its customers, which
comprises deferred revenue. The revenue is recognized when such prepaid vouchers are used or
expired. Unused prepaid vouchers have fixed expiration dates and usually expire at the end of the
following calendar year after issuance and are not refundable. Revenues from such vouchers are not
material to the Groups consolidated financial statements.
The Group also issues discount coupons to customers in connection with promotional events. The
discount against revenue is recognized when such coupons are used in combination of purchases by
the customers.
Related Parties. Parties are considered to be related if one party has the ability, directly
or indirectly, to control the other party or exercise significant influence over the other party in
making financial and operational decisions. Parties are also considered to be related if they are
subject to common control or common significant influence. Related parties may be individuals or
corporate entities.
Government Grants. Unrestricted government subsidies from local governmental agencies
allowing the Group full discretion to utilize the funds were RMB 322 and RMB 5,347 ($0.8 million)
for the years ended December 31, 2009 and 2010, respectively, which were recorded as other income
in the consolidated statements of operations.
Translation into United States Dollars. The financial statements of the Group are stated in
RMB. Translation of amounts from RMB into U.S. dollars are solely for the convenience of the
readers and were calculated at the rate of US$1.00 = RMB 6.600, on December 30, 2010 (the rate on
December 31, 2010 was not available), representing the noon buying rate in the City of New York for
F-10
cable transfers of Renminbi, as certified for customs purposes by the Federal Reserve Bank of
New York. The translation is not intended to imply that the RMB amounts could have been, or could
be, converted, realized or settled into U.S. dollars at that rate on December 31, 2010, or at any
other rates.
Recent Accounting Pronouncements.
In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards
update (ASU) 2010-06, Fair Value Measurements and Disclosures (Topic 820) Improving
Disclosures about Fair Value Measurements. The ASU amends ASC 820 (formerly SFAS 157) to add new
requirements for disclosures about (1) the different classes of assets and liabilities measured at
fair value, (2) the valuation techniques and inputs used, (3) the activity in Level 3 fair value
measurements, and (4) the transfers between Levels 1, 2, and 3. The guidance in the ASU is
effective for the first reporting period beginning after December 15, 2009, except for the
requirement to provide the Level 3 activity of purchases, sales, issuances, and settlements on a
gross basis, which will be effective for fiscal years beginning after December 15, 2010, and for
interim periods within those fiscal years. In the period of initial adoption, entities will not be
required to provide the amended disclosures for any previous periods presented for comparative
purposes. However, those disclosures are required for periods ending after initial adoption. Early
adoption is permitted. Management believes the adoption of ASC 820 does not materially impact the
Group.
In April 2010, the FASB issued ASU 2010-13, Compensation Stock Compensation (Topic 718);
Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the
Market in Which the Underlying Equity Security Trades. The objective of this ASU is to address the
classification of an employee share-based payment award with an exercise price denominated in the
currency of a market in which the underlying equity security trades. FASB Accounting Standards
Codification Topic 718, CompensationStock Compensation, provides guidance on the classification
of a share-based payment award as either equity or a liability. A share-based payment award that
contains a condition that is not a market, performance, or service condition is required to be
classified as a liability. Under Topic 718, awards of equity share options granted to an employee
of an entitys foreign operation that provide a fixed exercise price denominated in (1) the foreign
operations functional currency or (2) the currency in which the employees pay is denominated
should not be considered to contain a condition that is not a market, performance, or service
condition. However, U.S. generally accepted accounting principles do not specify whether a
share-based payment award with an exercise price denominated in the currency of a market in which
the underlying equity security trades has a market, performance, or service condition. Diversity in
practice has developed on the interpretation of whether such an award should be classified as a
liability when the exercise price is not denominated in either the foreign operations functional
currency or the currency in which the employees pay is denominated. ASU 2010-13 clarifies that an
employee share-based payment award with an exercise price denominated in the currency of a market
in which a substantial portion of the entitys equity securities trades should not be considered to
contain a condition that is not a market, performance or service condition. Therefore, an entity
would not classify such an award as a liability if it otherwise qualifies as equity. This ASU is
effective for fiscal years and interim periods within those fiscal years, beginning on or after
December 15, 2010. Management believes the adoption of ASC 817 will not materially impact the
Group.
In December 2010, the FASB issued ASU 2010-28, which (1) does not prescribe a specific method
of calculating the carrying value of a reporting unit in the performance of step 1 of the goodwill
impairment test and (2) requires entities with a zero or negative carrying value to assess,
considering qualitative factors such as those listed in ASC 350-20-35-30 (these factors are not
all-inclusive), whether it is more likely than not that a goodwill impairment exists. If an entity
concludes that it is more likely than not a goodwill impairment exists, the entity must perform
step 2 of the goodwill impairment test. For public entities, the ASU is effective for impairment
tests performed during entities fiscal years (and interim periods within those years) that begin
after December 15, 2010. Early application will not be permitted. Upon adoption (i.e., beginning of
the entitys fiscal year), an entity that has a reporting unit with a zero or negative carrying
value must assess, on the basis of current facts and circumstances, whether it is more likely than
not that a goodwill impairment exists. If so, the entity must perform step 2 of the goodwill
impairment test on the day of adoption and record the impairment charge, if any, as a
cumulative-effect adjustment through beginning retained earnings. Management believes the adoption
of ASC 350 will not materially impact the Group.
On December 21, 2010, the FASB issued ASU 2010-29 to address differences in the ways entities
have interpreted ASC 805s requirements for disclosures about pro forma revenue and earnings in a
business combination. The ASU states that if a public entity presents comparative financial
statements, the entity should disclose revenue and earnings of the combined entity as though the
business combination(s) that occurred during the current year had occurred as of the beginning of
the comparable prior annual reporting period only. In addition, the ASU expand(s) the
supplemental pro forma disclosures under ASC 805 to include a
F-11
description of the nature and amount of material, nonrecurring pro forma adjustments directly
attributable to the business combination included in the reported pro forma revenue and earnings.
The ASU is effective prospectively for business combinations whose acquisition date is at or after
the beginning of the first annual reporting period beginning on or after December 15, 2010. Early
adoption is permitted. Management believes the adoption of ASC 805 will not materially impact the
Group.
3. Property and Equipment, Net
Property and equipment, net:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2010 |
|
|
|
RMB |
Cost: |
|
|
|
|
|
|
|
|
Buildings |
|
|
32,875 |
|
|
|
52,321 |
|
Leasehold improvements |
|
|
30,238 |
|
|
|
66,164 |
|
Equipment |
|
|
33,660 |
|
|
|
64,132 |
|
Office furniture and fixtures |
|
|
4,420 |
|
|
|
9,120 |
|
Less: accumulated depreciation |
|
|
(12,847 |
) |
|
|
(33,362 |
) |
Construction in progress: |
|
|
7,615 |
|
|
|
30,324 |
|
|
|
|
|
|
|
|
|
|
|
95,961 |
|
|
|
188,699 |
|
|
|
|
|
|
|
|
Constructions in progress consist of mainly renovations for restaurants under development.
Depreciation expense for all property and equipment for the years ended December 31, 2008, 2009 and
2010 was RMB 2,855, RMB 10,999 and RMB 21,288 ($3.2 million), respectively.
4. Purchases of Restaurant Operating Assets
In 2008 and 2009, the Group purchased restaurant operating assets from 24 and 8 restaurants
owned and operated by self-employed owners who were not affiliated with the Group, respectively. No
restaurant operating assets purchase occurred in year 2010. Such restaurant operating assets
primarily consisted of used kitchen equipment and miscellaneous furniture and fixture. The Group
accounted for such purchases as business combinations due to the continuity of the revenue
generating activities despite the change in management and upgrade in the renovations and services
subsequent to the acquisitions.
Total consideration included cash paid to the selling owners and 2,800,000 Ordinary Shares
issued to certain owners at fair value of RMB 2.25 per share. The excess of the total cash and
share-based consideration over the fair value of the assets assumed was recorded as goodwill which
is not tax deductible. The total goodwill as of December 31, 2009 and 2010 was RMB 6,286 ($1.0
million). There was no impairment of the goodwill during the years ended December 31, 2009 and 2010
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2009 |
|
|
|
RMB |
|
Total consideration |
|
|
12,078 |
|
|
|
3,401 |
|
Fair value of identifiable assets acquired |
|
|
7,200 |
|
|
|
1,993 |
|
|
|
|
|
|
|
|
Goodwill |
|
|
4,878 |
|
|
|
1,408 |
|
|
|
|
|
|
|
|
The fair value of the ordinary shares was determined by the Group using generally accepted
valuation methodologies, including the discounted cash flow approach, which incorporates certain
assumptions including the financial results and growth trends of the Group, to derive the total
equity value of the Group.
5. Impairment of Long-Lived Assets and Other Lease Charges
The Group reviews its long-lived assets, principally property and equipment, for impairment at
the restaurant level. The Group uses one year of operating losses as the primary indicator of
potential impairment for the annual impairment testing of these restaurant assets. If an indicator
of impairment exists for any of the assets, an estimate of undiscounted future cash flows over the
life of the primary asset for each restaurant is compared to that long-lived assets carrying
value. If the carrying value is greater than the
F-12
undiscounted cash flow, the Group then determines the fair value of the asset and if an asset
is determined to be impaired, the loss is measured by the excess of the carrying amount of the
asset over its fair value.
The Group determined the fair value of the impaired long-lived assets at the restaurant level
based on current economic conditions and historical experience. These asset measurements are
considered Level 3 in the fair value hierarchy. The Group recorded RMB 2,087 ($0.3
million)impairment losses of certain long-lived assets from restaurants that were either not
performing strongly or closed.
6. Other Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2010 |
|
|
|
RMB |
|
Capital expenditure liability |
|
|
1,486 |
|
|
|
12,317 |
|
Security deposit |
|
|
2,000 |
|
|
|
|
|
Accrued utility costs |
|
|
2,291 |
|
|
|
3,976 |
|
Other tax payable |
|
|
7,214 |
|
|
|
6,639 |
|
Accrued professional fees |
|
|
2,204 |
|
|
|
1,742 |
|
Advance receipts from depositary bank |
|
|
|
|
|
|
436 |
|
Other |
|
|
1,878 |
|
|
|
5,903 |
|
|
|
|
|
|
|
|
|
|
|
17,073 |
|
|
|
31,013 |
|
|
|
|
|
|
|
|
7. Leases
Substantially all of the Groups restaurants are operated under leased properties. All lease
contracts are classified as operating leases. The Group does not consider any one of these
individual leases material to the Groups operations. Initial lease terms are generally for five to
ten years and, in many cases, provide for the lessees renewal options. Certain leases require
contingent rent, determined as a percentage of sales as defined by the terms of the applicable
lease agreement.
Deferred rent arise from the differences between actual rental payments and the recognition of
rental expenses on straight-line method for lease arrangements that contain scheduled escalated
lease payments. The deferred rent balance was RMB 5,526 and RMB 9,295 ($1.4 million) as of December
31, 2009 and 2010, respectively. Such deferred balances are amortized when actual rental payments
exceed the straight-line rental expenses in later portion of the lease terms. The balances of
security deposits for leases were RMB 5,949 and RMB 10,020 ($1.5 million) as of December 31, 2009
and 2010, respectively and are expected to be fully recovered at the end of leases.
(a) Minimum rent commitments under non-cancelable operating leases at December 31, 2010 were
as follows:
|
|
|
|
|
Years Ending December 31, |
|
RMB |
|
2011 |
|
|
70,319 |
|
2012 |
|
|
68,222 |
|
2013 |
|
|
64,228 |
|
2014 |
|
|
60,302 |
|
2015 |
|
|
52,851 |
|
Thereafter |
|
|
114,533 |
|
|
|
|
|
Total minimum lease payments |
|
|
430,455 |
|
|
|
|
|
(b) Total rent expense on operating leases, including contingent rent, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Years Ended |
|
|
|
December 31, |
|
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
|
RMB |
|
Minimum rent on real property |
|
|
16,169 |
|
|
|
36,381 |
|
|
|
62,579 |
|
Contingent rent |
|
|
1,776 |
|
|
|
2,165 |
|
|
|
2,790 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
17,945 |
|
|
|
38,546 |
|
|
|
65,369 |
|
|
|
|
|
|
|
|
|
|
|
F-13
8. Income Taxes
Cayman Islands
Under the current tax laws of the Cayman Islands, the Group and its subsidiaries are not
subject to tax on their income or capital gains. In addition, upon payment of dividends by the
Group to its shareholders, no Cayman Islands withholding tax will be imposed.
Hong Kong
Country Style Cooking International Restaurant Chain Group Ltd. is subject to a profit tax at
the rate of 16.5% on assessable profit determined under relevant Hong Kong tax regulations. The
Groups subsidiaries in Hong Kong did not have assessable profits that were derived in Hong Kong
during the years ended December 31, 2008, 2009 and 2010. Therefore, no Hong Kong profit tax has
been provided for in the years presented.
The PRC
The Groups subsidiaries in the PRC are subject to Enterprise Income Tax (EIT) on the
taxable income as reported in their respective statutory financial statements adjusted in
accordance with the Enterprise Income Tax Law of the Peoples Republic of China (EIT Law)
approved by the National Peoples Congress on March 16, 2007. The EIT Law went into effect as of
January 1, 2008, which unified the tax rate generally applicable to both domestic and
foreign-invested enterprises in the PRC. The Groups subsidiaries in the PRC are generally subject
to EIT at a statutory rate of 25%. However, Chongqing Xinghong Growing Rich Management Co., Ltd.
(Xinghong) received approval from local Tax Authority to be classified as Going West project.
This classification entitles Xinghong to enjoy a preferential EIT rate at 15% for the years from
2008 to 2010. The Group is in the process of applying for the renewal of the Going West
preferential rate.
F-14
According to the PRC Tax Administration and Collection Law, the statute of limitations is
three years if the underpayment of income taxes is due to computational errors made by the
taxpayer. The statute of limitations will be extended to five years under special circumstances,
which are not clearly defined, but an underpayment of income tax liability exceeding RMB 100 is
specifically listed as a special circumstance. In the case of a transfer pricing related
adjustment, the statute of limitations is ten years. There is no statute of limitations in the case
of tax evasion.
The Group recognizes a tax benefit associated with an uncertain tax position when, in our
judgment, it is more likely than not that the position will be sustained upon examination by a
taxing authority. For a tax position that meets the more-likely-than-not recognition threshold, we
initially and subsequently measure the tax benefit as the largest amount that we judge to have a
greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority. Our
liability associated with unrecognized tax benefits is adjusted periodically due to changing
circumstances, such as the progress of tax audits, case law developments and new or emerging
legislation. Such adjustments are recognized entirely in the period in which they are identified.
Our effective tax rate includes the net impact of changes in the liability for unrecognized tax
benefits and subsequent adjustments as considered appropriate by management.
The Groups classifies interest and penalties recognized on the liability for unrecognized tax
benefits as income tax expenses. The Group made its assessment of the level of tax authority for
each uncertain tax position (including the potential application of interest and penalties) based
on the technical merits, and measured the unrecognized tax benefits associated with the tax
positions. The Group did not have any unrecognized tax benefits as of December 31, 2009 and 2010.
The Group does not anticipate that unrecognized tax benefits will significantly increase within the
next twelve months. The Group will classify interest and penalties associated with taxes as income
tax expense if any. The Group had no such charges for the years ended December 31, 2008, 2009 and
2010.
Upon the New Tax Law and Implementation Regulations, PRC withholding income tax is applicable
from January 1, 2008 to dividends to be payable by the Groups PRC operating subsidiaries based on
their profits generated from 2008 onwards to investors that are non-PRC tax resident enterprises,
which do not have an establishment or place of business in the PRC, or which have such
establishment or place of business but the relevant income is not effectively connected with the
establishment or place of business, to the extent such dividends have their sources within the PRC.
Under such circumstances, dividends distributed from the PRC subsidiaries based on the profits
generated from 2008 onwards to non-PRC tax resident group entities shall be subject to the
withholding income tax at 10% or a lower tax rate, as applicable. Pursuant to the Double Taxation
Arrangement between the PRC and Hong Kong, a company being the Hong Kong tax resident shall be
eligible for a reduced withholding tax rate of 5% on dividends where the Hong Kong company directly
owns at least 25% of the capital of the PRC company which pays the dividends.
The PRC subsidiaries declared dividend in year 2009 amount to RMB 6,800 from its undistributed
earnings and incurred a payment of RMB 680 on withholding taxes. The Group did not accrue deferred
tax liabilities related to withholding tax for the earnings from its investment in PRC subsidiaries
for 2009, as the Group plans to indefinitely reinvest undistributed profits earned after December
31, 2009 from its PRC subsidiaries.
The current and deferred portions of income tax expense included in the consolidated
statements of operations and comprehensive income are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2008 |
|
2009 |
|
2010 |
|
|
|
|
|
|
RMB |
|
|
|
|
Current |
|
|
(5,992 |
) |
|
|
(12,557 |
) |
|
|
(16,597 |
) |
Deferred |
|
|
825 |
|
|
|
2,638 |
|
|
|
5,462 |
|
Change in valuation allowance |
|
|
(273 |
) |
|
|
(1,713 |
) |
|
|
(3,416 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
(5,440 |
) |
|
|
(11,632 |
) |
|
|
(14,551 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
F-15
Deferred income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and the amount used for
income tax purposes. The components of deferred income tax assets and liabilities at December 31,
2009 and 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2009 |
|
2010 |
|
|
RMB |
Deferred tax assets: |
|
|
|
|
|
|
|
|
Net operating loss carryforward |
|
|
1,673 |
|
|
|
4,829 |
|
Deferred rent |
|
|
1,273 |
|
|
|
2,842 |
|
Accrued expense |
|
|
462 |
|
|
|
994 |
|
Other |
|
|
55 |
|
|
|
443 |
|
Valuation allowance |
|
|
(1,986 |
) |
|
|
(5,402 |
) |
|
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
1,477 |
|
|
|
3,706 |
|
|
|
|
|
|
|
|
|
|
Deferred tax assets are analyzed as: |
|
|
|
|
|
|
|
|
Current |
|
|
518 |
|
|
|
639 |
|
Non-current |
|
|
959 |
|
|
|
3,067 |
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
1,477 |
|
|
|
3,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Foreign-currency forward exchange contracts |
|
|
|
|
|
|
(183 |
) |
|
|
|
|
|
|
|
|
|
Total deferred tax liabilitiescurrent |
|
|
|
|
|
|
(183 |
) |
|
|
|
|
|
|
|
|
|
As of December 31, 2010, the Group had tax loss carryforwards of RMB 19,317 ($2.9 million)
which will expire between 2013 and 2015 if not used.
The Group considers positive and negative evidence to determine whether some portion or all of
the deferred tax assets will more likely than not be realized. This assessment considers, among
other matters, the nature, frequency and severity of recent losses, forecasts of future
profitability, the duration of statutory carryforward periods, the Groups experience with tax
attributes expiring unused and tax planning alternatives. Valuation allowances have been
established for deferred tax assets based on a more likely than not threshold. The Groups ability
to realize deferred tax assets depends on its ability to generate sufficient taxable income within
the carryforward periods provided for in the tax law. The Group has considered the following
possible sources of taxable income when assessing the realization of deferred tax assets:
|
|
|
Future reversals of existing taxable temporary differences; |
|
|
|
Further taxable income exclusive of reversing temporary differences and carryforwards; |
|
|
|
Future taxable income arising from implementing tax planning strategies. |
The Group also considers historical operating results to the assessment. At December 31, 2009
and 2010, the Group had a valuation allowance of RMB 1,986 and RMB 5,402 ($0.8 million),
respectively, against net deferred tax assets due primarily to net operating loss carryforwards
where realization of the related deferred tax asset amounts was not likely. Thus, recorded
valuation allowances may be subject to future changes that could be material.
The Groups effective tax rates were 17.0%, 20.5% and 18.8% for the years ended December 31,
2008, 2009 and 2010, respectively. A reconciliation of the PRC statutory tax rate to the effective
tax rate for the years ended December 31, 2008, 2009 and 2010 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2009 |
|
2010 |
PRC statutory tax rate |
|
|
25.0 |
% |
|
|
25.0 |
% |
|
|
25.0 |
% |
Effect of different tax rate of Group entities operating in other jurisdictions or under different tax status |
|
|
(3.2 |
)% |
|
|
2.8 |
% |
|
|
1.3 |
% |
Tax effect of non-deductible expenses, net |
|
|
1.0 |
% |
|
|
0.4 |
% |
|
|
(0.3 |
)% |
Effect of tax holidays |
|
|
(6.5 |
)% |
|
|
(11.9 |
)% |
|
|
(11.7 |
)% |
Withholding tax on dividends |
|
|
|
|
|
|
1.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of change in valuation allowance |
|
|
0.9 |
% |
|
|
3.0 |
% |
|
|
4.4 |
% |
Others |
|
|
(0.2 |
)% |
|
|
|
|
|
|
0.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective EIT rate |
|
|
17.0 |
% |
|
|
20.5 |
% |
|
|
18.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
F-16
The aggregate amount and per share effect of the tax holiday are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2009 |
|
2010 |
|
|
RMB except per |
|
|
share amounts |
The aggregate dollar effect |
|
|
2,068 |
|
|
|
6,730 |
|
|
|
9,031 |
|
Per share effect basic |
|
|
0.03 |
|
|
|
0.08 |
|
|
|
0.11 |
|
Per share effect diluted |
|
|
0.03 |
|
|
|
0.08 |
|
|
|
0.10 |
|
9. Related Party Transactions and Balances
The Group purchased RMB 2,600, RMB 3,300 and RMB 288 ($0.04 million) food materials for the
years ended 2008, 2009 and 2010, respectively, from Mr. Dehong Chen, one of the shareholders of the
Group. During 2008, 2009 and 2010, the Group leased certain properties from the Founders for office
space and restaurant operations and incurred rental expenses RMB 1,081, RMB 1,497 and RMB 960 ($0.1
million), respectively. In December 2009, the Group purchased commercial property from Mr.
Xingqiang Zhang, one of the Founders, for office space use and restaurant operations totaling RMB
12,000, which was settled in year 2010.
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2010 |
|
|
RMB |
Related party balances |
|
|
|
|
|
|
|
|
Amounts due from related parties |
|
|
|
|
|
|
|
|
Shareholders and key management personnel |
|
|
9,012 |
|
|
|
100 |
|
Amounts due to related parties |
|
|
|
|
|
|
|
|
Shareholders and key management personnel |
|
|
11,031 |
|
|
|
560 |
|
Amounts due from related parties were mainly comprised of reimbursement from one of the
founders; and amounts due to related parties were mainly comprised of the lease of property.
Amounts due from and to relate parties are unsecured, interest-free and have no fixed repayment
terms. Substantially all of the amounts due to and from related parties had been settled in cash
subsequently.
10. Preferred shares
On September 26, 2007, the Company issued 24,000,000 Series A convertible preferred shares
(Series A Shares) to two strategic venture capital investors, SIG China Investments One, Ltd.,
(SIG) and Sequoia Capital China II, L.P. (Sequoia) (collectively, the VC or Investors) at
$0.5417 per share for total consideration of $13,000,000 which accounts for 30% of the total
outstanding equity of the Company. SIG and Sequoia each subscribed 12,000,000 shares of Series A
Shares. Upon IPO date on September 28, 2010, the 24,000,000 Series A converted into ordinary shares
according to the conversion term as described below.
The key terms of Series A Shares are as follows:
Conversion
Each Series A Share shall be convertible, at the option of the holder thereof, at any time
after the original issue date into such number of fully paid and non assessable ordinary shares as
determined by dividing the original issue price by the conversion price in effect at the time of
conversion. The conversion price for each Series A Share shall initially be equal to the
subscription price ($0.5417 per share), i.e., the initial conversion ratio between Series A Shares
and ordinary shares shall be 1:1.
The Series A Shares shall automatically convert into ordinary shares at the then effective
conversion price upon (i) a qualified Initial Public Offering (IPO), or (ii) the date specified
by written consent of the holders of at least 50% of all outstanding Series A Shares. A qualified
IPO refers to the closing of the Companys first firm commitment, underwritten public offering of
its ordinary shares on an internationally recognized securities exchange resulting in (i) aggregate
proceeds to the Company of at least $60 million before deduction of underwriters commissions and
expenses, and (ii) a market capitalization of the Company immediately after such offering of at
least $300 million, and (iii) such offering shall be acceptable to the holders of a majority of the
outstanding Series A Shares. The conversion prices of the Series A Shares are subject to
anti-dilution adjustments and in the event the Company issues ordinary shares at a price per share
lower than the applicable conversion price in effect immediately prior to such issuance.
F-17
The Company has determined that the conversion option do not qualify an embedded derivative to
be bifurcated and accounted for separately from the preferred shares. In addition, there was no
beneficial conversion feature (BCF) attributable to the Series A Shares as the effective
conversion price was greater than the fair value of the ordinary shares on the commitment date. The
Company will reevaluate whether a BCF is required to be recorded upon the modification to the
effective conversion price of the Series A Shares, if any.
Voting right
The holder of each Series A Share shall be entitled to cast the number of votes equal to the
number of ordinary shares into which such Series A Shares could be converted as of the record date
for determining shareholders entitled to vote on such matters at any general meeting.
Dividend
No dividends or other distributions (whether in cash, in property, or in shares of the
Company) shall be made or declared with respect to any other class or series of shares of the
Company unless at the same time an equivalent dividend is declared or paid on all outstanding
Series A Shares on an if-converted basis.
Liquidation Preference
In the event of any voluntary or involuntary liquidation, dissolution or winding up of the
Company, or another deemed liquidation event. A deemed liquidation event includes a change in
control and the sale, transfer or disposition of all or substantially all of the assets of the
Company, and an enactment of new PRC government policies, laws or regulations that prohibit non-PRC
entities from investing in, holding or disposing of any securities of the Company, or substantially
prohibit the Company from carrying on its businesses. The Series A Shareholders shall be entitled
to receive an amount equal to 100% of the original issue price of each Series A Share plus all
accrued or declared but unpaid dividends thereon.
Drag-along Rights
At any time after the expiry of the 60th month from closing, if the Company shall not have
undergone an IPO or sale of the Company, and (i) the shareholders holding a majority of the Series
A Shares, and (ii) the shareholders holding a majority of the Ordinary Shares may cause a
compulsory sale of the Company at a minimum price equal to $200 million to a third party purchaser.
If the holders of a majority of the Series A Shares approve a sale of the Company pursuant to this
provision but the holders of a majority of the ordinary shares do not so approve, the holders of
the Series A Shares shall have the right to sell all their Series A Shares to the holders of the
ordinary shares pro rata at the price contemplated by third party purchaser of the Company in such
proposed sale of the Company.
The cash proceeds, net of issuance costs of RMB 666, were recorded as the initial carrying
value of the Series A Shares. Prior to the conversion into ordinary shares, the Series A shares
were classified as mezzanine equity in the consolidated balance sheets as the shares are redeemable
upon the occurrence of certain event outside the control of the Company.
11. Mainland China Contribution Plan And Profit Appropriation
Full time employees of the Group in the PRC participate in a government-mandated
multi-employer defined contribution plan pursuant to which certain pension benefits, medical care,
unemployment insurance, employee housing fund and other welfare benefits are provided to employees.
PRC labor regulations require the Group to accrue for these benefits based on a certain percentage
of the employees salaries. The total monthly contributions for such employee benefits were RMB
6,571, RMB 22,553 and RMB 30,528 ($4.6 million) for the years ended December 31, 2008, 2009 and
2010, respectively. The Group has no ongoing obligation to its employees subsequent to its
contributions to the PRC plan.
F-18
12. Restricted Net Assets
Pursuant to laws applicable to entities incorporated in the PRC, the subsidiaries of the Group
in the PRC must make appropriations from after-tax profit to non-distributable reserve funds. These
reserve funds include one or more of the following: (i) a general reserve, (ii) an enterprise
expansion fund and (iii) a staff bonus and welfare fund. Subject to certain cumulative limits, the
general reserve fund requires annual appropriation of 10% of after tax profit (as determined under
accounting principles generally accepted in the PRC at each year-end) until the accumulative amount
of such reserve fund reaches 50% of their registered capital; the other fund appropriations are at
the subsidiaries discretion. These reserve funds can only be used for specific purposes of
enterprise expansion and staff bonus and welfare and are not distributable as cash dividends. The
reserve funds amounted to RMB 2,931, RMB 5,978 and RMB 17,922 ($2.7 million) for the years ended
December 31, 2008, 2009 and 2010, respectively. In addition, due to restrictions on the
distribution of share capital from the Groups PRC subsidiaries, the PRC subsidiaries share capital
of RMB 26,,831 ($4.1 million) at December 31, 2010 is considered restricted and not available for
distribution to the Company by its PRC subsidiaries in the form of dividends, loans or advances.
13. Dividend and Distributions
Dividends are recognized when declared. In 2009, the Group declared dividends in respect of
2008 earnings to Series A preferred shareholders totaling RMB 3,946. The allocation basis of the
dividends being distributed to the Series A preferred shareholders is based on the number of shares
in issue of 24,000,000 as at December 31, 2008. No dividend was declared in year 2010.
All net earnings arising from the operations of the 9 Owned-and-Operated restaurants prior to
their acquisition were distributed to the Founders amounting to approximately, RMB 2,436 and RMB
3,454 during the years ended December 31, 2008 and 2009, respectively, and are recorded as
distributions to Founders in the consolidated financial statements. This portion of earnings was
not available to the ordinary shareholders.
14. Net Income Per Share
The Group has used the two-class method of computing earnings per share as its Series A
convertible preferred shares participate in undistributed earnings on the same basis as the
ordinary shares. Under this method, net income applicable to holders of ordinary shares is
allocated on a pro-rata basis to the ordinary and preferred shares to the extent that each class
may share in income for the period had it been distributed. Losses are not allocated to the
participating securities. Diluted earnings per share are computed using the more dilutive of (a)
the two-class method or (b) the if-converted method.
F-19
The following table is a reconciliation of the net income and share amounts used in the
calculation of basic net income per share and diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2008 |
|
2009 |
|
2010 |
|
|
RMB except share amounts |
Basic net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net income |
|
|
26,617 |
|
|
|
45,079 |
|
|
|
62,810 |
|
Less: Distribution to Founders |
|
|
(2,436 |
) |
|
|
(3,454 |
) |
|
|
|
|
Dividend on Series A convertible preferred shares |
|
|
|
|
|
|
(3,946 |
) |
|
|
|
|
Amounts allocated to preferred shares for participating rights to dividends |
|
|
(7,254 |
) |
|
|
(11,303 |
) |
|
|
(12,987 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to ordinary shareholders basic |
|
|
16,927 |
|
|
|
26,376 |
|
|
|
49,823 |
|
Weighted average ordinary shares outstanding basic |
|
|
56,000,000 |
|
|
|
56,000,000 |
|
|
|
68,124,712 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share basic |
|
|
0.30 |
|
|
|
0.47 |
|
|
|
0.73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to ordinary shareholders basic |
|
|
16,927 |
|
|
|
26,376 |
|
|
|
49,823 |
|
Amounts allocated to preferred shares for participating rights to dividend |
|
|
7,254 |
|
|
|
11,303 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to ordinary shareholders diluted |
|
|
24,181 |
|
|
|
37,679 |
|
|
|
49,823 |
|
Weighted average ordinary shares outstanding basic |
|
|
56,000,000 |
|
|
|
56,000,000 |
|
|
|
68,124,712 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred shares |
|
|
24,000,000 |
|
|
|
24,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options |
|
|
|
|
|
|
|
|
|
|
2,379,082 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares outstanding diluted |
|
|
80,000,000 |
|
|
|
80,000,000 |
|
|
|
70,503,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share diluted |
|
|
0.30 |
|
|
|
0.47 |
|
|
|
0.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2010, 24,000,000 Series A preferred shares and options to
purchase 130,000 shares were not included in the computation of diluted earnings per share as their
effects would have been anti-dilutive.
15. Share based compensation
Under 2009 Share Incentive Plan (the Option Plan), the Group may offer incentive awards to
employees, officers, directors and consultants or advisors (the Participants) including the
issuance of options to the Participants to purchase not more than 7,720,000 ordinary shares.
Generally options granted to the employees vest over a requisite service period of five years with
10-year contractual term. Generally, the options allocated to the first year in the service period
are vested on the first anniversary of the grant date with the remaining options vesting ratably
over the following years in the requisite service period. For example, options with 5-year vesting
period will have 20% vested on the first anniversary of the grant date with the remaining 80%
vested ratably over the following 48 months. As of December 31, 2010, options to purchase 3,946,200
ordinary shares and 545,000 non-vested restricted shares were outstanding and options to purchase
3,148,800 ordinary shares were available for future grants under the Option Plan.
The Group records share-based compensation based on the grant date fair value of the award and
recognized the cost as an expense over the grantees requisite service period. The share-based
compensation expenses have been categorized as either restaurant wages and related expenses, or
selling, general and administrative expense depending on the job functions of the grantees.
The share-based compensation has been classified as follows as of December 31, 2010:
|
|
|
|
|
Restaurant wages and related expenses |
|
|
1,498 |
|
Selling, general and administrative |
|
|
4,222 |
|
|
|
|
|
|
Total |
|
|
5,720 |
|
|
|
|
|
|
The weighted-average grant date fair value for options granted during the year ended December
31, 2010 was RMB 7.97 ($1.17), computed using the binomial option pricing model. The binomial model
requires the input of highly subjective assumptions including the fair value of the Groups
ordinary shares, the expected stock price volatility and the expected price multiple at which
employees are likely to exercise stock options. The Group uses historical data to estimate
forfeiture rate. Expected volatilities are based on the
F-20
average volatility of comparable companies over a time period commensurate with the expected
life of the option. The risk-free rate for periods within the contractual life of the option is
based on the U.S. Treasury yield curve in effect at the time of grant.
When estimating the fair value of its ordinary shares, the Group has considered a number of
factors, including using generally accepted valuation methodologies, including the discounted cash
flow approach, which incorporates certain assumptions including the financial results and growth
trends of the Group, to derive the total equity value of the Group. The valuation model allocated
the equity value between the ordinary shares and the preference shares and determined the fair
value of the ordinary shares based on the option pricing model under the enterprise value allocation method. Under this method, the ordinary
shares have value only if the funds available for distribution to shareholders exceed the value of
the liquidation preference at the time of a liquidity event.
The fair values of stock options were estimated using the following significant assumptions:
|
|
|
|
|
|
|
2010 |
Suboptimal exercise factor |
|
|
2.5 |
|
Risk-free interest rate |
|
3.50% to 4.60% |
Volatility |
|
43.10% to 46.73% |
Dividend yield |
|
|
|
|
Life of option |
|
10 years |
A summary of option activities under the Option Plan for the year ended December 31, 2010 is
presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
Weighted |
|
Average |
|
|
|
|
|
|
|
|
Average |
|
Remaining |
|
Aggregate |
|
|
Number of |
|
Exercise |
|
Contractual |
|
Intrinsic |
|
|
Options |
|
Price |
|
Term |
|
Value of Options |
|
|
|
|
|
|
US$ |
|
|
|
|
|
US$ |
Outstanding, as of January 1, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
4,455,000 |
|
|
|
1.14 |
|
|
|
|
|
|
|
|
|
Early exercise of options |
|
|
(345,000 |
) |
|
|
1.23 |
|
|
|
|
|
|
|
|
|
Cancellation and termination |
|
|
(163,800 |
) |
|
|
1.00 |
|
|
|
|
|
|
|
|
|
Outstanding, as of December 31, 2010 |
|
|
3,946,200 |
|
|
|
1.14 |
|
|
9.1 years |
|
|
18,182 |
|
Vested and expected to vest as of
December 31, 2010 |
|
|
2,886,514 |
|
|
|
1.19 |
|
|
9.2 years |
|
|
13,148 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There are no options exercisable as of December 31, 2010.
As of December 31, 2010, there was RMB 21,373 ($3.2 million) in total unrecognized
compensation expense related to unvested share-based compensation arrangements granted under the
option plan, which is expected to be recognized over a weighted-average period of 2.13 years.
The following table summarized the Groups non-vested restricted shares activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Average Grant |
|
|
|
|
|
|
Date |
|
|
|
|
|
|
Fair Value |
|
|
|
|
|
|
US$ |
Non-vested restricted shares outstanding at January 1, 2010 |
|
|
|
|
|
|
|
|
Granted |
|
|
288,000 |
|
|
|
2.10 |
|
Issued through early exercise of options |
|
|
345,000 |
|
|
|
0.92 |
|
Vested |
|
|
(80,000 |
) |
|
|
2.90 |
|
Cancellation and termination |
|
|
(8,000 |
) |
|
|
0.90 |
|
|
|
|
|
|
|
|
|
|
Non-vested restricted shares outstanding at December 31, 2010 |
|
|
545,000 |
|
|
|
1.43 |
|
|
|
|
|
|
|
|
|
|
The total fair value of shares vested during the year ended December 31, 2010 was RMB 3,046
($0.5 million).
The fair value of non-vested restricted shares was computed based on the fair value of the
Groups ordinary shares on the grant date. As of December 31, 2010, there was RMB 3,733 ($0.6
million) in total unrecognized compensation expense related to such non-vested restricted shares,
which is expected to be recognized over a weighted-average period of 1.50 years.
F-21
16. Subsequent Events
The Group granted its employees in January and February 2011: 1) options to purchase 865,000
ordinary shares at an exercise price of $5.3775 per share and 2) 16,000 restricted shares. The
options vest on 5 years of continuous service and have 10-year contractual terms. The restricted
shares vest on one year of continuous service. The fair value of the options and restricted shares
were RMB 14,558 ($2.2 million) and RMB 563 ($0.1 million) at the grant date, respectively.
F-22
COUNTRY STYLE COOKING RESTAURANT CHAIN CO., LTD.
SCHEDULE I CONDENSED FINANCIAL INFORMATION OF COUNTRY STYLE
COOKING RESTAURANT CHAIN CO.,LTD
(PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2009 |
|
2010 |
|
|
(In thousands of RMB |
|
|
except share and per |
|
|
share amounts) |
ASSETS
|
Cash and cash equivalents |
|
|
100 |
|
|
|
241 |
|
Due from subsidiaries |
|
|
29 |
|
|
|
32,185 |
|
Prepaid expenses and other current assets |
|
|
1,900 |
|
|
|
3,991 |
|
Investment in subsidiaries |
|
|
132,166 |
|
|
|
746,124 |
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
134,195 |
|
|
|
782,541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, MEZZANINE EQUITY AND EQUITY
|
Due to subsidiaries |
|
|
176 |
|
|
|
8,322 |
|
Prepaid subscription |
|
|
|
|
|
|
2,229 |
|
Accrued expenses |
|
|
2,306 |
|
|
|
5,070 |
|
Dividend payable |
|
|
3,946 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
6,428 |
|
|
|
15,621 |
|
|
|
|
|
|
|
|
|
|
Mezzanine Equity: |
|
|
|
|
|
|
|
|
Series A convertible preferred shares, par value $0.001 24,000,000 shares issued and outstanding |
|
|
96,949 |
|
|
|
|
|
Equity: |
|
|
|
|
|
|
|
|
Ordinary shares, par value $.001, 96,000,000 and 1,000,000,000 shares authorized, respectively,
56,000,000 and 103,032,000 shares issued and outstanding, respectively |
|
|
420 |
|
|
|
736 |
|
Additional paid-in capital |
|
|
5,866 |
|
|
|
682,577 |
|
Retained earnings |
|
|
26,572 |
|
|
|
89,382 |
|
Accumulated other comprehensive loss |
|
|
(2,040 |
) |
|
|
(5,775 |
) |
|
|
|
|
|
|
|
|
|
Total equity |
|
|
30,818 |
|
|
|
766,920 |
|
|
|
|
|
|
|
|
|
|
Total liabilities, mezzanine equity and equity |
|
|
134,195 |
|
|
|
782,541 |
|
|
|
|
|
|
|
|
|
|
F-23
COUNTRY STYLE COOKING RESTAURANT CHAIN CO., LTD.
SCHEDULE I CONDENSED FINANCIAL INFORMATION OF COUNTRY STYLE
COOKING RESTAURANT CHAIN CO, LTD.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2008 |
|
2009 |
|
2010 |
|
|
(In thousands of RMB) |
Operating costs and expenses |
|
|
(369 |
) |
|
|
(120 |
) |
|
|
(6,441 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(369 |
) |
|
|
(120 |
) |
|
|
(6,441 |
) |
Other income (expense) |
|
|
235 |
|
|
|
3 |
|
|
|
1,899 |
|
Investment income from subsidiaries |
|
|
24,315 |
|
|
|
41,742 |
|
|
|
67,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Country Style Cooking Restaurant Chain Co., Ltd. |
|
|
24,181 |
|
|
|
41,625 |
|
|
|
62,810 |
|
Dividend on Series A convertible preferred shares |
|
|
|
|
|
|
(3,946 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to ordinary shareholders |
|
|
24,181 |
|
|
|
37,679 |
|
|
|
62,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-24
COUNTRY STYLE COOKING RESTAURANT CHAIN CO., LTD.
SCHEDULE I CONDENSED FINANCIAL INFORMATION OF COUNTRY STYLE
COOKING RESTAURANT CHAIN CO, LTD.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2008 |
|
2009 |
|
2010 |
|
|
(In thousands of RMB) |
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Country Style Cooking Restaurant Chain Co., Ltd. |
|
|
24,181 |
|
|
|
41,625 |
|
|
|
62,810 |
|
Investment income from subsidiaries |
|
|
(24,315 |
) |
|
|
(41,742 |
) |
|
|
(67,352 |
) |
Adjustments to reconcile net income to net cash used in operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation |
|
|
|
|
|
|
|
|
|
|
5,720 |
|
Increase in due from subsidiaries |
|
|
(19 |
) |
|
|
(10 |
) |
|
|
(32,156 |
) |
Increase in due to subsidiaries |
|
|
176 |
|
|
|
|
|
|
|
8,146 |
|
Increase in prepaid expenses and other current assets |
|
|
|
|
|
|
(1,900 |
) |
|
|
(2,091 |
) |
Decrease in accrued liability |
|
|
(362 |
) |
|
|
2,000 |
|
|
|
1,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(339 |
) |
|
|
(27 |
) |
|
|
(23,049 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Investment in subsidiaries |
|
|
(58,057 |
) |
|
|
|
|
|
|
(546,606 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(58,057 |
) |
|
|
|
|
|
|
(546,606 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Dividend paid to Series A |
|
|
|
|
|
|
|
|
|
|
(3,946 |
) |
Proceeds from early exercise of employee stock options |
|
|
|
|
|
|
|
|
|
|
2,833 |
|
IPO proceeds, net of offering expense 16,905 |
|
|
|
|
|
|
|
|
|
|
572,767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
|
|
|
|
|
|
|
|
571,654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate change |
|
|
(394 |
) |
|
|
(3 |
) |
|
|
(1,858 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
(58,790 |
) |
|
|
(30 |
) |
|
|
141 |
|
Cash and cash equivalents, beginning of year |
|
|
58,920 |
|
|
|
130 |
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
|
130 |
|
|
|
100 |
|
|
|
241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note to Schedule I
Schedule I has been provided pursuant to the requirements of Rule 12-04(a) and 5-04-(c) of
Regulation S-X, which require condensed financial information as to the financial position, change
in financial position and results of operations of a parent company as of the same dates and for
the same periods for which audited consolidated financial statements have been presented when the
restricted net assets of consolidated subsidiaries exceed 25 percent of consolidated net assets as
of the end of the most recently completed fiscal year. The condensed financial information has been
prepared using the same accounting policies as set out in the accompanying consolidated financial
statements except that the equity method has been used to account for investments in its
subsidiaries.
The condensed financial information has been prepared using the same accounting policies as
set out in the consolidated financial statements of the Group and its subsidiaries except that the
equity method has been used to account for investments in its subsidiaries.
Certain information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted. The footnote disclosures contain supplemental information
relating to the operations of the Group and, as such, these statements should be read in
conjunction with the notes to the consolidated financial statements of the Group.
F-25