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Via Facsimile and EDGAR
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Assistant
Director
Division
of Corporation Finance
Securities
and Exchange Commission
100
F Street, N.E.
Washington,
D.C. 20549
United
States of America
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Re:
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KongZhong
Corporation
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Annual
Report on Form 20-F for the Fiscal
Year
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ended December 31,
2009 filed on June 4, 2010 (File No.
000-50826)
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1.
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We
note that you disclose that under PRC law, a foreign investor may not own
more than 50% of enterprise that provides “value-added telecommunication
services,” which would include WVAS. You also state that
foreign investors are expressly prohibited from “gaining control” over a
domestic online game operator through “contractual or technical
arrangements.” Please provide clear disclosure addressing the
extent to which you are eligible to conduct your online game operations
through contractual arrangements with your PRC operating affiliates,
particularly Dacheng.
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Mr.
Larry Spirgel
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Mr.
Larry Spirgel
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levying
fines;
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confiscating
income;
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revoking
business licenses;
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shutting
down servers or blocking websites;
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requiring
us to revise our ownership structure or restructure our operations;
and/or
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requiring
the discontinuation of businesses.
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Mr.
Larry Spirgel
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2.
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We
note your disclosure that you and your employees intend to comply with
SAFE’s Application Procedures for Foreign Exchange Administration for
Domestic Individual Participating in Employee Stock Holding Plans or Share
Option Plans of Overseas Listed Companies, or the Stock Option
Rule. In your future filings, please clarify the specific
fines, or other sanctions, you may face for failing to comply with this
rule to date. Please describe the steps you have taken to
comply with this rule, and to cause your employees to
comply. We note that the Stock Option Rule was adopted in
2007. Please explain your
delay.
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Mr.
Larry Spirgel
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3.
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In
your future filings, please include a discussion of the relevant facts and
circumstances that provide the basis for your belief that you are not a
PRC resident enterprise.
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4.
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Please
disclose the facts and circumstances that led you to record a $1.5 million
dollar impairment on your investment in HiU! Media in
2009. Please include this disclosure here and in your
discussion of related party
transactions.
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Mr.
Larry Spirgel
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since
January 11, 2008, the date of the Company’s investment in HiU! Media, HiU!
Media has been in a continuous loss-making position and has failed over
time to create the type of profit-generating business that was
contemplated at the time of the Company’s
investment;
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the
Company was unable to create any value-generating synergies with HiU!
Media for its wireless Internet services business because HiU! Media
failed to develop its advertising business and expand its customer base;
and
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the
Company decided by the end of 2009 that, as a corporate strategy going
forward, the Company plans to place less emphasis on its wireless Internet
advertising business.
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5.
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We
note that on pages 93-94, you disclose that you control Dacheng through a
series of contractual arrangements. However, your corporate
structure chart on page 33 seems to indicate that you hold 100% of the
equity in Dacheng. Please
reconcile.
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6.
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We
note your disclosure that if you enter into licensing agreements with
third parties outside of the PRC through your PRC entities, these licenses
will need to be registered. We also note your statement on page
40 that you have licensed Loong outside of the PRC. In your
future filings, please explain why your Loong license agreements were not
required to be registered.
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Mr.
Larry Spirgel
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7.
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In
order to enhance our understanding of how you prepare your financial
statements and assess your internal control over financial reporting, we
ask that you provide us with information that will help us answer the
following questions.
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i.
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In
connection with your process to determine whether your internal control
over financial reporting was effective, please describe whether and how
you considered controls to address financial reporting risks that are
relevant to all locations where you have
operations.
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Mr.
Larry Spirgel
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Mr.
Larry Spirgel
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Mr.
Larry Spirgel
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1.
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Identifying
financial reporting risks and
controls:
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a.
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identifying
financial reporting risks;
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b.
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identifying
controls that adequately address financial reporting
risks;
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c.
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considering
entity-level controls;
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d.
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considering
the role of information technology general controls;
and
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e.
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maintaining
evidential matter to support the
assessment.
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2.
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Evaluating
evidence of the operating effectiveness of the Company’s internal control
over financial reporting:
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a.
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determining
the evidence needed to support the
assessment;
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b.
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implementing
procedures to evaluate evidence of the operation of internal control over
financial reporting; and
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c.
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maintaining
evidential matter to support the
assessment.
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Mr.
Larry Spirgel
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ii.
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If
you have an internal audit function, please describe it and explain how,
if at all, that function impacted your evaluation of your internal control
over financial reporting.
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1.
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Ensuring
compliance with the requirements of Section 404 of the Sarbanes-Oxley
Act:
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a.
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preparing
and updating the narratives and flow charts for (i) business lines and
other functions, (ii) laws and regulations, (iii) human resource, (iv)
financial reporting and (v) general information
system;
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b.
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identifying
key controls of each business cycle and completing and updating the
control matrix during interim test and annual
test;
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c.
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performing
testing on internal controls, completing testing documentation and
identifying control deficiencies at the Company’s headquarters and
operating entities at different
locations;
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d.
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communicating
control deficiencies with relevant personnel (including process owners,
management, the audit committee and board of directors) at quarterly and
annual audit committee’s meetings or board of directors’ meetings,
proposing remediation plans and supervising the implementation of
remediation plans; and
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e.
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communicating
and cooperating with the Company’s external auditors in their interim and
annual audits.
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2.
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Others:
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a.
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making
recommendations on improving and optimizing the internal control policies
and procedures to meet the needs of the Company’s operation and
development and supervising the implementation of such policies and
procedures.
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Mr.
Larry Spirgel
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iii.
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If
you maintain your books and records in accordance with U.S. GAAP, describe
the controls you maintain to ensure that the activities you conduct and
the transactions you consummate are recorded in accordance with U.S.
GAAP.
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1.
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Based
on the nature of its business, the Company has established accounting
policies under U.S. GAAP for the purpose of preparing consolidated
financial statements under U.S. GAAP. In particular, an
accounting manual has been formulated in accordance with U.S. GAAP, which
sets forth guidance on the application of accounting policies for
day-to-day business transactions, covering, among other things, revenue
recognition, business acquisitions, intangible assets and goodwill,
deferred taxes, share-based compensations, consolidation of subsidiaries
and variable interest entities, and net income (or loss) per
share. The accounting manual under U.S. GAAP is reviewed on a
regular basis by the Company’s financial reporting team, including the
CFO, the vice president of finance and the U.S. GAAP reporting manager
(who reports directly to the vice president of finance and has
responsibility over U.S. GAAP reporting), and the manual is updated as
needed.
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2.
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The
Company’s accounting and finance staff at each operating entity prepare
accounting entries for transactions occurred in accordance with the
Company’s accounting manual described above. The accounting and
finance staff’s supervisors, as well as the U.S. GAAP reporting manager at
the Company’s headquarters, will review the journal vouchers and conduct
quality control on the appropriateness of the accounting
treatments. In addition, the U.S. GAAP reporting manager will
complete an interim or annual report disclosure checklist for U.S. GAAP
reporting and deferred tax checklist to confirm whether all the
significant accounting matters have been considered. The
Company’s vice president of finance then reviews the completed
checklists.
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3.
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The
Company’s operating results, earnings releases and annual report are
reviewed by the CEO, CFO, chief investment officer, vice president of
finance, as well as the audit committee and board of directors, prior to
their public release.
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Mr.
Larry Spirgel
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1.
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The
Company’s vice president of finance attends management meeting together
with the Company’s CFO, which provides the finance department with access
to knowledge of significant new transactions and also an opportunity to
discuss the potential accounting impact with senior management before the
relevant new business contracts and transactions are
executed.
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2.
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Once
any new transaction or arrangement is identified, the Company’s vice
president of finance and the U.S. GAAP reporting manager will carry out
accounting research and analysis for such business transaction or
arrangement. The CFO and the vice president of finance will
report to the CEO and the board of directors to ensure a thorough
evaluation is conducted before a business decision is
made. Moreover, the U.S. GAAP reporting manager will update the
Company’s interim and/or annual report disclosure checklist(s) for U.S.
GAAP reporting, if necessary, and the vice president of finance will
review the revised checklist(s) before releasing it (them) to the finance
teams across all of the Company’s operating
entities.
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iv.
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If
you do not maintain your books and records in accordance with U.S. GAAP,
tell us what basis of accounting you use and describe the process you go
through to convert your books and records to U.S. GAAP for SEC
reporting. Describe the controls you maintain to ensure that
you have made all necessary and appropriate adjustments in your
conversions and disclosures.
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v.
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We
would like to understand more about the background of the people who are
primarily responsible for preparing and supervising the preparation of
your financial statements and evaluating the effectiveness of your
internal control over financial reporting and their knowledge of U.S. GAAP
and SEC rules and regulations. Do not identify people by name,
but for each person, please tell
us:
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Mr.
Larry Spirgel
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what role he or she takes in
preparing your financial statements and evaluating the effectiveness of
your internal control;
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what relevant education and
ongoing training he or she has had relating to U.S.
GAAP;
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the nature of his or her
contractual or other relationship to
you;
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whether he or she holds and
maintains any professional designations such as Certified Public
Accountant (U.S.) or Certified Management Accountant;
and
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about his or her professional
experience, including experience in preparing and/or auditing financial
statements prepared in accordance with U.S. GAAP and evaluating
effectiveness of internal control over financial
reporting.
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1.
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CFO
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a.
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Responsibilities:
the CFO’s responsibilities are to: (i) supervise the accounting and
finance teams of the Company, (ii) conduct the review of the Company’s
financial statements to ensure that transactions are recorded according to
the Company’s accounting manual and accounting policies, (iii) review the
regular reports prepared by the internal audit department on the
effectiveness of the Company’s internal control over financial reporting
and monitoring of the progress of remedial actions taken when any
deficiency is identified and (iv) take ultimate responsibility over
financial reporting and the effectiveness of the Company’s internal
control over financial reporting.
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b.
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Education:
bachelor of science in electrical engineering from the University of
Washington.
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c.
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Ongoing
training: the CFO regularly obtains updates on rules and guidance from the
SEC’s or the Financial Accounting Standards Board’s websites and other
sources (including periodic memoranda and newsletters from Deloitte)
to keep abreast of changes that may affect the Company’s accounting
and/or business. In addition, from time to time, the CFO
attends industry, finance and accounting related seminars, organized by
investment banks, investment funds and accounting firms in the
PRC.
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Mr.
Larry Spirgel
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d.
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Professional
experiences: The CFO has been acting in his current capacity since
February 2009. Prior to that time, he was the chief financial
officer of: (i) 56.com Inc. from August 2007 to February 2009; and (ii)
Tom Online Inc., a company previously listed on the NASDAQ, from April
2005 to August 2007. At both of those positions, the CFO led
the accounting and finance functions and was responsible for financial
reporting under U.S. GAAP and the effectiveness of the companies’ internal
control over financial reporting. Prior to joining TOM Online
Inc. in 2005, the CFO was a director with Credit Suisse First Boston from
1999 to 2005, in the Equity Research Department, focusing on NASDAQ-listed
companies in Internet and telecommunications sectors of the
PRC.
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2.
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Vice president of
finance
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a.
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Responsibilities:
the responsibilities of the vice president of finance are to: (i) assist
the CFO on accounting and financial reporting matters, (ii) lead the
finance team in preparation of financial statements under U.S. GAAP, and
(iii) maintain the effectiveness of internal control policies and
procedures.
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b.
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Education:
bachelor’s degree in economics from Fudan University and master’s degree
in electronic commerce (with 50% of the business school courses) from
Carnegie Mellon University.
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c.
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Ongoing
training: the vice president of finance receives external accounting
training on U.S. GAAP, which includes quarterly seminars on U.S. GAAP
conducted by Deloitte; she conducts subsequent independent research on
rules and issues discussed at such seminars; she receives regular updates
on SEC rules and regulations from the SEC’s websites and through the
trainings provided by Deloitte; and she regularly attends seminars
organized by finance managers of U.S.-listed
companies.
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d.
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Professional
experiences: The vice president of finance has over 12 years of
professional experiences in auditing, accounting and financial management,
including: (i) six years of financial management at the Company, (ii) two
years of financial management at Sohu.com Inc., a NASDAQ-listed company,
and (iii) four years at KPMG in Beijing, with experience in the auditing
of financial statements prepared under U.S.
GAAP.
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3.
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U.S. GAAP reporting
manager
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a.
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Responsibilities:
the responsibilities of the U.S. GAAP reporting manager are to: (i)
conduct research on accounting issues under U.S. GAAP and (ii) prepare
financial statements under U.S.
GAAP.
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Mr.
Larry Spirgel
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b.
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Education:
bachelor’s degree in accounting from Renmin University (with relevant
course work on U.S. GAAP).
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c.
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Ongoing
training: the U.S. GAAP reporting manager has external accounting training
on U.S. GAAP, which includes seminars on U.S. GAAP and new SEC rules and
regulations conducted by Deloitte, and receive regular updates on SEC
rules and regulations.
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d.
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Professional
experiences: the U.S. GAAP reporting manager has six years of professional
experiences in auditing, accounting and financial reporting, including
three years of experience at KPMG in Beijing, with experience in the
auditing of financial statements prepared under U.S.
GAAP.
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4.
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Internal audit
director
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a.
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Responsibilities:
the internal audit director’s responsibilities are to: (i) lead the
evaluation and testing of the effectiveness of the Company’s internal
control over financial reporting and (ii) report to audit committee on the
Company’s internal control over financial reporting on a quarterly
basis.
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b.
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Education:
bachelor’s degree in computer science from Beijing Institute of
Technology.
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c.
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Ongoing
training: the internal audit director regularly obtains updates on rules
and guidance from the SEC’s and the Financial Accounting Standards Board’s
websites and other sources (i.e. various newsletters and online training
courses from Deloitte) to keep abreast of any changes which might affect
the Company’s internal control over financial
reporting.
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d.
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Professional
experiences: the internal audit director has 13 years of professional
experiences in internal audit, including six years of internal audit
experience at Tom Online Inc., where he was responsible for preparing and
implementing the internal control over financial
reporting.
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5.
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Internal audit
manager
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a.
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Responsibilities:
the internal audit manager’s responsibilities are to describe the
Company’s main business processes, fix the key controls of the Company’s
nine cycles of control procedures, complete the control matrix, perform
testing on key controls (including completing the related documentation
and finding out any control weakness), communicate with the related
personnel, propose remedial measures, and supervise such remediation, and
coordinate and supervise the compliance of Section 404 of the Sarbane
Oxley Act in every department.
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b.
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Education:
bachelor’s degree of international trade and finance from Beijing
International Studies University.
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Mr.
Larry Spirgel
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c.
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Ongoing
training: the internal audit manager receives regular updates on SEC rules
and regulations from SEC’s websites and attends online training courses on
Section 404 of the Sarbanes-Oxley Act provided by
Deloitte.
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d.
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Professional
experiences: the internal audit manager has three years of integrated
audit experience with SEC registrants at Deloitte in
Beijing. In addition, she attended all the prerequisite U.S.
GAAP and SEC trainings at Deloitte.
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vi.
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If
you retain an accounting firm or other similar organization to prepare
your financial statements or evaluate your internal control over financial
reporting, please tell us:
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the name and address of the
accounting firm or
organization;
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the qualifications of their
employees who perform the services for your
company;
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how and why they are qualified
to prepare your financial statements or evaluate your internal control
over financial reporting;
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how many hours they spent last
year performing these services for you;
and
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the total amount of fees you
paid to each accounting firm or organization in connection with the
preparation of your financial statements and in connection with the
evaluation of internal control over financial reporting for the most
recent fiscal year end.
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vii.
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If
you retain individuals who are not your employees and are not employed by
an accounting firm or other similar organization to prepare your financial
statements or evaluate your internal control over financial reporting, do
not provide us with their names, but please tell
us:
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why you believe they are
qualified to prepare your financial statements or evaluate your internal
control over financial
reporting;
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how many hours they spent last
year performing these services for you;
and
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the total amount of fees you
paid to each individual in connection with the preparation of your
financial statements and in connection with the evaluation of internal
control over financial reporting for the most recent fiscal year
end.
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Mr.
Larry Spirgel
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viii.
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We
note that Hope Ni and Xiaoxin Chen are your audit committee financial
experts. Please describe their qualifications, including the
extent of their knowledge of U.S. GAAP and internal control over financial
reporting.
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1.
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Xiaoxin
Chen. For more than three years, Mr. Chen has been
managing a private equity fund that invests in PRC companies in various
industries. After examining a large number of growth stage
investment opportunities, Mr. Chen has accumulated significant experience
evaluating the financial position of PRC companies. Mr. Chen
was previously the chief financial officer of Oak Pacific Interactive
(“OPI”), one of the leading technology companies based in
Beijing. Mr. Chen’s general responsibilities at OPI included
overseeing all of the company’s financial and legal
functions. While at OPI, Mr. Chen quickly expanded its finance
department from three employees to 15 employees. Under Mr.
Chen’s leadership, OPI converted its financial reporting system from PRC
GAAP to U.S. GAAP. Xiaoxin also spearheaded the establishment
of the internal audit department to audit all sales and expense
contracts. Prior to OPI, Mr. Chen worked in Hong Kong from 2001
to 2003 at Citigroup/Salomon Smith Barney’s China Investment Banking
Group, which provided financial advisory services and executed complex
financings for Chinese clients in multiple currencies in a variety of
cross-border transactions. Mr. Chen was also a financial
analyst for Bank of America’s Credit Products Group in San Francisco from
1996 to 1998, covering a portfolio of 42 large corporate clients to
certify appropriate risk assessment and
management.
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2.
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Hope
Ni. From 2004 to 2007, Ms. Ni was the chief financial
officer of COGO Group (NASDAQ: COGO), leading its accounting and finance
functions and having ultimate responsibility over financial reporting and
the effectiveness of the company internal control over financial
reporting. From 1996 to 2004, Ms. Ni obtained a law degree and
was in private practice with a U.S.-based law firm. From 1994
to 1995, Ms. Ni worked at Merrill Lynch’s Investment Banking and Corporate
Finance Division as a financial
analyst.
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Mr.
Larry Spirgel
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the
Company is responsible for the adequacy and accuracy of the disclosure in
the filings;
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the
Staff’s comments or changes to disclosure in response to the Staff’s
comments do not foreclose the Commission from taking any action with
respect to the filings; and
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the
Company may not assert the Staff’s comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities
laws of the United States.
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Sincerely,
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/s/
Jay Chang
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Jay
Chang
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Chief
Financial Officer
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cc:
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Brandon
A. Hill
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