UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 20-F
|
|
|
|
|
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, 2008
|
|
|
|
|
|
|
|
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: 1-33430
QIAO XING MOBILE
COMMUNICATION CO., LTD.
(Exact name of Registrant as specified in its charter)
British Virgin Islands
(Jurisdiction of Incorporation or Organization)
10th Floor CEC Building, 6 Zhongguancun South Street, Beijing 100086, People’s Republic of China
(Address of Principal Executive Offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
|
|
|
|
|
Title of each class
|
|
Exchange on which registered
|
|
Ordinary Shares, without par value
|
|
New York Stock Exchange, Inc.
|
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Number of outstanding shares of each of the issuer’s classes of capital or common stock as of December 31, 2008:
47,609,731 Ordinary Shares, without par value
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
o
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See the definitions 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:
U.S. GAAP
þ
International Financial Reporting Standards as issued by the International Accounting Standards Board
o
Other
o
Indicate by check mark which financial statement item the registrant has elected to follow.
Item 17
o
Item 18
þ
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
INTRODUCTION
This annual report on Form 20-F includes our audited consolidated financial statements as of
December 31, 2007 and 2008, and for the period from January 1, 2006 to November 30, 2006, the
period from November 30, 2006 to December 31, 2006, and the years ended December 31, 2007 and 2008.
We and certain selling shareholders of our company completed the initial public offering of
13,333,334 ordinary shares of nil par value on May 8, 2007. On May 3, 2007, we listed our ordinary
shares on the New York Stock Exchange, or NYSE, under the symbol “QXM.”
Unless otherwise indicated, references in this annual report to:
|
•
|
|
“3G” are to the third generation of telecommunication hardware standards and general
technology for mobile networking that provides increased bandwidth and allows a mobile device
user to access a wide variety of services, such as multimedia;
|
|
|
|
•
|
|
“CECT” are to CEC Telecom Co., Ltd., our principal operating subsidiary in China;
|
|
|
|
•
|
|
“China” or the “PRC” are to the People’s Republic of China, excluding, for the purpose of
this annual report only, Taiwan and the special administrative regions of Hong Kong and Macau;
|
|
|
|
•
|
|
“CDMA” are to Code Division Multiple Access, a method for transmitting simultaneous encoded
signals over a shared portion of the spectrum. The foremost application of CDMA is digital
cellular phone technology;
|
|
|
|
•
|
|
“EDGE” are to Enhanced Data GSM Environment, a faster version of the GSM wireless service
designed to deliver data at rates up to 384 Kbps;
|
|
|
|
•
|
|
“EMS” are to electronic manufacturing services, a general term used to describe the
services provided by companies that design, test, manufacture, distribute and provide return
and repair services for electronic components and assemblies for original equipment
manufacturers;
|
|
|
|
•
|
|
“GSM” are to Global System for Mobile Communications, a digital cellular phone technology
based on time division multiple access;
|
|
|
|
•
|
|
“GPS” are to Global Positioning System, a global navigation satellite system often used for
navigation purposes;
|
|
|
|
•
|
|
“MIIT” are to China Ministry of Industry and Information Technology;
|
|
|
|
•
|
|
“RMB” and “Renminbi” are to the legal currency of China;
|
|
|
|
•
|
|
“SIM” are to Subscriber Identity Module, the smart card used in cellular phones to securely
store the key that is used to identify the mobile phone service subscriber;
|
|
|
|
•
|
|
“SMT” are to Surface Mount Technology, a space saving technique whereby special leadless
components are soldered onto the surface of a printed circuit board;
|
|
|
|
•
|
|
“TD-SCDMA” are to Time Division-Synchronous Code Division Multiple Access, a 3G wireless
standard that supports data transmission at speeds up to 2 Mbps. The standard combines time
division multiple access with an adaptive, synchronous-mode code division multiple access
component;
|
|
|
|
•
|
|
“US$,” “$,” and “U.S. dollars” are to the legal currency of the United States;
|
|
|
|
•
|
|
“WCDMA” are to Wideband Code Division Multiple Access, a 3G wireless standard which
utilizes one 5 MHz channel for both voice and data, initially offering data speeds up to 384
Kbps; and
|
|
|
|
•
|
|
“We,” “us,” “our company” and “our” are to Qiao Xing Mobile Communication Co., Ltd., its
predecessor entities and its consolidated subsidiaries, unless the context indicates
otherwise.
|
Unless otherwise indicated, all historical share information and per-share information contained in
this annual report has been retroactively adjusted to reflect a 40-for-one share split that became
effective on April 13, 2007.
1
FORWARD-LOOKING STATEMENTS
This annual report contains forward-looking statements that relate to our current expectations and
views of future events. The forward-looking statements are made under the “safe harbor” provisions
of the U.S. Private Securities Litigation Reform Act of 1995 and relate to events that involve
known and unknown risks, uncertainties and other factors, including those listed under “Item 3. Key
Information—D. Risk factors,” which may cause our actual results, performance or achievements to
be materially different from any future results, performance or achievements expressed or implied
by the forward-looking statements.
In some cases, these forward-looking statements can be identified by words or phrases such as
“anticipate,” “believe,” “continue,” “estimate,” “expect,” “intend,” “is/are likely to,” “may,”
“plan,” “potential,” “will” 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, among other things, statements
relating to:
|
•
|
|
our expectations regarding the market for mobile handsets;
|
|
|
|
•
|
|
our expectations regarding the continued growth of the mobile communications industry;
|
|
|
|
•
|
|
our expectations with respect to advancements in our technologies;
|
|
|
|
•
|
|
our beliefs regarding the competitiveness of our mobile handset products;
|
|
|
|
•
|
|
our expectations regarding our manufacturing capacity;
|
|
|
|
•
|
|
our expectations with respect to revenue growth and our ability to achieve profitability;
|
|
|
|
•
|
|
our future business development, results of operations and financial condition; and
|
|
|
|
•
|
|
competition from other manufacturers of mobile handsets.
|
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. 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
filed as exhibits in this annual report completely and with the understanding that our actual
future results may be materially different from what we expect.
2
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
A. Selected Financial Data
The following selected consolidated statement of operations data and selected consolidated cash
flow data for the period from January 1, 2006 to November 30, 2006, the period from November 30,
2006 to December 31, 2006, and the years ended December 31, 2007 and 2008 and the selected
consolidated balance sheet data as of December 31, 2007 and 2008 are derived from our audited
consolidated financial statements included elsewhere in this annual report, and are qualified by
reference to, and should be read in conjunction with, our audited consolidated financial statements
and related notes. The selected consolidated statement of operations data and the selected
consolidated cash flow data for the years ended December 31, 2004 and 2005, and the selected
consolidated balance sheet data as of December 31, 2004, 2005, 2006 and November 30, 2006 have been
derived from our audited consolidated financial statements, which are not included in this annual
report. Our consolidated financial statements are prepared and presented in accordance with United
States generally accepted accounting principles, or U.S. GAAP. Our historical results do not
necessarily indicate the results that may be expected for any future periods.
Due to the impact of push-down accounting adjustments resulting from our parent company’s purchase
of the remaining 20% equity interest in our company on November 30, 2006, as more fully described
in “Item 5. Operating and financial review and prospects—Financial impact of our corporate
history,” our 2006 consolidated financial data are presented by two separate periods: (1) the “old
basis” period from January 1, 2006 through November 30, 2006 and (2) the “new basis” period from
November 30, 2006 through December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Old Basis)
|
|
|
(New Basis)
|
|
|
|
|
|
|
|
|
|
|
|
January 1,
|
|
|
November
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 to
|
|
|
30, 2006 to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated statement of operations data
|
|
Year ended December 31,
|
|
November
|
|
|
December
|
|
Year ended December 31,
|
|
(Amounts in thousands, except per share data)
|
|
2004
|
|
2005
|
|
30, 2006
|
|
|
31, 2006
|
|
2007
|
|
2008
|
|
|
|
(RMB)
|
|
(RMB)
|
|
(RMB)
|
|
|
(RMB)
|
|
(RMB)
|
|
(RMB)
|
|
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
1,414,265
|
|
|
|
1,864,125
|
|
|
|
2,281,198
|
|
|
|
|
256,013
|
|
|
|
3,141,094
|
|
|
|
2,153,873
|
|
|
|
315,701
|
|
|
Gross profit
|
|
|
168,751
|
|
|
|
337,747
|
|
|
|
437,871
|
|
|
|
|
37,131
|
|
|
|
885,250
|
|
|
|
866,777
|
|
|
|
127,047
|
|
|
In-process research and development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
(41,739
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Amortization of other intangible assets
|
|
|
(11,880
|
)
|
|
|
(11,880
|
)
|
|
|
(10,890
|
)
|
|
|
|
(4,288
|
)
|
|
|
(32,280
|
)
|
|
|
(11,727
|
)
|
|
|
(1,719
|
)
|
|
Impairment of other intangible assets
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(26,235
|
)
|
|
|
(3,845
|
)
|
|
Operating income (loss)
|
|
|
100,367
|
|
|
|
273,890
|
|
|
|
379,917
|
|
|
|
|
(13,934
|
)
|
|
|
729,017
|
|
|
|
608,791
|
|
|
|
89,233
|
|
|
Interest expense
|
|
|
(21,719
|
)
|
|
|
(32,332
|
)
|
|
|
(27,115
|
)
|
|
|
|
(2,213
|
)
|
|
|
(47,034
|
)
|
|
|
(165,506
|
)
|
|
|
(24,259
|
)
|
|
Gain on remeasurement of embedded derivatives
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
144,939
|
|
|
|
21,244
|
|
|
Loss on extinguishment of convertible debts
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(10,634
|
)
|
|
|
(1,559
|
)
|
|
Gain on disposal of subsidiaries
|
|
|
—
|
|
|
|
10,307
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,269
|
|
|
|
333
|
|
|
Gain on disposal of an investment in affiliate
|
|
|
10,721
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Equity in earnings of an affiliate
|
|
|
1,681
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Earnings (loss) before income tax expense, minority interests,
and extraordinary items
|
|
|
91,283
|
|
|
|
251,518
|
|
|
|
371,607
|
|
|
|
|
(13,435
|
)
|
|
|
711,251
|
|
|
|
595,422
|
|
|
|
87,274
|
|
|
Income tax expense
|
|
|
(7,533
|
)
|
|
|
(16,719
|
)
|
|
|
(55,991
|
)
|
|
|
|
(4,251
|
)
|
|
|
(113,377
|
)
|
|
|
(155,717
|
)
|
|
|
(22,824
|
)
|
|
Minority interests
|
|
|
(43,520
|
)
|
|
|
(52,349
|
)
|
|
|
(27,260
|
)
|
|
|
|
(1,799
|
)
|
|
|
(33,074
|
)
|
|
|
(15,901
|
)
|
|
|
(2,331
|
)
|
|
Earnings (loss) before extraordinary items
|
|
|
41,911
|
|
|
|
182,450
|
|
|
|
288,356
|
|
|
|
|
(19,485
|
)
|
|
|
564,800
|
|
|
|
423,804
|
|
|
|
62,119
|
|
|
Extraordinary items: Gains on acquisitions of additional equity
interests in CECT, net of nil tax
|
|
|
—
|
|
|
|
48,157
|
|
|
|
17,796
|
|
|
|
|
—
|
|
|
|
28,689
|
|
|
|
—
|
|
|
|
—
|
|
|
Net income (loss)
(1)
|
|
|
41,911
|
|
|
|
230,607
|
|
|
|
306,152
|
|
|
|
|
(19,485
|
)
|
|
|
593,489
|
|
|
|
423,804
|
|
|
|
62,119
|
|
|
Earnings (loss) per share before extraordinary gains
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— Basic
|
|
|
1.05
|
|
|
|
4.56
|
|
|
|
7.21
|
|
|
|
|
(0.49
|
)
|
|
|
11.69
|
|
|
|
7.52
|
|
|
|
1.10
|
|
|
— Diluted
|
|
|
1.05
|
|
|
|
4.56
|
|
|
|
7.21
|
|
|
|
|
(0.49
|
)
|
|
|
11.69
|
|
|
|
6.99
|
|
|
|
1.02
|
|
|
Earnings (loss) per share
(1)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— Basic
|
|
|
1.05
|
|
|
|
5.77
|
|
|
|
7.65
|
|
|
|
|
(0.49
|
)
|
|
|
12.28
|
|
|
|
7.52
|
|
|
|
1.10
|
|
|
— Diluted
|
|
|
1.05
|
|
|
|
5.77
|
|
|
|
7.65
|
|
|
|
|
(0.49
|
)
|
|
|
12.28
|
|
|
|
6.99
|
|
|
|
1.02
|
|
|
Weighted average number of shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Old Basis)
|
|
|
(New Basis)
|
|
|
|
|
|
|
|
|
|
|
|
January 1,
|
|
|
November
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 to
|
|
|
30, 2006 to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated statement of operations data
|
|
Year ended December 31,
|
|
November
|
|
|
December
|
|
Year ended December 31,
|
|
(Amounts in thousands, except per share data)
|
|
2004
|
|
2005
|
|
30, 2006
|
|
|
31, 2006
|
|
2007
|
|
2008
|
|
|
|
(RMB)
|
|
(RMB)
|
|
(RMB)
|
|
|
(RMB)
|
|
(RMB)
|
|
(RMB)
|
|
($)
|
|
— Basic
|
|
|
40,000
|
|
|
|
40,000
|
|
|
|
40,000
|
|
|
|
|
40,000
|
|
|
|
48,322
|
|
|
|
49,216
|
|
|
|
49,216
|
|
|
— Diluted
|
|
|
40,000
|
|
|
|
40,000
|
|
|
|
40,000
|
|
|
|
|
40,000
|
|
|
|
48,322
|
|
|
|
56,386
|
|
|
|
56,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Old Basis)
|
|
|
(New Basis)
|
|
Consolidated balance sheet data
|
|
December 31,
|
|
November
|
|
|
December 31,
|
|
(Amounts in thousands)
|
|
2004
|
|
2005
|
|
30, 2006
|
|
|
2006
|
|
2007
|
|
2008
|
|
|
|
(RMB)
|
|
(RMB)
|
|
(RMB)
|
|
|
(RMB)
|
|
(RMB)
|
|
(RMB)
|
|
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
81,741
|
|
|
|
379,377
|
|
|
|
713,099
|
|
|
|
|
762,086
|
|
|
|
2,729,982
|
|
|
|
2,907,148
|
|
|
|
426,112
|
|
|
Accounts receivable, net
|
|
|
373,051
|
|
|
|
513,035
|
|
|
|
407,610
|
|
|
|
|
546,893
|
|
|
|
418,564
|
|
|
|
462,282
|
|
|
|
67,758
|
|
|
Prepayments to suppliers
|
|
|
233,098
|
|
|
|
232,189
|
|
|
|
145,652
|
|
|
|
|
232,008
|
|
|
|
155,993
|
|
|
|
363,907
|
|
|
|
53,339
|
|
|
Total current assets
|
|
|
1,228,800
|
|
|
|
1,678,800
|
|
|
|
1,684,197
|
|
|
|
|
1,893,910
|
|
|
|
3,601,182
|
|
|
|
4,177,000
|
|
|
|
612,238
|
|
|
Total assets
|
|
|
1,452,774
|
|
|
|
1,798,408
|
|
|
|
1,985,147
|
|
|
|
|
2,336,152
|
|
|
|
3,994,102
|
|
|
|
4,522,920
|
|
|
|
662,942
|
|
|
Short-term borrowings
|
|
|
638,068
|
|
|
|
639,972
|
|
|
|
610,314
|
|
|
|
|
602,790
|
|
|
|
983,904
|
|
|
|
983,950
|
|
|
|
144,221
|
|
|
Accounts payable
|
|
|
214,204
|
|
|
|
312,806
|
|
|
|
177,609
|
|
|
|
|
165,326
|
|
|
|
107,990
|
|
|
|
52,047
|
|
|
|
7,629
|
|
|
Embedded derivative liability
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
124,130
|
|
|
|
18,194
|
|
|
Convertible notes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
206,211
|
|
|
|
30,225
|
|
|
Total current liabilities
|
|
|
954,089
|
|
|
|
1,156,072
|
|
|
|
1,026,702
|
|
|
|
|
1,207,228
|
|
|
|
1,239,764
|
|
|
|
1,515,747
|
|
|
|
222,169
|
|
|
Total liabilities
|
|
|
966,692
|
|
|
|
1,161,491
|
|
|
|
1,030,413
|
|
|
|
|
1,218,968
|
|
|
|
1,245,325
|
|
|
|
1,516,067
|
|
|
|
222,216
|
|
|
Total shareholders’ equity
|
|
|
339,356
|
|
|
|
569,963
|
|
|
|
879,637
|
|
|
|
|
1,040,288
|
|
|
|
2,670,542
|
|
|
|
2,914,788
|
|
|
|
427,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Old Basis)
|
|
|
(New Basis)
|
|
|
|
|
|
|
|
|
|
|
|
January 1,
|
|
|
November
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 to
|
|
|
30, 2006 to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated cash flow data
|
|
Year ended December 31,
|
|
November
|
|
|
December
|
|
Year ended December 31,
|
|
(Amounts in thousands)
|
|
2004
|
|
2005
|
|
30, 2006
|
|
|
31, 2006
|
|
2007
|
|
2008
|
|
|
|
(RMB)
|
|
(RMB)
|
|
(RMB)
|
|
|
(RMB)
|
|
(RMB)
|
|
(RMB)
|
|
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(13,426
|
)
|
|
|
110,970
|
|
|
|
513,378
|
|
|
|
|
(215,111
|
)
|
|
|
855,524
|
|
|
|
110,106
|
|
|
|
16,139
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(43,455
|
)
|
|
|
18,386
|
|
|
|
(249,317
|
)
|
|
|
|
63,431
|
|
|
|
23,016
|
|
|
|
(57,663
|
)
|
|
|
(8,452
|
)
|
|
Net cash provided by financing activities
|
|
|
26,120
|
|
|
|
168,413
|
|
|
|
69,661
|
|
|
|
|
200,667
|
|
|
|
1,117,327
|
|
|
|
143,738
|
|
|
|
21,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
Other selected operating data
(3)
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobile handsets shipped (in thousands of units)
|
|
|
1,353
|
|
|
|
1,730
|
|
|
|
2,262
|
|
|
|
3,816
|
|
|
|
2,714
|
|
|
Average mobile handset selling price (RMB)
(4)
|
|
|
1,011
|
|
|
|
1,012
|
|
|
|
1,094
|
|
|
|
816
|
|
|
|
788
|
|
|
(1)
|
|
Our PRC operating subsidiary, CECT, enjoys certain preferential tax rates and holidays under
local government policies. See “Item 5. Operating and financial review and
prospects—Taxation” and note 14 to our audited consolidated financial statements included
elsewhere in this annual report. Without the tax holidays, our net income (loss) and basic and
diluted earnings (loss) per share for the following periods would have been reduced or
increased as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Old Basis)
|
|
|
(New Basis)
|
|
|
|
|
|
|
|
|
|
|
|
January 1,
|
|
|
November
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 to
|
|
|
30, 2006 to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
November
|
|
|
December
|
|
Year ended December 31,
|
|
(Amounts in thousands)
|
|
2004
|
|
2005
|
|
30, 2006
|
|
|
31, 2006
|
|
2007
|
|
2008
|
|
|
|
(RMB)
|
|
(RMB)
|
|
(RMB)
|
|
|
(RMB)
|
|
(RMB)
|
|
(RMB)
|
|
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Reduction in net income by) / increase in net loss by
|
|
|
(11,133
|
)
|
|
|
(24,017
|
)
|
|
|
(1,147
|
)
|
|
|
|
1
|
|
|
|
(1,056
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Reduction in basic and diluted earnings per share by
(2)
|
|
|
(0.28
|
)
|
|
|
(0.61
|
)
|
|
|
(0.02
|
)
|
|
|
|
—
|
|
|
|
(0.02
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
(2)
|
|
Basic and diluted earnings (loss) per share data reflects on a retroactive basis a 40-for-one
share split that became effective on April 13, 2007. See note 17 to our audited consolidated
financial statements included elsewhere in this annual report.
|
|
|
|
(3)
|
|
Other selected operating data is derived from our operating records.
|
|
|
|
(4)
|
|
The average mobile handset selling price for handsets in a given period is calculated by
dividing revenue from handsets by unit sales volume during the same period.
|
4
We publish our financial statements in Renminbi. This annual report contains translations of
Renminbi amounts into U.S. dollars at specified rates solely for the convenience of the reader.
Unless otherwise noted, all translations from Renminbi to U.S. dollars were made at the noon buying
rate in the City of New York for cable transfers in Renminbi per U.S. dollar as certified for
customs purposes by the Federal Reserve Bank of New York as of December 31, 2008, which was
RMB6.8225 to $1.00. No representation is made that the Renminbi amounts referred to in this annual
report could have been or could be converted into U.S. dollars at any particular rate or at all.
On June 19, 2009, the certified exchange rate was RMB6.8360 to $1.00.
The following table sets forth information regarding the certified exchange rates in Renminbi and
U.S. dollars for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Renminbi per U.S. dollar certified exchange rate
|
|
|
|
Period end
|
|
Average
(1)
|
|
Low
|
|
High
|
|
2004
|
|
|
8.2765
|
|
|
|
8.2768
|
|
|
|
8.2764
|
|
|
|
8.2774
|
|
|
2005
|
|
|
8.0702
|
|
|
|
8.1826
|
|
|
|
8.0702
|
|
|
|
8.2765
|
|
|
2006
|
|
|
7.8041
|
|
|
|
7.9579
|
|
|
|
7.8041
|
|
|
|
8.0702
|
|
|
2007
|
|
|
7.2946
|
|
|
|
7.5806
|
|
|
|
7.2946
|
|
|
|
7.8127
|
|
|
2008
|
|
|
6.8225
|
|
|
|
6.9193
|
|
|
|
6.7800
|
|
|
|
7.2946
|
|
|
December
|
|
|
6.8225
|
|
|
|
6.8539
|
|
|
|
6.8225
|
|
|
|
6.8842
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
|
|
|
6.8392
|
|
|
|
6.8360
|
|
|
|
6.8225
|
|
|
|
6.8403
|
|
|
February
|
|
|
6.8395
|
|
|
|
6.8363
|
|
|
|
6.8241
|
|
|
|
6.8470
|
|
|
March
|
|
|
6.8329
|
|
|
|
6.8760
|
|
|
|
6.8240
|
|
|
|
6.8438
|
|
|
April
|
|
|
6.8180
|
|
|
|
6.8306
|
|
|
|
6.8180
|
|
|
|
6.8361
|
|
|
May
|
|
|
6.8278
|
|
|
|
6.8235
|
|
|
|
6.8176
|
|
|
|
6.8278
|
|
|
June (through June 19, 2009)
|
|
|
6.8360
|
|
|
|
6.8337
|
|
|
|
6.8264
|
|
|
|
6.8371
|
|
|
|
|
|
|
Source:
|
|
For the period from January 1, 2004 to December 31, 2008, the exchange rates were the
noon buying rates in New York City for cable transfers as certified for customs purposes by
the Federal Reserve Bank of New York and for the period subsequent to and including January
5, 2009, the exchange rates were the certified exchange rates as published by the Federal
Reserve Board of the United States. Effective January 1, 2009, the Federal Reserve Bank of
New York discontinued publication of foreign exchange rates certified for customs purposes
and effective January 5, 2009, the Federal Reserve Board of the United States reinstituted
the publication of the daily exchange rate data in a weekly version of the H.10 release.
|
|
|
|
|
|
(1)
|
|
Annual averages are calculated from month-end rates. Monthly averages are calculated using
the average of the daily rates during the relevant period.
|
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
Risks Related to Our Business
The
current financial crisis and economic downturn may have a material and adverse effect on our businesses, results of operations and financial condition.
The current global financial crisis and economic downturn have adversely affected economies and
businesses around the world, including in China. Due to the global economical downturn and a
decrease in consumer demand, the economic situation in China has been quite severe since the second
half of 2008. This change in the macro-economic conditions has and is expected to continue to have
an adverse impact on our business and operations. The financial and economic situation may also
have a negative impact on third parties with whom we do, or may do, business. As a result, our
results of operations, financial condition and liquidity could be materially and adversely
affected.
Evaluating our business and prospects may be difficult and our past results may not be indicative
of our future performance.
Our business had grown and evolved rapidly from 2003 to 2007. However, primarily due to the
decrease of our sales volume in 2008 as a result of the global financial crisis and economic
downturn, for the year ended December 31, 2008, there was a decrease in our revenue, operating
income and net income, from the year ended December 31, 2007.
We may continue to experience decreases in our revenue, operating income and net income and may not
be able to achieve a similar growth rate in future periods as we did from 2003 to 2007 and our
historical operating results therefore may not provide a meaningful basis for evaluating our
business, financial performance and prospects. Moreover, our business model, technology and ability to achieve
5
satisfactory manufacturing results at higher volumes are unproven. Therefore,
you should not rely on our past results or our historical rate of growth as an indication of our
future performance.
If we cannot keep pace with market changes and produce mobile handsets with new technologies and
features in a timely and cost-efficient manner to meet our customers’ requirements and preferences,
the growth and success of our business will be materially adversely affected.
The mobile handset market in China is characterized by changing consumer preferences with respect
to style and functionality, increasing demand for new and advanced technologies and features, rapid
product obsolescence and price erosion, evolving industry standards, intense competition and wide
fluctuations in product supply and demand. If we cannot keep pace with market changes and produce
new mobile handsets in a timely and cost-efficient manner to meet our customers’ requirements and
preferences, the growth and success of our business will be materially adversely affected.
From time to time, we or our competitors may announce new products, product enhancements or
technologies that may replace or shorten the life cycles of our products or cause mobile phone
users to defer purchasing our existing products. Shorter product cycles may require us to invest
more in developing and designing new products and to introduce new products more rapidly, which may
increase our costs of product development and decrease our margins and profitability. In addition,
we may not be able to make such additional investments and any additional investments we make in
new product development and introductions may not be successful.
Even if we are able to continually develop and introduce new products, they may not gain market
acceptance. Market acceptance of our products will depend on various factors including:
|
•
|
|
the perceived advantages of our new products over existing competing products;
|
|
|
|
•
|
|
our ability to attract mobile handset users who are currently using products of our competitors;
|
|
|
|
•
|
|
product cost relative to performance; and
|
|
|
|
•
|
|
the level of customer service available to support new products.
|
Market acceptance of our products can also be affected by the telecommunication services provided
by mobile telecommunications operators in China. For example, on May 24, 2008, the MIIT, the
National Development and Reform Commission, or the NDRC, and the Ministry of Finance jointly issued
an announcement to promote innovation in homegrown telecommunications technology and the
restructuring of the operations in the telecommunications industry. In January 2009, the MIIT
issued 3G licenses to China Mobile (TD-SCDMA), China Unicom (CDMA2000) and China Telecom (WCDMA).
The development of 3G wireless telecommunication services and subsequent new technologies could
materially impact the sales of our existing and future products. In addition, the operation of
inexpensive limited mobility telecommunication services or other competitive services, such as
personal handyphone system, in China may also have a material adverse effect on the sales of our
mobile handsets.
Therefore, commercial acceptance by customers of new products including any 3G mobile handset we
offer may not occur at the rate or level we expect, and we may not be able to successfully adapt
existing products to effectively and economically meet customer demand, thus impairing the return
from our investments. In addition, a very small portion of our mobile handset models represented a
disproportionately large percentage of our handset unit sales and revenue in the past several years
and these product leaders served as important drivers for our overall growth. However, we may not
be able to replicate such “hit” models on a regular basis, if at all, in future periods. If our
existing or new products fail to achieve market acceptance for any reason, our business and growth
prospects could be materially adversely affected. We may also be required under applicable
accounting standards to recognize a charge for the impairment of assets to the extent our existing
products become uncompetitive or obsolete, or if any new products fail to achieve commercial
acceptance. Any such charge may have a material adverse effect on our results of operations.
Competition in our industry is intense. Our failure to maintain or improve our market position and
respond successfully to changes in the competitive landscape may have a material adverse impact on
our business and results of operations.
The mobile handset manufacturing industry in China is intensely competitive. Industry participants
compete with each other mainly on the basis of the breadth and depth of their product portfolios,
price, operational and manufacturing efficiency, technical performance, product features, quality,
customer support and brand recognition. We are facing significant competition from a number of
competitors, including domestic mobile handset producers such as Bird Ningbo Co., Ltd., Konka Group
Co., Ltd., Beijing Tianyu Communication Equipment Co. Ltd., Gionee Communication Co., Ltd. and
Haier (Qingdao) Telecom Co., Ltd. and a number of large multinational mobile handset producers,
such as Nokia Corporation, Motorola, Inc., Samsung Electronics Co., Ltd., Sony Ericsson Mobile
Communications (China) Co. Ltd., and LG Electronics (China) Ltd. Many of our competitors have
longer operating histories, greater name recognition, significantly larger market shares, access to
larger customer bases and significantly greater economies of scale and financial, sales and
marketing, manufacturing, distribution, technical and other resources than we do. Some of these
competitors have used, and we expect will continue to use, more aggressive pricing strategies,
greater amounts of incentives and subsidies for distributors, retailers and customers, more
successful design approaches and more advanced technologies. In addition, some competitors have
chosen to focus on building products based on commercially available components, which may enable
them to introduce these products faster and with lower levels of research and development spending
than us. Furthermore, consolidation among the industry participants in China may potentially result
in stronger competitors that are better able to compete as end-to-end suppliers as well as
competitors who are more specialized in particular areas and geographic markets. This could have a
material adverse effect on our business, financial condition, results of operations and prospects.
6
Our operating results significantly depend on our ability to compete in this market environment, in
particular on our ability to adapt to political, economic or regulatory changes, to introduce new
products to the market and to continuously enhance the functionality while reducing the cost of new
and existing products. If we fail to maintain or increase our market share and scale compared to
our competitors, our cost advantage may be eroded, which could materially adversely affect our
competitive position and our results of operations, particularly our profitability.
In addition, we also face competition from unlicensed mobile handset manufacturers in China that
make mobile handsets without the requisite governmental approvals and licenses. We believe that
these manufacturers are able to keep their production costs low primarily as a result of tax
avoidance and non-payment of various fees that are required for all licensed products. Despite
recent government action against many of these unlicensed manufacturers, we believe that such
mobile handsets still account for a significant portion of all mobile handsets sold in China. If
the government is not successful in preventing these unlicensed mobile handset manufacturers from
producing and selling their mobile handsets, our market share and our results of operations could
be materially adversely affected.
As a result of developments in our industry, we also expect to face new competition from companies
in related industries, such as consumer electronics manufacturers. Additionally, we face increasing
competition from mobile telecommunication operators that are increasingly offering mobile devices
under their own brands. If we cannot respond successfully to these competitive developments, our
business and results of operations may be materially adversely affected.
Our sales, results of operations and reputation could be materially adversely affected if we fail
to efficiently manage our manufacturing operations without interruption, or fail to ensure that our
products meet the expectations of our distributors and our end-user customers and are delivered on
time.
The operation of our business requires successful coordination of several sequential and complex
manufacturing processes, the disruption of any of which could interrupt our revenue generation and
have a material and adverse effect on our relationships with our distributors and end-user
customers, our brand name, and our financial performance. Our manufacturing operations involve raw
material and component sourcing from third parties, internal assembly processes and distribution
processes. These operations are modified on a regular basis in an effort to improve manufacturing
and distribution efficiency and flexibility. We may experience difficulties in coordinating our
supplies of components and raw materials to meet the demand for our products, increasing or
decreasing production at our facilities, adopting new manufacturing processes, finding a timely way
to develop the best technical solutions for new products, or achieving manufacturing efficiency and
flexibility. We may experience delays in adjusting or upgrading production at our facilities when
we introduce new models, delays in expanding manufacturing capacity, failure in our manufacturing
processes or failure by our business partners to adequately perform the services we have outsourced
to them, which in turn may have a material adverse effect on our sales and results of operations.
In addition, a failure or an interruption could occur at any stage of our product development,
manufacturing and delivery processes, resulting in products not meeting the expectations of our
distributors and our customers, or being delivered late, which could have a material adverse effect
on our sales, results of operations and reputation.
Our operations could be materially adversely affected if we fail to manage effectively our
relationships with, or lose the services of, our third-party manufacturers or other third-party
service providers.
We rely on the manufacturing services provided by third-party manufacturers, including EMS
providers, to manufacture a significant portion of our mobile handset products. In 2006, 2007 and
2008, we outsourced to third-party EMS providers, 71.8%, 85.6%, and 73.7%, respectively, of the
total mobile handsets we shipped. Reliance on third-party manufacturers involves a number of risks,
including the lack of control over the manufacturing process and the potential absence or
unavailability of adequate capacity. If any of our third-party manufacturers cannot or will not
manufacture our products in required volumes on a cost-effective basis, in a timely manner, at a
sufficient level of quality, or at all, we will need to secure additional manufacturing capacity.
Even if this additional capacity is available at commercially acceptable terms, the qualification
process could be lengthy and could cause interruptions in product shipments, which may result in a
decrease in our sales. In many cases, some of our competitors also utilize the same contract
manufacturers, and we could be blocked from acquiring the needed components or increasing capacity
if they have purchased capacity ahead of us. The unexpected loss of any of our third-party
manufacturers could be disruptive to our business.
We rely on independent mobile handset designers in China for certain software and hardware designs
used in our production. If these or other mobile handset designers terminate their business
relationships with us, or are otherwise unable to provide us with designs suitable for our
products, or if we fail to enhance our in-house research and development activities to compensate
for our inability to obtain designs suitable for our products from these handset designers, our
business and our results of operations could be materially adversely affected.
We outsource certain software and hardware designs used in producing our products, such as high-end
handset main boards, to independent mobile handset designers in China, such as SIM Technology Group
Limited. If these or other mobile handset designers terminate their business relationships with us,
or are otherwise unable to provide us with designs suitable for our products, or if we fail to
increase our in-house research and development activities to compensate for our inability to obtain
designs suitable for our products from these handset designers, our business and our results of
operations could be materially adversely affected.
7
Our results of operations, particularly our profitability, may be materially adversely affected if
we do not successfully manage price erosion and are not able to manage costs related to our
products and operations.
Price erosion is a characteristic of the mobile handset industry, and the products offered by us
are also subject to natural price erosion over time. If we are not able to lower our costs at the
same rate or faster than this price erosion and introduce new cost-efficient products with higher
prices in a timely manner, as well as manage costs related to our products and operations
generally, it will have a material adverse effect on our business and results of operations,
particularly our profitability.
We rely primarily on our distributors for marketing our products at the provincial and local levels
and for after-sales support of our products. Because we have limited influence over our
distributors, we cannot be certain that their marketing and after-sale support of our products will
be adequate or will not harm our brand and reputation. Moreover, if we fail to timely identify
additional or replacement distributors upon the loss of one or more of our distributors, or if we
are unable to successfully manage our distribution network, or if we are unable to collect payments
from our distributors on a timely basis, our operating results may suffer.
Substantially all of our sales are made to our distributors. As of June 12, 2009, our distribution
network currently included five national distributors, 66 provincial distributors, 15 TV direct
sales distributors and one internet distributor. These distributors sell our products to
approximately 300 local distributors, over 3,600 retail outlets and directly to end users in China.
We grant our distributors the right to use our brand name and logo when they market our products
within their respective sales territories or channels and when they provide after-sales support to
our end-user customers. However, our contractual arrangements with our distributors do not provide
us with control over their everyday business activities, and one or more of our distributors may
engage in activities that are prohibited under our contractual arrangements with them, that violate
PRC laws and regulations governing the mobile handset industry or other PRC laws and regulations
generally, or that are otherwise harmful to our business or our reputation in the industry.
Distributors individually accounting for more than 10% of our revenues collectively accounted for
71.1%, 36.1% and 65.1% of our revenues in 2006, 2007 and 2008, respectively. See note 1(c) to our
audited consolidated financial statements included elsewhere in this annual report for a list of
such distributors. Due to our dependence on distributors for the sale, marketing and after-sales
support of our products, any one of the following events may cause material fluctuations or
declines in our revenue and have a material adverse effect on our financial condition and results
of operations:
|
•
|
|
reduction, delay or cancellation of orders from one or more of our distributors;
|
|
|
|
•
|
|
selection by one or more of our distributors of our competitors’ products;
|
|
|
|
•
|
|
failure to timely identify additional or replacement distributors upon the loss of one or
more of our distributors; and
|
|
|
|
•
|
|
failure of any of our distributors to make timely payment for our products.
|
In addition, we rely on our distributors for marketing activities at the provincial and local
levels. This approach may not be effective in building brand recognition at provincial and local
levels consistent with our national brand-building efforts. We also outsource to some of our
distributors and other third parties our after-sales support to end-user customers. If our
after-sales service providers fail to provide adequate, satisfactory and effective after-sales
support, our brand image may suffer, and our business and results of operations could be materially
adversely affected.
We currently enjoy a number of favorable arrangements with some of our distributors, such as
exclusive sales relationships, up-front payment by distributors, and settlement by cash or
promissory notes guaranteed by banks. However, the competition for distribution channels is intense
in the mobile handset industry in China and many of our competitors are expanding their
distribution channels in China. We may not be able to compete successfully against the larger and
better funded sales and marketing operations of some of our current or potential competitors,
especially if these competitors provide more favorable contractual arrangements for distributors.
As a result, we may lose some of our distribution channels to our competitors, which may cause us
to lose some or all of our favorable arrangements with these distributors and may even result in
the termination of our contractual relationships with some of our distributors. While we do not
believe we are substantially dependent upon any individual distributor, finding replacement
distributors could be time-consuming and any resulting delay may be disruptive and costly to our
business. In addition, we may not be able to successfully manage our distribution channels and the
cost of any consolidation or further expansion may exceed the revenue generated from these efforts.
The occurrence of any of these factors could result in a significant decrease in the sales volume
of our products and therefore materially harm our financial condition and results of operations.
Our distributors often must make a significant commitment of capital to purchase our products, and
we provide trade credits to some of our distributors. As a result, any downturn in a distributor’s
business that affects the distributor’s ability to pay us could harm our financial condition.
Historically, we have not experienced any significant bad debt or collection problems, but such
problems may arise in the future. The failure of any of our distributors to make timely payments
could require us to write off accounts receivable or increase provisions made against our accounts
receivable, either of which could adversely affect our financial condition.
8
If we fail to source a sufficient quantity of high-quality components used in our products at
reasonable costs from our suppliers, our competitive position, reputation and business could
suffer. Our dependence on suppliers for certain types of components could jeopardize our production
activities and increase our cost of sales.
We do not produce most of the components and raw materials necessary for the production of our
mobile handsets and rely on suppliers to provide us with a substantial portion of these components
and raw materials. The aggregate costs attributable to our five largest raw materials and
components suppliers in 2006, 2007 and 2008 were 77.9%, 70.0% and 72.5%. We may experience a
shortage in the supply of certain components in the future and if any such shortage occurs, our
manufacturing capabilities and results of operations could be materially adversely affected. If any
supplier is unwilling or unable to provide us with high quality components and raw materials in
required quantities and at acceptable costs, we may not be able to find alternative sources on
satisfactory terms in a timely manner, or at all. Our inability to find or develop alternative
sources if and as required could result in delays or reductions in manufacturing and product
shipments. Moreover, these suppliers may delay component or material shipments or supply us with
inferior quality components or raw materials that may adversely impact the performance of our
mobile handsets. If any of these events occur, our competitive position, reputation and business
could suffer.
Some of our products also incorporate imported components. Our imported electronic components and
raw materials are subject to a variety of Chinese governmental permit requirements, approval
procedures and import duties, and may also, from time to time, be subject to export controls and
other legal restrictions imposed by foreign countries. Should the Chinese government refuse to
issue the necessary permits or approvals to us or our suppliers, or take any administrative actions
to limit imports of certain components, or if we or our suppliers fail to pay any required import
duties, or if governmental agencies or laws of foreign countries prevent the timely export of
certain components we require to China, we may become subject to penalties and fines or fail to
obtain important components for our mobile handsets, and our ability to manufacture and sell our
products in China could be adversely affected. In addition, import duties increase the cost of our
products and may make them less competitive.
Some components and materials used in our products are currently purchased from a single supplier
or a small number of suppliers and our ability to deliver our products according to market demands
depends in large part on obtaining timely and adequate supplies of components and materials on
competitive terms. Failure by any of our suppliers to meet our needs for components could impact
our production targets, limit our sales or increase our costs. While we do not believe we are
substantially dependent upon any individual supplier, finding alternative suppliers for these
components and materials could be costly and time-consuming. Moreover, if we fail to anticipate
customer demand properly, an over- or undersupply of components and production capacity could
occur. This factor could limit our ability to supply sufficient products to our customers or could
increase our costs. At the same time, we may commit to certain capacity levels or component
quantities, which, if unused, will result in charges for unused capacity or scrapping costs.
We maintain inventories of raw materials, components and handsets, and our inventories may become
obsolete.
The rapid technological change in our industry, the short product life cycle of our handsets, our
limited forecasting experience and processes and the competitive nature of our target markets make
forecasting our future sales and operating results difficult. Our expense levels are based, in
part, on our expectations regarding future sales. In addition, to enable us to promptly fill
orders, we maintain inventories of raw materials, components and handsets. As a result, we have to
commit to considerable costs in advance of anticipated sales. Any significant shortfall of sales
may result in our maintaining higher levels of inventories of raw materials, components and
finished goods than we require, thereby increasing our risk of inventory obsolescence and
corresponding inventory write-downs and write-offs. We cannot guarantee that such write-downs will
be adequate to cover all losses resulting from inventory obsolescence.
We plan to market our products to countries outside of China, which may subject us to various
economic, political, regulatory, legal and foreign exchange risks.
We currently sell substantially all of our products in China. We plan to selectively enter into
international markets in which we identify an opportunity to sell differentiated products and where
we believe we will be able to minimize our distribution and marketing costs in order to maintain a
reasonable return on sales. The marketing, distribution and sale of our mobile handsets overseas
expose us to a number of risks, including:
|
•
|
|
fluctuations in currency exchange rates of the U.S. dollar and other foreign currencies
against the Renminbi;
|
|
|
|
•
|
|
difficulty in engaging and retaining distributors and agents who are knowledgeable about,
and can function effectively in, overseas markets;
|
|
|
|
•
|
|
difficulty in designing products that are compatible with communications and product
standards in foreign countries;
|
|
|
|
•
|
|
longer accounts receivable collection periods and greater difficulty in accounts receivable
collection;
|
|
|
|
•
|
|
increased costs associated with maintaining marketing and sales activities in various
countries;
|
|
|
|
•
|
|
difficulty and costs relating to compliance with unexpected changes in regulatory
requirements and different commercial and legal requirements in the jurisdictions in which we
offer our products;
|
|
|
|
•
|
|
inability to obtain, maintain or enforce intellectual property rights; and
|
|
|
|
•
|
|
changes to import and export regulations, including quotas, tariffs and other trade
barriers, delays or difficulties in obtaining export and import licenses, potential foreign
exchange controls and repatriation controls on foreign earnings, exchange rate fluctuations
and currency conversion restrictions.
|
9
If we are unable to effectively manage these risks, our ability to conduct or expand our business
abroad would be impaired, which may in turn have a material adverse effect on our business,
financial condition, results of operations and prospects.
We may require additional capital and we may not be able to obtain it on acceptable terms or at
all.
We believe that our current cash and cash flow from operations will be sufficient to meet our
present cash needs. We may, however, require additional cash resources due to changed business
conditions or other future developments, including any investments or acquisitions we may decide to
pursue. If these resources are insufficient to satisfy our cash requirements, we may seek to sell
additional equity or debt securities or obtain a credit facility. The sale of additional equity
securities could result in dilution to our shareholders. The incurrence of indebtedness would
result in increased debt service obligations and could require us to agree to operating and
financing covenants that would restrict our operations. 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 China-based mobile handset
companies;
|
|
|
|
•
|
|
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 telecommunications industry;
|
|
|
|
•
|
|
economic, political and other conditions in China; and
|
|
|
|
•
|
|
PRC governmental policies relating to foreign currency borrowings.
|
Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by
us to raise additional funds on terms favorable to us, or at all, could have a material adverse
effect on our business, financial condition and results of operations.
Our past brand-sharing practices may result in negative publicity and may even lead to
investigations or penalties by relevant PRC regulatory authorities, which could have a material
adverse impact on our reputation and business.
Through the first half of 2006, we allowed other mobile handset manufacturers to use our GSM
licenses to produce mobile handsets and sell these mobile handsets under our brand name. Although
we exerted a certain degree of control over the manufacturing processes of these mobile handsets,
we had almost no control over most other aspects of the production and sale of these handsets,
including raw materials purchases. As a result, mobile handsets produced under these arrangements
by the other manufacturers may not have the same quality as the products made by us and any product
quality claims associated with these mobile handsets may result in adverse publicity for us and
harm to our reputation in the market, which may result in a decrease in sales of our mobile
handsets and materially adversely affect our financial condition and results of operations.
In addition, although there are no specific laws and regulations in China governing the
brand-sharing practice as described above or similar practices, the MIIT and the State
Administration of Industry and Commerce launched certain campaigns in the past aimed at stopping
practices they considered inconsistent with acceptable industry practices. Should these relevant
regulatory authorities decide that our past brand-sharing practices were unacceptable or
contravened existing laws and regulations in China, we may become subject to investigations or
penalties. Furthermore, if any new regulation prohibiting brand-sharing is promulgated with
retroactive effect, our past brand-sharing practice may be subject to investigation based upon such
new regulation, which may result in penalties and may have an adverse effect on us.
Our operating results are difficult to predict and may fluctuate significantly from period to
period in the future.
Our operating results are difficult to predict and may fluctuate significantly from period to
period based on a number of factors such as the launch of particular best-selling products in a
given period, the seasonality of our mobile handset sales, the short life-cycle of any given
handset model in China due to rapid technological advances, a possible deterioration of economic
conditions in China and potential changes to the regulation of the mobile handset industry in
China. These factors are discussed elsewhere in this annual report. As a result, you may not be
able to rely on period-to-period comparisons of our operating results as an indication of our
future performance. If our revenues for a particular period are lower than we expect, we may be
unable to reduce our fixed costs and operating expenses for that period by a corresponding amount,
which would negatively impact our operating results for that period relative to our operating
results for other periods.
We must develop or otherwise acquire complex, evolving technologies to use in our business and meet
market demand. Our failure to develop or otherwise acquire these complex technologies, or to
successfully commercialize such technologies as new advanced products that meet customer demand on
a timely basis, will have a material adverse effect on our business, our ability to meet our
targets and our results of operations.
To succeed in our markets and meet market demand, we must develop or otherwise acquire complex,
evolving technologies to use in our business. However, the development and use of new technologies,
applications and technology platforms for our mobile handsets involves the commitment of
significant amounts of our management’s time, substantial costs and risks both within and outside
of our control. This is true whether we develop these technologies internally, acquire or invest in
other companies with these technologies or collaborate with third parties on the development of
these technologies.
The technologies, functionalities and features on which we choose to focus may not achieve as broad
or timely customer acceptance as we expect. This may result from numerous factors, including the
availability of more attractive alternatives or a lack of sufficient compatibility
10
with other
existing technologies, products and solutions. Additionally, even if we do select the technologies,
functionalities and features that customers ultimately want, we or the companies that work with us may not be able to bring them
to the market in a timely manner. We may also face difficulties obtaining and providing the
technologies preferred by our potential customers, or at prices acceptable to them.
In addition, our products include increasingly complex technologies developed or licensed to us by
third parties. We may not be able to obtain or maintain necessary or desirable licenses or permits
from third parties, with full rights needed to use them in our business, on commercially acceptable
terms at such times as we may seek to use them.
We rely on a number of technologies licensed from third parties and the loss of some or all of
these licenses or failure to renew them on a timely basis could interrupt our production and have a
material adverse impact on our business.
We rely on a number of technologies licensed from third parties for manufacturing our mobile
handsets. For example, we rely on Access China Inc. for certain software supporting wireless
application protocol and multimedia messaging service functions. If some or all of such licenses
are terminated, or if we fail to renew certain licenses on a timely basis or if we fail to find
alternative suppliers, our production of mobile handsets would be disrupted and our business and
financial conditions could be materially adversely affected.
We have not applied for patents or registered copyrights for most of our intellectual property and
our failure to adequately protect our intellectual property rights may undermine our competitive
position, and litigation to protect our intellectual property rights may be costly.
Implementation of PRC intellectual property-related laws has historically been lacking, primarily
because of ambiguities in PRC laws and difficulties in enforcement. Accordingly, intellectual
property rights and confidentiality protections in China may not be as effective as in the United
States or other countries. We rely primarily on trade secrets and other contractual restrictions to
protect our intellectual property. We have not applied for patents or registered copyrights in
China for most of our inventions, original works of authorship, developments and improvements
relating to the mobile handsets we produce. The actions we have taken to protect our intellectual
property rights may not be adequate to provide us with meaningful protection or commercial
advantage. As a result, third parties may use the technologies that we have developed and compete
with us, which could have a material adverse effect on our business, financial condition and
operating results.
In addition, policing unauthorized use of proprietary technology can be difficult and expensive.
Litigation may be necessary to enforce our intellectual property rights and the outcome of any such
litigation may not be in our favor. Given the relative unpredictability of China’s legal system and
potential difficulties in enforcing a court judgment in China, there is no guarantee that we would
be able to halt the unauthorized use of our intellectual property through litigation in a timely
manner. Furthermore, any such litigation may be costly and may divert management attention away
from our business and cause us to expend significant resources. An adverse determination in any
such litigation will impair our intellectual property rights and may harm our business, prospects
and reputation. In addition, we have no insurance coverage against litigation costs and would have
to bear all costs arising from such litigation to the extent we are unable to recover them from
other parties. The occurrence of any of the foregoing could have a material adverse impact on our
business, financial condition and results of operations.
We may be exposed to infringement or misappropriation claims by third parties, which, if determined
adversely against us, could disrupt our business and subject us to significant liability to third
parties, as well as have a material adverse effect on our financial condition and results of
operations.
Our success depends, in large part, on our ability to use and develop our technology, know-how and
product designs without infringing upon the intellectual property rights of third parties.
Our products include increasingly complex technology and, as the amount of such technologies and
the number of parties claiming rights continue to increase, the possibility of alleged infringement
and related intellectual property claims against us continues to rise. The holders of patents and
other intellectual property rights potentially relevant to our product offerings may be unknown to
us, or may otherwise make it difficult for us to acquire a license on commercially acceptable
terms. There may also be technologies licensed to and relied on by us that are subject to
infringement or other corresponding allegations or claims by others which could damage our ability
to rely on such technologies. In addition, although we endeavor to ensure that companies that work
with us possess appropriate intellectual property rights or licenses, we cannot fully avoid the
risks of intellectual property rights infringement created by suppliers of components used in our
products or by companies with which we work in cooperative research and development activities.
Since all technology standards, including those used and relied on by us, include some intellectual
property rights, we cannot fully avoid risks of a claim for infringement of such rights due to our
reliance on such standards. We believe that the number of third parties declaring their
intellectual property to be relevant to these standards, for example, those standards related to 3G
mobile communication technologies as well as other advanced mobile communications standards, is
increasing, which may increase the likelihood that we will be subject to such claims in the future.
While we believe that any such intellectual property rights declared and found to be essential to a
given standard carry with them an obligation to be licensed on fair, reasonable and
non-discriminatory terms, not all intellectual property owners agree on the meaning of that
obligation and, thus, costly and time-consuming litigation over such issues may result in the
future.
As we continue to market and sell our products throughout China, and as litigation becomes more
common in China, we face a higher risk of becoming subject to claims for intellectual property
infringement. While we have not, to date, become subject to these types of claims, it is possible
that we may, in the future, become subject to such intellectual property infringement claims.
Regardless of whether such claims have merit or are decided in our favor, any such litigation could
have a negative impact on our brand, reputation and ability to conduct our business and sell some
or all of our products.
11
Our current or potential competitors, many of which have substantial resources and have made
substantial investments in competing technologies, may have or may obtain patents that will
prevent, limit or interfere with our ability to make, use or sell our products in China or other
countries. The validity and scope of claims relating to these patents involve complex scientific,
legal and factual questions and analysis and, therefore, may be highly uncertain. In addition, the
defense of intellectual property claims, including patent infringement suits, and related legal and
administrative proceedings can be both costly and time consuming, and may significantly divert the
efforts and resources of our technical and management personnel. Furthermore, an adverse
determination in any such litigation or proceeding to which we may become a party could cause us
to:
|
•
|
|
pay damage awards;
|
|
|
|
•
|
|
seek licenses from third parties;
|
|
|
|
•
|
|
pay additional ongoing royalties, which could decrease our profit margins;
|
|
|
|
•
|
|
redesign our products; or
|
|
|
|
•
|
|
be restricted by injunctions,
|
each of which could effectively prevent us from pursuing some or all of our business and result in
our customers or potential customers deferring or limiting their purchase or use of our products,
which could have a material adverse effect on our financial condition and results of operations.
It may become more difficult to maintain our quality standards, and problems with product quality
or product performance could result in a decrease in customers and revenue, unexpected expenses and
loss of market share. Product liability claims against us could result in adverse publicity and
potentially significant monetary damages.
Our operating results depend, in part, on our ability to deliver quality products on a timely and
cost-effective basis. In the past, we have experienced manufacturing defects as a result of various
factors, including defects in component parts and human error in assembly. As mobile handset
products become technologically more complex, it may become more difficult to maintain our quality
standards. If we experience deterioration in the performance or quality of any of our products, it
could result in delays in shipments, cancellations of orders or customer returns and complaints,
loss of goodwill, and harm to our brand and reputation. Furthermore, as a result of ongoing
technological developments, our products are increasingly used together with hardware or software
components that have been developed by third parties and when a problem occurs, it may be difficult
to identify the source of the problem. In addition, some components, such as batteries or software
applications, may not be fully compatible with our products and may not meet our and our customers’
quality, safety, security or other standards. The use by customers of our products with
incompatible or otherwise substandard hardware or software components, while largely outside of our
control, could result in malfunctions or defects in our handsets and result in harm to our brand.
These problems may lead to a decrease in customers and revenue, harm to our brand, unexpected
expenses, loss of market share, the incurrence of significant warranty and repair costs, diversion
of the attention of our engineering personnel from our product development efforts, customer
relation problems or loss of customers, any one of which could materially adversely affect our
business.
In addition, we contract with third parties, such as EMS providers, to use their manufacturing
facilities to produce our mobile handsets. We may be unable to exercise the same degree of quality
control over these manufacturing facilities as we can over our own facilities. Any product quality
problems associated with the products produced by these third parties may also lead to adverse
publicity against us, affect our reputation and cause a decrease in sales of our mobile handsets.
As with other mobile handset producers, we are also exposed to risks associated with product
liability claims if the use of the mobile handsets we sell results in injury, death or damage to
property. We cannot predict at this time whether product liability claims will be brought against
us in the future or the effect of any resulting negative publicity on our business. We do not have
product liability insurance and have not made provisions for potential product liability claims.
Therefore, we may not have adequate resources to satisfy a judgment if a successful claim is
brought against us. Moreover, the successful assertion of product liability claims against us could
result in potentially significant monetary damages and require us to make significant payments and
incur substantial legal expenses. Even if a product liability claim is not successfully pursued to
judgment by a claimant, we may still incur substantial legal expenses defending against such a
claim.
Our sales and profitability depend on the continued growth of the mobile telecommunications
industry, especially in China, and if the mobile telecommunications industry does not grow as we
expect or grows at a slower speed than we expect, our sales and profitability may be materially
adversely affected.
We derive substantially all of our revenues from sales of mobile handsets in China. The continued
development of our business depends, in large part, on continued growth in the mobile
telecommunications industry, especially in China, in terms of the number of existing mobile
subscribers who upgrade or replace their existing mobile handsets, the number of new subscribers
and increased usage. Although China’s wireless telecommunication industry has grown rapidly in the
past, it may not continue to grow at the same growth rate in the future or at all.
Furthermore, our sales and profitability are also affected by the extent to which there is
increasing demand for, and development of, value-added services, leading to opportunities for us to
successfully market mobile handsets that feature those services. To a certain extent, we are
dependent on third-party mobile telecommunication operators to successfully introduce these
value-added services that encourage end users to upgrade or replace their mobile handsets. For
instance, mobile telecommunication operators in China have upgraded their networks to offer 3G
wireless telecommunication services, which we believe will lead to increased demand for enhanced
wireless value-added services and, therefore, increased demand for mobile handsets with more
advanced technologies in China. Therefore, if mobile
12
telecommunication operators are not successful
in their attempts to introduce new services, increase the number of subscribers, stimulate
increased usage and drive replacement sales, our business and results of operations could be
materially adversely affected.
These developments in our industry are, to a large extent, outside of our control and any reduced
demand for wireless voice and data services, any other downturn or other adverse changes in China’s
wireless telecommunication industry could severely harm our business.
Changes in the regulatory environment for telecommunications systems and services, especially in
China, could negatively impact our business.
The telecommunications industry in China is heavily regulated and regulatory changes may affect
both our customers and us. For example, changes in regulations that impose more stringent standards
for the production of mobile handsets could adversely affect our business. Similarly, tariff
regulations that affect the pricing of new services offered by mobile telecommunication operators
could also affect their ability to invest in network infrastructure, which in turn could affect the
sales of our mobile handsets. License fees, environmental, health and safety, privacy and other
regulatory changes may increase costs and restrict operations of mobile telecommunication network
operators and service providers. The indirect impact of such changes could affect our business
adversely even though the specific regulations may not directly apply to our products or us.
MIIT has broad discretion and authority to regulate all aspects of the telecommunication and
information technology industry in China, including managing spectrum bandwidths, setting mobile
handset specifications and standards, approving the adoption of new technologies such as 3G, and
drafting laws and regulations related to the electronics and telecommunication industries. MIIT
also determines the forms and types of services that may be offered by telecommunication companies
to the public, the rates that are charged to subscribers for those services and the content of
material available in China over wireless services, including Internet content. In addition,
China’s telecommunication regulatory framework is still at a relatively early stage of development,
and prone to directional shifts and major structural changes. The PRC government is in the process
of drafting a national telecommunication law, which may include new legislation governing the
mobile handset industry. If MIIT sets standards with which our company is unable to comply or which
would render our products uncompetitive, our ability to sell products could be severely limited,
resulting in substantial harm to our operations.
Any environmental claims or failure to comply with any present or future environmental regulations
may require us to spend additional funds and may materially adversely affect our financial
condition and results of operations.
We are subject to environmental, health and safety laws and regulations that affect our operations,
facilities and products in each of the jurisdictions in which we operate. We believe that we are in
compliance with all material environmental, health and safety laws and regulations related to our
products, operations and business activities. Although we have not suffered material environmental
claims in the past, the failure to comply with any present or future regulations could result in
the assessment of damages or imposition of fines against us, suspension of production or a
cessation of our operations. New regulations could also require us to acquire costly equipment or
to incur other significant expenses. Any failure by us to control the use of, or to adequately
restrict the discharge of, hazardous substances could subject us to potentially significant
monetary damages and fines or suspension of our business operations, which could materially
adversely affect our financial condition and results of operations.
We do not carry any business interruption insurance or third-party liability insurance for our
manufacturing facilities.
We currently have one main handset manufacturing facility and another newly established
manufacturing facility that is engaged in the production of molds, cast components and other
handset products located in Huizhou City, Guangdong Province, China. Operation of manufacturing
facilities involves many risks, including equipment failures, natural disasters, industrial
accidents, power outages, labor disturbances and other business interruptions. We do not carry any
business interruption insurance or third-party liability insurance for our manufacturing facilities
to cover claims in respect of personal injury or property or environmental damage arising from
accidents on our property or relating to our operations. Therefore, our existing insurance coverage
may not be sufficient to cover all risks associated with our business. As a result, we may be
required to pay for financial and other losses, damages and liabilities, including those caused by
natural disasters and other events beyond our control, out of our own funds, which could have a
material adverse effect on our business, financial condition and results of operations.
The discontinuation of the preferential tax treatment currently available to our PRC subsidiary,
CECT, could materially adversely affect our results of operations.
Our primary PRC operating subsidiary, CECT, was subject to the PRC Enterprise Income Tax Law
Concerning Foreign-Invested Enterprises and Foreign Enterprises. CECT, as a foreign-invested
enterprise, was generally subject to enterprise income tax at a statutory rate of 33% (30% national
income tax plus 3% local income tax) through 2007 under this law and its related regulations, and
25% from January 1, 2008 under the new tax law described below. However, as a “high-tech
enterprise” formed in the Zhongguancun Science Park high technology zone in Beijing, CECT enjoyed
preferential tax treatment through 2007. In particular, CECT was exempted from enterprise income
tax from May 22, 2000 to December 31, 2002 and was entitled to preferential enterprise income tax
rates of 7.5% from January 1, 2003 to December 31, 2005 and 15% from January 1, 2006 to December
31, 2007.
On March 16, 2007, the National People’s Congress of the PRC passed the PRC Enterprise Income Tax
Law, which law took effect as of January 1, 2008. In accordance with the new tax law, a unified
enterprise income tax rate of 25% and unified tax deduction standards will be applied equally to
both domestic-invested enterprises and foreign-invested enterprises such as CECT. However, certain
qualifying high-technology enterprises may still benefit from a preferential tax rate of 15% under
the new tax law if they meet the definition of “qualifying high-technology enterprise.” The Chinese
tax authorities issued “Circular 362” on July 11, 2008 that provides detailed implementation
guidance on identifying and approving “qualifying high-technology enterprise” status. Circular 362
follows “Circular 172” issued in April 2008, which was China’s first step in creating a mechanism
to identify and approve “qualifying high-technology enterprise”
13
status. CECT is currently in the
process of applying for the status of “qualifying high-technology enterprise”. If the application
is approved, CECT will be qualified to apply for a preferential enterprise income tax rate of 15%.
We cannot assure you that CECT will qualify as a “qualifying high-technology enterprise” under the
new tax law, and even if CECT successfully obtains this high-tech enterprise status, its
preferential tax treatment may be discontinued by the tax authorities at their discretion or
pursuant to any future changes in PRC tax laws, rules or regulations. Before being qualified as a “qualifying high-technology enterprise” under the
new tax law, CECT is subject to a 25% tax rate from January 1, 2008 under the new tax law described
above, which significantly increases our effective tax rate and materially adversely affect our
operating results.
New labor laws in the PRC may adversely affect our results of operations.
On June 29, 2007, the PRC government promulgated a new labor law, namely, the Labor Contract Law of
the PRC, or the New Labor Contract Law, which became effective on January 1, 2008. The New Labor
Contract Law imposes greater liabilities on employers and significantly impacts the cost of an
employer’s decision to reduce its workforce. Further, it requires certain terminations to be based
upon seniority and not merit. In the event we decide to significantly change or decrease our
workforce, the New Labor Contract Law could adversely affect our ability to enact such changes in a
manner that is most advantageous to our business or in a timely and cost effective manner, thus
materially and adversely affecting our financial condition and results of operations.
The dividends we receive from CECT and our global income may be subject to PRC tax under the new
PRC Enterprise Income Tax Law, which would have a material adverse effect on our results of
operations. In addition, our foreign corporate holders of ordinary shares may be subject to a PRC
withholding tax upon the dividends payable by us and upon gains realized on the sale of our
ordinary shares, if we are classified as a PRC “resident enterprise.”
Under the new PRC Enterprise Income Tax Law, dividends, interests, rent, royalties and gains on
transfers of property payable by a foreign-invested enterprise in the PRC to its foreign investor
who is a non-resident enterprise will be subject to a 10% withholding tax, unless such non-resident
enterprise’s jurisdiction of incorporation has a tax treaty with the PRC that provides for a
reduced rate of withholding tax. The British Virgin Islands, where we are incorporated, does not
have such a tax treaty with the PRC. If we are considered a non-resident enterprise, this new 10%
withholding tax imposed on our dividend income received from CECT would reduce our net income and
have an adverse effect on our operating results.
Under the new tax law, an enterprise established outside the PRC with its “de facto management
body” within the PRC is considered a resident enterprise and will be subject to the enterprise
income tax at the rate of 25% on its worldwide income. The “de facto management body” is defined as
the organizational body that effectively exercises overall management and control over production
and business operations, personnel, finance and accounting, and properties of the enterprise. It
remains unclear how the PRC tax authorities will interpret such a broad definition. Substantially
all of our management members are based in the PRC. If the PRC tax authorities subsequently
determine that we should be classified as a resident enterprise, then our worldwide income will be
subject to income tax at a uniform rate of 25%, which may have a material adverse effect on our
financial condition and results of operations. Notwithstanding the foregoing provision, the new tax
law also provides that, if a resident enterprise directly invests in another resident enterprise,
the dividends received by the investing resident enterprise from the invested enterprise are
exempted from income tax, subject to certain conditions. Therefore, if we are classified as a
resident enterprise, the dividends we receive from CECT may be exempted from income tax.
In addition, under the new tax law, foreign corporate holders of our ordinary shares may be subject
to a 10% withholding tax upon dividends payable by us and gains realized on the sale or other
disposition of ordinary shares, if such income is sourced from within the PRC. Although we are
incorporated in the British Virgin Islands, it remains unclear whether the dividends payable by us
or the gains our foreign corporate holders may realize will be regarded as income from sources
within the PRC if we are classified as a PRC resident enterprise. Any such tax may reduce the
return on an investment in our ordinary shares by a foreign corporation.
We depend on our key personnel, and our business and growth may be severely disrupted if we lose
their services. We may also have difficulty attracting and retaining qualified management and
research and development personnel.
Our future success depends substantially on the continued services of our key personnel. In
particular, we are highly dependent on Mr. Zhi Yang Wu, our chairman, and Dr. David Li, our chief
executive officer. We rely on their experience in the mobile handset manufacturing industry,
similar business operations and sales and marketing and on their relationships with our
shareholders, customers and suppliers. If we lose the services of one or more of these key
personnel, we may not be able to replace them readily, if at all, with suitable or qualified
candidates, and may incur additional expenses to recruit and retain new officers, which could
severely disrupt our business and growth. We do not maintain key-man life insurance for any of our
key personnel. If one or more of our key personnel is unable or unwilling to continue in their
present positions, we may not be able to replace them easily or at all.
In addition, if any of these key personnel joins a competitor or forms a competing company, we may
lose some of our customers. We have entered into employment agreements with each of these key
personnel, which contain confidentiality and non-competition provisions. However, if any disputes
arise between these key personnel and us, it is not clear, in light of uncertainties associated
with the PRC legal system, what the court decisions will be and the extent to which these court
decisions could be enforced in China, where all of these key personnel reside and hold some of
their assets. See “—Risks related to doing business in China—Uncertainties with respect to the
PRC legal system could limit the legal protections available to you and us.” Furthermore, as we
expect to continue to expand our operations and develop new products, we will need to continue
attracting and retaining experienced management and key research and development personnel.
Competition for management and research and development personnel in the mobile handset market in
China is intense, and the availability of suitable and qualified candidates is limited. In
particular, we compete to attract and retain qualified research and development personnel with
other mobile handset manufacturers, universities and research institutions. Competition for these
individuals
14
could cause us to offer higher compensation and other benefits in order to attract and
retain them, which could have a material adverse effect on our financial condition and results of
operations. We may also be unable to attract or retain the personnel necessary to achieve our
business objectives, and any failure in this regard could severely disrupt our business and growth.
Fluctuations in exchange rates could adversely affect our business.
Because substantially all of our earnings are denominated in Renminbi, any appreciation or
depreciation in the value of the Renminbi relative to the U.S. dollar would affect our balance
sheet position and financial results reported in U.S. dollar terms without giving effect to any
underlying change in our business or results of operations. In addition, fluctuations in the
exchange rate between the U.S. dollar and the Renminbi would affect the relative purchasing power
of our U.S. dollar denominated cash assets and the Renminbi value of our U.S. dollar denominated
bank borrowings. Fluctuations in the exchange rate will also affect the relative value of any
dividend we may issue that will be exchanged into U.S. dollars and the earnings from and value of
any U.S. dollar-denominated investments we make in the future.
Since July 2005, the Renminbi has no longer been pegged to the U.S. dollar. Although currently the
Renminbi exchange rate versus the U.S. dollar is restricted to a rise or fall of no more than 0.3%
per day and the People’s Bank of China regularly intervenes in the foreign exchange market to
prevent significant short-term fluctuations in the exchange rate, the Renminbi may appreciate or
depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it
is possible that in the future the PRC authorities may lift restrictions on fluctuations in the
Renminbi exchange rate and lessen intervention in the foreign exchange market.
Only limited hedging transactions are available in China to reduce our exposure to exchange rate
fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our
exposure to foreign currency exchange risk. While we may enter into hedging transactions in the
future, the availability and effectiveness of these transactions may be limited and we may not be
able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses
may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi
into foreign currencies.
Our net income could be adversely affected as a result of the grant of employee share options and
other share-based compensation.
We adopted our 2007 equity incentive plan for our employees in March 2007. As a result of the
issuance of options under this plan, we incurred share-based compensation expense of approximately
RMB14.7 million in 2008 and we expect to incur additional share-based compensation expense in
future periods. We have adopted Statement of Financial Accounting Standard No. 123-R, “Share-based
payment” for the accounting treatment of our share-based compensation. We account for compensation
costs for all share options, including share options granted to our directors and employees, using
a fair-value based method and recognize expenses in our consolidated statement of operations in
accordance with U.S. GAAP, which may have a material adverse effect on our net profit. Moreover,
the additional expenses associated with share-based compensation may reduce the attractiveness of
our equity incentive plan. However, our equity incentive plan and other similar types of incentive
plans are important in order to attract and retain key personnel.
We believe that we were a passive foreign investment company for U.S. federal income tax purposes
for our taxable year that ended December 31, 2008 and we may continue to be a passive foreign
investment company in the current and future taxable years, which could result in adverse U.S.
federal income tax consequences to U.S. investors.
We believe that we were a passive foreign investment company for U.S. federal income tax purposes
for our taxable year that ended December 31, 2008 under the asset test for the determination of
passive foreign investment company as described below. We may continue to be a passive foreign
investment company in the current and future taxable years unless (i) we significantly reduce the
amount of cash we hold or (ii) our market capitalization increases significantly. Such
classification could result in adverse U.S. federal income tax consequences to U.S. investors. We
must make a separate determination each year as to whether we are a passive foreign investment
company.
Specifically, we would be a passive foreign investment company for a taxable year if (i) at least
75% of our gross income is passive income during the taxable year or (ii) at least 50% of the
average quarterly value of our assets during the taxable year is derived from assets that produce,
or that are held for the production of, passive income.
In applying the asset test described above, the value of our assets will generally be deemed to be
equal to the sum of the aggregate value of our outstanding equity plus our liabilities. For
purposes of the asset test, our goodwill, which is generally measured as the sum of the aggregate
value of outstanding equity plus liabilities, less the value of known assets, should be treated as
a non-passive asset. Therefore, a decrease in the market price of our ordinary shares and
associated decrease in the value of our goodwill would cause a reduction in the value of our
non-passive assets for purposes of the asset test. If there is such a reduction in goodwill and the
value of our non-passive assets, the percentage of the value of our assets that is attributable to
passive assets may increase, and if such percentage, based on an average of the quarterly values
during a taxable year, exceeds 50%, we will be a passive foreign investment company for such
taxable year. Accordingly, fluctuations in the market price of our ordinary shares may result in us
being a passive foreign investment company for any year. In addition, the composition of our income
and assets will be affected by how, and how quickly, we spend the cash we raised in the initial
public offering of our ordinary shares in May 2007.
If we are a passive foreign investment company for any taxable year, dividends paid by us in that
year or the following taxable year will not be eligible for the reduced rate of taxation applicable
to non-corporate holders, including individuals. Additionally, absent a special election, you may
be subject to additional U.S. federal income taxes on gain recognized with respect to the ordinary
shares and on certain distributions, plus an interest charge.
15
For a detailed discussion of the passive foreign investment company rules, see “Item 10. Additional
information—E. Taxation—U.S. Federal Income Taxation—Passive foreign investment company.” We
urge investors to consult their own tax advisors with respect to the U.S. federal income tax
consequences of their investment.
If we fail to maintain an effective system of internal control over financial reporting, our
ability to accurately and timely report our financial results or prevent fraud may be adversely
affected. In addition, investor confidence and the market price of our ordinary shares may be
adversely impacted if we or our independent registered public accounting firm conclude that our
internal control over financial reporting is not effective, in accordance with the requirements of
Section 404 of the Sarbanes-Oxley Act of 2002.
Upon the closing of the initial public offering of our ordinary shares in May 2007, we became a
public company in the United States that is subject to the Sarbanes-Oxley Act of 2002, or the
Sarbanes-Oxley Act. Section 404 of the Sarbanes-Oxley Act requires that we include a report from
management on our internal control over financial reporting beginning in this annual report on Form
20-F. In addition, our independent registered public accounting firm must report on the
effectiveness of our internal control over financial reporting beginning with our annual report for
the fiscal year ending December 31, 2009. Our management has concluded that our internal controls
over financial reporting were effective as of December 31, 2008. Such management report on internal
control over financial reporting was not subject to attestation by our registered public accounting
firm pursuant to temporary rules of the Securities and Exchange Commission, or the SEC. If, in the
future, our independent registered public accounting firm is not satisfied with our internal
control over financial reporting or the level at which our internal control over financial
reporting is documented, designed, operated or reviewed, or if the independent registered public
accounting firm interprets the requirements, rules or regulations differently than we do, then they
may issue an adverse opinion. Any 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 adversely impact the market price of our ordinary shares. Our reporting
obligations as a public company place a significant strain on our management, operational and
financial resources and systems for the foreseeable future.
Effective internal controls over financial reporting are necessary for us to produce reliable
financial reports and are important to help prevent fraud. As a result, our failure to achieve and
maintain effective internal controls over financial reporting could result in the loss of investor
confidence in the reliability of our financial statements, which in turn could harm our business
and negatively impact the market price of our ordinary shares. Furthermore, we anticipate that we
will incur considerable costs and use significant management time and other resources in the effort
to comply with Section 404 of the Sarbanes-Oxley Act.
Compliance with new rules and regulations applicable to companies publicly listed in the United
States is costly and complex and any failure by us to comply with these requirements on an ongoing
basis could negatively affect investor confidence in us and cause the market price of our ordinary
shares to decrease.
In addition to Section 404, the Sarbanes-Oxley Act also mandates, among other things, that
companies adopt new corporate governance measures, imposes comprehensive reporting and disclosure
requirements, sets stricter independence and financial expertise standards for audit committee
members, and imposes increased civil and criminal penalties for companies, their chief executive
officers, chief financial officers and directors for securities law violations. For example, in
response to the Sarbanes-Oxley Act, the New York Stock Exchange has adopted additional
comprehensive rules and regulations relating to corporate governance. After the initial public
offering of our ordinary shares in May 2007, these new laws, rules and regulations increased the
scope, complexity and cost of our corporate governance and future reporting and disclosure
practices. Our current and future compliance efforts will continue to require significant
management attention. It has also become more difficult and more expensive for companies such as
ours to obtain director and officer liability insurance, and we may be required to accept reduced
coverage and to incur substantially higher costs to obtain coverage. Further, our board members,
chief executive officer and chief financial officer could face an increased risk of personal
liability in connection with the performance of their duties. As a result, we may have difficulty
attracting and retaining qualified board members and executive officers to fill critical positions
within our company. Any failure by us to comply with these requirements on an ongoing basis could
negatively affect investor confidence in us, cause the market price of our ordinary shares to
decrease or even result in the delisting of our ordinary shares from the New York Stock Exchange.
Risks Related to our Relationship with XING
Our parent company has substantial control over us, and one of the existing shareholders of our
parent company has substantial control over our parent company and us. The interests of our parent
company and its controlling shareholder/shareholders may not be aligned with the interests of our
other shareholders.
Our parent company, Xing, a public company listed on the Nasdaq Global Market, currently owns
approximately 67.6% of our outstanding share capital. Accordingly, Xing, as our controlling
shareholder, has substantial control over our business, including mergers, consolidations and the
sale of all or substantially all of our assets, election of directors and other significant
corporate actions. Xing’s ultimate major shareholder is Mr. Rui Lin Wu, the chief executive officer
and chairman of Xing and vice chairman of our company, who owned an aggregate of 43.7% equity
interest in Xing as of April 30, 2009. In addition, Mr. Zhi Jian Wu Li, brother of our chairman and
son of our vice chairman, also owned a 9.3% equity interest in Xing through Qiao Xing Trust and Wu
Holdings Ltd. as of April 30, 2009. Accordingly, Mr. Rui Lin Wu, who has a controlling influence in
determining the outcome of any corporate transaction or other matter submitted to the shareholders
for approval at our parent company, also has substantial control over our business.
Without the consents of Xing, Mr. Rui Lin Wu and the other shareholders of Xing, we could be
prevented from entering into transactions that could be beneficial to us. The interests of Xing,
Mr. Rui Lin Wu and the other shareholders of Xing may differ from the interests of our other
shareholders. Xing, Mr. Rui Lin Wu and the other shareholders of Xing may take actions that could
have a material adverse impact on us, such as influencing the way we allocate our resources,
restricting our entry into certain kinds of businesses and preventing us from
16
pursuing certain
business opportunities that may be beneficial and profitable to us and our other shareholders. In
addition, this concentration of ownership may 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 ordinary shares. These
actions may be taken even if they are opposed by our other shareholders, including those who
purchased our ordinary shares in the initial public offering of our ordinary shares in May 2007.
As a “controlled company,” we are exempt from certain NYSE corporate governance requirements, which
may result in our independent directors not having as much influence as they would if we were not a
controlled company.
We are a “controlled company” as defined under Section 303A of the New York Stock Exchange Listed
Company Manual, or the NYSE Manual, because one of our shareholders holds more than 50% of our
voting power. As a result, for so long as we remain a controlled
company as defined under that rule, we are exempt from, and our shareholders generally are not
provided with the benefits of, some of the NYSE corporate governance requirements, including that:
|
•
|
|
our compensation committee must be composed entirely of independent directors; and
|
|
|
|
•
|
|
our nomination committee must be composed entirely of independent directors.
|
Relying on this exemption, Mr. Zhi Yang Wu, who does not satisfy the “independence” requirements of
Section 303A of the NYSE Manual, serves as a member of our nominating and corporate governance
committee and compensation committee.
We may face competition from our parent company or the other subsidiaries of our parent company or
companies established by Mr. Rui Lin Wu or his family members, and may not be able to compete
successfully against these related parties.
Our parent company, Xing, which currently owns approximately 67.6% of our outstanding share
capital, specializes in making mobile handsets and indoor phones. Mr. Rui Lin Wu, the chief
executive officer and chairman of Xing and vice chairman of our company, owned an aggregate of
43.7% equity interest in Xing as of April 30, 2009. In addition, Mr. Zhi Jian Wu Li, brother of our
chairman and son of our vice chairman, also owned a 9.3% equity interest in Xing through Qiao Xing
Trust and Wu Holdings Ltd. as of April 30, 2009. Our parent company operates mainly through two
indirect subsidiaries, CECT and Huizhou Qiao Xing Communication Industry Ltd., or QXCI. QXCI
currently designs and manufactures COSUN-branded economy mobile handsets for the PRC market. In
connection with the initial public offering of our ordinary shares in May 2007, we have entered
into a non-competition arrangement with Xing, QXCI and Mr. Rui Lin Wu that restricts the ability of
Xing, QXCI, Mr. Rui Lin Wu and the family members of Mr. Rui Lin Wu to compete with us and provides
us with preferential treatment over new business opportunities in the mobile handset industry. This
arrangement will also prohibit Xing and Mr. Rui Lin Wu from using knowledge of our business and
strategy to our detriment. See “Item 7. Major Shareholders and related party transactions—B.
Related party transactions—Non-competition arrangement.” However, we cannot assure you that this
arrangement will protect our interests effectively or eliminate all potential competition between
us and Xing, QXCI or companies established by Mr. Rui Lin Wu or his family members. If such
competition does occur, we may not be able to compete effectively with them. In addition, this
non-competition arrangement may not be followed by all of the parties thereto and may not be fully
enforceable when a dispute arises. If any of the above occurs, we may lose our market share and our
business may be materially adversely affected.
Because we and Xing have different management, finance teams and audit committees, it is possible
that they may apply accounting policies differently under U.S. GAAP, or make different decisions on
accounting matters or estimates that require judgment. This could result in significant differences
between the financial information presented by Xing and that presented by us.
As a consolidated subsidiary of Xing, our financial results are to a large extent reflected in the
financial results of Xing. Because we and Xing have different management, finance teams and audit
committees, it is possible that they may apply accounting policies differently under U.S. GAAP, or
make different decisions on accounting matters or estimates that require judgment. If such
differences occur, especially if the differences relate to accounting policies and judgments that
are critical to an understanding of our financial statements, it may raise doubt or uncertainty
among investors about the accuracy of our financial information and the reliability of our
financial reporting system, which may have an adverse impact on the market price of our ordinary
shares.
Risks Related to Doing Business in China
Adverse changes in political and economic policies of the PRC government could have a material
adverse effect on the overall economic growth of China, which could reduce the demand for our
products and materially adversely affect our competitive position.
We conduct substantially all of our operations and generate most of our revenues in China.
Accordingly, our business, financial condition, results of operations and prospects are affected
significantly by economic, political and legal developments in China. The PRC economy differs from
the economies of most developed countries in many respects, including:
|
•
|
|
the higher level of government involvement;
|
|
|
|
•
|
|
the early stage of development of the market-oriented sector of the economy;
|
|
|
|
•
|
|
the rapid growth rate;
|
|
|
|
•
|
|
the higher level of control over foreign exchange; and
|
|
|
|
•
|
|
the allocation of resources.
|
17
While the PRC economy has grown significantly since the late 1970s, the growth has been uneven,
both geographically and among various sectors of the economy. The PRC government has implemented
various measures to encourage economic growth 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 the telecommunications industry, capital investments or changes in tax regulations that are
applicable to us.
The PRC economy has been transitioning from a planned economy to a more market-oriented economy.
Although the PRC government has in recent years implemented measures emphasizing the utilization of
market forces for economic reform, the PRC government continues to exercise significant control
over economic growth in China through the allocation of resources, controlling payment of foreign
currency-denominated obligations, setting monetary policy and imposing policies that impact
particular industries or companies in different ways. For example, efforts by the PRC government to
manage the pace of growth of the PRC economy could result in decreased capital expenditure by
mobile telecommunication network operators, which in turn could reduce demand for our products.
Any adverse change in the economic conditions or government policies in China could have a material
adverse effect on the overall economic growth and the level of mobile communications investments
and expenditures in China, which in turn could lead to a reduction in demand for our products and
consequently have a material adverse effect on our business and prospects. In particular, any
adverse change in the PRC government’s policies towards the mobile communications industry may have
a material adverse effect on our business.
Uncertainties with respect to the PRC legal system could limit the legal protections available to
you and us.
We conduct substantially all of our business through our operating subsidiary in the PRC, CECT,
which is a foreign-invested enterprise in China. CECT is generally subject to laws and regulations
applicable to foreign investment in China and, in particular, laws applicable to foreign-invested
enterprises. The PRC legal system is based on written statutes, and prior court decisions may be
cited for reference but have limited precedential value. Since 1979, a series of new PRC laws and
regulations have significantly enhanced the protections afforded to various forms of foreign
investments in China. However, since these laws and regulations are relatively new and the PRC
legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules
are not always uniform and enforcement of these laws, regulations and rules involve uncertainties,
which may limit legal protections available to you and us. In addition, any litigation in China may
be protracted and result in substantial costs and diversion of resources and management attention.
We rely principally on dividends and other distributions on equity paid by our operating subsidiary
to fund our cash and financing requirements, but such dividends and other distributions are subject
to restrictions under PRC law. Limitations on the ability of our operating subsidiary to pay
dividends or other distributions to us could have a material adverse effect on our ability to grow,
make investments or acquisitions, pay dividends to you, and otherwise fund and conduct our
business.
We are a holding company and conduct substantially all of our business through our operating
subsidiary, CECT, which is a limited liability company established in China. We rely on dividends
paid by CECT for our cash needs, including the funds necessary to pay dividends and other cash
distributions to our shareholders, to service any debt we may incur and to pay our operating
expenses. The payment of dividends by entities organized in China is subject to limitations. In
particular, regulations in the PRC currently permit payment of dividends by CECT to us only out of
accumulated profits as determined in accordance with PRC accounting standards and regulations. CECT
is also required to set aside at least 10% of its after-tax profit based on PRC accounting
standards each year to its general reserves until the cumulative amount of such reserves reaches
50% of its registered capital. These reserves are not distributable as cash dividends. In addition,
CECT is required to allocate a portion of its after-tax profit to its enterprise expansion fund and
the staff welfare and bonus fund at the discretion of its board of directors. Moreover, if CECT
incurs debt on its own behalf in the future, the instruments governing the debt may restrict its
ability to pay dividends or make other distributions to us. Any limitations on the ability of CECT
to pay dividends or other distributions to us could have a material adverse effect on our ability to grow, make investments or acquisitions, pay dividends to you, and otherwise fund or
conduct our business.
Restrictions on currency exchange may limit our ability to receive and use our revenues
effectively.
Most of our revenues and expenses are denominated in Renminbi. Under PRC law, the Renminbi is
currently convertible under the “current account,” which includes dividends and trade and
service-related foreign exchange transactions, but not under the “capital account,” which includes
foreign direct investment and loans. Currently, CECT may purchase foreign currencies for settlement
of current account transactions, including payments of dividends to us, without the approval of the
State Administration of Foreign Exchange, or SAFE, by complying with certain procedural
requirements. However, the relevant PRC government authorities may limit or eliminate our ability
to purchase foreign currencies in the future. Since a significant amount of our future revenues
will be denominated in Renminbi, any existing and future restrictions on currency exchange may
limit our ability to utilize revenues generated in Renminbi to fund our business activities outside
China that are denominated in foreign currencies.
Foreign exchange transactions by CECT under the capital account continue to be subject to
significant foreign exchange controls and require the approval of or need to register with PRC
government authorities, including SAFE. In particular, if CECT borrows foreign currency through
loans from us or other foreign lenders, these loans must be registered with SAFE, and if we finance
CECT by means of additional capital contributions, these capital contributions must be approved by
certain government authorities, including the NDRC, the Ministry of Commerce, or MOFCOM, or their
respective local counterparts. These limitations could affect the ability of CECT to obtain foreign
exchange through debt or equity financing.
Recent 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
acquire PRC companies or to inject capital into our PRC subsidiary, limit our PRC subsidiary’s
ability to distribute profits to us, or otherwise materially and adversely affect us.
18
In October 2005, SAFE issued the Notice on Issues Relating to the Administration of Foreign
Exchange in Fund-raising and Return Investment Activities of Domestic Residents Conducted via
Offshore Special Purpose Companies, or Notice 75, which took effect on November 1, 2005. In May
2007, SAFE issued the Notice of the State Administration of Foreign Exchange on Operating
Procedures Concerning Notice on Issues Relating to the Administration of Foreign Exchange in
Fund-raising and Return Investment Activities of Domestic Residents Conducted via Offshore Special
Purpose Companies, or Notice 106. Notice 75 and Notice 106 require PRC residents, including both
legal persons and natural persons, to register with the competent local SAFE branch before
establishing or controlling any company outside of China, referred to as an “offshore special
purpose company,” for the purpose of acquiring any assets of or equity interest in PRC companies
and raising fund from overseas. In addition, any PRC resident that is the shareholder of an
offshore special purpose company is required to amend its SAFE registration with the local SAFE
branch, with respect to that offshore special purpose company in connection with any increase or
decrease of capital, transfer of shares, merger, division, equity investment or creation of any
security interest over any assets located in China. If any PRC shareholder of any offshore special
purpose company fails to make the required SAFE registration and amendment, the PRC subsidiaries of
that offshore special purpose company may be prohibited from distributing their profits and the
proceeds from any reduction in capital, share transfer or liquidation to the offshore special
purpose company. The PRC residents who have already incorporated or gained control of offshore
entities that had completed onshore investments in the PRC before Notice 75 took effect must
register with the relevant local SAFE branch on or before March 31, 2006. In addition, such PRC
residents are required to repatriate into the PRC all of their dividend profits or capital gains
from their shareholdings in the offshore entity within 180 days of their receipt of such profits or
gains. Moreover, failure to comply with the SAFE registration and amendment requirements described
above could result in liability under PRC laws for evasion of applicable foreign exchange
restrictions.
A number of terms and provisions in Notice 75 and Notice 106 remain unclear. Because of uncertainty
over how the Notice 75 and Notice 106 will be interpreted and implemented, and how or whether SAFE
will apply it to us, we cannot predict how it will affect our business operations or future
strategies. For example, our present and prospective PRC subsidiaries’ ability to conduct foreign exchange
activities, such as the remittance of dividends and foreign currency-denominated borrowings, may be
subject to compliance with the Notice 75 and Notice 106 by our or our parent company’s PRC resident
beneficial holders. In addition, such PRC residents may not always be able to complete the
necessary registration procedures required by the Notice 75 and Notice 106. We also have little
control over either our present or prospective direct or indirect shareholders or the outcome of
such registration procedures. A failure by our or our parent company’s PRC resident beneficial
holders or future PRC resident shareholders to comply with the Notice 75 and Notice 106, if SAFE
requires it, could subject us to fines or legal sanctions, restrict our overseas or cross-border
investment activities, limit our subsidiary’s ability to make distributions or pay dividends or
affect our ownership structure, which could adversely affect our business and prospects.
In addition, the NDRC promulgated a rule in October 2004, or the NDRC Rule, which requires NDRC
approvals for overseas investment projects made by PRC entities. The NDRC Rule also provides that
approval procedures for overseas investment projects of PRC individuals shall be implemented with
reference to this rule. However, there exist extensive uncertainties in terms of interpretation of
the NDRC Rule with respect to its application to a PRC individual’s overseas investment, and in
practice, we are not aware of any precedents that a PRC individual’s overseas investment has been
approved by the NDRC or challenged by the NDRC based on the absence of NDRC approval. Our current
beneficial owners who are PRC individuals did not apply for NDRC approval for investment in us. We
cannot predict how and to what extent this will affect our business operations or future strategy.
For example, the failure of our shareholders who are PRC individuals to comply with the NDRC Rule
may subject these persons or our PRC subsidiary to certain liabilities under PRC laws, which could
adversely affect our business.
We face risks related to health epidemics and other outbreaks.
Adverse public health epidemics or pandemics could disrupt business and the economies of the PRC
and other countries where we do business. From December 2002 to June 2003, China and other
countries experienced an outbreak of a highly contagious form of atypical pneumonia now known as
severe acute respiratory syndrome, or SARS. On July 5, 2003, the World Health Organization declared
that the SARS outbreak had been contained. However, a number of isolated new cases of SARS were
subsequently reported, most recently in central China in April 2004. During May and June of 2003,
many businesses in China were closed by the PRC government to prevent transmission of SARS. Some
countries, including China, have encountered incidents of the H5N1 strain of avian influenza from
2003. From April 2009 to present, the U.S. and certain other countries and regions, including
China, reported the occurrence of H1N1 influenza. We are unable to predict the effect, if any, that
any health epidemics may have on our business. In particular, any future outbreak of SARS, avian
influenza, H1N1 influenza or other similar adverse public developments may, among other things,
significantly disrupt our business, including limiting our ability to travel or ship our products
within or outside China and forcing us to temporarily close our manufacturing facilities.
Furthermore, an outbreak may severely restrict the level of economic activity in affected areas,
which may in turn materially adversely affect our financial condition and results of operations. We
have not adopted any written preventive measures or contingency plans to combat any outbreak of
H1N1 influenza, avian influenza, SARS or any other epidemic.
Risks Related to Investment in our Shares
The market price for our ordinary shares may be highly volatile.
The trading price of our ordinary shares has been and may continue to be subject to wide
fluctuations. During the period from May 3, 2007, the first day on which our ordinary shares were
listed on the NYSE, until June 12, 2009, the trading prices of our ordinary shares ranged from
$1.32 to $15.48 per ordinary shares and the closing sale price on June 12, 2009 was $3.26 per
ordinary share. The market price for our ordinary shares may continue to be volatile and subject to
wide fluctuations in response to factors including the following:
|
•
|
|
announcements of technological or competitive developments;
|
|
|
|
•
|
|
regulatory developments in our target markets affecting us, our customers or our competitors;
|
19
|
•
|
|
announcements regarding intellectual property infringement litigation involving us or other mobile handset manufacturers or the issuance of patents to us or our competitors;
|
|
|
|
•
|
|
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 mobile handset companies;
|
|
|
|
•
|
|
additions or departures of our directors, executive officers and key research personnel; and
|
|
|
|
•
|
|
release or expiry of lock-up or other transfer restrictions on our outstanding ordinary shares.
|
In addition, securities markets may from time to time experience significant price and volume
fluctuations that are not related to the operating performance of particular companies. These
market fluctuations may have a material adverse effect on the market price of our ordinary shares.
In particular, changes in the market price of the shares of our parent company, Xing, may result in
changes to the market price of our ordinary shares, even if the underlying reasons for the changes
in the share price of Xing do not directly relate to our business. In addition, the performance and
fluctuation of the 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
and trading volumes for our ordinary shares. Some of these companies have experienced significant
volatility, including significant price declines after their initial public offerings. The trading
performances of these companies’ securities at the time of or after their offerings may affect the
overall investor sentiment towards PRC companies listed in the United States and consequently may
impact the trading performance of our ordinary shares.
Substantial future sales or perceived sales of our ordinary shares in the public market could cause
the price of our ordinary shares to decline.
Sales of our ordinary shares in the public market, or the perception that these sales could occur,
could cause the market price of our ordinary shares to decline. Such sales also might make it more
difficult for us to sell equity or equity-related securities in the future at a time and price that
we deem appropriate. If any existing shareholder or shareholders sell a substantial amount of our
ordinary shares, the prevailing market price for our ordinary shares could be adversely affected.
In addition, we may issue additional ordinary shares for future acquisitions. If we pay for our
future acquisitions in whole or in part with additionally issued ordinary shares, your ownership
interests in our company would be diluted and this, in turn, could have a material adverse effect
on the price of our ordinary shares.
Our articles of association contain anti-takeover provisions that could have a material adverse
effect on the rights of holders of our ordinary shares.
Our amended and restated articles of association 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. Preferred shares
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 ordinary shares may fall and the voting and other rights of the
holders of our ordinary shares may be materially adversely affected.
Your right to participate in any future rights offerings may be limited, which may cause dilution
to your holdings.
We may from time to time distribute rights to our shareholders, including rights to acquire our
securities. However, we cannot make rights available to you in the United States unless we register
the rights and the securities to which the rights relate under the U.S. Securities Act of 1933, as amended, or the
Securities Act or an exemption from the registration requirements is available. We are under no
obligation to file a registration statement with respect to any such rights or securities or to
endeavor to cause such a registration statement to be declared effective. Moreover, we may not be
able to establish an exemption from registration under the Securities Act. Accordingly, in the
event we conduct any rights offerings in the future, you may be unable to participate in such
offerings and may experience dilution in your holdings.
Certain judgments obtained against us by our shareholders may not be enforceable.
We are a company incorporated under the laws of the British Virgin Islands. We conduct our
operations in China and substantially all of our assets are located in China. In addition, our
directors and executive officers, and some of the experts named in this annual report, reside
within China, and most of the assets of these persons are located within China. 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 the U.S.
federal securities laws or otherwise. Even if you are successful in bringing an action of this
kind, the laws of the British Virgin Islands and of the PRC may render you unable to enforce a
judgment against our assets or the assets of our directors and officers.
Since we are a British Virgin Islands company, the rights of our shareholders may be more limited
than those of shareholders of a company organized in the United States.
20
Under the laws of some jurisdictions in the United States, majority and controlling shareholders
generally have certain fiduciary responsibilities to the minority shareholders. Shareholder action
must be taken in good faith, and actions by controlling shareholders which are obviously
unreasonable may be declared null and void. British Virgin Island law protecting the interests of
minority shareholders may not be as protective in all circumstances as the law protecting minority
shareholders in some U.S. jurisdictions. In addition, the circumstances in which a shareholder of a
British Virgin Islands company may sue the company derivatively, and the procedures and defenses
that may be available to the company, may result in the rights of shareholders of a British Virgin
Islands company being more limited than those of shareholders of a company organized in the United
States.
Furthermore, our directors have the power to take certain actions without shareholder approval
which would require shareholder approval under the laws of most U.S. jurisdictions.
ITEM 4. INFORMATION ON THE COMPANY
A. History and Development of the Company
We are a British Virgin Islands company incorporated on January 31, 2002. We became a wholly owned
subsidiary of Xing in November 2006 when Xing acquired the remaining 20% equity interest in our
company that was held by Galbo Enterprise Limited. Immediately prior to the listing of our ordinary
shares on the NYSE on May 3, 2007, DKR SoundShore Oasis Holding Fund Ltd. and CEDAR DKR Holding
Fund Ltd., the holders of senior convertible notes issued by Xing in June 2006, exchanged all of
their notes for 7,800,000 of our ordinary shares that were owned by Xing. See “Item 7. Major
Shareholders and Related Party Transactions—B. Related Party Transactions—Arrangements in
Connection with the Senior Convertible Notes Issued by Xing.” Immediately subsequent to the
exchange, we were 80.50% held by Xing, 17.55% held by DKR SoundShore Oasis Holding Fund Ltd. and
1.95% held by CEDAR DKR Holding Fund Ltd. Xing is a British Virgin Islands company whose ordinary
shares have been listed on the Nasdaq Global Market (Nasdaq: XING) since February 1999. Our
chairman and vice chairman, Messrs. Zhi Yang Wu and Rui Lin Wu, are also executive officers and
directors of Xing. Upon the completion of the initial public offering of our ordinary shares on May
8, 2007, Xing owned approximately 61.3% of our outstanding share capital and continues to exercise
control over our company, including the ability to select a majority of the directors and to
influence the outcome of decisions requiring shareholder approval.
On May 15, 2008, we entered into and completed the transactions contemplated by a Securities
Purchase Agreement (the “SPA”) with DKR SoundShore Oasis Holding Fund Ltd. and CEDAR DKR Holding
Fund Ltd. (the “Investors”) pursuant to which we issued, and the Investors purchased, an aggregate
of $70,000,000 of our 4.0% senior convertible notes (the “Notes”) that came with 1,648,721 common
stock purchase warrants. The consideration paid by the Investors comprised a combination of 6,966,666
ordinary shares that were owned by the Investors, valued at approximately US$48,349,000, and cash
of $21,651,000. All ordinary shares submitted by the Investors in exchange for the Notes were
cancelled. In addition, we also issued to our placement agent 942,127 common stock purchase
warrants (collectively with the warrants issued to the Investors, the “Warrants”) at terms
identical to those issued to the Investors.
The following discussion on the material terms of the transaction should be read in conjunction
with, and is qualified in its entirety by, the SPA and the exhibits thereto.
The material terms and conditions of the Notes are summarized as follows:
|
•
|
|
the Notes are unsecured and mature on May 15, 2011;
|
|
|
|
•
|
|
the Notes bear interest at a rate of 4.0% per annum, payable in cash in arrears on a
calendar semi-annual basis beginning June 30, 2008;
|
|
|
|
•
|
|
the Notes are convertible at the holders’ option into our ordinary shares at an initial
conversion price of $7.43 per ordinary share (which represents a 10% premium to the arithmetic
average of the daily volume-weighted average price (“VWAP”) of our ordinary shares during the
five trading day period ending on the day immediately prior to the date of execution of the
SPA), subject to adjustments as provided for in the Notes;
|
|
|
|
•
|
|
the conversion price for our ordinary shares is subject to reset if the average of the
daily VWAP of our ordinary shares for the five consecutive trading days ending on each
three-month anniversary of the issuance date of the Notes until maturity (each a “Reset Date”)
is less than $6.76. In that event, the conversion price is reset to a price equal to 92.5% of
the arithmetic average of the daily VWAP of our common stock for the five trading days ending
on the applicable Reset Date. In no event will the conversion price be reset to a price less
than $4.05 per share. The conversion price of the Notes was reset to US$4.05 per share on
November 15, 2008;
|
|
|
|
•
|
|
the Notes cannot be converted if, after giving effect to such conversion, the holders of
the Notes (together with their affiliates) would beneficially own in excess of 9.99% of our
ordinary shares outstanding immediately after giving effect to the conversion;
|
|
|
|
•
|
|
the Notes require an automatic re-pricing of the conversion price if we make certain sales
of our ordinary shares or ordinary share equivalents in a capital-raising transaction at a
price below the conversion price;
|
|
|
|
•
|
|
the holders of the Notes can require us to redeem the Notes at any time on or after the 18
month anniversary of the issuance date of the Notes in an amount equal to the sum of (a) the
outstanding principal of the Notes, and (b) the accrued and unpaid interest thereon;
|
|
|
|
•
|
|
in the event of a default, change of control and certain other fundamental transactions,
the holders of the Notes have the right to require us to redeem all or any portion of the
Notes at a price equal to the greater of (i) the amount to be redeemed multiplied by a
redemption premium of 125% and (ii) the amount to be redeemed multiplied by the quotient
determined by dividing the closing bid price of our ordinary shares on the date immediately
preceding such event by the conversion price of the Notes;
|
21
|
•
|
|
all principal, interest, late charges and other amounts due under the Notes that are
payable in cash shall be settled in U.S. dollars in an amount equal to the applicable U.S.
dollar cash payment due under the terms of the Notes multiplied by 6.99 and divided by the
exchange rate of one U.S. dollar to Renminbi on the date such payment is due; and
|
|
|
|
•
|
|
we are required under the terms of a Registration Rights Agreement entered into
concurrently with the SPA to file with the SEC a registration statement to register the
ordinary shares issuable upon the conversion of the Notes and the exercise of the Warrants to
permit the resale of such ordinary shares to the public. The registration statement was filed
by the Company on June 27, 2008 and was declared effective by the SEC on July 11, 2008.
|
The material terms and conditions of the Warrants are summarized as follows:
|
•
|
|
each Warrant is exercisable to purchase one ordinary share;
|
|
|
|
•
|
|
the initial exercise price of each Warrant is $8.91 per share, subject to adjustments as
provided for in the Warrant;
|
|
|
|
•
|
|
the Warrants are exercisable at any time during a period of five years from May 15, 2008,
the date of issuance;
|
|
|
|
•
|
|
the Warrants contain a “cashless exercise” feature if the registration statement covering
the shares underlying the Warrants is not available for the resale of the ordinary shares upon
the exercise of the Warrants;
|
|
|
|
•
|
|
the Warrants contain certain limitations on the exercise thereof in the event that the
holder would beneficially own in excess of 9.99% of our ordinary shares outstanding
immediately after giving effect to such exercise; and
|
|
|
|
•
|
|
the Warrants require an automatic re-pricing of the exercise price if we make certain sales
of our ordinary shares or ordinary share equivalents in a capital-raising transaction at a
price below the exercise price of the Warrants.
|
On August 19, 2008, the holders of the Notes exercised the option to convert approximately
US$8,251,000 of the principal amount of the Notes and accrued interest thereon of approximately
US$46,000 into 1,511,397 ordinary shares of the Company at a conversion price of US$5.49 per share.
On March 31, 2009, Xing and Mr. Rui Lin Wu, the chairman of Xing and vice chairman of our company,
entered into agreements to purchase our outstanding Notes of approximately US$61.7 million from the
three holders of the Notes, DKR SoundShore Oasis Holding Fund Ltd., CEDAR DKR Holding Fund Ltd. and
Chestnut Fund Ltd. (collectively, the “Sellers”). Under the terms of the agreements, Xing agreed to
purchase US$30.0 million of the outstanding Notes for an aggregate purchase price of US$24.0
million, payable in three installments to the Sellers on or before the close of business, New York
time, on May 1, 2009. Mr. Rui Lin Wu agreed to purchase the remaining Notes for an aggregate
purchase price of US$26.0 million, payable in full to the Sellers on or before the close of
business, New York time, on August 31, 2009.
As a consequence of the above convertible note transactions and the issuance of 565,000 ordinary
shares pursuant to the exercise of share options by a director and certain of our employees in
January 2008, Xing owned approximately 67.6% of our outstanding share capital as of June 12, 2009.
We conduct substantially all of our business through our operating subsidiary in the PRC, CECT, in
which we own a 96.6% equity interest. CECT was formed in 2000 by six PRC companies. We acquired an
initial 65% ownership stake in CECT in February 2003 by purchasing equity interests from the
initial shareholders, and have increased our ownership position three times. In July 2005, we
increased our equity ownership to 90% through a purchase from a minority shareholder of CECT and in
July 2006 we further increased our equity ownership to 93.4% through a cash capital injection into
CECT in which the other CECT shareholder did not participate. In June 2007, we made another cash
capital injection into CECT in which the other CECT shareholder did not participate and increased
our equity ownership to 96.6%. The remaining 3.4% equity interest in CECT is currently held by Qiao
Xing Group Limited, or Qiao Xing Group, a private company controlled by Messrs. Zhi Yang Wu and Rui
Lin Wu, our chairman and vice chairman, respectively. Qiao Xing Group currently does not intend to
transfer this 3.4% equity interest in CECT to us or any related party. CECT has a branch located in Huizhou City, Guangdong
Province, China.
In September 2007, we incorporated Beijing CECT Yitong Technology Co., Ltd., or BCYT, in Beijing,
China to engage in the sales of mobile phones and accessories. Our interest in BCYT was held
through CECT, which owned a 66.7% equity interest in BCYT. We disposed of our equity interest in
BCYT in July 2008 to an independent third party.
In January 2008, we incorporated a subsidiary, Huizhou CEC Telecom Co., Ltd., or HCECT, in Huizhou
City, Guangdong Province, China to engage in the manufacture of molds, cast components and other
handset products. Our interest in HCECT was held through CECT, which owned a 100.0% equity interest
in HCECT. We disposed of our equity interest in HCECT in September 2008 to an independent third
party.
In March 2009, we incorporated Beijing VEVA Technology Co., Ltd., or BVT, in Beijing, China to
engage in the sales of mobile phones and accessories. Our interest in BVT is held through CECT,
which owns a 100.0% equity interest in BVT.
22
Set forth below is a chart showing our current corporate structure as of June 12, 2009:
Our principal executive offices are located at 10th Floor CEC Building, 6 Zhongguancun South
Street, Beijing 100086, People’s Republic of China. Our telephone number at this address is (86-10)
6250-1728 and our fax number is (86-10) 6250-1722. Our registered office in the British Virgin
Islands is at Romasco Place, Wickhams Cay 1, P.O. Box 3140, Road Town, Tortola, British Virgin
Islands.
Investor inquiries should be directed to us at the address and telephone number of our principal
executive offices set forth above. Our website is www.qxmc.com. The information contained on our
website does not constitute a part of this annual report.
B. Business Overview
We are a domestic manufacturer of mobile handsets in China. We manufacture and sell mobile handsets
based primarily on the GSM global cellular technologies. We are currently in the process of
developing 3G mobile handsets based on the WCDMA and TD-SCDMA technologies and we expect to launch
our first 3G mobile handset to the Chinese market in the third quarter of 2009. We operate our
business primarily through CECT, our 96.6% owned subsidiary in China. Our products have been
primarily sold under the “CECT” brand name and we launched the “VEVA” brand in May 2008.
We develop, produce and market a wide range of mobile handsets, with increasing focus on
differentiated products that generally generate higher profit margins. We sold approximately 3.82
million and 2.71 million handset products in 2007 and 2008, respectively. The average selling price
of our handsets was RMB816 in 2007 and RMB788 ($116) in 2008.
Our in-house handset development teams are based in our two research and development centers in
Beijing and Huizhou. Our Beijing research center focuses on developing higher-end and
differentiated products, while our Huizhou research center concentrates on developing handsets
targeted at the mid-range and economy markets based on existing technologies. Our in-house research
and development teams developed a number of handset designs and certain technologies used in
producing our handsets, such as mobile phone application software, user-friendly product interfaces
and printed circuit board designs, including baseband designs and radio frequency circuit designs,
that contribute to our ability to produce differentiated handsets. We also source certain software
and hardware designs used in producing our handsets from third-party designers to complement our
in-house development capabilities.
We currently have one handset manufacturing facility in Huizhou City, Guangdong Province, China.
This facility is equipped with three SMT lines and seven assembly and testing lines. We
historically outsourced and continue to outsource the manufacturing of a substantial portion of our products to
EMS providers. We produced approximately 0.56 million units in our Huizhou facility in 2007 and
0.71 million units in 2008. We sourced approximately 3.33 million units in 2007 and 2.04 million
units in 2008 through EMS providers.
In January 2008, our subsidiary, HCECT, completed the construction of a new manufacturing facility
in Huizhou to produce molds, cast components and other handset parts. A total of approximately
RMB13.7 million was invested on this facility, which started operation in January 2008. This
facility was disposed of in September 2008 when we disposed of our equity interest in HCECT.
Substantially all of our products are sold in China. We sell our products primarily to our national
distributors, provincial distributors, TV direct sales distributors and internet distributors,
which resell our products to end customers either directly or through their own distribution
networks, which are typically composed of local distributors and retail outlets. As of June 12,
2009, our distribution network included five national distributors, 66 provincial distributors, 15
TV direct sales distributors and one internet distributors. These distributors sell our products to
approximately 300 local distributors, over 3,600 retail outlets and directly to end users in China.
In addition, certain of our distributors and other third parties provide repairs and other
after-sales services to our end customers through over 200 after-sales service centers located
throughout China. In November 2008, we also began the online retail sale of our VEVA-branded
handsets directly to end customers through the website, www.vevago.com. Since the beginning of
2009, we have also started to build and operate our own specialty
23
retail stores to market and sell
our VEVA branded handsets directly to end customers. As of June 12, 2009, we operated six VEVA
retail stores in Beijing, China.
PRC Mobile Handset Industry
In recent years, China’s mobile handset market has experienced rapid growth and development. China
is the world’s largest wireless telecommunication market in terms of subscribers. We believe that
China will continue to play a key role in the development of the global telecommunication industry
and remain one of the largest wireless subscriber markets in the world for the foreseeable future.
Moreover, three mobile telecommunication operators in China have been granted 3G licenses in
January 2009 by the Chinese government. 3G technology is expected to enable users to transmit
larger volumes of data and more sophisticated content, such as streaming media and multi-player
games, more quickly. The more extensive use of data transmission, as facilitated by new and
upgraded technologies and networks, is expected to lead to increased demand for enhanced wireless
value-added services and, therefore, increased demand for mobile phones with more advanced
technologies in China.
The mobile phone penetration rate in China is still considerably lower than most of the more
developed countries and we believe that it has the potential to increase significantly in the next
several years. Historically, the mobile telecommunication subscription and handset demand growth
took place in China’s large cities, such as Beijing, Shanghai and Guangzhou. More recently,
however, the demand growth is increasingly driven by medium and small cities and rural areas, which
still have low penetration rates and benefit from favorable government policies, such as universal
service obligations imposed upon mobile telecommunication operators in China, and the increasing
affordability of handsets, mainly due to the higher average standard of living across China.
We have observed the following key industry trends and characteristics in the mobile handset
industry in China:
Growing affordability of mobile handsets
Living standards in China continue to improve and the cost of wireless network usage and mobile
handsets continues to decrease through the development of technology and intensifying competition.
Mobile handsets have evolved from luxury products into common electronic consumer goods in China
with ownership becoming increasingly affordable. These factors drive both the continued growth of
first-time users and replacement demand from existing users.
Continuing growth increasingly driven by replacement demand
In addition to growth from first-time mobile phone users, handset demand growth in China has
increasingly been driven by replacement demand and, to a lesser extent, secondary phones. Key
factors driving this trend include the increasing affordability of mobile phones and the incessant
and rapid improvement in their functionality and usefulness through technological innovations.
Increasing demand for differentiated mobile handsets with more functions and personalized features
As mobile phones have become more sophisticated, Chinese mobile telecommunication operators have
begun to make more data and other wireless value-added services available on handsets. Doing so is
enabling a growing convergence between wireless communications and traditional media, such as TV,
radio and magazines, and new media such as the Internet. The result is that mobile phones are now
more than just communication devices and are increasingly being used for a variety of personal,
work and entertainment purposes. This convergence has made mobile phones more useful for consumers
in China and has increased demand for sophisticated, yet affordable, handsets. Furthermore, we
believe consumers in China, particularly younger generations, often view mobile handsets as fashion
accessories, preferring customized and distinctive mobile handset products with greater
functionality.
As new services and mobile handset functions become available to customers, we believe that more
wireless telecommunication subscribers will seek to upgrade their mobile handsets to newer products
on a more regular basis.
We believe the future success of mobile handset producers in China will, to a large extent, depend
on their ability to offer distinctive products that stand out from those offered by their
competitors. Successful products are typically those with distinctive features that are popular
with different users. The product life cycle of mobile handsets has been shortened significantly
compared to the recent past as new handsets with advanced features and different look and feel are
continually being launched in this fast evolving market. To succeed, mobile handset brand owners
must constantly and rapidly introduce to the market new handsets with enhanced look and feel and
functionality but expect to sell them in lower volumes for each model.
Continual evolution of wireless network technologies
Wireless network technologies have been continually evolving at a rapid pace. Most mobile handsets
are currently based on 2G or 2.5G wireless technology. 2.5G technology enables mobile handsets to
offer more features, such as Internet access through mobile phones using wireless application
protocol technology and multimedia messaging service. Bridging between 2.5G and 3G, 2.75G
technology allows data transmission speed of up to 384Kbps. This enhanced data speed has extended
the service scope of current wireless infrastructure before the new 3G networks were deployed. 3G
allows a significantly higher data transmission speed at a maximum of 2 to 2.5 Mbps, which enables
users to access more features and applications on their mobile phones, such as online mobile gaming
and video communication or downloading. In January 2009, MIIT issued 3G licenses to China Mobile
(TD-SCDMA), China Unicom (CDMA2000) and China Telecom (WCDMA).
24
Highly competitive market
Competition in the mobile handset market in China is intense. While international mobile handset
brand owners have achieved substantial market share, new Chinese mobile handset brands and handsets
are continually being introduced to the market. We believe competition is being fought on multiple
fronts such as cost, functionality and industrial design. The market is continuously evolving and
the ability to quickly interpret and adapt to trends is a key driver of success.
Increasing presence of mobile telecommunication operators and large electronic retailers in handset
distribution
As in international markets, mobile telecommunication operators and large electronics retailers
have become increasingly important as distribution channels in recent years. Mobile
telecommunication operators are increasingly trying to differentiate themselves by launching
customized services, which in turn often require customized handsets that can support these
services. Coupled with this, mobile telecommunication operators are buying more handsets as they
use handset promotions in order to win and keep customers. Large electronics retail chains, such as
GOME Electrical Appliances Holdings Limited and Suning Appliance Co., Ltd., are rapidly expanding
throughout China and their proliferation is contributing to the increase in consumer spending on
personal electronics.
We cannot assure you that we will benefit from the projections and trends regarding the mobile
handset industry set forth in this section.
Our Products
We manufacture and sell a wide variety of mobile handsets that are primarily based on GSM global
cellular technologies. We are currently in the process of developing 3G mobile handsets based on
the WCDMA and TD-SCDMA technologies and we expect to launch our first 3G mobile handset to the
Chinese market in the third quarter of 2009.
We sold approximately 2,262,000, 3,816,000 and 2,714,000 handset products in 2006, 2007 and 2008,
respectively. The average selling prices of our handsets were RMB1,094, RMB816 and RMB788 ($116) in
2006, 2007 and 2008, respectively.
We have devoted significant resources to developing and producing handset products with various
features that are targeted at different consumer segments. In 2006, 2007 and 2008, we rolled out
55, 49 and 23 new handset models, respectively. As of December 31, 2008, we offered approximately
23 different handset models to our customers. These products include features such as multimedia
functions, touch-screen pads, large LCD screens, ultra-long standby battery, EDGE technology and
luxury design with embedded crystals.
We develop and produce our products based on a limited number of handset platform designs, which
can be easily customized according to required specifications to produce multiple models with
varying features. For example, our VEVA S60 and VEVA U9 models are all based on the same platform
design. In 2006, 2007 and 2008, we introduced 23, 21 and 9 new platform designs, respectively.
The following table sets forth the key features and launch time of our main handset products that
are currently available on the market.
|
|
|
|
|
|
|
|
|
|
|
Date of
|
|
Model
|
|
Key features
|
|
commercial launch
|
|
|
|
|
|
|
|
C3100
|
|
Flash light; ultra-long standby battery; ultra-low cost
|
|
December 2007
|
|
C1800
|
|
Ultra-long standby battery; FM radio; ultra-low cost
|
|
March 2008
|
|
T150
|
|
Fingerprint identification; ultra-long standby battery; metal
casing;
|
|
April 2008
|
|
VEVA S60
|
|
Luxury series with embedded crystals; ultra-long standby
battery
|
|
May 2008
|
|
C6000D
|
|
Ultra-long standby battery; dual SIM cards; stock trading
function
|
|
June 2008
|
|
VEVA S70
|
|
Luxury series with embedded crystals; ultra-long standby
battery; EDGE technology
|
|
July 2008
|
|
C5188
|
|
Ultra-long standby battery; stock trading function; bluetooth
technology
|
|
July 2008
|
|
VEVA S50
|
|
Luxury series with embedded crystals; ultra-long standby
battery; GPS function
|
|
October 2008
|
|
VEVA S80
|
|
Luxury series with embedded crystals; ultra-long standby
battery; dual SIM cards; arc slider design; EDGE function
|
|
April 2009
|
|
VEVA S90
|
|
Luxury series with embedded crystals; ultra-long standby
battery; digital TV; GPS function; multi-touch function
|
|
May 2009
|
|
VEVA U9
|
|
Luxury series with embedded crystals; slider design; FM
radio; bluetooth technology
|
|
May 2009
|
25
Mobile handset models typically have a limited economic life, which is approximately 12 to 15
months for particularly successful handsets and four to six months for most other handsets. Our
higher-end and differentiated products that incorporate features which are different from our
competitors’ products usually have longer economic lives than our other products. The revenue we
derive from a particular model typically declines as the product approaches the end of its economic
life. The following table sets forth our five best selling products and product series in terms of
sales generated in each of 2006, 2007 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
|
2006
|
|
2007
|
|
2008
|
|
Product
|
|
Revenue
|
|
Percentage
|
|
Rank
|
|
Revenue
|
|
Percentage
|
|
Rank
|
|
Revenue
|
|
Percentage
|
|
Rank
|
|
|
|
(RMB)
|
|
|
|
|
|
|
|
|
|
(RMB)
|
|
|
|
|
|
|
|
|
|
(RMB)
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands, except percentages)
|
|
VEVA S60
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
633,328
|
|
|
|
29.6
|
%
|
|
|
1
|
|
|
VEVA S70
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
262,688
|
|
|
|
12.3
|
%
|
|
|
2
|
|
|
W100
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
234,443
|
|
|
|
11.0
|
%
|
|
|
3
|
|
|
C3100
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
182,521
|
|
|
|
8.5
|
%
|
|
|
4
|
|
|
VEVA S50
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
150,298
|
|
|
|
7.0
|
%
|
|
|
5
|
|
|
C1000
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
623,495
|
|
|
|
19.8
|
%
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
C1000+
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
332,318
|
|
|
|
10.6
|
%
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
T100
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
321,903
|
|
|
|
10.2
|
%
|
|
|
3
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
C2000
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
320,147
|
|
|
|
10.2
|
%
|
|
|
4
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
C6000
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
264,099
|
|
|
|
8.4
|
%
|
|
|
5
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
A1000 series
|
|
|
478,015
|
|
|
|
18.8
|
%
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
V180 series
|
|
|
419,634
|
|
|
|
16.5
|
%
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
IPD series
|
|
|
377,106
|
|
|
|
14.9
|
%
|
|
|
3
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
CECT 3270 series
|
|
|
256,554
|
|
|
|
10.1
|
%
|
|
|
4
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
T800 series
|
|
|
110,162
|
|
|
|
4.3
|
%
|
|
|
5
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Research and Development
The mobile handset industry is characterized by rapid technological developments, frequent launches
of new products and services, changes in customer preferences and behavior, and evolving industry
standards. In order to maintain our long-term profitability and financial and operating success, we
must continually develop new mobile handsets that are attractive to users to replace our existing
handsets as they reach the end of their economic lives. The success of our handsets will largely
depend on our ability to anticipate and effectively respond to changing consumer tastes and
preferences.
We believe that we have strong product development capabilities for mobile handsets. Our research
and development team has developed a number of distinctive handset designs and certain product and
process technologies used in producing our handsets, including mobile phone application software,
user-friendly product interfaces, printed circuit board designs, such as baseband and radio
frequency circuit designs, production technology designs and production testing systems, that
contribute to our ability to produce differentiated products. We also designed the ultra-long
standby batteries used in our products, which are produced by a third-party. In 2006, 2007 and
2008, our total research and development expenses were RMB16.3 million, RMB18.6 million and RMB29.2
million ($4.3 million), respectively. As of December 31, 2008, we employed 168 research and
development personnel, which included personnel specialized in industrial design, mechanical
design, software and hardware development, project management and quality assurance. Approximately
81.3% of our research and development personnel have undergraduate or higher education degrees.
We have strengthened our product development capabilities in recent years. With our accumulated
knowledge and experience, we have been able to increasingly shorten our product development cycles.
Currently, our product development cycle, from product concept defining to mass production, is
typically six to nine months. In 2006, 2007 and 2008, we designed, developed and rolled out 55, 49 and 23 new
handset models, respectively.
Our research and development efforts concentrate on developing higher-end and differentiated
products. Our research and development expenditures have been, and will continue to be, directed
primarily at enhancing our ability to design and develop mobile handsets tailored for the PRC
market and differentiated from the products of our competitors. As part of our cost reduction
efforts, we also direct part of our research and development resources to increase the percentage
of locally sourced raw materials and components used in producing our handsets.
Our in-house handset development teams are based at our two research and development centers in
Beijing and Huizhou. Our Beijing research center had 163 research and development personnel as of
December 31, 2008 and focuses on developing higher-end and differentiated products. Our Huizhou
research center had five research and development employees as of December 31, 2008 and
concentrates on developing handsets for the mid-range and economy markets based on existing
technologies.
We also outsource certain software and hardware designs used in producing our products, such as
high-end handset main boards, to certain independent mobile handset designers in China, such as SIM
Technology Group Limited.
26
Manufacturing
Manufacturing facilities
Currently, we mainly manufacture our products in an approximately 3,700 square meter manufacturing
facility located in Huizhou City, Guangdong Province, China, which commenced operations in
September 2004. This facility is located on property we lease from third parties. As of December
31, 2008, our Huizhou facility was equipped with three SMT lines and seven assembly and testing
lines, with annual production design capacity of 1.5 million units. Our design capacity represents
the maximum output of our existing equipment based on their design specifications. However, there
is typically a substantial difference between our design capacity and our actual output due to
various factors, including the high number of different models we produce and the time required to
adjust the production line and conduct test production for each new model change. We produced
approximately 612,000, 561,000 and 714,000 units of our own handsets in 2006, 2007 and 2008,
respectively, at our Huizhou facility. As of December 31, 2008, we had an aggregate of 378
manufacturing employees working in this facility.
We also outsource the production of a substantial portion of our products to EMS providers, thereby
leveraging their production process technology and capability. Under this arrangement, the EMS
providers establish the production lines mainly using their own equipment while we provide product
design as well as certain equipment and all components used for the production. Our EMS provider is
also obligated to provide after-sales services for products they manufactured for a certain period
of time. The production volumes under such arrangements were approximately 1,598,000 units in 2006,
3,335,000 units in 2007 and 2,040,000 units in 2008. Our current EMS providers include Shenzhen
Changcheng Co., Ltd, Huizhou Yunlong Co., Ltd., and Shenzhen Zhong Zhi Chuang Co., Ltd.. We believe
that our business is not substantially dependent on any individual EMS provider.
In addition, we provide handset processing services to certain handset producers, including a
subsidiary of Xing that is not part of our operating group. Under this arrangement, we receive raw
materials and components from third parties and process them into handsets or into handset printed
circuit boards, or PCB. We produced approximately 307,000, 1,227,000 and 1,106,000 units of
handsets and handset PCB under such arrangement in 2006, 2007 and 2008, respectively.
In January 2008, our subsidiary, HCECT, completed the construction of a new manufacturing facility
in Huizhou to produce molds, cast components and other handset parts. A total of approximately
RMB13.7 million was invested on this facility, which started operation in January 2008. This
facility was disposed of in September 2008 when we disposed of our equity interest in HCECT.
Raw materials and components
Our raw materials and components costs accounted for 94.6% of our total cost of goods sold in 2006,
92.0% in 2007 and 92.5% in 2008. The principal raw materials and components used in the production
of our mobile handsets are chipsets, molds, LCD screens, casings, cameras, batteries and keypads.
We source raw materials and components based on price and quality. We believe continuing price
negotiations with our suppliers have contributed to our profitability in the past few years. We
source chipsets and high-end LCD screens and cameras primarily from overseas suppliers due to the
better quality of their products. For example, we source chipsets from MediaTek Inc. and Philips
NXP and LCD screens from Truly Semiconductors Ltd. and Foxconn Technology Group. As part of our
continuing cost control efforts, we also locally source a significant portion of the raw materials
and components used in our manufacturing process, including primarily casing, batteries, cable and
low-end LCD screens and cameras. The use of locally sourced raw materials and components also
shortens our lead order time and provides us with better access to technical and other support from
our suppliers. We also enjoy volume discounts for purchasing certain raw materials and components
from our suppliers.
We seek to diversify the supply sources of raw materials and components and to date have not
experienced any material disruption of our manufacturing operations due to insufficient supply of
raw materials or components. We currently source raw materials and components from approximately
149 suppliers. We do not anticipate any significant interruption in the supply of our raw materials
and components that would have a material impact on our business in the future. The aggregate costs
attributable to our five largest raw materials and components suppliers in 2006, 2007 and 2008 were 77.9%, 70.0% and 72.5%, respectively, of our total purchases during the relevant periods. However,
we believe that our business is not substantially dependent on any individual supplier.
We purchase raw materials and components using both forecast orders and purchase orders. To ensure
our suppliers will have sufficient time to prepare the components according to our requirements, we
typically make a forecast order three or four months before the expected delivery time. The
forecast order is not binding on either party. We then make a confirmed purchase order four to
eight weeks prior to the delivery time. We separately negotiate the price for each purchase order
and typically do not enter into long-term supply contracts.
We maintain different inventory levels of our raw materials, depending on the type of product and
lead time required to obtain additional supplies. We seek to maintain reasonable inventory levels
that achieve a balance between our efforts to reduce our storage costs and optimize working
capital, and the need to ensure that we have access to adequate supplies. As of December 31, 2007
and 2008, we had RMB119.4 million and RMB116.2 million ($17.0 million), respectively, of raw
materials in inventory.
Production management
We closely monitor our inventory levels based on sales levels. We typically maintain an aggregate
of approximately 30,000 units of inventory of our finished products. We plan our production on a
monthly basis based on anticipated demand and make periodic adjustments to our actual production
and inventory levels based on actual orders received.
27
Manufacturing process
The following diagram shows the general production stages for our handsets:
Quality control and certifications
Our quality control procedures include raw material and components quality inspection and testing.
In addition, we have established inspection points at key production stages to identify product
defects during the production process. Our finished handset products are inspected and tested
according to standardized procedures. Moreover, we provide regular training and specific guidelines
to our operators to ensure that production processes meet our quality inspection and other quality
control procedures.
Our handset manufacturing facility obtained the ISO 9001 quality management system certification in
2000.
Distribution and Marketing
Distribution network
Substantially all of our products were sold to customers in mainland China. We sell our products
primarily to our national distributors, provincial distributors, TV direct sales distributors and
internet distributors that resell our products to end customers either directly or through their
own distribution networks, which are principally composed of local distributors and retail outlets.
As of June 12, 2009, our distribution network included five national distributors, 66 provincial
distributors and 15 TV direct-sales distributors and one internet distributors. These distributors
sell our products to approximately 300 local distributors and over 3,600 retail outlets and
directly to end users, covering 27 provinces and municipalities in China. These retail outlets
mainly include handset retail chains, electronic appliance retail chains and department stores. In
addition to traditional distribution channels, we are also actively exploring other channels. In
November 2008, we also began the online retail sale of our VEVA-branded handsets directly to end
customers through the website, www.vevago.com. Since the beginning of 2009, we have also started to
build and operate our own specialty retail stores to market and sell our VEVA-branded handsets
directly to end customers. As of June 12, 2009, we operated six VEVA retail stores in Beijing,
China.
We enter into distribution agreements with our national and provincial distributors. Under these
agreements, our national distributors are granted the exclusive rights to distribute certain of our
products in China. Our provincial distributors are granted the exclusive rights to distribute
selected products within their respective territories. Under such exclusive distribution
arrangements, no distributor is allowed to sell the same product in the same region with other
distributors, which effectively eliminates competition among our distributors. We provide our
distributors with product and training guidelines for each of our products and require them to
observe these guidelines and provide trainings to employees working at the retail outlets. We
regularly monitor and review our distributors’ sales performance and compliance with our guidelines
and contract terms. Our distributors engage in self-initiated promotional activities within the scope of guidelines provided by us, and bear the costs associated with such
activities.
Sales generated by our five best-performing distributors accounted for approximately 76.0%, 53.0%
and 85.1% of our revenue in 2006, 2007 and 2008, respectively, and the best-performing distributor
accounted for approximately 28.4%, 12.4% and 52.7% of our revenue in the same periods. Our
distribution agreements generally have a term of one year, but in some cases may extend as long as
five years for key distributors. However, the best-performing distributors varied and their
respective percentages of our revenue fluctuated significantly in each of the above periods.
Although we rely on distributors for the sale, marketing and after-sales support of our products,
we believe our business is not substantially dependent on any individual distributor.
Marketing
We market our handsets through traditional mass media channels, including television, newspapers,
magazines, the Internet and outdoor media, such as billboards. In addition, we also provide
guidelines to our distributors for conducting promotional activities at retail outlets, such as
offering products at discount prices during holiday seasons.
28
Pricing
We set the prices of our products based on our development and production costs, the prices of
competing products and end-user feedback we collect through our distributors, and review and adjust
our product pricing periodically based on these factors. Due to rapidly evolving technology
developments that lower our production costs, intense market competition and changes of consumer
tastes and preferences, we typically experience gradual price declines during the economic lives of
our products.
To avoid pricing competition among our distributors, we set retail price-setting guidelines for our
products. Under these guidelines, distributors are permitted to sell our products within a
pre-determined range, which provides them with limited flexibility in terms of pricing.
After-Sales Services
We have established uniform replacement and warranty policies for each of our products. Certain of
our distributors and other third-parties provide after-sales services for our products, including
handset replacements, components replacements and repairs, through over 200 after-sales service
centers located throughout China. We enter into agreements with those service providers, under
which we are obligated to bear the costs of materials used for after-sales services provided during
the warranty period. The after-sales service providers bear all other expenses, including cost of
materials for services provided after the warranty period has expired as well as labor expenses. We
are also responsible for the training of after-sales service personnel.
Intellectual Property and Proprietary Rights
We utilize our internally developed technologies and intellectual property rights to develop,
design and manufacture our handset products. Our internally developed technologies and intellectual
property rights are an important element of our business operations and a competitive tool for us.
We rely on trade secret protection and confidentiality agreements to protect our proprietary
information and know-how. Our management and each of our research and development personnel have
entered into a standard annual employment contract, which includes a confidentiality clause and a
clause acknowledging that all inventions, designs, trade secrets, works of authorship, developments
and other processes generated by them on our behalf are our property, and assigning to us any
ownership rights that they may claim in those works. Despite our precautions, it may be possible
for third parties to obtain and use, without our consent, intellectual property that we own or are
licensed to use. Unauthorized use of our intellectual property by third parties, and the expenses
incurred in protecting our intellectual property rights, may adversely affect our business. See
“Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—We have not applied for
patents or registered copyrights for most of our intellectual property and our failure to
adequately protect our intellectual property rights may undermine our competitive position, and
litigation to protect our intellectual property rights may be costly.”
We have not applied for patents or registered copyrights in China for most of our inventions,
original works of authorship, developments and improvements relating to the mobile handsets we
produce. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—We have not
applied for patents or registered copyrights for most of our intellectual property and our failure
to adequately protect our intellectual property rights may undermine our competitive position, and
litigation to protect our intellectual property rights may be costly.” Although we believe that, as
of today, patents and copyrights have not been essential to maintaining our competitive market
position, we intend to assess appropriate occasions in the future for seeking patent and copyright
protections for those aspects of our business that provide significant competitive advantages.
We are currently in the process of applying for the registration of three trademarks relating to
our brand name “CECT” with the China Trademark Office. The registration of these trademarks was
previously applied for by a third party who was not involved in the mobile handset manufacturing
industry. We purchased the trademark application rights from the third party through a related
party in 2007 and anticipate to receive the final approval of our application from the China
Trademark Office in the second half of 2009. See “Item 7. Major Shareholders and Related Party
Transactions—B. Related Party
Transactions—Transfer of Trademark Application Rights.” In addition, as of December 31, 2008, we
had 11 approved trademarks and 25 trademark applications pending with the China Trademark Office.
Technology Licenses and Agreements
In addition to our internally developed technologies and know-how, we also depend on technologies
licensed from third parties to design and manufacture our products. For example, we entered into a
technology license agreement with Beijing InfoQuick SinoVoice Speech Technology Corp, or SinoVoice,
dated April 10, 2009, under which we were granted the right to use certain handwriting technology
developed by SinoVoice, for a period of one year. Under a software license agreement entered into
by CECT with Mobile Soft Technology (Nanjing) Co., Ltd., or Mobile Soft, on October 28, 2005, we
were granted the right to use certain software that supports wireless application protocol and
multimedia messaging service functions in our handsets for a period of two years. The contract was
renewed on March 10, 2008 with Access China Inc., a company that acquired Mobile Soft in 2007, for
an additional three years.
We believe that none of the license agreements is critical to our business and that we can identify
alternative technologies and technology providers without undue disruption to our business and
operations. However, we cannot assure you that the loss of one or more of these licenses will not
have a material adverse effect on our business. See “Item 3. Key Information—D. Risk Factors—Risk
Related to Our Business—We rely on a number of technologies licensed from third parties and the
loss of some or all of these licenses or failure to renew them on a timely basis could interrupt
our production and have a material adverse impact on our business.”
29
Competition
The mobile handset manufacturing industry in China is intensely competitive. Industry participants
compete with each other mainly on the basis of the breadth and depth of their product portfolios,
price, operational and manufacturing efficiency, technical performance, product features, quality,
customer support and brand recognition. We face significant competition from a number of
competitors, including domestic mobile handset producers such as Bird Ningbo Co., Ltd., Konka Group
Co., Ltd., Beijing Tianyu Communication Equipment Co. Ltd., Gionee Communication Co., Ltd., and
Haier (Qingdao) Telecom Co., Ltd. and a number of large multinational mobile handset producers,
such as Nokia Corporation, Motorola, Inc., Samsung Electronics Co., Ltd., Sony Ericsson Mobile
Communications (China) Co. Ltd., and LG Electronics (China) Ltd. Many of our competitors have
longer operating histories, greater name recognition, significantly larger market shares, access to
larger customer bases and significantly greater economies of scale and financial, sales and
marketing, manufacturing, distribution, technical and other resources than we do. Some of these
competitors have used, and we expect will continue to use, more aggressive pricing strategies,
greater incentives and subsidies for distributors, retailers and customers, more successful design
approaches and more advanced technologies. In addition, some competitors have chosen to focus on
building products based on commercially available components, which may enable them to introduce
these products faster and with lower levels of research and development spending than us.
International mobile handset makers tend to have established and well-known brands, which we
believe Chinese consumers tend to find desirable relative to domestic Chinese brands. Domestic
mobile handset manufacturers in China generally compete on style, functionality, price, quality,
after-sales service and breadth of products, and are constantly exposed to the risk that
competitors may implement new technologies, or may offer lower prices, additional products or
services or other incentives that they are not able to offer.
Since we commenced our handset business operations, we have experienced significant price and
margin pressures due to intense market competition. However, we have been able to maintain
relatively high product margins due to our strategic focus on developing higher-end and
differentiated products, which provides us with a competitive advantage over other handset
manufacturers. Price competition may become even more intense in the future and we cannot guarantee
we will be able to maintain the current level of our profit margins.
In addition, we also face competition from unlicensed mobile handset manufacturers in China that
make mobile handsets without the requisite governmental approvals and licenses. However, we believe
that these manufacturers are able to keep their production costs low primarily as a result of tax
avoidance and non-payment of various fees that are required for all licensed products. Despite
recent government actions against many of these unlicensed manufacturers, we believe that such
mobile handsets still account for a significant portion of all mobile handsets sold in China. If
the PRC government is not successful in preventing these unlicensed mobile handset manufacturers
from producing and selling their mobile handsets, our market share and our results of operations
could be materially adversely affected.
As a result of developments in our industry, we also expect to face new competition from companies
in related industries, such as consumer electronics manufacturers. Additionally, we face increasing
competition from mobile telecommunication operators that are increasingly offering mobile devices
under their own brands.
Environmental Matters
Our manufacturing facilities are subject to various pollution control regulations with respect to
noise and air pollution and the disposal of waste and hazardous materials. We are also subject to
periodic inspections by local environmental protection authorities. We believe that we have
obtained all requisite environmental permits and approvals to conduct our business.
Employees
As of December 31,2008, we had 692 full-time employees. The following table sets forth the number
of our full-time employees by function as of December 31, 2006, 2007 and 2008, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
Functions
|
|
2006
|
|
2007
|
|
2008
|
|
Manufacturing and engineering
|
|
|
550
|
|
|
|
516
|
|
|
|
373
|
|
|
General and administration
|
|
|
77
|
|
|
|
66
|
|
|
|
66
|
|
|
Marketing and sales
|
|
|
32
|
|
|
|
44
|
|
|
|
85
|
|
|
Research and development
|
|
|
153
|
|
|
|
162
|
|
|
|
168
|
|
We offer our employees competitive compensation packages and various training programs, and as a
result we have been able to attract and retain qualified personnel. As of December 31, 2008, 30.7%
of our employees held university or graduate degrees.
As required by PRC regulations, we participate in various employee benefit plans that are organized
by municipal and provincial governments, including housing, pension, medical and unemployment
benefit plans. We are required under PRC law to make contributions to the employee benefit plans at
specified percentages of the salaries, bonuses and certain allowances of our employees, up to a
maximum amount specified by the local government from time to time. Members of the retirement plan
are entitled to a pension equal to a fixed proportion of the salary prevailing at the member’s
retirement date. The total amount of contributions we made to employee benefit plans for the years
ended December 31, 2006, 2007 and 2008 was approximately RMB1.3 million, RMB1.3 million and RMB4.6
million ($0.7 million), respectively.
We adopted our 2007 equity incentive plan in March 2007 to provide an additional means to attract,
motivate, retain and reward selected directors, officers, managers, employees and other eligible
persons. As of June 12, 2009, there were outstanding options to purchase
30
2,944,800 ordinary shares
held by one of our directors, officers, employees and one consultant and 6,035,675 ordinary shares
remained reserved for issuance under this plan.
We enter into a standard employment agreement with our management and research and development
personnel that includes confidentiality and non-competition provisions. These contracts include a
covenant that prohibits each of them from engaging in any activities that compete with our business
during, and for three years after, the period of their employment with our company. Under current
national and local PRC laws and regulations, which vary by jurisdiction, we cannot assure you that
the non-competition provisions will be enforceable in all cases.
We believe that we maintain a good working relationship with our employees and we have not
experienced any significant labor disputes or any difficulty in recruiting staff for our
operations. Our employees are not covered by any collective bargaining agreement.
Insurance
Qiao Xing Telecommunication Industry Co., Ltd., an independent third party, maintains property
insurance for its premises in Huizhou, in which our current handset production facility is located.
The aggregate maximum amount covered by this policy is equivalent to approximately RMB130.9 million
($19.2 million). We also maintain property insurance for our automobiles. We do not maintain
business interruption insurance, product quality insurance or key-man life insurance. We believe
our insurance coverage is customary and standard for companies of comparable size in comparable
industries in China. However, we cannot assure you that our existing insurance policies are
sufficient to insulate us from all losses and liabilities that we may incur.
Our Principal Facilities
Our corporate headquarters are located in approximately 4,100 square meters of office space in the
CECT Building in Beijing for which we have entered into a lease under which 1,200 square meters
will expire in December 2009 and 2,900 square meters will expire in December 2010. Our handset
manufacturing facility is located on a leased property of approximately 3,700 square meters in
Huizhou. This lease expires in December 2010. In addition, we hold the land use rights for a
property with an area of approximately
100,000 square meters in Huizhou City. The land use rights for 77,410 square meters of this land
will expire in September 2051 and for 22,590 square meters will expire in September 2052.
We believe that our existing facilities are adequate and suitable to meet our present needs and
that additional space can be obtained on commercially reasonable terms to meet our future
requirements.
In 2009, we started to build and operate our own specialty retail stores to market and sell our
VEVA-branded mobile handsets directly to end customers. As of June 12, 2009, we operated six VEVA
retail stores in Beijing, China. These retail stores are located in approximately 296 square meters
of shopping space with lease terms ranging from one to three years.
Regulations
This section sets forth a summary of the most significant regulations or requirements that affect
our business activities in China or our shareholders’ right to receive dividends and other
distributions from us.
Chinese Regulatory Framework for the Telecommunications Industry
Overview
China’s telecommunications industry, including the mobile handset manufacturing industry, is
heavily regulated, primarily through MIIT, which is under the supervision of the State Council. In
addition, a number of other government departments, such as the NDRC, also have regulatory
authority over various aspects of the telecommunications industry.
The telecommunications industry in China is regulated at both the national and provincial levels.
At the national level, MIIT is the primary regulatory authority and, together with other regulatory
authorities, such as the NDRC, is responsible for, among other things:
|
•
|
|
Formulating and enforcing industry policies, regulations and technology standards;
|
|
|
|
•
|
|
Granting network access licenses for telecommunications equipment;
|
|
|
|
•
|
|
Supervising the quality and the operation of telecommunications equipment connected to
public telecommunication networks; and
|
|
|
|
•
|
|
Together with other relevant regulatory authorities, formulating the macro-planning of
mobile telecommunications equipment production.
|
At the provincial level, provincial telecommunications authorities, together with other relevant
regulatory authorities, are responsible for implementing and enforcing the policies and regulations
formulated by MIIT, as well as other central government authorities, within their provinces.
The Chinese government is currently in the process of drafting a telecommunications law in order to
establish a uniform regulatory framework for the telecommunications industry in China. However, it
is not clear when the law will be adopted. Pending the adoption of the telecommunications law, the
PRC Telecommunications Regulation issued by the State Council on September 25, 2000, or the
Telecommunications Regulation, is currently the main regulation governing the telecommunications
industry in China. The Telecommunications Regulation covers all key aspects of telecommunications
operations, including, among others, access of telecommunications equipment to networks such as for
use in the mobile handset industry.
31
MIIT license
The PRC government regulates telecommunications equipment manufacturing primarily through requiring
network access licenses for telecommunications equipment, under a unified network entry approval
and certification system established pursuant to the Notice Regarding the Implementation of Network
Entry License System for Mobile Communications Terminal Products, promulgated on May 19, 1994 by
the Ministry of Posts and Telecommunications, the predecessor of MIIT.
On May 10, 2001, MIIT promulgated the Administration Measures of the Network Access of
Telecommunications Equipment. According to these measures, all telecommunications terminal
equipment that is subject to the network entry license system, including mobile handsets, must obtain a
network access license issued by MIIT in order for that product to have access to public
telecommunications networks and to be sold in China.
To obtain a network access license, a handset manufacturer must submit an application to MIIT,
together with a test report issued by a telecommunications equipment testing organization
recognized by the General Administration of Quality Supervision, Inspection and Quarantine, or the
GAQSIQ, and authorized by MIIT, or a product quality certificate issued by a state-designated
certification agency. Handset manufacturers must place a sticker on the licensed handset bearing
the mark of the network access license issued by MIIT. Each network access license is valid for
three years. Handset manufacturers must submit applications to renew such licenses at least three
months before the expiration of the three-year period. In addition, manufacturers must re-apply for
such a license if there are any changes in the technology or certain other prescribed particulars
of the licensed handset.
MIIT requires handset manufacturers to implement a comprehensive quality control system and provide
after-sales services for their licensed products. These requirements apply equally to both domestic
and foreign manufacturers and to both equipment produced in China and equipment imported from
overseas. The GAQSIQ, in consultation with MIIT, carries out on-the-spot checks to supervise the
quality of the licensed telecommunications equipment and publicly announces the results of such
spot checks. Any violation of these requirements may result in penalties in the form of a
suspension of the network access license, a warning or a fine.
In addition, according to the Implementation Rules for Compulsory Certification of
Telecommunications Equipment issued by the Certification and Accreditation Administration of the
PRC on December 7, 2001 and the Administration of Compulsory Product Certification Provisions
issued on December 3, 2001 by the GAQSIQ, starting from May 1, 2002, certain telecommunications
terminal products, including wireless terminal products (such as GSM and CDMA handsets) and
multimedia terminal products become subject to a mandatory certification program by designated
governmental agencies, known as the China Compulsory Certification, or the 3C certificate. A 3C
certificate will be issued to terminal products after testing of such products against standards
for health and safety, telecommunications network security and radio compatibility. Terminal
products without 3C certificates cannot be sold or used in telecommunications networks in China,
regardless of whether a network access license has been obtained for such product.
We have obtained 3C certificates and network access licenses for all models of the handsets we
manufacture.
NDRC approval
In China, investments in fixed assets are generally subject to the approval of the NDRC (or its
predecessor, the State Planning Commission). On December 31, 1998, MIIT and the State Planning
Commission jointly issued the Notice of Accelerating the Development of the Mobile
Telecommunications Industry. This Notice emphasizes that mobile handset production projects shall
be subject to the approval of the State Planning Commission, after MIIT’s examination of such
projects. Furthermore, mobile handset production shall be incorporated into the national guidance
plan approved annually by the State Planning Commission.
In 2004, the State Council promulgated the Decision of Investment Regime Reform, which provides
that certain types of investment projects, including mobile handset production investment projects,
shall be verified, instead of being approved, by the NDRC. On February 19, 2005, the NDRC
promulgated the Several Regulations on the Verification of Mobile Communication Systems and
Terminal Product Investment Projects, which provides that mobile handset manufacturers must first
obtain verification from the NDRC, which shall solicit the opinion of MIIT before issuance of such
verification.
As a result of the gradually decreasing involvement of regulatory authorities, licenses to
manufacture mobile handsets have become increasingly easy for domestic enterprises to obtain. On
October 9, 2007, the State Council promulgated the Decision of the Fourth Abolition and Adjustment
of the Administrative Approval Items, which abolished the verification requirement for mobile
handset production.
We possess all licenses and verifications necessary to conduct our business as a manufacturer and
seller of mobile handsets in China under these and all other applicable laws and regulations.
Environmental Regulations
We use, generate and discharge toxic, volatile or otherwise hazardous chemicals and wastes in our
research and development and manufacturing activities. As a result, we are subject to a variety of
governmental regulations related to the storage, use and disposal of hazardous materials. The major
environmental regulations applicable to us include the Environmental Protection Law of the PRC, the
Law of the PRC on the Prevention and Control of Water Pollution, Implementation Rules of the Law of
the PRC on the Prevention and Control of Water Pollution, the Law of the PRC on the Prevention and
Control of Air Pollution, the Law of the PRC on the Prevention and Control of Solid Waste
Pollution, and the Law of the PRC on the Prevention and Control of Noise Pollution. We believe we
are in compliance with these environmental laws and rules in all material respects.
C. Organizational Structure
32
See “—A. History and Development of the Company.”
D. Property, Machinery and Equipment
See “—B. Business Overview—Manufacturing—Manufacturing facilities.”
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion of our financial condition and results of operations is based upon and
should be read in conjunction with our consolidated financial statements and related notes included
elsewhere in this annual report. This discussion contains forward-looking statements that involve
risks and uncertainties. Actual results could differ materially from those projected in the
forward-looking statements. In evaluating our business, you should carefully consider the
information provided under “Item 3. Key Information—D. Risk factors.”
Unless otherwise indicated, the 2006 full-year financial data set forth in this section are sums of
the data for the period from January 1 to November 30, 2006 and the period from November 30 to
December 31, 2006. The latter period reflects push-down accounting resulting from the purchase by
our parent company of the remaining 20% equity interest in our company on November 30, 2006. See
“—Financial impact of our corporate history.” Although the presentation of the combined full year
financial data for the year ended December 31, 2006 is not in accordance with U.S. GAAP, we believe
this combination is useful to provide investors with a more complete understanding of our results
of operations data from year to year.
Overview
We are a domestic manufacturer of mobile handsets in China. We manufacture and sell mobile handsets
based primarily on GSM global cellular technologies. We are currently in the process of developing
3G mobile handsets based on the WCDMA and TD-SCDMA technologies and we expect to launch our first
3G mobile handset to the Chinese market in the third quarter of 2009. We develop, produce and
market a wide range of mobile handsets, with increasing focus on differentiated products that
generally have higher profit margins. We sell our products primarily to our national distributors,
provincial distributors, TV direct sales distributors and internet distributors, which resell our
products to end customers in mainland China either directly or through their own distribution
networks principally composed of local distributors and retail outlets. In November 2008, we also
began the online retail sale of our VEVA-branded handsets directly to end customers through the
website, www.vevago.com. Since the beginning of 2009, we have also started to build and operate our
own specialty retail stores to market and sell our VEVA-branded handsets directly to end customers.
As of June 12, 2009, we operated six VEVA retail stores in Beijing, China.
We sold approximately 2.26 million, 3.82 million and 2.71 million mobile handsets in 2006, 2007 and
2008, respectively. Our revenues increased by 23.8% from RMB2,537.2 million in 2006 to RMB3,141.1
million in 2007, and decreased by 31.4% to RMB2,153.9 million ($315.7 million) in 2008. Our earnings before
extraordinary items increased by RMB295.9 million from RMB268.9 million in 2006 to RMB564.8 million
in 2007 and decreased by 25.0% to RMB423.8 million ($62.1 million) in 2008. Our net income
increased by RMB306.8 million from RMB286.7 million in 2006 to RMB593.5 million in 2007, and
decreased by 28.6% to RMB423.8 million ($62.1million) in 2008.
Key Factors Affecting Our Financial Performance
We believe the most significant factors affecting our financial performance are:
|
•
|
|
Industry growth;
|
|
|
|
•
|
|
Competition and market position;
|
|
|
|
•
|
|
Product offerings and pricing;
|
|
|
|
•
|
|
Cost management; and
|
|
|
|
•
|
|
Working capital management.
|
Industry growth
In recent years, China’s mobile handset market has experienced rapid growth and development. We
believe that China will continue to play a key role in the development of the global
telecommunication industry and remain one of the largest wireless subscriber markets in the world
for the foreseeable future.
Moreover, China’s mobile telecommunication operators have upgraded their networks to offer 3G
wireless telecommunication services. 3G technology is expected to enable users to transmit larger
volumes of data and more sophisticated content, such as streaming media and multi-player games,
more quickly. In January 2009, MIIT issued 3G licenses to China Mobile (TD-SCDMA), China Unicom
(CDMA2000) and China Telecom (WCDMA). The more extensive use of data transmission, as facilitated
by new and upgraded technologies and networks, is expected to lead to increased demand for enhanced
wireless value-added services and, therefore, increased demand for mobile phones with more advanced
technologies in China.
33
The mobile phone penetration rate in China is still considerably lower than most of the more
developed countries and we believe that it has the potential to increase significantly in the next
several years. Historically, the mobile telecommunication subscription and handset demand growth
took place in China’s large cities, such as Beijing, Shanghai and Guangzhou. More recently,
however, the demand growth is increasingly driven by medium and small cities and rural areas, which
still have low penetration rates and benefit from favorable government policies, such as universal
service obligations imposed upon mobile telecommunication operators in China, and the increasing
affordability of handsets, mainly due to the higher average standard of living across China.
Competition and market position
While China’s mobile handset market is expected to grow significantly, competition is intense. The
market has become highly fragmented in recent years as an increasing number of handset producers
have entered the market.
We face significant competition from domestic and multinational mobile handset producers. A small
number of multinational players have gained significant market share in China based on greater
brand name recognition among Chinese consumers. In addition, competition from domestic handset
makers has intensified in recent years.
We focus on developing and marketing differentiated products for the Chinese handset market. By
leveraging our in-house research and development capabilities and operational cost advantages, we
have been able to offer consumers handsets with more attractive features at relatively lower
prices. This strategy has allowed us to maintain our market position while avoiding direct
competition with mass market competitive products.
Product offerings and pricing
The mobile handset market in China, as well as globally, is characterized by rapidly changing
technical standards and increasing demand for handsets with more functions and personalized
features and shortening product life cycles. Pricing of mobile handsets depends principally on
manufacturing costs, overall market demand, competition and, increasingly, costs associated with
licensing fees, royalties and other payments for technology improvements. Increased economies of
scale, technology advancements, and intensified market competition among material and component
suppliers have led to significant reductions in handset prices. The selling price and corresponding
gross profit margin for a particular mobile handset model typically declines over time as it
reaches maturity in the product life cycle. The product life cycle for our most successful handsets
has been approximately 12 to 15 months and four to six months for other handset products.
Our success depends on our ability to satisfy market demand by continually and successfully
introducing new product offerings tailored towards local consumers and changing trends.
Historically, we have been able to limit the decline in our average selling prices and reduce the
impact on our overall margins by successfully introducing popular new products with increased
features and designs. For example, in 2007, we released a series of products with enhanced
functions, such as the fingerprint recognition information security phone and the wrist watch
phone. In 2008, we released our new VEVA-branded mobile handsets to target the fashion-conscious
professional men and women. The VEVA mobile handsets not only took our products’ overall design and
functionality to a new level, but also gave value-conscious shoppers an attractive
performance-price value proposition. Our ability to continually introduce new product offerings
with attractive features has allowed us to achieve higher average selling prices and consistently
achieve relatively higher profit margins.
We also expect to continue to incur costs to license third-party technologies used in our products,
as well as for royalties and other fees we may be required to pay in order to use 3G or other
technologies used in our handset products.
Cost management
We have adopted various measures to control our development and production costs, including
utilizing locally sourced raw materials and components, focusing on in-house design and
manufacturing and utilizing a limited number of core handset platform designs for developing and
producing a wide range of products with varying features. We also achieved greater economies of
scale by significantly increasing our total sales while containing the increases in operating
expenses such as selling and distribution expenses, and general and administrative expenses.
Working capital management
We believe our success also depends on our ability to effectively manage our inventory levels,
trade-related receivables and payables and other working capital needs. We communicate regularly
with our distributors to collect timely feedback from end users and through other channels
regarding demand for particular products and project our production volumes and inventory levels
based on our analysis of this feedback. As a result, this careful monitoring helps us better manage
our working capital requirements. However, we depend on timely and accurate market feedback and a
good relationship with our distributors to achieve these added efficiencies. Any failure to obtain
timely and accurate market feedback or to correctly estimate demand for our products could result
in lost sales opportunities, potential inventory related charges or reduced sales prices and gross
margins for our products. We also closely monitor the level of trade-related receivables and
payables to effectively anticipate and manage working capital needs.
Financial Impact of Our Corporate History
The following sets forth our corporate transactions that have had a significant impact on our
statement of operations for the years ended December 31, 2004, 2005, 2006, 2007 and 2008:
|
•
|
|
In 2004, CECT disposed of its 40.0% equity interest in CEC Mobile Co., Ltd., or CECM, for
cash consideration of RMB72.0 million, resulting in a gain on disposal of RMB10.7 million.
After the disposal, CECT continued to hold a 10% equity interest in CECM.
|
34
|
•
|
|
In 2005, we acquired an additional 25.0% equity interest in CECT for aggregate
consideration of RMB75.0 million, including, among other components, the transfer of a 90.0%
equity interest in Beijing Jinxin Hengtong Technology Company Limited, or BJHTCL, and a 3.9%
equity interest in China Electronics Financial Co., Ltd., both of which were originally held
through CECT. This transaction resulted in an extraordinary gain of RMB48.2 million on the
acquisition of additional equity interest in CECT and a gain of RMB10.3 million on the
disposal of BJHTCL.
|
|
|
|
•
|
|
In July 2006, we made an additional capital contribution of $18.8 million (equivalent to
RMB149.6 million) into CECT. As the minority CECT shareholder did not make a corresponding
additional capital contribution, our ownership interest in CECT increased by 3.4% to 93.4%.
The transaction resulted in an extraordinary gain of RMB17.8 million.
|
|
|
|
•
|
|
In June 2007, we made another capital contribution of $50 million (equivalent to RMB380.4
million) into CECT. As the minority CECT shareholder did not make a corresponding additional
capital contribution, our ownership interest in CECT increased by 3.14% to 96.6%. The
transaction resulted in an extraordinary gain of RMB28.7 million.
|
|
|
|
•
|
|
In May 2008, we issued the $70,000,000 Notes in exchange for a combination of 6,966,666 of
our ordinary shares that were owned by the Investors of the Notes, valued at approximately
US$48,349,000, and cash of $21,651,000. For the year ended December 31, 2008, the Notes
resulted in interest expense of RMB92.9 million ($13.6 million), gain on revaluation of the
derivative instruments embedded in the Notes of RMB144.9 million ($21.2 million) and an
exchange loss of RMB11.5 million ($1.7 million) that arose from the revaluation of the Notes.
|
|
|
|
•
|
|
In August 2008, the holders of the Notes exercised the option to convert $8,251,000 of the
principal amount of the Notes and accrued interest thereon of $46,000 into 1,511,397 of our
ordinary shares at a conversion price of US$5.49 per share, resulting in a loss on
extinguishment of the convertible debts of RMB10.6 million ($1.6 million).
|
In addition, on November 30, 2006, Xing obtained 100% ownership of our company when it completed
its acquisition of the remaining 20% equity interest in our company from Galbo Enterprise Limited.
As more fully described in note 2(a) and note 3 to our audited consolidated financial statements
included elsewhere in this annual report, this acquisition by Xing established a new basis of
accounting that resulted from the “push-down” of Xing’s basis to our underlying assets and
liabilities, effective November 30, 2006. The effects of the push-down accounting adjustments
include the following:
|
•
|
|
Fair value adjustments to the extent of Xing’s additional 20% acquired interest relating to
inventories (RMB1.1 million), property, machinery and equipment (RMB1.5 million) and
intangible assets (RMB55.2 million), and the related adjustments to deferred taxes;
|
|
|
|
•
|
|
A net adjustment to historical goodwill of RMB89.4 million; and
|
|
|
|
•
|
|
An in-process research and development charge of RMB41.7 million, representing Xing’s
acquired interest in the estimated fair value of product technologies under development as of
November 30, 2006.
|
We present all financial data in the “old basis” period based on the historical carrying amounts of
our assets and liabilities. In 2006, we had net income of RMB306.2 million during the “old basis”
period and a net loss of RMB19.5 million during the “new basis” period. The loss in the “new basis”
period resulted mainly from the push-down of in-process research and development charge of RMB41.7
million and an increase in amortization of other intangible assets of RMB3.3 million.
Our business grew and evolved rapidly from 2003 to 2007. However, for the year ended December 31,
2008, there was a decrease in our revenue, operating income and net income, from the year ended
December 31, 2007. We may continue to experience decreases in our revenue, operating income and net
income and may not be able to achieve a similar growth rate in future periods as we did from 2003
to 2007 and our historical operating results therefore may not provide a meaningful basis for
evaluating our business, financial performance and prospects. Moreover, our business model,
technology and ability to achieve satisfactory manufacturing results at higher volumes are
unproven. Therefore, you should not rely on our past results or our historical rate of growth as an
indication of our future performance.
We operate and manage our business as a single segment. Since we primarily generate our revenue
from customers in mainland China, we do not account for our results of operations on a geographic
basis. For more details regarding our results of operations, see “—A. Operating results.” For more
details regarding our corporate history, see “Item 4. Information on the company—A. History and
Development of the Company.”
Revenue
We generate a substantial majority of our revenue from the sale of mobile handsets and related
accessories to our distributors. Accessories mainly include components used for after-sales
services. We also derive a portion of our revenue from other services, including value-added
services and handset processing services. In addition, we previously generated a portion of our
revenue from handset testing services and brand-sharing activities.
We report handsets and accessories revenue net of value-added taxes, selling price rebates and
price guarantees. Selling price rebates refer to price discounts to distributors when they achieve
certain sales volumes. Price guarantees are monetary compensation for distributors when the retail
prices of our products fall below certain pre-agreed levels.
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Combined)
(1)
|
|
|
(New Basis)
|
|
|
|
Year ended
|
|
|
Year ended December 31,
|
|
|
|
December 31, 2006
|
|
|
2007
|
|
2008
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
(Amounts in thousands, except percentages)
|
|
Amount
|
|
of revenue
|
|
|
Amount
|
|
of revenue
|
|
Amount
|
|
of revenue
|
|
|
|
(RMB)
|
|
|
|
|
|
|
(RMB)
|
|
|
|
|
|
(RMB)
|
|
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Handsets and accessories
|
|
|
2,494,004
|
|
|
|
98.3
|
%
|
|
|
|
3,113,756
|
|
|
|
99.1
|
%
|
|
|
2,140,346
|
|
|
|
313,719
|
|
|
|
99.4
|
%
|
|
Services and others
|
|
|
43,207
|
|
|
|
1.7
|
%
|
|
|
|
27,338
|
|
|
|
0.9
|
%
|
|
|
13,527
|
|
|
|
1,982
|
|
|
|
0.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,537,211
|
|
|
|
100.0
|
%
|
|
|
|
3,141,094
|
|
|
|
100.0
|
%
|
|
|
2,153,873
|
|
|
|
315,701
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents the sum of the relevant data for the period from January 1 to November 30, 2006
and the period from November 30 to December 31, 2006. Although the presentation of the
combined revenues for the year ended December 31, 2006 is not in accordance with U.S. GAAP, we
believe this combination is useful to provide investors with a more complete understanding of
our results of operations data from year to year.
|
We sold approximately 2.26 million, 3.82 million and 2.71 million handsets in 2006, 2007 and 2008,
respectively. The average selling price of our handsets was RMB1,094 in 2006, RMB816 in 2007 and
RMB788 ($116) in 2008. The decrease in average selling price in 2008 was primarily due to the sale
of a large volume of ultra-low cost phones, such as the C3100, in the first and second quarter of
2008, as well as promotional sales in the fourth quarter of 2008 across the CECT-branded products
in response to the economic downturn in China.
Our services mainly include value-added services provided to our end customers, such as ringtone
downloading, handset testing services provided to third-party handset producers, and handset
processing services. Our revenue from value-added services was RMB10.9 million, RMB8.1 million and
RMB4.2 million ($0.6 million), respectively, in 2006 and 2007 and 2008. Our revenue from handset
testing services was RMB23.2 million in 2006. We ceased to provide such services in 2007 and
accordingly, no revenue from handset testing services was generated in 2007 and 2008. We provided
handset processing services to certain handset producers, including a subsidiary of Xing that is
not part of our operating group. Under this arrangement, we receive raw materials and components
from third parties and process them into handsets or into handset PCB. Our revenue from handset
processing services was RMB9.1 million, RMB19.2 million and RMB9.3 million ($1.4 million),
respectively, in 2006, 2007 and 2008. We were also engaged in brand-sharing activities, in which we
permitted other handset producers to market and sell their products under the “CECT” brand name. In
exchange, we generally charged fees ranging from RMB10 to RMB16 per unit. Products sold through
such brand-sharing arrangements amounted to approximately 36,000 units in 2006. We ceased
conducting such brand-sharing activities starting from the second half of 2006. Since we
significantly reduced the level of such activities in 2006, we derived only an insignificant amount
of revenue in 2006 from such activities.
Cost of Goods Sold and Operating Expenses
The following table sets forth our cost of goods sold and operating expenses and these amounts as
percentages of our revenue for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Combined)
(1)
|
|
|
(New Basis)
|
|
|
|
Year ended
|
|
|
Year ended December 31,
|
|
|
|
December 31, 2006
|
|
|
2007
|
|
2008
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
(Amounts in thousands, except percentages)
|
|
Amount
|
|
of revenue
|
|
|
Amount
|
|
of revenue
|
|
Amount
|
|
of revenue
|
|
|
|
(RMB)
|
|
|
|
|
|
|
(RMB)
|
|
|
|
|
|
(RMB)
|
|
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
2,062,209
|
|
|
|
81.3
|
%
|
|
|
|
2,255,844
|
|
|
|
71.8
|
%
|
|
|
1,287,096
|
|
|
|
188,654
|
|
|
|
59.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and distribution
|
|
|
14,761
|
|
|
|
0.6
|
%
|
|
|
|
36,322
|
|
|
|
1.2
|
%
|
|
|
146,551
|
|
|
|
21,481
|
|
|
|
6.8
|
%
|
|
General and administrative
|
|
|
21,049
|
|
|
|
0.8
|
%
|
|
|
|
69,032
|
|
|
|
2.2
|
%
|
|
|
44,231
|
|
|
|
6,483
|
|
|
|
2.1
|
%
|
|
Research and development
|
|
|
16,292
|
|
|
|
0.6
|
%
|
|
|
|
18,599
|
|
|
|
0.6
|
%
|
|
|
29,242
|
|
|
|
4,286
|
|
|
|
1.4
|
%
|
|
In-process research and development
|
|
|
41,739
|
|
|
|
1.7
|
%
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of other intangible
assets
|
|
|
15,178
|
|
|
|
0.6
|
%
|
|
|
|
32,280
|
|
|
|
1.0
|
%
|
|
|
11,727
|
|
|
|
1,719
|
|
|
|
0.5
|
%
|
|
Impairment of other intangible assets
|
|
|
—
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
26,235
|
|
|
|
3,845
|
|
|
|
1.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
109,019
|
|
|
|
4.3
|
%
|
|
|
|
156,233
|
|
|
|
5.0
|
%
|
|
|
257,986
|
|
|
|
37,814
|
|
|
|
12.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents the sum of the relevant data for the period from January 1 to November 30, 2006
and the period from November 30 to December 31, 2006. Although the presentation of the
combined cost of goods sold and operating expenses for the year ended December 31, 2006 is not
in accordance with U.S. GAAP, we believe this combination is useful to provide investors with
a more complete understanding of our results of operations data from year to year.
|
36
Cost of goods sold
Prior to 2004, we mainly sold handset products sourced from ODMs. In September 2004, we commenced
the manufacturing of our products in our Huizhou facility. We also outsource the production of our
products to EMS providers. The following table sets forth the unit sales volume and revenue
contribution of the products produced by us, outsourced from EMS providers and through ODM
arrangements, respectively, for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Combined)
(1)
|
|
|
(New Basis)
|
|
|
|
Year ended
|
|
|
Year ended December 31,
|
|
|
|
December 31, 2006
|
|
|
2007
|
|
2008
|
|
|
|
Sales
|
|
|
|
|
|
|
Sales
|
|
|
|
|
|
Sales
|
|
|
|
(Amounts in thousands, except units)
|
|
volume
|
|
Revenue
|
|
|
volume
|
|
Revenue
|
|
volume
|
|
Revenue
|
|
|
|
(Unit)
|
|
(RMB)
|
|
|
(Unit)
|
|
(RMB)
|
|
(Unit)
|
|
(RMB)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufactured in Huizhou facility
|
|
|
617,454
|
|
|
|
1,058,112
|
|
|
|
|
549,547
|
|
|
|
416,707
|
|
|
|
714,199
|
|
|
|
389,348
|
|
|
Outsourced from EMS providers
|
|
|
1,624,747
|
|
|
|
1,391,829
|
|
|
|
|
3,266,751
|
|
|
|
2,697,037
|
|
|
|
1,999,756
|
|
|
|
1,748,879
|
|
|
Outsourced from ODMs
|
|
|
19,621
|
|
|
|
23,569
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,261,822
|
|
|
|
2,473,510
|
|
|
|
|
3,816,298
|
|
|
|
3,113,744
|
|
|
|
2,713,955
|
|
|
|
2,138,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents the sum of the relevant data for the period from January 1 to November 30, 2006
and the period from November 30 to December 31, 2006. Although the presentation of the
combined revenue for the year ended December 31, 2006 is not in accordance with U.S. GAAP, we
believe this combination is useful to provide investors with a more complete understanding of
our results of operations data from year to year.
|
The largest items contributing to our cost of goods sold are the cost of raw materials and
components used for the manufacturing of our products, including those produced at our Huizhou
facility and through outsourcing arrangements with EMS providers, and the purchase price for
products sold under ODM arrangements. Other items contributing to our cost of goods sold are direct
labor, which includes salaries and benefits for personnel directly involved in manufacturing
activities, production expenses, which consist of salaries and benefits for indirect labor,
depreciation charges, utilities and rental expenses, product design fees paid to third-party
designers, shipping costs for products sold, processing fees for handsets outsourced from EMS
providers, mold amortization expenses, and after-sales service-related expenses, including related
labor costs and materials expenses.
Our cost of goods sold per unit was RMB912, RMB591 and RMB474 ($70), in 2006, 2007 and 2008,
respectively. The decrease in cost of goods sold per unit in 2007 was mainly due to the increase in
the sales volume of lower-cost but higher margin products such as our C1000 series ultra-long
standby handsets. The decrease in cost of goods sold per unit in 2008 was mainly due to the sale of
a large volume of ultra-low cost phones, such as the C3100, in the first half of 2008.
Operating expenses
Our operating expenses consist of selling and distribution expenses, general and administrative
expenses, research and development expenses, an in-process research and development charge and
amortization of other intangible assets.
Selling and distribution expenses
Our selling and distribution expenses primarily consist of share-based compensation, salaries,
benefits and other staff-related expenses for our sales and marketing personnel, office expenses
related to sales and marketing activities and advertising and other promotional expenses. Our
selling and distribution expenses increased by RMB110.3 million from RMB36.3 million in 2007 to
RMB146.6 million ($21.5 million) in 2008, primarily due to higher airtime costs incurred on
increased TV direct sales in 2008. We plan to increase the level of our marketing and promotional
activities and recruit additional sales and marketing
personnel to expand our business in the near term. We do not expect the increase in our sales and
marketing efforts to have a material adverse effect on our results of operations.
General and administrative expenses
Our general and administrative expenses primarily consisted of share-based compensation, salaries,
benefits and other expenses for our administrative personnel, expenses relating to legal,
accounting and other professional services, travel and entertainment, depreciation and amortization
charges and bad debt provisions. As a result of becoming a public company in May 2007, we have
incurred a higher level of expenses relating to legal, accounting, financial compliance and other
professional services. Our general and administrative expenses have also increased significantly in
2007 due to the share-based compensation expense relating to options that we granted to a director
and various employees in March 2007.
Our general and administrative expenses in 2008 were RMB44.2 million ($6.5 million), compared to
RMB69.0 million in 2007. The decrease was primarily due to the lower share-based compensation
expenses recognized in 2008, which decreased from RMB36.3 million in 2007 to RMB12.2 million ($1.8
million) in 2008.
37
Research and development expenses
Our research and development expenses primarily consist of share-based compensation, salaries,
benefits and other staff-related expenses for our research and development personnel, office
expenses and related cost of materials and product testing expenses.
We expect our research and development expenses to increase in the future as we intend to recruit
more research and development engineers and acquire new technologies and testing equipment to
strengthen our in-house design and development capabilities, particularly our capability to develop
higher-end and differentiated products. We do not expect the increase in our research and
development expenses to have a material adverse effect on our results of operations.
In-process research and development
In-process research and development in 2006 relates to a charge of RMB41.7 million pushed down from
Xing on November 30, 2006 related to Xing’s acquisition of the remaining 20% interest in our
company. Purchased in-process research and development is derived by assigning values to various
ongoing development projects identified by our management as having economic value on November 30,
2006, but without technological feasibility or alternative future use.
Amortization of other intangible assets
Amortization of other intangible assets was RMB15.2 million in 2006, RMB32.3 million in 2007 and
RMB11.7 million ($1.7 million) in 2008. The higher amortization of other intangible assets in 2007
arose as a result of the push-down accounting adjustments related to Xing’s acquisition of the
remaining 20% interest in our company on November 30, 2006. Amortization expense decreased in 2008
as certain intangible assets had been fully amortized during 2007 and 2008.
Impairment of other intangible assets
As a result of our strategic shift to focus more on our high-end VEVA-branded mobile handsets, we
made an impairment charge of RMB26.2 million ($3.8 million) on our “CECT” brand in the year ended
December 31, 2008, We did not record any impairment charge on other intangible assets during the
years ended December 31, 2006 and 2007.
Share-based compensation expense
We adopted our 2007 equity incentive plan on March 19, 2007 pursuant to which we may issue up to
8,000,000 ordinary shares upon exercise of awards granted under the plan. On March 19, 2007, we
granted options to a director and certain employees to purchase 2,716,520 ordinary shares under
this plan. These options have an exercise price of $7.50 per share, vest at different dates
beginning November 1, 2007 and have terms varying from two to six years from the date of grant. In
addition, on March 19, 2007, we also granted an option to a consultant who provided consulting
services to us in connection with the initial public offering of our ordinary shares to purchase up
to 1,200,000 ordinary shares at an exercise price of $18.00 per share. This option vested on April
1, 2007 and has a term of four years commencing from the grant date. See “Item 6. Directors, Senior
Management and Employees—B. Compensation—Equity Incentive Plan.”
In 2008, the amount of share-based compensation expense recognized were $2.1 million (equivalent to
RMB14.7 million), of which 1.6% was charged to selling and distribution expenses, 83.5% to general
and administrative expenses and 14.9% to research and development expenses. We expect to recognize
a further $1.9 million, $1.9 million, $1.9 million and $0.6 million, respectively, in 2009, 2010,
2011 and 2012. The share-based compensation relating to the option granted to our consultant, as
determined using the Black-Scholes option pricing model, amounted to $1.7 million (equivalent to
RMB12.9 million) on March 19, 2007, the option grant date and the date of completion of the
relevant consultancy work as agreed to by our management, and was debited to our ordinary share
capital as share issuance cost upon the completion of our initial public offering in May 2007.
Taxation
Taxation in the British Virgin Islands
We are exempt from all provisions of the Income Tax Act of the British Virgin Islands, including
with respect to all dividends, interests, rents, royalties, compensation and other amounts payable
by us to persons who are not person’s resident in the British Virgin Islands. Capital gains
realized with respect to any of our shares, debt obligations or other securities by persons who are
not persons resident in the British Virgin Islands are also exempt from all provisions of the
Income Tax Act of the British Virgin Islands. No estate, inheritance, succession or gift tax rate,
duty, levy or other charge is payable by persons who are not persons resident in the British Virgin
Islands with respect to any of our shares, debt obligations or other securities.
No stamp duty is payable in the British Virgin Islands on a transfer of shares in a British Virgin
Islands business company.
PRC enterprise income tax
Our primary PRC operating subsidiary, CECT, was subject to the PRC Enterprise Income Tax Law
Concerning Foreign-Invested Enterprises and Foreign Enterprises. CECT, as a foreign-invested
enterprise, was generally subject to enterprise income tax at a statutory rate of 33% (30% national
income tax plus 3% local income tax) through 2007 under this law and its related regulations, and
25% effective January 1, 2008 under the new tax law described below. However, as a “high-tech
enterprise” formed in the Zhongguancun Science Park high technology zone in Beijing, CECT has
enjoyed preferential tax treatment. In particular, CECT was exempted from enterprises income
38
tax
from May 22, 2000 to December 31, 2002 and was entitled to preferential enterprise income tax rates
of 7.5% from January 1, 2003 to December 31, 2005 and 15% from January 1, 2006 to December 31,
2007.
On March 16, 2007, the National People’s Congress of the PRC passed the PRC Enterprise Income Tax
Law, which law took effect on January 1, 2008. In accordance with the new law, a unified enterprise
income tax rate of 25% and unified tax deduction standards will be applied equally to both
domestic-invested enterprises and foreign-invested enterprises such as CECT. However, certain
qualifying high-technology enterprises may still benefit from a preferential tax rate of 15% under
the new tax law if they meet the definition of “qualifying high-technology enterprise.” Regarding
the implementation of the preferential treatment for “qualifying high-technology enterprise” under
the new tax law, the Chinese government has issued Circular 362 that provides detailed
implementation guidance on identifying and approving “qualifying high-technology enterprise”
status. Circular 362 follows Circular 172, which was China’s first step in creating a mechanism to
identify and approve “qualifying high-technology enterprise” status. CECT is currently in the
process of applying to the relevant government authorities for the status of a “qualifying
high-technology enterprise.” Before being qualified as a “qualifying high-technology enterprise”
under the new tax law, CECT’s applicable tax rate increased from its then existing tax rate of 15%
to the statutory tax rate of 25% effective from January 1, 2008. In the absence of any confirmation
that CECT will qualify for the preferential tax rate of 15% under the new tax law, we have accrued
for the income tax liability and re-measured the deferred tax assets and liabilities of CECT as of
December 31, 2008 using the statutory tax rate of 25%. In the event that CECT is subsequently
qualified and approved as a “qualifying high-technology enterprise” under the new tax law,
appropriate adjustments will be made to the current and deferred tax balances of CECT in the year
that such confirmation is obtained.
In addition, under the prior laws and regulations, dividend payments to foreign investors made by
foreign-invested enterprises in the PRC, such as CECT, were exempted from PRC withholding tax.
Under the new PRC Enterprise Income Tax Law and the relevant implementing rules, however,
dividends, interests, rent, royalties and gains on transfers of property payable by a
foreign-invested enterprise in the PRC to a foreign corporate investor who is a non-resident
enterprise will be subject to a 10% withholding tax, unless such non-resident enterprise’s
jurisdiction of incorporation has a tax treaty with the PRC that provides for a reduced rate of
withholding tax. The British Virgin Islands, where we are incorporated, does not have such a tax
treaty with the PRC. If we are considered a non-resident enterprise, the 10% withholding tax on
dividend income received from CECT would reduce our net income and have an adverse effect on our
operating results.
Under the new tax law, an enterprise established outside the PRC with its “de facto management
body” within the PRC is considered a resident enterprise and will be subject to the enterprise
income tax at the rate of 25% on its worldwide income. The “de facto management body” is defined as
the organizational body that effectively exercises overall management and control over production
and business operations, personnel, finance and accounting, and properties of the enterprise. It
remains unclear how the PRC tax authorities will interpret such a broad definition. Substantially
all of our management is based in the PRC. If the PRC tax authorities subsequently determine that
we should be classified as a resident enterprise, then our worldwide income will be subject to
income tax at a uniform rate of 25%, which may have a material adverse effect on our financial
condition and results of operations. Notwithstanding the foregoing provision, the new law also
provides that, if a resident enterprise directly invests in another resident enterprise, the
dividends received by the investing resident enterprise from the invested enterprise are exempt
from income tax, subject to certain conditions. Therefore, if we are classified as a resident
enterprise, the dividends received from CECT may be exempted from income tax.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in conformity with U.S. GAAP, which requires us to
make estimates and assumptions that affect the reported amounts of, among other things, assets,
liabilities, revenue and expenses. We base our estimates on our own historical experience and on
various other factors that we believe to be relevant under the circumstances. Actual results may
differ from these estimates under different assumptions or conditions. Some of our accounting
policies require higher degrees of judgment than others in their application. We consider the
policies discussed below to be critical to an understanding of our financial statements as their
application places the most significant demands on our management’s judgment.
Obligations for price guarantees
We report revenue net of estimated obligations for price guarantees. Our obligations under price
guarantees, which generally cover a period of between three to four months, are provided based on
management’s estimates of future price reductions and the level of unsold inventories held by our
customers at the dates of the expected price adjustments. These estimations are made by our
management based on their judgment and experience, and any errors could result in our accruing a
provision amount that does not correspond with the actual level of claims. Our provision for price
guarantees is analyzed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Old Basis)
|
|
|
(New Basis)
|
|
|
|
January 1,
|
|
|
November
|
|
|
|
|
|
2006 to
|
|
|
30, 2006 to
|
|
|
|
|
|
November
|
|
|
December
|
|
Year ended December 31,
|
|
(Amounts in thousands)
|
|
30, 2006
|
|
|
31, 2006
|
|
2007
|
|
2008
|
|
|
|
(RMB)
|
|
|
(RMB)
|
|
(RMB)
|
|
(RMB)
|
|
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year/period
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Provision — reported as a reduction of revenue
|
|
|
26,619
|
|
|
|
|
—
|
|
|
|
2,943
|
|
|
|
91
|
|
|
|
13
|
|
|
Utilization
|
|
|
(26,619
|
)
|
|
|
|
—
|
|
|
|
(2,943
|
)
|
|
|
(91
|
)
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year/period
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
As of December 31, 2006, 2007 and 2008, there were no significant planned price reductions for
products sold that were still covered under price guarantees and, accordingly, we had not made any
provision for such obligations.
Obligations for product warranties
We guarantee that products will meet the stated functionality as agreed to in each sale
arrangement. We provide for the estimated warranty costs under these guarantees based upon
historical experience and our estimate of the level of future claims, and accrue for specific items
at the time their existence is known and the amounts can be estimated. These various estimations
are made by our management based on their
judgment and experience, and any errors could result in our accruing a warranty amount that does
not correspond with the actual level of warranty claims. Provisions for product warranty costs are
included in cost of goods sold in our consolidated statements of operations and are analyzed as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Old Basis)
|
|
|
(New Basis)
|
|
|
|
January 1,
|
|
|
November
|
|
|
|
|
|
2006 to
|
|
|
30, 2006 to
|
|
|
|
|
|
November
|
|
|
December
|
|
Year ended December 31,
|
|
(Amounts in thousands)
|
|
30, 2006
|
|
|
31, 2006
|
|
2007
|
|
2008
|
|
|
|
(RMB)
|
|
|
(RMB)
|
|
(RMB)
|
|
(RMB)
|
|
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year/period
|
|
|
3,922
|
|
|
|
|
6,905
|
|
|
|
6,809
|
|
|
|
8,097
|
|
|
|
1,187
|
|
|
Provision
|
|
|
13,751
|
|
|
|
|
908
|
|
|
|
14,960
|
|
|
|
7,485
|
|
|
|
1,097
|
|
|
Utilization
|
|
|
(10,768
|
)
|
|
|
|
(1,004
|
)
|
|
|
(13,672
|
)
|
|
|
(10,553
|
)
|
|
|
(1,547
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year/period
|
|
|
6,905
|
|
|
|
|
6,809
|
|
|
|
8,097
|
|
|
|
5,029
|
|
|
|
737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranty costs as a percentage of our handsets and accessories revenue may fluctuate from year to
year and does not necessarily correlate directly with the trends of our revenue growth. In any
particular period, we may experience higher warranty claims due to the launch of new products
and/or variations in our manufacturing processes. We typically experience a lower level of warranty
claims as our products and manufacturing processes mature and a higher level of claims on new
products and processes. Historically, our actual warranty claims have not been significantly
different from our estimates, and our method of making warranty claims estimates and the
significant assumptions used in making such estimates have been consistently applied over the past
three years.
Collectibility of accounts receivable
The allowance for doubtful accounts is based on our management’s best estimate of the amount of
probable credit losses in our existing accounts receivable. An analysis of the allowance for
doubtful accounts for the period from January 1, 2006 to November 30, 2006, the period from
November 30, 2006 to December 31, 2006, and the years ended December 31, 2007 and 2008 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Old Basis)
|
|
|
(New Basis)
|
|
|
|
January 1,
|
|
|
November
|
|
|
|
|
|
2006 to
|
|
|
30, 2006 to
|
|
|
|
|
|
November
|
|
|
December
|
|
Year ended December 31,
|
|
(Amounts in thousands)
|
|
30, 2006
|
|
|
31, 2006
|
|
2007
|
|
2008
|
|
|
|
(RMB)
|
|
|
(RMB)
|
|
(RMB)
|
|
(RMB)
|
|
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year/period
|
|
|
2,640
|
|
|
|
|
2,046
|
|
|
|
2,045
|
|
|
|
5,429
|
|
|
|
796
|
|
|
Bad debt expense
|
|
|
—
|
|
|
|
|
—
|
|
|
|
3,384
|
|
|
|
1,277
|
|
|
|
187
|
|
|
Bad debt recovery
|
|
|
(594
|
)
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(595
|
)
|
|
|
(87
|
)
|
|
Bad debt write-off
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(68
|
)
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year/period
|
|
|
2,046
|
|
|
|
|
2,045
|
|
|
|
5,429
|
|
|
|
6,043
|
|
|
|
886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We review our accounts receivable on a periodic basis and make allowances when there is doubt as to
the collectibility of the balances. In evaluating the collectibility of a receivable balance, we
consider various factors, including the age of the balance, the customer’s historical payment
history, its current credit-worthiness and current economic trends. Account balances are charged
off against the allowance after all means of collection have been exhausted and the possibility for
recovery is considered remote. We do not have any off-balance sheet credit exposure related to our
customers.
Changes to our allowance for doubtful accounts may be necessary in the event that the financial
condition of our customers improves or deteriorates. Considering the current financial conditions
of our customers,
we believe that our allowance for doubtful accounts is not excessive and is adequate to cover the
estimated losses in our accounts receivable balance.
40
Inventories
Inventories are stated at the lower of cost, determined on a first-in, first-out basis, or market
value. Write-downs for damaged, obsolete and slow-moving items are determined by our management
based on a consideration of several factors, including the aging of the inventories, current and
expected future market trends and conditions, and physical condition of goods observed during
periodic inventory counts. In determining whether such write-downs are necessary and assessing the
amount of such write-downs, our management is required to make judgments and estimates regarding
future selling prices, level of demand and indications of obsolescence of the inventories. If our
management fails to properly assess these various factors, the amounts actually realized may differ
from the carrying amounts.
For the period from January 1, 2006 to November 30, 2006, the period from November 30, 2006 to
December 31, 2006, and the years ended December 31, 2007 and 2008, inventory write-downs, which had
been charged to cost of goods sold amounted to approximately RMB3.2 million, RMB0.1 million,
RMB11.1 million and RMB6.6 million ($1.0 million), respectively. Subsequent to these write-downs,
we had sold or disposed of portions of such inventories at amounts that were higher than the
written-down value. Inventories sold during the period from January 1, 2006 to November 30, 2006,
the period from November 30, 2006 to December 31, 2006, and the years ended December 31, 2007 and
2008 included recovery of previously written-down inventories of approximately RMB16.0 million,
nil, RMB0.3 million, and RMB1.2 million ($0.2 million), respectively.
Recoverability of the carrying amount of goodwill
Goodwill is evaluated for impairment at least annually. We have determined that CECT is the
reporting unit for testing goodwill impairment. The first step screens for potential impairment of
goodwill to determine if the fair value of the reporting unit is less than its carrying value,
while the second step measures the amount of goodwill impairment, if any, by comparing the implied
fair value of goodwill to its carrying value. The fair value of CECT is determined based on the
market approach, under which the fair value is estimated based on market multiples of earnings for
comparable companies.
We performed step one of the annual goodwill impairment test for the years ended December 31, 2006,
2007 and 2008, and determined that the fair value of CECT exceeded its net book value as at the
respective year end dates. Therefore, step two was not required and no goodwill impairment charges
have been recognized.
“CECT” brand name
We commenced using the “CECT” brand name since our acquisition of the 65% equity interest in CECT
on February 8, 2003. The brand is considered to be of value as it enables our products to be better
recognized in the market. We had determined that this brand does not have a definitive useful life
as there were no legal, regulatory, contractual, competitive, economic or other factors that would
limit its useful life. We are currently in the process of applying for the registration of three
trademarks relating to our brand name “CECT” with the China Trademark Office. The registration of
these trademarks was previously applied for by a third party who was not involved in the mobile
handset manufacturing industry. We purchased the trademark application rights from the third party
through a related party and anticipate to receive the final approval of our application from the
China Trademark Office in the second half of 2009. Despite the fact that we did not have legal
title to or a license to use this brand name, our PRC legal counsel, King & Wood, has advised us
that we had sufficient rights under PRC law to use this brand since our acquisition of the 65%
interest in CECT on February 8, 2003. This intangible asset is not amortized but rather tested for
impairment annually or more frequently if events or changes in circumstances indicate that the
asset might be impaired. Such impairment test consists of a comparison of the fair value of the
brand with its carrying amount, and an impairment loss is recognized when the carrying amount of
the brand exceeds its fair value. The fair value of the “CECT” brand name is estimated using the
Relief-from-Royalty Method, a discounted cash flow approach which brings into play, in the case of
CECT, a single set of estimated cash flows and a discount rate commensurate with the risk. The cash
flow contribution from the brand comes from savings in royalty that CECT would have to pay to a
third party for the use of its brand name if CECT had not had the right to use it but nevertheless
had wanted its products to have a recognized brand. The cash flow
contribution of the “CECT” brand name is linked to the cash inflow from the sales revenue of CECT.
As there is a lack of publicly available information about comparable licensing transactions in the
PRC suitable for our purpose, the royalty savings as a percentage of sales revenue is estimated by
comparing the operational profit margin as a percentage of sales revenue of CECT with its superior
“CECT” brand name with those of comparable companies in China which operate on an OEM
sub-contractor basis or with an inferior brand. Also, marketing expense is required to maintain the
brand name for CECT. An average of marketing expense as a percentage of sales revenue is taken from
the statements of operations of CECT in the medium term forecast. This percentage is then used to
estimate cash outflow relating to marketing expense in the cash flow forecast under the
Relief-from-Royalty Method.
For the years ended December 31, 2006 and 2007, we did not record any impairment charges on our
CECT brand. In 2008, due to our strategic shift to focus more on our high-end VEVA-branded mobile
handsets, we recorded an impairment charge of RMB26.2 million ($3.8 million) on our CECT brand.
Impairment of long-lived assets
We review long-lived assets with determinable useful lives, principally consisting of property,
machinery and equipment, and intangible assets, which include customer relationships, completed
technology, core technology, backlog and licenses, for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability
of an asset is measured by a comparison of the carrying value of the asset to the future
undiscounted cash flows expected to be generated by the asset. If such asset is considered to be
impaired, the impairment is measured by the amount by which the carrying value exceeds the fair
value of the asset. Fair value is determined by discounting future forecasted cash flows or
utilizing an observable market value if readily available.
41
In analyzing long-lived assets for potential impairment, significant assumptions and estimates are
required in determining the future cash flows of an asset group, including, among other things,
estimates of the assets’ residual values and the period of time over which the assets will be held
and used, our views of future economic conditions and our future operating performance, and other
factors. Different assumptions and estimates used could potentially result in different conclusions
regarding the need for impairment charges. Similarly, the use of different discount rates when
utilizing the discounted cash flow methodology to determine the fair value of an asset group could
result in different fair values and hence impact any related impairment charges.
For the years ended December 31, 2006, 2007 and 2008, we did not record any impairment charges on
our long-lived assets.
Depreciation and amortization of long-lived assets
We have a substantial amount of property, machinery and equipment, and intangible assets, and the
depreciation/amortization of these assets constitutes a significant operating cost for us. The
useful lives of our long-lived assets represent our estimate of the periods during which we expect
to derive economic benefits from the assets. In estimating the useful lives and also the
recoverable salvage values of these assets and in determining whether subsequent revisions to the
useful lives and salvage values are necessary, we consider the likelihood of technological
obsolescence arising from changes in production techniques, technology, market demand and intended
use. We routinely review the remaining estimated useful lives and salvage values of our long-lived
assets to determine if such lives and values should be adjusted. However, actual economic lives and
salvage values may differ from our estimates and any future revisions to these estimates will
impact our depreciation/amortization expenses, and hence our operating results, in future periods.
In the years ended December 31, 2006, 2007 and 2008, we have not made any changes to the estimated
useful lives or salvage values for our long-lived assets.
Valuation of the Embedded Derivatives
The derivative instruments embedded in the $70,000,000 Notes that we issued in May 2008 includes
the right to convert the Notes into our ordinary shares by the note holders, an early redemption
put option, a put option conditional upon certain events of default and a put option conditional
upon a change of control. In
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 133, as amended,
“Accounting for Derivative Instruments and Hedging Activities” and EITF Issue No. 00-19,
“Accounting for Derivative Financial Instruments Indexed to a Company’s Own Stock,” we have
determined that these embedded derivatives are required to be bifurcated from the associated host
instrument and accounted for separately as a derivative instrument liability. The embedded
derivatives are revalued at the end of each reporting period, with changes in the fair value of the
derivative liability recorded as charges or credits to income in the period in which the changes
occur.
The valuation of the embedded derivatives was derived by using various valuation methods, which
included Monte Carlo Simulation and Backward Dynamic Programming. These methods require us to make
assumptions regarding the probability of certain future events. Other factors used to determine
fair value include our period-end stock price, historical stock volatility, risk-free interest rate
and derivative term. The identification of, and accounting for, derivative instruments and the
assumptions used to value them can significantly affect our financial position and results of
operations.
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board, or the FASB, issued SFAS No. 157,
“Fair Value Measurements,” or SFAS No. 157, which defines fair value, provides a framework for
measuring fair value, and expands the disclosures required for assets and liabilities measured at
fair value. SFAS No. 157 applies to existing accounting pronouncements that require fair value
measurements; it does not require any new fair value measurements. In February 2008, FASB issued
FASB Staff Position (“FSP”) No. FAS 157-2, “Effective Date of FASB Statement No. 157”, or FSP
157-2, which delays the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial
liabilities, except for items that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually), until fiscal years beginning after November
15, 2008, and interim periods within those fiscal years. We adopted the effective portions of SFAS
No. 157 beginning the year ended December 31, 2008, with no material impact to its consolidated
financial statements. We do not expect the adoption of FSP 157-2 to have a material impact on our
consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141R, a revision of SFAS No. 141, “Business
Combinations,” or SFAS No. 141R. SFAS No. 141R establishes requirements for the recognition and
measurement of acquired assets, liabilities, goodwill, and non-controlling interests (formerly
minority interests). SFAS No. 141R also provides disclosure requirements related to business
combinations. SFAS No. 141R is effective for fiscal years beginning after December 15, 2008. SFAS
No. 141R will be applied prospectively to business combinations with an acquisition date on or
after the effective date.
In December 2007, the FASB issued SFAS No. 160, “Non-Controlling Interests in Consolidated
Financial Statements — an amendment of ARB No. 51,” or SFAS No. 160. SFAS No. 160 establishes new
standards for the accounting for and reporting of non-controlling interests and for the loss of
control of partially owned and consolidated subsidiaries. SFAS No. 160 does not change the criteria
for consolidating a partially owned entity. SFAS No. 160 is effective for fiscal years beginning
after December 15, 2008. The provisions of SFAS No. 160 will be applied prospectively upon adoption
except for the presentation and disclosure requirements, which will be applied retrospectively.
SFAS No. 160 states that accounting and reporting for minority interests will be recharacterized as
non-controlling interests and classified as a component of equity. The calculation of earnings per
share will continue to be based on income amounts attributable to the parent. SFAS No. 160 applies
to all entities that prepare consolidated financial statements, except not-for-profit
organizations, but will affect only those entities that have an outstanding non-controlling
interest in one or more partially owned and consolidated subsidiaries. Except for the
classification of minority interest as a component of equity, we do not expect the initial adoption
of SFAS No. 160 to have a material impact on our consolidated financial statements.
42
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging
Activities — an amendment of FASB Statement No. 133,” or SFAS 161. This statement requires enhanced
disclosures for derivative instruments and hedging activities that include how and why an entity
uses derivatives, how these instruments and the related hedged items are accounted for under SFAS
133 and related interpretations, and how derivative instruments and related hedged items affect the
entity’s financial position, results of operations and cash flows. SFAS 161 is effective for
financial statements issued for
fiscal years and interim periods beginning after November 15, 2008. We do not expect the adoption
of SFAS 161 to have a material impact on our consolidated financial statements.
In April 2008, the FASB issued FSP No. FAS 142-3, “Determination of the Useful Life of Intangible
Assets,” or FSP 142-3, which amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized intangible asset under SFAS
No. 142, “Goodwill and Other Intangible Assets.” FSP 142-3 is effective for fiscal years beginning
after December 15, 2008 and interim periods within those fiscal years. Early adoption is
prohibited. The guidance for determining the useful life of a recognized intangible asset in FSP
142-3 shall be applied prospectively to intangible assets acquired after the effective date. We do
not expect the adoption of FSP 142-3 to have a material impact on our consolidated financial
statements.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting
Principles,” or SFAS No. 162, which identifies the sources of accounting principles and the
framework for selecting the principles used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with U.S. GAAP. SFAS No. 162 became
effective November 15, 2008. We do not expect the adoption of SFAS No. 162 to have a material
impact on our consolidated financial statements.
In May 2008, the FASB issued FSP No. APB 14-1, “Accounting for Convertible Debt Instruments That
May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement),” or FSP 14-1, which
requires the issuer of convertible debt instruments with cash settlement features to account
separately for the liability and equity components of the instrument. The debt would be recognized
at the present value of its cash flows discounted using the issuer’s nonconvertible debt borrowing
rate at the time of issuance. The equity component would be recognized as the difference between
the proceeds from the issuance of the note and the fair value of the liability. FSP 14-1 will also
require an accretion of the resultant debt discount over the expected life of the debt. The
proposed transition guidance requires retrospective application to all periods presented, and does
not grandfather existing instruments. FSP 14-1 is effective for fiscal years beginning after
December 15, 2008. We do not expect the adoption of FSP 14-1 to have a material impact on our
consolidated financial statements.
In June 2008, the Emerging Issue Task Force (“EITF”) issued EITF Issue No. 07-5, “Determining
Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock,” or EITF 07-5.
EITF 07-5 clarifies the determination of whether an instrument (or an embedded feature) is indexed
to an entity’s own stock, which would qualify as a scope exception under SFAS No. 133, “Accounting
for Derivative Instruments and Hedging Activities.” EITF 07-5 is effective for financial statements
issued for fiscal years beginning after December 15, 2008. EITF 07-5 does not permit early adoption
for an existing instrument. We do not expect the adoption of EITF 07-5 to have a material effect on
our consolidated financial statements.
In June 2008, the FASB issued FSP EITF Issue No. 03-6-1, “Determining Whether Instruments Granted
in Share-Based Payment Transactions Are Participating Securities,” or FSP 03-6-1. FSP 03-6-1
clarifies that share-based payment awards that entitle their holders to receive non-forfeitable
dividends or dividend equivalents before vesting should be considered participating securities. FSP
03-6-1 is effective for fiscal years beginning after December 15, 2008 on a retrospective basis.
The Company has not granted any share-based payment awards that contain non-forfeitable rights to
dividends or dividend equivalents before vesting since incorporation. We do not expect the adoption
of FSP 03-6-1 to have a material impact on our consolidated financial statements.
On October 10, 2008, the FASB issued FSP No. FAS 157-3, “Determining the Fair Value of a Financial
Asset When the Market for that Asset is Not Active,” or ESP 157-3, which clarifies the application
of SFAS No. 157 in a market that is not active. Additional guidance is provided regarding how the
reporting entity’s own assumptions should be considered when relevant observable inputs do not
exist, how available observable inputs in a market that is not active should be considered when
measuring fair value, and how the use of market quotes should be considered when assessing the
relevance of inputs available to measure fair value. FSP 157-3 became effective immediately upon
issuance. Its adoption did not have a material effect on our consolidated financial statements.
In November 2008, the FASB ratified EITF Issue No. 08-7, “Accounting for Defensive Intangible
Assets,” or EITF 08-7. EITF 08-7 applies to defensive intangible assets, which are acquired
intangible assets that the
acquirer does not intend to actively use but intends to hold to prevent its competitors from
obtaining access to them. As these assets are separately identifiable, EITF 08-7 requires an
acquiring entity to account for defensive intangible assets as a separate unit of accounting.
Defensive intangible assets must be recognized at fair value in accordance with SFAS No. 141R and
SFAS No. 157. EITF 08-7 is effective for defensive intangible assets acquired in fiscal years
beginning on or after December 15, 2008. We do not expect the adoption of EITF 08-7 to have a
material impact on our consolidated financial statements.
43
A. Operating Results
The following table sets forth our summary consolidated statements of operations for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Old Basis)
|
|
|
(New Basis)
|
|
|
(Combined)
(1)
|
|
|
(New Basis)
|
|
|
|
January 1,
|
|
|
November
|
|
|
|
|
|
|
|
|
|
2006 to
|
|
|
30, 2006 to
|
|
|
Year ended
|
|
|
|
|
Consolidated statements of operations data
|
|
December
|
|
|
December
|
|
|
December
|
|
|
Year ended December 31,
|
|
(Amounts in thousands)
|
|
31, 2006
|
|
|
31, 2006
|
|
|
31, 2006
|
|
|
2007
|
|
2008
|
|
|
|
(RMB)
|
|
|
(RMB)
|
|
|
(RMB)
|
|
|
(RMB)
|
|
(RMB)
|
|
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
2,281,198
|
|
|
|
|
256,013
|
|
|
|
|
2,537,211
|
|
|
|
|
3,141,094
|
|
|
|
2,153,873
|
|
|
|
315,701
|
|
|
Cost of goods sold
|
|
|
(1,843,327
|
)
|
|
|
|
(218,882
|
)
|
|
|
|
(2,062,209
|
)
|
|
|
|
(2,255,844
|
)
|
|
|
(1,287,096
|
)
|
|
|
(188,654
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
437,871
|
|
|
|
|
37,131
|
|
|
|
|
475,002
|
|
|
|
|
885,250
|
|
|
|
866,777
|
|
|
|
127,047
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
Selling and distribution
|
|
|
(12,054
|
)
|
|
|
|
(2,707
|
)
|
|
|
|
(14,761
|
)
|
|
|
|
(36,322
|
)
|
|
|
(146,551
|
)
|
|
|
(21,481
|
)
|
|
General and administrative
|
|
|
(19,879
|
)
|
|
|
|
(1,170
|
)
|
|
|
|
(21,049
|
)
|
|
|
|
(69,032
|
)
|
|
|
(44,231
|
)
|
|
|
(6,483
|
)
|
|
Research and development
|
|
|
(15,131
|
)
|
|
|
|
(1,161
|
)
|
|
|
|
(16,292
|
)
|
|
|
|
(18,599
|
)
|
|
|
(29,242
|
)
|
|
|
(4,286
|
)
|
|
In-process research and development
|
|
|
—
|
|
|
|
|
(41,739
|
)
|
|
|
|
(41,739
|
)
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Amortization of other intangible assets
|
|
|
(10,890
|
)
|
|
|
|
(4,288
|
)
|
|
|
|
(15,178
|
)
|
|
|
|
(32,280
|
)
|
|
|
(11,727
|
)
|
|
|
(1,719
|
)
|
|
Impairment of other intangible assets
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
(26,235
|
)
|
|
|
(3,845
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
379,917
|
|
|
|
|
(13,934
|
)
|
|
|
|
365,983
|
|
|
|
|
729,017
|
|
|
|
608,791
|
|
|
|
89,233
|
|
|
Interest income
|
|
|
5,320
|
|
|
|
|
631
|
|
|
|
|
5,951
|
|
|
|
|
16,373
|
|
|
|
24,405
|
|
|
|
3,577
|
|
|
Interest expense
|
|
|
(27,115
|
)
|
|
|
|
(2,213
|
)
|
|
|
|
(29,328
|
)
|
|
|
|
(47,034
|
)
|
|
|
(165,506
|
)
|
|
|
(24,259
|
)
|
|
Foreign currency exchange gain (loss), net
|
|
|
9,628
|
|
|
|
|
1,502
|
|
|
|
|
11,130
|
|
|
|
|
12,022
|
|
|
|
(5,142
|
)
|
|
|
(754
|
)
|
|
Gain on remeasurement of embedded
derivatives
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
144,939
|
|
|
|
21,244
|
|
|
Loss on extinguishment of convertible debts
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
(10,634
|
)
|
|
|
(1,559
|
)
|
|
Gain on disposal of subsidiaries
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
2,269
|
|
|
|
333
|
|
|
Other income (loss), net
|
|
|
3,857
|
|
|
|
|
579
|
|
|
|
|
4,436
|
|
|
|
|
873
|
|
|
|
(3,700
|
)
|
|
|
(541
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before income tax expense,
minority interests, and extraordinary
items
|
|
|
371,607
|
|
|
|
|
(13,435
|
)
|
|
|
|
358,172
|
|
|
|
|
711,251
|
|
|
|
595,422
|
|
|
|
87,274
|
|
|
Income tax expense
|
|
|
(55,991
|
)
|
|
|
|
(4,251
|
)
|
|
|
|
(60,242
|
)
|
|
|
|
(113,377
|
)
|
|
|
(155,717
|
)
|
|
|
(22,824
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before minority interests,
and extraordinary items
|
|
|
315,616
|
|
|
|
|
(17,686
|
)
|
|
|
|
297,930
|
|
|
|
|
597,874
|
|
|
|
439,705
|
|
|
|
64,450
|
|
|
Minority interests
|
|
|
(27,260
|
)
|
|
|
|
(1,799
|
)
|
|
|
|
(29,059
|
)
|
|
|
|
(33,074
|
)
|
|
|
(15,901
|
)
|
|
|
(2,331
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before extraordinary items
|
|
|
288,356
|
|
|
|
|
(19,485
|
)
|
|
|
|
268,871
|
|
|
|
|
564,800
|
|
|
|
423,804
|
|
|
|
62,119
|
|
|
Extraordinary items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains on acquisitions of additional equity
interests in CECT, net of nil tax
|
|
|
17,796
|
|
|
|
|
—
|
|
|
|
|
17,796
|
|
|
|
|
28,689
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
306,152
|
|
|
|
|
(19,485
|
)
|
|
|
|
286,667
|
|
|
|
|
593,489
|
|
|
|
423,804
|
|
|
|
62,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents the sum of the relevant data for the period from January 1 to November 30, 2006
and the period from November 30 to December 31, 2006. Although the presentation of the
combined operating results for the year ended December 31, 2006 is not in accordance with U.S.
GAAP, we believe this combination is useful to provide investors with a more complete
understanding of our results of operations data from year to year.
|
44
Period-to-Period Comparisons of Historical Financial Data — 2008 Compared to 2007 and 2007
Compared to 2006
The 2006 full-year financial data presented in this section are sums of the data for the period
from January 1 to November 30, 2006 and the period from November 30 to December 31, 2006. Although
such presentation is not in accordance with U.S. GAAP, we believe this combination is useful to
provide investors with a more complete understanding of our results of operations data from year to
year.
Revenue
2008 compared to 2007
Our revenue decreased by 31.4% from RMB3,141.1 million in 2007 to RMB2,153.9 million ($315.7
million) in 2008. The decrease was primarily due to a decline in our handsets and accessories
revenue, which accounted for 99.1% and 99.4% of our total revenues in 2007 and 2008, respectively.
Our revenue from the sale of handsets and accessories decreased by 31.3% from RMB3,113.8 million in
2007 to RMB2,140.3 million ($313.7 million) in 2008, primarily due to lower handset shipment and a
decrease in the average selling price of products sold in 2008. Our handset shipment decreased by
28.9% from 3,816,000 units in 2007 to 2,714,000 units in 2008. Our handset shipment in 2008 was
negatively impacted by the earthquake that took place in Sichuan Province, China in May 2008 and
the economic downturn in China in 2008. In addition, handset shipment in 2008 also decreased due to
our strategic shift to focus on the higher-margin but lower-volume VEVA-branded handsets. VEVA
shipments accounted for approximately 29.2% of the total shipment in 2008, compared with zero in
2007. The average selling price of our handsets decreased from RMB816 per unit in 2007 to RMB788
($116) per unit in 2008, primarily due to the sale of a high volume of ultra-low cost phones, such
as the C3100, in the first half of 2008, as well as promotional sales in the fourth quarter of 2008
across our CECT-branded products in response to the economic downturn in China.
Our revenue from the provision of various services and other revenue decreased by 50.5% from
RMB27.3 million in 2007 to RMB13.5 million ($2.0 million) in 2008, primarily due to a decline in
the volume of handset processing services provided to external customers.
2007 compared to 2006
Our revenue increased by 23.8% from RMB2,537.2 million in 2006 to RMB3,141.1 million in 2007. This
increase was primarily due to the significant growth of our handsets and accessories revenue, which
accounted for 98.3% and 99.1%, respectively of our total revenue in those periods.
Our revenue from the sale of handsets and accessories increased by 24.9% from RMB2,494.0 million in
2006 to RMB3,113.8 million in 2007, primarily due to increases in unit sales volume, which was
offset to a certain extent by a decrease in the average selling price of our handsets. Our handset
sales volume increased by 68.7% from approximately 2,262,000 units in 2006 to approximately
3,816,000 units in 2007. The increase in the unit sales volume was primarily driven by the increase
in the unit sales volume of our C1000 model handsets from 9,400 units in 2006 to 1,045,000 units in
2007, and the commercial launch of new models, such as C1000+, C2000, T100 and W100, which
generated aggregate sales volume of approximately 2,026,000 units in 2007. The unit sales volume
increase was also due to our increased sales and marketing efforts, including increased marketing
expenses, increased use of TV direct sales programs and expansion of our sales and distribution
network to include internet direct sales in 2007. Sales to our TV and internet direct sales
distributors reached 1,090,000 units in 2007. The average selling price of our handsets decreased
from RMB1,094 per unit in 2006 to RMB816 per unit in 2007, primarily reflecting the increased sales
volume and percentage of total sales of lower-cost but higher-margin differentiated products such
as the C1000 series ultra-long standby handsets.
Cost of goods sold
2008 compared to 2007
Our cost of goods sold decreased by 42.9% from RMB2,255.8 million in 2007 to RMB1,287.1 million
($188.7 million) in 2008, primarily driven by the decreased sales volume of our handset products
and increased percentage in our total sales of ultra-low cost phones, which resulted in, among others,
a RMB885.4 million decrease in raw materials and components cost. Our product design fees paid to
third parties also decreased by 75.7% from RMB74.4 million in 2007 to RMB18.1 million ($2.7
million) in 2008, as a greater proportion of product development was done in-house in 2008. The
cost of goods sold as a percentage of revenue decreased from 71.8% in 2007 to 59.8% in 2008,
primarily reflecting our strategic shift to focus on the higher-margin VEVA-branded handsets in
2008.
2007 compared to 2006
Our cost of goods sold increased by 9.4% from RMB2,062.2 million in 2006 to RMB2,255.8 million in
2007, primarily driven by increased unit sales volume of our handset products, which resulted in,
among others, a RMB124.1 million increase in raw materials and components cost. Our product design
fees paid to third parties also increased by 49.7% from RMB49.7 million in 2006 to RMB74.4 million
in 2007, primarily due to increased unit shipments. Depreciation of property, machinery and
equipment increased from RMB3.9 million in 2006 to RMB9.0 million in 2007 due mainly to the
depreciation of a factory premise which we acquired towards the end of 2006. The cost of goods sold
as a percentage of revenue decreased from 81.3% in 2006 to 71.8% in 2007, primarily reflecting the
increased unit sales volume and percentage of total sales of lower-cost but higher-margin products
such as the C1000 series ultra-long standby handsets.
45
Gross profit and gross margin
2008 compared to 2007
Our gross profit decreased by 2.1% from RMB885.3 million in 2007 to RMB866.8 million ($127.0
million) in 2008, primarily due to the decreased revenue from our mobile handset products. Our
gross margin increased from 28.2% in 2007 to 40.2% in 2008, primarily due to contributions of the
VEVA-branded handset models and a higher percentage of revenue we generated from TV direct sales.
Under the TV direct sales arrangement, we were able to sell our handsets to infomercial companies
at a higher price, but in return, we had to bear the airtime and logistics costs.
2007 compared to 2006
Our gross profit increased by 86.4% from RMB475.0 million in 2006 to RMB885.3 million in 2007,
primarily due to increased sales volume of higher-margin handset products. Our gross margin
increased from 18.7% in 2006 to 28.2% in 2007, primarily reflecting the launch of several
successful higher-margin products in 2007, including the C1000 series ultra-long standby models,
the T100 fingerprint recognition information security models and the W100 wrist watch handset. In
addition, our increased use of TV direct sales programs and our use of internet direct sales in
2007 also contributed to the increase in our gross margin as we were able to charge a higher price
for our products due to the increased advertisement exposures.
Operating expenses
2008 compared to 2007
Our operating expenses increased by RMB101.8 million from RMB156.2 million in 2007 to RMB258.0
million ($37.8 million) in 2008, primarily due to an impairment charge we made on other intangible
assets and the increases in selling and distribution expenses and research and development expenses
in 2008, partially offset by a decrease in general and administrative expenses and amortization of
other intangible assets.
2007 compared to 2006
Our operating expenses increased by RMB47.2 million from RMB109.0 million in 2006 to RMB156.2
million in 2007, primarily due to increases in selling and distribution expenses, general and
administrative expenses and amortization of other intangible assets, partially offset by a decrease
in in-process research and development charge.
Selling and distribution expenses
2008 compared to 2007
Our selling and distribution expenses increased by 303.5% from RMB36.3 million in 2007 to RMB146.6
million ($21.5 million) in 2008. The increase in selling and distribution expenses was primarily
due to the higher airtime costs we incurred on the increased TV direct sales from RMB19.8 million
in 2007 to RMB128.2 million (US$18.8 million) in 2008.
Our selling and distribution expenses as a percentage of our total revenue increased from 1.2% in
2007 to 6.8% in 2008.
2007 compared to 2006
Our selling and distribution expenses increased by 145.3% from RMB14.8 million in 2006 to RMB36.3
million in 2007. The increase was driven primarily by an increase in advertising and promotional
expenses by RMB13.5 million from RMB12.9 million in 2006 to RMB26.4 million in 2007 and sales
commissions of RMB6.1 million paid to our TV infomercial direct sales distributors in 2007. The
higher advertising and promotional expenses in 2007 mainly resulted from an increased use of TV
direct sales programs to sell and market our products and higher expenditures on advertising and
promotional activities. The commission of RMB6.1 million paid in 2007 was to reward our TV
infomercial partners for the sales that the TV infomercials helped to generate in our traditional
sales channels. Share-based compensation
expenses recognized in selling and distribution expenses in 2007 amounted to RMB0.5 million. No
share-based compensation expenses relating to sales and marketing personnel were incurred in 2006.
Our selling and distribution expenses as a percentage of our total revenue increased from 0.6% in
2006 to 1.2% in 2007.
General and administrative expenses
2008 compared to 2007
Our general and administrative expenses decreased by 35.9% from RMB69.0 million in 2007 to RMB44.2
million ($6.5 million) in 2008. The decrease was primarily due to the lower share-based
compensation expenses we recognized in 2008, which decreased from RMB36.3 million in 2007 to
RMB12.2 million (US$1.8 million) in 2008.
As for the percentage of total revenue, our general and administrative expenses decreased from 2.2%
in 2007 to 2.1% in 2008.
2007 compared to 2006
Our general and administrative expenses increased by 228.6% from RMB21.0 million in 2006 to RMB69.0
million in 2007. Our share-based compensation expenses recorded in general and administration
expenses increased from RMB3.5 million in 2006 to RMB36.3 million in 2007 as a result of the grant
of share options to our employees and a director in March 2007. Auditing, legal, investor relation
and other professional service expenses increased from RMB1.9 million in 2006 to RMB5.6 million in
2007, primarily due to increased expenditures associated with being a public company in 2007. In
2007, we incurred a provision for doubtful debts of RMB3.4 million
46
compared to a bad debt recovery
of RMB0.6 million in 2006. In addition, salaries and other payroll-related expenses increased from
RMB4.3 million in 2006 to RMB6.2 million in 2007 while office rental and other office-related
expenses increased from RMB1.6 million in 2006 to RMB2.9 million in 2007. As a percentage of total
revenue, our general and administrative expenses increased from 0.8% in 2006 to 2.2% in 2007.
Research and development expenses
2008 compared to 2007
Our research and development expenses increased by 57.2% from RMB18.6 million in 2007 to RMB29.2
million ($4.3 million) in 2008. The increase was mainly driven by an increase in the number of
engineering personnel, which resulted in an increase in salary expenses and office expenses.
Our research and development expenses as a percentage of total revenue was 0.6% in 2007 and 1.4% in
2008.
2007 compared to 2006
Our research and development expenses increased by 14.1% from RMB16.3 million in 2006 to RMB18.6
million in 2007. The increase in research and development expenses was mainly due to the
recognition of share-compensation expenses of RMB1.9 million in 2007. No share-based compensation
expenses relating to research and development personnel were incurred in 2006. Our research and
development expenses as a percentage of total revenue was 0.6% in both 2006 and 2007.
In-process research and development
As a result of push-down accounting, we recorded an in-process research and development charge of
RMB41.7 million in 2006. We did not have similar charges in 2007 and 2008.
Amortization of other intangible assets
As a result of push-down accounting, amortization of other intangible assets increased by 112.5%
from RMB15.2 million in 2006 to RMB32.3 million in 2007. Amortization of other intangible assets
decreased by 63.7% from RMB32.3 million in 2007 to RMB11.7 million ($1.7 million) in 2008 mainly
because certain intangible assets had been fully amortized during 2007 and 2008.
Impairment of other intangible assets
As a result of our strategic shift to focus more on our high-end VEVA-branded mobile handsets, we
made an impairment charge of RMB26.2 million ($3.8 million) on our “CECT” brand in the year ended
December 31, 2008, We did not record any impairment charge on other intangible assets during the
years ended December 31, 2006 and 2007.
Operating income
As a result of the foregoing, our operating income decreased by 16.5% from RMB729.0 million in 2007
to RMB608.8 million ($89.2 million) in 2008, and increased by RMB363.0 million from RMB366.0
million in 2006 to RMB729.0 million in 2007. Our operating margin was 14.4%, 23.2% and 28.3%,
respectively, in 2006, 2007 and 2008.
Interest income, interest expenses, foreign currency exchange gain, net, and other income, net
2008 compared to 2007
Our interest income increased by 49.1% from RMB16.4 million in 2007 to RMB24.4 million ($3.6
million) in 2008, primarily due to the increase in our bank deposits. Our interest expenses
increased by 251.9% from RMB47.0 million in 2007 to RMB165.5 million ($24.3 million) in 2008,
primarily due to an increase in the average balance of our short-term bank borrowings and interest
expense relating to the $70,000,000 Notes we issued in May 2008. Interest expense relating to the
Notes amounted to RMB92.9 million ($13.6 million) in 2008. We recognized a foreign currency
exchange gain of RMB12.0 million in 2007 and a foreign currency loss of RMB5.1 million ($0.8
million) in 2008. The foreign currency gain in 2007 primary resulted from the translation of our
foreign currency denominated borrowings into Renminbi, reflecting the appreciation in the value of
the Renminbi against the U.S. dollar. The foreign currency loss in 2008 primarily resulted from the
translation of our Renminbi-denominated Notes into U.S. dollars, our functional currency,
reflecting the appreciation in the value of the Renminbi against the U.S. dollar.
2007 compared to 2006
Our interest income increased by 173.3% from RMB6.0 million in 2006 to RMB16.4 million in 2007,
primarily due to the increase in our bank deposits due to proceeds received from the initial public
offering of our ordinary shares. Our interest expenses increased by 60.4% from RMB29.3 million in
2006 to RMB47.0 million in 2007, primarily due to the increased average balance of our short-term
bank borrowings and an increase in the average interest rate from 6.0% to 6.7%. We recognized a
foreign currency exchange gain of RMB11.1 million and RMB12.0 million in 2006 and 2007,
respectively, primarily resulting from the translation of foreign currency denominated borrowings
into Renminbi, reflecting the appreciation in the value of the Renminbi against the U.S. dollar.
Gain on remeasurement of embedded derivatives
For the year ended December 31, 2008, we recognized a non-cash gain of approximately RMB144.9
million ($21.2 million) on the mark-to-market of the liability-classified derivatives embedded in
the Notes we issued in May 2008.
47
Loss on extinguishment of convertible debts
On August 19, 2008, the holders of the Notes exercised the option to convert $8,251,000 of the
principal amount of the Notes and accrued interests thereon of $46,000 into 1,511,397 of our
ordinary shares at a conversion price of $5.49 per share. The extinguishment of the convertible
debts that arose from such conversion resulted in a loss of RMB10.6 million ($1.6 million).
Gain on disposal of subsidiaries
In 2008, we recognized a gain of RMB2.3 million on the disposal of our equity interests in BCYT and
HCECT.
Income tax expense
Our income tax expense increased by RMB42.3 million from RMB113.4 million in 2007 to RMB155.7
million ($22.8 million) in 2008, primarily due to the increase in the applicable income tax rate.
Our income tax expense increased by RMB53.2 million from RMB60.2 million in 2006 to RMB113.4
million in 2007, primarily due to increases in our taxable income. We were subject to a 25%
enterprise income tax rate in 2008, compared to 15% in both 2007 and 2006. Our effective tax rates
for 2006, 2007 and 2008 were 16.8%, 15.9% and 26.2%, respectively.
Minority interests
2008 compared to 2007
Minority interests relate primarily to the minority shareholder’s share of the results of CECT.
Minority interest is RMB15.9 million ($2.3 million) in 2008 compared to RMB33.1 million in 2007.
The decrease primarily reflects the decline in the net income of CECT in 2008.
2007 compared to 2006
Minority interests relate primarily to the minority shareholder’s share of the results of CECT. We
increased our equity interest in CECT from 90% to 93.4% in July 2006 and by an additional 3.14% to
96.6% in June 2007, thereby resulting in a decrease in the minority interest in CECT. However, this
decrease was more than offset by the significant growth in CECT’s income during 2007. Consequently,
this smaller minority interest in CECT still resulted in a greater reduction in our net income in
the amount of RMB33.1 million in 2007, compared to RMB29.1 million in 2006.
Extraordinary items: Gains on acquisitions of additional equity interests in CECT, net of nil tax
We recorded an extraordinary gain of RMB17.8 million in connection with our capital injection of
$18.8 million (equivalent to RMB149.6 million) into CECT in July 2006 because the other minority
shareholder of CECT, who sold all its remaining 6.6% equity interest in CECT to Qiao Xing Group in
December 2006, did not participate in the capital injection at that time. In June 2007, we made
another capital contribution of $50 million (equivalent to RMB380.4 million) into CECT. The
transaction resulted in an extraordinary gain of RMB28.7 million as the minority shareholder, Qiao
Xing Group, did not participate in the capital injection.
Net income
As a result of the foregoing, our net income increased by RMB306.8 million from RMB286.7 million in
2006 to RMB593.5 million in 2007 and decreased by 28.6% to RMB423.8 million ($62.1 million) in
2008. Our net income margin was 11.3%, 18.9% and 19.7%, respectively, in 2006, 2007 and 2008. Our
basic earnings per share was RMB7.16, RMB12.28 and RMB7.52 ($1.10), respectively, in 2006, 2007 and
2008. Our diluted earnings per share was RMB7.16, RMB12.28 and RMB6.99 ($1.02), respectively, in
2006, 2007 and 2008.
Inflation
Since our inception, inflation in China has not materially impacted our results of operations.
According to the National Bureau of Statistics of China, the change of consumer price index in
China was 1.5% in 2006, 4.8% in 2007 and 5.9% in 2008.
B. Liquidity and Capital Resources
Liquidity
We believe the cash we currently hold, cash flow from operations and available credit facilities
will be sufficient to meet our present cash needs, including our cash needs for working capital and
capital expenditures. We may, however, require additional cash resources due to changing business
conditions or other future developments, including any investments or acquisitions we may decide to
pursue.
We expect to incur capital expenditures of about RMB100.0 million in 2009, which will be used
primarily for the establishment of our VEVA specialty retail stores in the PRC.
We estimate our liquidity needs for 2009 will be approximately RMB1.5 billion, which will be
primarily related to repayment of shareholder loans from Xing, repayment of bank borrowings and the
Notes due in 2008, and the establishment of our VEVA specialty retail stores. In addition, we
anticipate that we would require a higher level of financial resources to fund our working capital
as we continue to expand our operations in 2009. Our future working capital requirements will
depend on many factors, including, among others, the rate of our revenue growth, the timing and
extent of expansion of our sales and marketing activities, the timing of introductions of new
products and/or enhancements to existing products, and the timing and extent of expansion of our
manufacturing capacity.
48
Our long-term liquidity needs will relate primarily to working capital to pay our suppliers,
distributors and third-party manufacturers, as well as any increases in manufacturing capacity or
acquisitions of third party businesses or licenses that we may seek in the future. We expect to
meet these requirements primarily through our current cash holdings, revolving short-term bank
borrowings, as well as our cash flow from operations. We currently do not have any plan to incur
significant capital expenditures in 2010 and for the foreseeable future beyond 2010.
The following table sets forth a summary of our cash flows for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Old Basis)
|
|
|
(New Basis)
|
|
|
(Combined)
(1)
|
|
|
(New Basis)
|
|
|
|
January 1,
|
|
|
November
|
|
|
|
|
|
|
|
|
|
2006 to
|
|
|
30, 2006 to
|
|
|
Year ended
|
|
|
|
|
|
|
December
|
|
|
December
|
|
|
December
|
|
|
Year ended December 31,
|
|
(Amounts in thousands)
|
|
31, 2006
|
|
|
31, 2006
|
|
|
31, 2006
|
|
|
2007
|
|
2008
|
|
|
|
(RMB)
|
|
|
(RMB)
|
|
|
(RMB)
|
|
|
(RMB)
|
|
(RMB)
|
|
(US$)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating
activities
|
|
|
513,378
|
|
|
|
|
(215,111
|
)
|
|
|
|
298,267
|
|
|
|
|
855,524
|
|
|
|
110,106
|
|
|
|
16,139
|
|
|
Net cash provided by (used in) investing
activities
|
|
|
(249,317
|
)
|
|
|
|
63,431
|
|
|
|
|
(185,886
|
)
|
|
|
|
23,016
|
|
|
|
(57,663
|
)
|
|
|
(8,452
|
)
|
|
Net cash provided by financing activities
|
|
|
69,661
|
|
|
|
|
200,667
|
|
|
|
|
270,328
|
|
|
|
|
1,117,327
|
|
|
|
143,738
|
|
|
|
21,068
|
|
|
|
|
|
|
(1)
|
|
Represents the sum of the relevant data for the period from January 1 to November 30, 2006
and the period from November 30 to December 31, 2006. Although the presentation of the
combined cash flow data for the year ended December 31, 2006 is not in accordance with U.S.
GAAP, we believe this combination is useful to provide investors with a more complete
understanding of our results of operations data from year to year.
|
Net cash provided by (used in) operating activities
Our net cash provided by operating activities was RMB110.1 million ($16.1 million) in 2008,
compared to RMB855.5 million in 2007. This difference was primarily due to the significant decrease
in sales, slower
collection of accounts receivable and an increase in prepayments made to our suppliers during 2008.
Our total accounts receivable and bills receivable increased from RMB418.6 million as of December
31, 2007 to RMB505.8 million ($74.1 million) as of December 31, 2008 while our prepayments to
suppliers increased from RMB156.0 million as of December 31, 2007 to RMB363.9 million ($53.3
million) as of December 31, 2008.
Our net cash provided by operating activities was RMB855.5 million in 2007, compared to RMB298.3
million in 2006. This difference was primarily due to significant increase in the sales of
higher-margin products and an improvement in our collection of accounts receivable during 2007. As
a result, our total accounts receivable and bills receivable decreased from RMB574.5 million as of
December 31, 2006 to RMB418.6 million as of December 31, 2007.
Net cash provided by (used in) investing activities
Our net cash provided by (used in) investing activities primarily relates to net cash inflows and
outflows from the acquisitions and disposals of our equity investments, net outflows for capital
expenditures and changes in the level of our restricted cash. In 2006 and 2008, our net cash used
in investing activities was RMB185.9 million and RMB57.7 million ($8.5 million), respectively. In
2007, our net cash provided by investing activities was RMB23.0 million. In 2006, we paid RMB191.6
million for the purchase of certain production facilities, staff quarters and warehouses for a new
factory premises in Huizhou City, Guangdong Province, China. In 2008, we incurred capital
expenditures of RMB14.9 million ($2.2 million), primarily for the set-up of a manufacturing
facility for the production of molds, cast components and other handset parts in Huizhou City,
Guangdong Province, China. Our restricted cash, which relates primarily to bank deposits pledged as
securities for bank borrowings, decreased by RMB7.1 million and RMB24.9 million in 2006 and 2007,
respectively, and increased by RMB41.9 million ($6.1 million) in 2008.
Net cash provided by financing activities
Our cash flows from financing activities primarily relate to short-term bank borrowings, related
company advances and proceeds from the issuance of the Notes in May 2008. Our net cash provided by
financing activities was RMB270.3 million, RMB1,117.3 million and RMB143.7 million ($21.1 million)
in 2006, 2007 and 2008, respectively. The significant increase in net cash provided by financing
activities in 2007 arose primarily due to the net proceeds received from the initial public
offering of our ordinary shares and increases in our short-term bank borrowings, partially offset
by the repayment of outstanding advances to Xing. Net cash provided by financing activities in 2008
included the net proceeds received from the issuance of the Notes in May 2008. In the years ended
December 31, 2006, 2007 and 2008, we participated in a cash management arrangement at the direction
and discretion of Xing, the objective of which was to provide each entity within the related party
group, including our company, the necessary cash resources on an as-needed basis. Consequently, we
periodically both transfer cash to and receive cash from certain related parties under such
arrangement. These cash flows are unrelated to the production and delivery of our products and
services and do not stem from transactions or other events that enter into the determination of our
net income. After the execution of the deed of assignment by Xing in respect of the advances to and
from the related parties, we had net cash advances from Xing of RMB345.1 million as of December 31,
2006. Subsequent to the completion of the initial public offering of our ordinary shares, we had
used RMB330.4 million of the net proceeds to repay Xing and after taking into
49
account the exchange
differences arising from the translation of foreign currency-denominated debts, we have net cash
advances owing to Xing of RMB4.5 million as of December 31, 2007. In 2008, we received net cash
advances from our related parties of RMB8.0 million ($1.2 million) and after taking into account
the exchange differences arising from the translation of foreign currency-denominated debts, we
have net cash advances owing to Xing of RMB11.2 million ($1.6 million) as of December 31, 2008. We
have substantially ceased entering into these types of intragroup financing transactions in 2008
and will fund our operations through our own capital resources.
Capital resources
We have financed our operations primarily through cash flows from operations, the proceeds of the
initial public offering of our ordinary shares, the proceeds from the issuance of the Notes in May
2008 and also through bank loans, bills payable and related-party advances. As of December 31,
2008, we had convertible
notes with an aggregate outstanding principal amount of RMB431.6 million ($63.3 million),
short-term bank loans and other borrowings from various commercial banks with an aggregate
outstanding balance of RMB944.1 million ($138.4 million), bills payable issued by various
commercial banks with an aggregate outstanding balance of RMB39.9 million ($5.8 million) and
outstanding related-party advances in the aggregate amount of RMB11.2 million ($1.6 million). The
outstanding convertible notes bear interest at 4.0% per annum, mature on May 15, 2011 and contain
an early redemption option which can require us to redeem the convertible notes at any time on or
after November 15, 2009. Our short-term bank loans bear a weighted average interest rate of 6.8%
and 7.3% as of December 31, 2007 and 2008, respectively. These short-term bank loans have terms of
three months to one year, and expire at various times throughout the year. These facilities contain
no specific renewal terms but we have historically been able to obtain extensions of some of the
facilities shortly before they mature. Bills payable are interest-free bank borrowings with terms
of not more than 180 days. All related-party advances outstanding as at December 31, 2008 were
interest-free, unsecured and without fixed terms of repayment.
Capital expenditures
Our capital expenditures were RMB200.5 million, RMB1.9 million and RMB14.9 million ($2.2 million)
in 2006, 2007 and 2008, respectively. In 2006, we paid RMB191.6 million in cash for the purchase of
new factory premises in Huizhou. Our capital expenditures in 2008 relate primarily to the set-up of
a manufacturing facility for the production of molds, cast components and other handset parts in
Huizhou City, Guangdong Province, China, which was disposed by us together with our disposal of our
equity interests in HCECT. We expect to incur capital expenditures of approximately RMB100.0
million in 2009, which will be used primarily for the set up of our VEVA specialty retail stores in
the PRC.
C. Research, Development, Patents and Licenses, Etc.
See “Item 4 Information on the Company—B. Business Overview—Research and 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, 2008 that are
reasonably likely to have a material adverse effect on our net revenues, income, profitability,
liquidity or capital resources, or that caused the disclosed financial information to be not
necessarily indicative of future operating results or financial conditions.
E. Off-Balance Sheet Arrangements
We do not have any outstanding derivative financial instruments, interest rate swap transactions or
foreign currency forward contracts. We do not engage in speculative transactions involving
derivatives.
We provided guarantees to QXCI for bank borrowings in the amount of RMB190.0 million, RMB150.0
million and RMB150.0 million ($22.00 million) as of December 31, 2006, 2007 and 2008, respectively.
We also provided a guarantee of $40.0 million to Xing for senior convertible notes issued to two
strategic investors of Xing in June 2006, which have been exchanged into our ordinary shares that
were then owned by Xing immediately prior to the completion of the initial public offering of our
ordinary shares in May 2007.
F. Tabular Disclosure of Contractual Obligations
The following table sets forth our contractual obligations and commitments as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due by Period
|
|
|
|
|
|
|
|
Less than
|
|
1 to
|
|
3 to
|
|
More than
|
|
|
|
Total
|
|
1 year
|
|
3 years
|
|
5 years
|
|
5 years
|
|
|
|
(amounts in thousands of Renminbi)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase obligations relating to raw materials and components
|
|
|
17,034
|
|
|
|
17,034
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Operating lease commitments
|
|
|
7,818
|
|
|
|
4,362
|
|
|
|
3,456
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Total
|
|
|
24,852
|
|
|
|
21,396
|
|
|
|
3,456
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
G. Safe Harbor
See “Forward-Looking Statements.”
50
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
The following table sets forth information regarding our directors and executive officers as of the
date of this annual report.
|
|
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position/Title
|
|
Zhi Yang Wu
|
|
|
35
|
|
|
Chairman and Director
|
|
Rui Lin Wu
|
|
|
56
|
|
|
Vice Chairman and Director
|
|
Zacky Sun
|
|
|
46
|
|
|
Independent Director
|
|
Xin Zhang
|
|
|
44
|
|
|
Independent Director
|
|
Pei De Lou
|
|
|
47
|
|
|
Independent Director
|
|
David Li
|
|
|
39
|
|
|
Chief Executive Officer
|
|
Kok Seong Tan
|
|
|
37
|
|
|
Chief Financial Officer and Principal Accounting Officer
|
Directors
Mr. Zhi Yang Wu is the chairman of our board of directors. He joined our company in 2003. Mr. Wu’s
additional roles include vice chairman of Qiao Xing Group, vice chairman and board secretary of
Xing, our parent company currently listed on the Nasdaq Global Market, and director of QXCI. He was
general manager of QXCI from 1995 to 1999. Mr. Wu received a diploma in enterprise management from
Huizhou University in China.
Mr. Rui Lin Wu is our vice chairman and is also the father of our chairman. Mr. Wu founded our
parent company, Xing, and currently serves as its chairman and chief executive officer. Mr. Wu has
over 18 years of experience in the telecommunications industry. Prior to his career in the
telecommunications industry, he was a general manager of a fashion and garment factory from 1980 to
1986. Currently, Mr. Wu is the executive commissioner of the China National Association of Industry
and Commerce, senior analyst of the China National Condition and Development Research Center, and a
member of the Poverty Fund of China.
Mr. Zacky Sun is our independent director. He joined our company in March 2007. From July 2004 to
February 2007, Mr. Sun was a financial consultant to Intermost Corporation (OTCBB: IMOT). He also
served as financial controller of the same company from February 2002 to March 2003. During the
period from March 2003 to July 2004, he was the financial manager and executive director of Kanhan
Technologies Group Limited, a Hong Kong publicly listed company. From July 2000 to February 2002,
Mr. Sun served as director of Voice Services Department at Far East Gateway Limited. From March
1999 to July 2000, he worked for Man Sang Holdings, Inc. (AMEX: MHJ) and its affiliated companies
in various roles as group financial controller, chief financial officer and vice president. From
December 1997 to February 1999, Mr. Sun was financial controller at CCT Communications Group
Limited. From May 1995 to July 1999, he held several positions, including financial controller,
acting general manager and financial controller, at Synergy Power Corporation Pty Ltd, an
Australia-based power company. Mr. Sun holds a B.S. degree from University College of Wales,
Aberystwyth in England. He is a certified public accountant in Hong Kong.
Dr. Xin Zhang is our independent director. He joined our company in February 2008. Dr. Zhang is the
chairman and chief executive officer of Sinocro Partners, a merchant bank specializing in
investment and advisory services related to the PRC. Before founding Sinocro Partners, Dr. Zhang
was the CEO of Chipscreen Bioscience, or Chipscreen. Chipscreen was recognized as one of the ten
most potential biotech and pharmaceutical company in China. China Medicine Economic News recognized
Dr. Zhang as one of “China’s New Strength, Top Individuals of China Pharmaceutical Industry” in
2003. Prior to joining Chipscreen, Dr. Zhang was the managing director at Delirium, a global
strategic consulting company in New York, Hong Kong and China. Dr. Zhang also had work experience
in KPMG and Credit Suisse First Boston. Dr. Zhang received his Ph.D. from University of
Pennsylvania, M.D. from Tianjin Medical University and MBA from the University of Chicago with a
concentration in Finance and Accounting.
Professor Pei De Lou is our independent director. He joined our company in March 2007 and has been
a professor of telecom engineering at Beijing University of Posts and Telecommunications since July
2001. His other current positions include executive secretary of the China Mobile Communications
Association, chairman of the Multimedia Communication Broadcasting Standardization Technology
Committee under the China Association for Standardization, independent director of Xinzhi Sci &
Tech Co., Ltd, a PRC listed company, and chief scientist of Wireless China Network Technology Co.,
Ltd., where he also served as chief executive officer from May 2005 to February 2007. From December
2002 to May 2005, Professor Lou was general manager of Yunnan Golden Horizon Mobile Communication
Technology Co., Ltd. From July 2001 to December 2002, he was general manager of ZT Chinacom Mobile
Communication R&D Co., Ltd. From March 1998 to July 2001, Professor Lou was section chief of the
Administrative Department of Electronic Information Products of MIIT, where he was in charge of the
first national fund for mobile handset research and development. Professor Lou has received the
National Invention Award (1993) and the Gold Prize at the 8th National Invention Show in China.
Professor Lou holds a Ph.D. degree from the University of Electronic Science and Technology of
China.
Executive officers
Dr. David Li is our chief executive officer and is also head of our production and research and
development teams. He joined our company in 2004. Prior to that, Dr. Li served as vice general
manager of the Telecommunications Department of Haier Group Company from 1998 to 2001, responsible
for manufacturing, research and development and quality control. After that, he served as vice
general manager of the Haier-CCT joint venture from 2001 to 2004. From 1993 to 1998, Dr. Li studied
as a graduate student at Tianjin University in China. From 1991 to 1993, he was an engineer at
Jingdezhen Communications Equipment Co., Ltd., which is affiliated with the Ministry of Posts and
Telecommunications. Dr. Li received both his master degree in Communications and Electronics and
his doctorate degree in Signal Processing from Tianjin University in China.
51
Mr. Kok Seong Tan is our chief financial officer and principal accounting officer. Mr. Tan joined
our company in September 2006. From February 2005 to May 2006, he was an independent director and
member of the audit committee of Zhonghui Holdings Ltd., a Singapore Stock Exchange listed company.
Mr. Tan worked at the Shanghai Office of Capgemini, a French public company engaged in consulting,
technology and outsourcing, from 2004 to 2005. He was a senior manager of the Audit & Assurance
Business Services Department of Ernst & Young Hua Ming in Beijing from 2001 to 2004. From 1995 to
2001, Mr. Tan was a manager at Ernst & Young’s Singapore Office. Mr. Tan is a Singapore certified
public accountant. He holds an honors degree in Accounting from the Nanyang Technological
University in Singapore.
B. Compensation
Cash Compensation of Directors and Executive Officers
In 2008, we paid aggregate cash compensation of RMB3.0 million ($0.4 million) to our directors and
executive officers.
Equity Incentive Plan
We adopted our 2007 equity incentive plan in March 2007. Our equity incentive plan provides for the
grant of options as well as restricted share units, share appreciation rights and other share-based
awards, referred to as “awards.” The purpose of the plan is to attract and retain the best
available personnel for positions of substantial responsibility, provide additional incentive to
employees, directors and consultants and promote the success of our business. Our board of
directors believes that our company’s long-term success is dependent upon our ability to attract
and retain superior individuals who, by virtue of their ability, experience and qualifications,
make important contributions to our business.
Administration
Our 2007 equity incentive plan may be administered by our board of directors or any of its
committees. The administrator is authorized to interpret the plan, to prescribe, amend and rescind
any rules and regulations relating to the plan, and to make any other determinations that it deems
necessary or desirable for the
administration of the plan. The administrator determines the fair market value, terms and
conditions of each award agreement, including but not limited to, the exercise price, the time or
times when awards may be exercised, any vesting acceleration or waiver of forfeiture, or repurchase
restrictions, and other applicable terms.
Options
The terms and conditions of options granted under our 2007 equity incentive plan are set forth in
an award agreement. The term of options granted under the 2007 equity incentive plan will be ten
years from the date of grant or such shorter term as provided in the individual award agreement.
The compensation committee will determine the acceptable form of consideration for exercise of an
option. Such consideration may consist entirely of cash, check, promissory note, ordinary shares,
consideration received by us in a cashless exercise, a reduction in the amount of any company
liability to the participant, or any combination of the foregoing methods of payment. Under the
individual award agreements, to exercise the options granted on March 19, 2007, the optionees are
obligated to pay for the consideration entirely by cash.
In the event of termination of employment, a participant may exercise his or her vested options
within such period of time as is specified in the individual award agreement, generally 90 days
after the date of termination, and any unvested options are immediately forfeited. In no event may
a participant exercise an option after its original term has expired.
Change of control
In the event of a change of control, each outstanding option shall be assumed or substituted for by
the successor corporation or a parent or subsidiary of the successor corporation. Unless determined
by the administrator, if the successor corporation refuses to assume or substitute for the awards,
the participant may fully vest in and have the right to exercise the awards, including those that
would not otherwise be vested or exercisable. If an award is not assumed or substituted for, the
administrator shall notify the participant that the award shall be exercisable for a period up to
fifteen days from the date of such notice, and the award shall terminate upon the expiration of
such period.
Amendment and termination of plan and awards
Our board of directors may at any time amend, alter, suspend or terminate our 2007 equity incentive
plan. Amendments to our 2007 equity incentive plan are subject to shareholder approval, to the
extent required by law, or by stock exchange rules or regulations. Any amendment, suspension or
termination of our 2007 equity incentive plan may not adversely affect awards already granted
without written consent of the recipients of such awards .
In the event of a participant’s termination of employment, his or her unvested awards are generally
immediately forfeited, and any vested awards are treated in accordance with the terms of the
applicable award agreement.
Our board of directors and shareholders authorized the issuance of up to 8,000,000 ordinary shares
upon exercise of awards granted under our 2007 equity incentive plan. On March 19, 2007, we granted
options to purchase 3,916,520 of our ordinary shares to one of our directors, officers, key
employees and one consultant. In 2008, options to purchase 565,000 of our ordinary shares were
exercised and options to purchase 140,000 of our ordinary shares were forfeited, and in March 2009,
options to purchase 266,720 of our ordinary shares expired. As a result, options to purchase
2,944,800 of our ordinary shares remained outstanding as of June 12, 2009. The following table sets
forth certain information regarding our outstanding options under our 2007 equity incentive plan as
of June 12, 2009.
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares
|
|
Exercise
|
|
|
|
|
|
|
|
underlying
|
|
price
|
|
|
|
|
|
Name
|
|
options granted
|
|
($/Share)
|
|
Grant date
|
|
Expiration date
|
|
Zhi Yang Wu
|
|
|
20,000
|
|
|
|
7.50
|
|
|
March 19, 2007
|
|
March 18, 2010
|
|
|
|
|
1,250,000
|
|
|
|
7.50
|
|
|
March 19, 2007
|
|
March 18, 2013
|
|
David Li
|
|
|
120,000
|
|
|
|
7.50
|
|
|
March 19, 2007
|
|
March 18, 2013
|
|
Others
(1)
|
|
|
1,200,000
|
|
|
|
18.00
|
|
|
March 19, 2007
|
|
March 18, 2011
|
|
|
|
|
354,800
|
|
|
|
7.50
|
|
|
March 19, 2007
|
|
March 18, 2013
|
|
|
|
|
|
(1)
|
|
Consists of one consultant and employees that are not our directors or executive officers.
|
Employment Agreements
We have entered into employment agreements with each of our executive officers, which have
substantially similar terms. Under these agreements, each of our executive officers is employed for
a specified time period, but we may terminate his or her employment for “cause” at any time. These
agreements do not provide for any special termination benefits, nor do we have any other
arrangements with these executive officers for special termination benefits. Each executive officer
has agreed to hold in strict confidence and not to use, except for the benefit of our company, any
proprietary information, technical data, trade secrets and know-how of our company or the
confidential or proprietary information of any third party, including our affiliated entities and
our subsidiaries, received by our company. Each of these executive officers has also agreed not to
engage in any other employment, occupation, consulting or other business activity directly related
to the business in which we are involved, or engage in any other activities that conflict with his
or her obligations to us during the term of his or her employment and for three years following the
termination of his or her employment.
C. Board Practices
Board Composition
Our board of directors consists of five members, three of whom are independent directors within the
meaning of Section 303A of the NYSE Manual and Rule 10A-3 under the Securities Exchange Act of
1934, as amended.
We are a “controlled company” as defined under NYSE Manual Section 303A. As a result, for so long
as we remain a controlled company as defined in that rule, we are exempt from, and our shareholders
generally are not provided with the benefits of, some of the NYSE corporate governance
requirements, including:
|
•
|
|
the establishment of a compensation committee composed entirely of independent directors;
and
|
|
|
|
•
|
|
the establishment of a nomination committee composed entirely of independent directors.
|
Board Committees
To enhance our corporate governance, we have established three committees under the board of
directors: the audit committee, the nominating and corporate governance committee and the
compensation committee. We have adopted a charter for each of these committees. The committees have
the following functions and members.
Audit committee
Our audit committee reports to the board of directors regarding the appointment of our independent
public accountants, the scope and results of our annual audits, compliance with our accounting and
financial policies and management’s procedures and policies relating to the adequacy of our
internal accounting controls. The current members of our audit committee are Mr. Zacky Sun, Mr. Xin
Zhang and Professor Pei De Lou. Mr. Zacky Sun, Mr. Xin Zhang and Professor Pei De Lou satisfy the
“independence” requirements of Section 303A of the NYSE Manual and Rule 10A-3 under the Securities
Exchange Act of 1934, as amended. Mr. Zacky Sun acts as the chairman of our audit committee and
meets the criteria of our audit committee financial expert as set forth under applicable SEC rules.
The audit committee will oversee our accounting and financial reporting processes and the audits of
the financial statements of our company. The audit committee is responsible for, among other
things.
|
•
|
|
the appointment, re-appointment, evaluation, compensation, oversight and termination of the
work of our independent auditor (including resolution of disagreements between management and
the independent auditor regarding financial reporting);
|
|
|
|
•
|
|
ensuring that it receives from our independent auditor a formal written statement attesting
to the auditor’s independence and describing all relationships between the independent auditor
and us;
|
|
|
|
•
|
|
pre-approving any audit and non-audit services, including tax services, to be provided by
our independent auditor in accordance with NYSE rules;
|
|
|
|
•
|
|
reviewing and discussing our annual audited financial statements and quarterly financial
statements with management and our independent auditor;
|
53
|
•
|
|
reviewing and discussing with our independent auditor all critical accounting policies and
practices to be used by us in preparing our financial statements, all alternative treatments
of financial information within U.S. GAAP, and other material communications between our
independent auditor and management;
|
|
|
|
•
|
|
reviewing and discussing our policies with respect to risk assessment and risk management;
|
|
|
|
•
|
|
reviewing and discussing, with management and counsel, any legal matters that may have a
material impact on us and any material reports or inquiries from regulatory or governmental
agencies;
|
|
|
|
•
|
|
establishing procedures for the receipt, retention and treatment of complaints regarding
accounting, internal accounting controls, auditing matters or potential violations of law, and
the confidential, anonymous submission by our employees of concerns regarding questionable
accounting or auditing matters or potential violations of law;
|
|
|
|
•
|
|
annually reviewing the independent auditors’ report describing the auditing firm’s internal
quality control procedures, any material issues raised by the most recent internal quality
control review, or peer review of the independent auditors and all relationships between the
independent auditors and us;
|
|
|
|
•
|
|
setting hiring policies for employees or former employees of the independent auditors;
|
|
|
|
•
|
|
reviewing reports prepared by management or the independent auditors relating to
significant financial reporting issues and judgments;
|
|
|
|
•
|
|
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;
|
|
|
|
•
|
|
meeting separately and periodically with management, the internal auditors and the
independent auditors and reporting regularly to the full board of directors; and
|
|
|
|
•
|
|
reviewing and approving policies and procedures with respect to proposed transactions
between us and our related parties, and approving in advance all proposed related-party
transactions as defined in Item 404 of Regulation S-K promulgated by the SEC.
|
Nominating and corporate governance committee
Our nominating and corporate governance committee assists the board of directors in identifying
individuals qualified to become members of our board of directors and in determining the
composition of the board and its committees. The current members of our nominating and corporate
governance committee are Mr. Xin Zhang, who acts as the chairman of our nominating and corporate
governance committee, Professor Pei De Lou and Mr. Zhi Yang Wu. Mr. Xin Zhang and Professor Pei De
Lou satisfy the “independence” requirements of Section 303A of the NYSE Manual.
Our nominating and corporate governance committee will be responsible for, among other things:
|
•
|
|
identifying and recommending to the board nominees for election or re-election to the
board, or for appointment to fill any vacancy;
|
|
|
|
•
|
|
reviewing annually with the board the current composition of the board in light of the
characteristics of independence, age, skills, experience and availability of service to us;
|
|
|
|
•
|
|
reviewing the continued board membership of a director upon a significant change in such
director’s principal occupation;
|
|
|
|
•
|
|
identifying and recommending to the board the names of directors to serve as members of the
audit committee and the compensation committee, as well as the nominating and corporate
governance committee itself;
|
|
|
|
•
|
|
advising the board 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;
|
|
|
|
•
|
|
establishing criteria and processes for, and leading the board and each committee of the
board in, its annual performance self-evaluation;
|
|
|
|
•
|
|
monitoring compliance with our code of business conduct and ethics, including reviewing the
adequacy and effectiveness of our procedures to ensure proper compliance; and
|
|
|
|
•
|
|
ensuring that the composition of the board facilitates our ability to maintain our status
as a foreign private issuer.
|
54
Compensation committee
Our compensation committee assists the board 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. In addition, the compensation committee reviews share-based
compensation arrangements for all of our other employees. 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 or her compensation is
deliberated. The current members of our compensation committee are Professor Pei De Lou, who acts
as the chairman of our compensation committee, Mr. Zacky Sun and Mr. Zhi Yang Wu. Mr. Zacky Sun and
Professor Pei De Lou satisfy the “independence” requirements of Section 303A of the NYSE Manual.
Our compensation committee will be responsible for, among other things:
|
•
|
|
approving and overseeing the total compensation package for our executives;
|
|
|
|
•
|
|
reviewing and making recommendations to the board with respect to the compensation of our
directors and officers;
|
|
|
|
•
|
|
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, including any bonus compensation, of
our chief executive officer based on this evaluation;
|
|
|
|
•
|
|
reviewing the results of, and procedures for, the evaluation of the performance of other
executive officers, including any bonus compensation;
|
|
|
|
•
|
|
reviewing periodically and making recommendations to the board regarding any long-term
incentive compensation or equity plans, programs or similar arrangements, administering these
plans and reviewing and determining share-based compensation for our directors and officers;
|
|
|
|
•
|
|
reviewing and making recommendations to the board regarding all new employment, consulting,
retirement and severance agreements and arrangements proposed for our executives; and
|
|
|
|
•
|
|
selecting peer groups of companies to be used for purposes of determining competitive
compensation packages.
|
Duties of Directors
Under British Virgin Islands law, our directors have a duty to act honestly, in good faith and with
a view to our best interests. Our directors also have a duty to exercise the care, diligence and
skills 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. A shareholder has the right to seek damages if a duty owed by our directors is
breached.
Our board of directors has all the powers necessary for managing, and for directing and
supervising, our business affairs. The functions and powers of our board of directors include,
among others:
|
•
|
|
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 the officers;
|
|
|
|
•
|
|
exercising the borrowing powers of our company and mortgaging the property of our company;
and
|
|
|
|
•
|
|
approving the transfer of shares in our company, including the registering of such shares
in our share register.
|
Interested Transactions
A director may vote in respect of any contract or transaction in which he is interested, provided
that the nature of the interest of any director in such contract or transaction shall be disclosed
by him or her at or prior to its consideration and any vote on that matter. A general notice or
disclosure to the directors or otherwise contained in the minutes of a meeting or a written
resolution of the directors or any committee of directors that a director is a shareholder of any
specified firm or company and is to be regarded as interested in any transaction with such firm or
company will be sufficient disclosure, and, after such general notice, it will not be necessary to
give special notice relating to any particular transaction.
Remuneration and Borrowing
With the prior or subsequent approval by our shareholders, our directors may determine the
remuneration to be paid to the directors. The emoluments of all officers are to be fixed by our
directors. Our compensation committee will assist our directors in reviewing and approving the
compensation structure for our directors. Our directors may exercise all the powers of our company
to borrow money and to mortgage or charge its undertaking, property and uncalled capital or any
part thereof and to issue debentures, debenture stock and other securities whether outright or as
security for any debt, liability or obligation of our company or of any third party subject to our
amended and restated articles of association.
55
Qualification
There is no shareholding qualification for directors. Further, shareholding qualification for
directors may not be fixed by our company in a general meeting.
Terms of Directors and Executive Officers
At each general meeting of the shareholders of our company, all such directors whose term expires
are required to retire from office and are eligible for re-election. All of these directors will
retain office until the close of such general meeting.
Limitation on Liability and Indemnification Matters
British Virgin Islands law allows us to indemnify our directors, officers and auditors acting in
relation to any of our affairs against actions, costs, charges, losses, damages and expenses
incurred by reason of any act done or omitted in the execution of their duties as our directors,
officers and auditors.
Under our amended and restated memorandum and articles of association, we may indemnify our
directors, officers, employees and agents against expenses (including attorneys’ fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by such persons in connection
with actions, suits or proceedings to which they are party or are threatened to be made a party by
reason of their acting as our directors, officers, employees or agents. To be entitled to
indemnification, these persons must have acted honestly and in good faith and in the best interest
or not opposed to the interest of our company and they must have had no reasonable cause to believe
their conduct was unlawful.
D. Employees
See “Item 4. Information on the Company—B. Business Overview—Employees.”
E. Share Ownership
The following table sets forth information with respect to the beneficial ownership, within the
meaning of Rule 13d-3 of the Exchange Act, of our ordinary shares as of April 30, 2009 for:
|
•
|
|
each of our current directors and executive officers; and
|
|
|
|
•
|
|
each person known to us to own beneficially more than 5.0% of our shares.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares beneficially owned
(1)(2)(3)
|
|
|
|
Number
|
|
Percentage
|
|
Directors and executive officers:
|
|
|
|
|
|
|
|
|
|
Zhi Yang Wu
(4)
|
|
|
32,720,000
|
|
|
|
68.0
|
%
|
|
Rui Lin Wu
(5)
|
|
|
32,200,000
|
|
|
|
67.6
|
%
|
|
David Li
(6)
|
|
|
48,000
|
|
|
|
*
|
|
|
All Directors and Executive Officers as a Group
|
|
|
32,768,000
|
|
|
|
68.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Principal shareholder:
|
|
|
|
|
|
|
|
|
|
Qiao Xing Universal Telephone, Inc.
(7)
|
|
|
32,200,000
|
|
|
|
67.6
|
%
|
|
|
|
|
|
*
|
|
Less than 1%.
|
|
|
|
(1)
|
|
Beneficial ownership is determined in accordance with the rules of the SEC and includes
voting or investment power with respect to the ordinary shares.
|
|
|
|
(2)
|
|
The percentage of beneficial ownership of each listed person is based on 47,609,731 ordinary
shares outstanding as of April 30, 2009 and any ordinary shares underlying share options
exercisable by
such person within 60 days of the date of this annual report but excludes ordinary shares
underlying options held by any other person.
|
|
|
|
(3)
|
|
As of April 30, 2009, the outstanding amount of the Notes was approximately $61.7 million.
Given that the conversion price of the Notes was reset to US$4.05 per share on November 15,
2008, the outstanding Notes could be converted into approximately 15,246,556 ordinary shares
of our company. The holders of the Notes also held 1,648,721 warrants to purchase our ordinary
shares as of April 30, 2009. As a result, immediately after giving effect to the conversion of
the Notes into our ordinary shares and the exercise of the right to purchase our ordinary
shares under the warrants, the holders of the Notes and warrants would beneficially own
approximately 26.2% of our ordinary shares. However, the SPA provides that neither the Notes
nor the warrants could be converted or exercised, if, after giving effect to such conversion
or exercise, the holders of the Notes (together with their affiliates) would beneficially own
in excess of 9.99% of our ordinary shares outstanding immediately after giving effect to such
conversion or exercise. The notes and warrants were held by DKR SoundShore Oasis Holding Fund
Ltd., CEDAR DKR Holding Fund Ltd. and Chestnut Fund Ltd. as of April 30, 2009. The registered
address of DKR SoundShore Oasis Holding Fund Ltd. and Chestnut Fund Ltd. is c/o Codan Trust
Company (Cayman) Limited, Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman,
KY1-1111, Cayman Islands. The registered address of CEDAR DKR Holding Fund Ltd. is c/o Walkers
SPV Limited, PO Box 908GT, Walker House, Mary
|
56
|
|
|
|
|
|
|
Street, George Town, Grand Cayman, Cayman
Islands. DKR Oasis Management Company L.P., with its principal address at 1281 East Main
Street, 3rd Floor, Stamford, CT 06902-3565, United States, acts as the discretionary
investment manager of DKR SoundShore Oasis Holding Fund Ltd., CEDAR DKR Holding Fund Ltd. and
Chestnut Fund Ltd., and is responsible for directing the formulation of the investment program
of the three funds, and has the authority to do any and all acts on behalf of the three funds
with respect to the investment program, maintenance and administration of the three funds,
including voting any shares held by them. Oasis Management Holdings LLC, for which Mr. Seth
Fischer is a managing member, is the non-managing general partner of DKR Oasis Management
Company L.P. On March 31, 2009, Xing and Mr. Ru Lin Wu, the chairman of Xing and vice chairman
of our company, entered into agreements to purchase our outstanding Notes of approximately
US$61.7 million from the three holders of the Notes, DKR SoundShore Oasis Holding Fund Ltd.,
CEDAR DKR Holding Fund Ltd. and Chestnut Fund Ltd. (collectively, the “Sellers”). Under the
terms of the agreements, Xing agreed to purchase US$30.0 million of the outstanding Notes for
an aggregate purchase price of US$24.0 million, payable in three installments to the Sellers
on or before the close of business, New York time, on May 1, 2009. Mr. Ru Lin Wu agreed to
purchase the remaining Notes for an aggregate purchase price of US$26.0 million, payable in
full to the Sellers on or before the close of business, New York time, on August 31, 2009.
|
|
|
|
(4)
|
|
Includes 520,000 ordinary shares issuable upon exercise of options held by Mr. Zhi Yang Wu
and 32,200,000 ordinary shares held by Xing. Mr. Zhi Yang Wu is the vice chairman of Xing.
Excluding equity interest owned by his brother, Mr. Zhi Jian Wu Li, and his father, Mr. Rui
Ling Wu, he does not own any equity interest in Xing. Mr. Zhi Yang Wu disclaims ownership of
the ordinary shares held by Xing except to the extent of his pecuniary interest therein.
|
|
|
|
(5)
|
|
Includes 32,200,000 ordinary shares held by Xing. Mr. Rui Lin Wu is the chairman and chief
executive officer of Xing. Mr. Zhi Jian Wu Li, brother of our chairman and son of our vice
chairman, owned an aggregate of 9.3% equity interest in Xing through Qiao Xing Trust and Wu
Holdings Ltd. as of April 30, 2009. Mr. Ru Lin Wu also owned 43.7% equity interest in Xing as
of April 30, 2009. Mr. Rui Lin Wu disclaims ownership of the ordinary shares held by Xing
except to the extent of his pecuniary interest therein.
|
|
|
|
(6)
|
|
Includes 48,000 ordinary shares issuable upon exercise of options held by Dr. David Li.
|
|
|
|
(7)
|
|
Xing is a British Virgin Islands company currently listed on the Nasdaq Global Market. Mr.
Zhi Jian Wu Li, brother of our chairman and son of our vice chairman, owned an aggregate of
9.3% equity interest in Xing through Qiao Xing Trust and Wu Holdings Ltd. as of April 30,
2009. Mr. Ru Lin Wu also owned a 43.7% equity interest in Xing as of April 30, 2009. The
address of Xing is Qiao Xing Science Technological & Industrial Zone, Tangquan, Huizhou,
Guangdong, 516023, People’s Republic of China.
|
None of our existing shareholders has voting rights that will differ from the voting rights of
other shareholders. We are not aware of any arrangement that may, at a subsequent date, result in a
change of control of our company.
As of June 12, 2009, our company had a total of 47,609,731 of its ordinary shares held by six
record holders.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
See “Item 6. Directors, Senior Management and Employees—E. Share Ownership.”
B. Related Party Transactions
Equity Incentive Plan
In March 2007, we granted share options to purchase an aggregate of 3,916,520 ordinary shares in
our company to certain of our employees, officers, a director and one consultant. See “Item 6.
Directors, Senior Management and Employees—B. Compensation— Equity Incentive Plan.” In January
2008, we issued 565,000 ordinary shares at $7.50 per share upon the exercise of share options by a
director and certain employees.
Sales of Mobile Handsets and Accessories
CECT sold mobile handsets and accessories to QXCI for cash consideration of RMB1.4 million in 2006.
Service Transactions
CECT received handset processing fees of approximately RMB3.6 million, RMB13.3 million and RMB6.6
million ($1.0 million) in 2006, 2007 and 2008, respectively from QXCI.
Cash Advances To and From Related Parties
In prior years, we made cash advances to, and received cash advances from a group of related
parties at the direction and discretion of Xing. The group of related parties consists of Xing, Mr.
Zhi Jian Wu Li, Mr. Zhi Yang Wu, Qiao Xing Group, QXCI, Qiao Xing Communication Holdings, Ltd., or
Communication Holdings, and Qiao Xing Electronics Holdings Co., Ltd., or Electronics Holdings. Mr.
Zhi Jian Wu Li is the brother of our chairman, Mr. Zhi Yang Wu, and the son of our vice chairman,
Mr. Rui Lin Wu, and is also a shareholder of Xing. Each of Qiao Xing Group and Electronics Holdings
is controlled by Mr. Zhi Yang Wu and Mr. Rui Lin Wu. Each of Communication Holdings and Hui Zhou
Qiao Xing is a subsidiary of Xing.
In 2006, we made advances and repayments to, and received advances and repayments from, the related
party group of RMB531.8 million and RMB836.4 million, respectively. The net balance due to the
related parties as of December 31, 2006 was RMB345.1 million. In 2007, we made advances and
repayments to, and received advances and repayments from, the related party group of RMB727.4
million and
57
RMB397.0 million, respectively. Taking into account the exchange differences of RMB10.2
million arising from the translation of foreign currency-denominated debts, the net balance due to
the related parties as of December 31, 2007 was RMB4.5 million. In 2008, we made advances and
repayments to, and received advances and repayments from, the related party group of RMB49.6
million ($7.3 million) and RMB57.7 million ($8.5 million), respectively. Taking into account the
exchange differences of RMB1.4 million arising from the translation of foreign currency-denominated
debts, the net balance due to the related parties as of December 31, 2008 was RMB11.2 million ($1.6
million).
The cash advances were unsecured, non-interest bearing and had no fixed repayment terms.
Arrangements in Connection with the Senior Convertible Notes Issued by Xing
Xing and our company entered into a securities purchase agreement with DKR SoundShore Oasis Holding
Fund Ltd. and CEDAR DKR Holding Fund Ltd. in April 2006, under which Xing issued $36 million and
$4 million in senior convertible notes in June 2006 to DKR SoundShore Oasis Holding Fund Ltd. and
CEDAR DKR Holding Fund Ltd., respectively. Upon the execution and delivery of this agreement, we
and the two holders of these senior convertible notes entered into a registration rights agreement
under which we agreed to provide registration rights to these holders. This registration rights
agreement provides that, upon the initial public offering of our ordinary shares and to the extent
that less than 100% of (i) the senior convertible notes are converted into the common stock of Xing
prior to the initial public offering of our ordinary shares and (ii) our shares received by the
holders upon conversion of the senior convertible notes are sold in the initial public offering of
our ordinary shares, we are obligated to file with the SEC a registration statement on Form F-3 (or
any comparable form for a registration acceptable to the requesting holders) to cover the resale of
all of the registrable securities upon the request of such holders. Under this registration rights
agreement, in the case of our failure to file such registration statement as required under this
registration rights agreement or to obtain and maintain the effectiveness of the registration
statement, we will be required to, among others, pay penalties to the holders of such notes. Xing
has agreed to indemnify us for any losses, claims, damages, liabilities, judgments, fines,
penalties, charges, and costs resulting from our failure to make any registration or obtain and
maintain the effectiveness of the relevant registration statement. In addition, we provided a
guaranty to the two holders of the senior convertible notes under which we unconditionally and
irrevocably guarantee the payment of all obligations of Xing under the securities purchase
agreement and other related documents. Immediately prior to the listing of our ordinary shares on
the NYSE on May 3, 2007, DKR SoundShore Oasis Holding Fund Ltd. and CEDAR DKR Holding Fund Ltd.
exchanged all of their senior convertible notes for 7,800,000 of our ordinary shares held by Xing
under the terms of the securities purchase agreement. Subsequent to the exchange and prior to the
initial public offering of our shares in May 2007, we were 80.50% held by Xing, 17.55% held by DKR
SoundShore Oasis Holding Fund Ltd. and 1.95% held by CEDAR DKR Holding Fund Ltd.
Guarantees and Pledges
Certain affiliates also provided guarantees and pledges for CECT’s short-term borrowings. Qiao Xing
Group made guarantees for CECT of RMB449.0 million, RMB160.0 million and RMB160.0 million ($23.5
million) as of December 31, 2006, 2007 and 2008, respectively. Qiao Xing Group and certain of our
directors jointly provided guarantees for CECT of RMB400.0 million, RMB570.0 million and RMB360.0
million ($52.8 million) as of December 31, 2006, 2007 and 2008, respectively. Xing provided
guarantees of RMB78.1 million, RMB338.0 million and RMB336.0 million ($49.2 million) as of December
31, 2006, 2007 and 2008, respectively. Certain directors provided guarantees of RMB60.0 million,
nil and RMB218.5 million ($32.0 million) as of December 31, 2006, 2007 and 2008, respectively. We
have not made any personal loans to our directors or officers in the past. We provided guarantees
to QXCI for bank borrowings in the amount of RMB190.0 million, RMB150.0 million and RMB150.0
million ($22.0 million) as of December 31, 2006, 2007 and 2008, respectively. We also provided a
guarantee in respect of $40.0 million of senior convertible notes issued by Xing to its two
strategic investors in June 2006, which were exchanged into our ordinary shares immediately prior
to the completion of the initial public offering of our ordinary shares in May 2007. See
“—Arrangements in connection with the senior convertible notes issued by Xing.”
Non-Competition Arrangement
In connection with the initial public offering of our ordinary shares in May 2007, we entered into
a non-competition agreement with Xing, QXCI and Mr. Rui Lin Wu, which will remain valid until Xing
or Mr. Rui Lin Wu or any family member of Mr. Rui Lin Wu does not directly or indirectly own any of
our shares, or until termination of such agreement through the written consent of the parties. This
agreement provides that Xing, QXCI and Mr. Rui Lin Wu will not and will procure their subsidiaries
and Mr. Wu’s family members will not, solely or jointly, or through any person, company, enterprise
or unit other than us and our subsidiaries, develop, carry on, participate in, engage in, or be
involved in any businesses or activities that result in or may result in direct or indirect
competition with our business, including but not limited to (i) making investments in businesses
that result in or may result in direct or indirect competition with our business; (ii) soliciting
any business, for itself or for other persons, from any person that has business relationships with
us; (iii) soliciting the employment of, or hiring, any officer, directors or employee of our
company and (iv) interfering with our business or encouraging other persons to interfere with our
business. This arrangement will also prohibit Xing and Mr. Rui Lin Wu from using knowledge of our
business and
strategy to our detriment and provide our company with the right of first refusal over new business
opportunities that come to the attention of Xing, QXCI or Mr. Rui Lin Wu and his family members,
which are reasonably likely to result in direct or indirect competition with our business or are
reasonably associated with our business. This non-competition arrangement will not affect QXCI’s
ability to conduct its current business, which includes the manufacture and sale of COSUN-branded
economy mobile handsets for the PRC market.
Transfer of Trademark Application Rights
We entered into a transfer agreement of trademark application rights with Ms. Hong Su, the wife of
our chairman, on December 12, 2006. Ms. Hong Su purchased the application rights of the three
trademarks relating to our brand name “CECT” from a third party, who submitted the application with
the China Trademark Office, received the approval for the initial application and had these
trademarks
58
registered under its name pending the final approval of the China Trademark Office.
Under the transfer agreement between Ms. Hong Su and us, she transferred all the rights and
obligations in connection with the trademark application to us for no consideration when she was
announced as the new applicant of the three trademarks by the China Trademark Office in March 2007.
We subsequently submitted our application for the registration of these three trademarks to the
China Trademark Office and expect to receive the final approval in the second half of 2009.
C. Interests of Experts and Counsel
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A. Consolidated Statements and Other Financial Information
See our consolidated financial statements filed as part of this annual report.
Legal Proceedings
From time to time, we are involved in a number of legal proceedings, both as plaintiff and as
defendant, arising in the ordinary course of our business, including intellectual property right
infringement claims that have been brought against us. We do not expect any of these claims or
actions, individually or in the aggregate, to have a material adverse effect on our business,
results of operations or financial condition and we are not aware of any pending or threatened
litigation, arbitration or administrative proceedings against us that could have such an effect.
Dividend Policy
We have never declared or paid dividends, nor do we have any present plan to pay any cash dividends
on our ordinary shares in the foreseeable future. We currently intend to retain most, if not all,
of our available funds and any future earnings to operate and expand our business.
Our board of directors has complete discretion on whether to pay dividends. Even if our board of
directors decides to pay 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 the board of directors may deem relevant. Cash dividends on our
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.
ITEM 9. THE OFFER AND LISTING
A. Offering and Listing Details
Our ordinary shares have been listed on the NYSE since May 3, 2007 under the symbol “QXM.” The
following table sets forth the high and low daily closing trading prices of our ordinary shares on
the NYSE for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading price
|
|
|
|
High
|
|
Low
|
|
|
|
($)
|
|
($)
|
|
Annual highs and lows:
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2007 (from May 3, 2007)
|
|
|
15.48
|
|
|
|
6.76
|
|
|
Year ended December 31, 2008
|
|
|
8.89
|
|
|
|
1.56
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly highs and lows:
|
|
|
|
|
|
|
|
|
|
Second quarter 2007 (from May 3, 2007)
|
|
|
12.45
|
|
|
|
8.53
|
|
|
Third quarter 2007
|
|
|
10.75
|
|
|
|
6.92
|
|
|
Fourth quarter 2007
|
|
|
15.48
|
|
|
|
6.76
|
|
|
First quarter 2008
|
|
|
8.89
|
|
|
|
5.50
|
|
|
Second quarter 2008
|
|
|
7.88
|
|
|
|
4.78
|
|
|
Third quarter 2008
|
|
|
6.47
|
|
|
|
2.79
|
|
|
Fourth quarter 2008
|
|
|
3.40
|
|
|
|
1.56
|
|
|
First quarter 2009
|
|
|
2.95
|
|
|
|
1.32
|
|
|
|
|
|
|
|
|
|
|
|
|
Monthly highs and lows:
|
|
|
|
|
|
|
|
|
|
December 2008
|
|
|
3.18
|
|
|
|
2.15
|
|
|
January 2009
|
|
|
2.95
|
|
|
|
1.84
|
|
|
February 2009
|
|
|
2.70
|
|
|
|
1.70
|
|
|
March 2009
|
|
|
2.40
|
|
|
|
1.32
|
|
|
April 2009
|
|
|
2.82
|
|
|
|
2.00
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading price
|
|
|
|
High
|
|
Low
|
|
|
|
($)
|
|
($)
|
|
May 2009
|
|
|
4.06
|
|
|
|
2.76
|
|
|
June 2009 (through June 12, 2009)
|
|
|
4.33
|
|
|
|
3.25
|
|
B. Plan of Distribution
Not applicable.
C. Markets
Our ordinary shares have been listed on the NYSE since May 3, 2007 under the symbol “QXM.”
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
We incorporate by reference into this annual report the description of our amended and restated
memorandum of association contained in our F-1 registration statement (File No. 333-142162), as
amended, first filed with the SEC on April 17, 2007. Our shareholders adopted our amended and
restated memorandum and articles of association by a special resolution on March 19, 2007, which
took effect upon filing on May 3, 2007.
C. Material Contracts
We have not entered into any material contracts other than in the ordinary course of business and
other than those described elsewhere in this annual report.
D. Exchange Controls
Pursuant to the Foreign Currency Administration Rules promulgated in 1996 and amended in 1997 and
2008 and various regulations issued by SAFE and other relevant PRC government authorities, RMB is
freely convertible only to the extent of current account items, such as trade related receipts and
payments, interest and dividends. Capital account items, such as direct equity investments, loans
and repatriation of investment, require prior approval from SAFE or its provincial branch for
conversion of RMB into a foreign currency, such as U.S. dollars, and remittance of the foreign
currency outside the PRC.
Payments for transactions that take place within the PRC must be made in RMB. Unless otherwise
approved, PRC companies must repatriate foreign currency payments received from abroad. Foreign
invested enterprises may retain foreign exchange in accounts with designated foreign exchange banks
subject to a cap set by SAFE or its local counterpart. Unless otherwise approved, domestic
enterprises must convert all of their foreign currency receipts into RMB.
E. Taxation
British Virgin Islands Taxation
We are exempt from all provisions of the Income Tax Act of the British Virgin Islands, including
with respect to all dividends, interests, rents, royalties, compensation and other amounts payable
by us to persons who are not persons resident in the British Virgin Islands. Capital gains realized
with respect to any of our shares, debt obligations or other securities by persons who are not
persons resident in the British Virgin Islands are also exempt from all provisions of the Income
Tax Act of the British Virgin Islands. No estate, inheritance, succession or gift tax rate, duty,
levy or other charge is payable by persons who are not persons resident in the British Virgin
Islands with respect to any of our shares, debt obligations or other securities.
No stamp duty is payable in the British Virgin Islands on a transfer of shares in a British Virgin
Islands business company.
U.S. Federal Income Taxation
The following discussion describes the material U.S. federal income tax consequences to you if you
are a U.S. Holder (as defined below) of an investment in the ordinary shares and you hold the
ordinary shares as capital assets. This discussion is based on the tax laws of the United States as
in effect on the date of this annual report, including the Internal Revenue Code of 1986, as
amended, U.S. Treasury
60
regulations in effect as of the date of this annual report and judicial and
administrative interpretations thereof available on or before such date. All of the foregoing
authorities are subject to change, which change could apply on a retroactive basis and could affect
the tax consequences described below.
The following discussion does not deal with the U.S. federal income tax consequences relevant to
you if you are in a special tax situation such as:
|
•
|
|
banks;
|
|
|
|
•
|
|
certain financial institutions;
|
|
|
|
•
|
|
insurance companies;
|
|
|
|
•
|
|
broker dealers;
|
|
|
|
•
|
|
U.S. expatriates;
|
|
|
|
•
|
|
traders that elect to mark-to-market;
|
|
|
|
•
|
|
tax-exempt entities;
|
|
|
|
•
|
|
persons that have a functional currency other than the U.S. dollar;
|
|
|
|
•
|
|
persons liable for alternative minimum tax;
|
|
|
|
•
|
|
persons holding an ordinary share as part of a straddle, hedging, conversion or integrated
transaction; or
|
|
|
|
•
|
|
persons that actually or constructively own 10% or more of our voting stock.
|
PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR TAX ADVISORS ABOUT THE APPLICATION OF THE U.S.
FEDERAL INCOME TAX RULES TO THEIR PARTICULAR CIRCUMSTANCES AS WELL AS THE STATE, LOCAL AND FOREIGN
TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF ORDINARY SHARES.
For purposes of this discussion, you are a U.S. Holder if you are a beneficial owner of ordinary
shares and you are, for U.S. federal income tax purposes,
|
•
|
|
an individual citizen or resident of the United States;
|
|
|
|
•
|
|
a corporation (or other entity taxable as a corporation for U.S. federal income tax
purposes) organized under the laws of the United States, any state thereof or the District of
Columbia;
|
|
|
|
•
|
|
an estate whose income is subject to U.S. federal income taxation regardless of its source;
or
|
|
|
|
•
|
|
a trust that (1) is subject to the primary supervision of a court within the United States
and one or more U.S. persons have the authority to control all substantial decisions of the
trust or (2) was in existence on August 20, 1996, was treated as a U.S. person under the
Internal Revenue Code on the previous day and has a valid election in effect under applicable
U.S. Treasury regulations to be treated as a U.S. person.
|
If you are a partner in a partnership or other entity taxable as a partnership that holds ordinary
shares, your tax treatment will depend on your status and the activities of the partnership. If you
are a partner of a partnership holding our ordinary shares, you should consult your tax advisor
regarding the U.S. federal income tax consequences to you of the purchase, ownership and
disposition of our ordinary shares.
Taxation of dividends and other distributions on the ordinary shares
Subject to the passive foreign investment company rules discussed below, the gross amount of all
our distributions to you with respect to the ordinary shares will be included in your gross income
as dividend income on the date of receipt by you, but only to the extent that the distribution is
paid out of our current or accumulated earnings and profits (as determined under U.S. federal
income tax principles). The dividends will not be eligible for the dividends-received deduction
allowed to corporations in respect of dividends received from other U.S. corporations.
If you are a non-corporate U.S. Holder, including an individual, for taxable years beginning before
January 1, 2011, dividends may constitute “qualified dividend income” which is taxed at the lower
long-term capital gains rate provided that (1) the ordinary shares are readily tradable on an
established securities market in the United States, (2) we are not a passive foreign investment
company (as discussed below) for either our taxable year in which the dividend was paid or the
preceding taxable year, and (3) certain holding
period requirements are met. Under Internal Revenue Service authority, our ordinary shares will be
considered for the purpose of clause (1) above to be readily tradable on an established securities
market in the United States if they continue to be listed on the New York Stock Exchange. You are
urged to consult your tax advisors regarding the availability of the lower rate for dividends paid
with respect to our ordinary shares.
Dividends will constitute foreign source income for U.S. foreign tax credit limitation purposes.
For this purpose, dividends distributed by us with respect to the ordinary shares will be “passive
category income” but could, in the case of certain U.S. Holders, constitute “general category
income.”
61
To the extent that the amount of the distribution exceeds our current and accumulated earnings and
profits, it will be treated first as a tax-free return of your tax basis in your ordinary shares,
and to the extent the amount of the distribution exceeds your tax basis, the excess will be taxed
as capital gain. We do not intend to calculate our earnings and profits under U.S. federal income
tax principles. Therefore, you should expect that any distribution we make will be treated as a
dividend.
If PRC withholding taxes apply to dividends paid to you with respect to the ordinary shares, such
withholding taxes may be treated as foreign taxes eligible for credit against your U.S. federal
income tax liability. U.S. Holders should consult their own tax advisors regarding the
creditability of any PRC tax.
Taxation of disposition of ordinary shares
Subject to the passive foreign investment company rules discussed below, you will recognize taxable
gain or loss on any sale, exchange or other taxable disposition of an ordinary share equal to the
difference between the amount realized for the ordinary share and your tax basis in the ordinary
share. The gain or loss will be capital gain or loss. If you are a non-corporate U.S. Holder,
including an individual, who has held the ordinary share for more than one year, you will be
eligible for reduced tax rates. The deductibility of capital losses is subject to limitations. Any
such gain or loss that you recognize will be treated as U.S. source income or loss for foreign tax
credit limitation purposes.
If PRC withholding taxes apply to you on the gain on the sale of ordinary shares, such withholding
taxes may be treated as foreign taxes eligible for credit against your U.S. federal income tax
liability. U.S. Holders should consult their own tax advisors regarding the creditability of any
PRC tax.
Passive foreign investment company
We believe that we were a passive foreign investment company, or PFIC, for our taxable year that
ended December 31, 2008, and we may continue to be a PFIC in the current and future taxable years
.
Our actual PFIC status in any taxable year will not be determinable until the close of the taxable
year. As a result, our PFIC status may change. If we are a PFIC for any year during which you hold
ordinary shares, unless you make a timely mark-to-market election (as described below), we will
continue to be treated as a PFIC to you for all succeeding years during which you hold ordinary
shares.
A non-U.S. corporation is considered to be a PFIC for any taxable year if either:
|
•
|
|
at least 75% of its gross income is passive income, or
|
|
|
|
•
|
|
at least 50% of the average quarterly value of its assets during a taxable year is derived
from assets that produce, or that are held for the production of, passive income.
|
For purposes of the asset test and the income test described above, we will be treated as owning a
proportionate share of the assets and earnings and 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.
In applying the asset test described above, the value of our assets will be deemed to be equal to
the sum of the aggregate value of our outstanding equity plus our liabilities. For purposes of the
asset test, our goodwill, which is measured as the sum of the aggregate value of outstanding equity
plus liabilities, less the value of known assets, should be treated as a non-passive asset.
Therefore, a decrease in the market price of our ordinary shares and an associated decrease in the
value of our goodwill would cause a reduction in the value of our non-passive assets for purposes
of the asset test. If there is such a reduction in goodwill and the value of our non-passive
assets, the percentage of the value of our assets that is attributable to passive
assets may increase, and if such percentage, based on an average of the quarterly values during a
taxable year, exceeds 50%, we will be a PFIC for such taxable year. Accordingly, fluctuations in
the market price of our shares may result in us being a PFIC for any taxable year. In addition, the
composition of our income and assets will be affected by how, and how quickly, we spend the cash we
raised in the initial public offering of our ordinary shares in May 2007.
If we are a PFIC for any taxable year during which you hold ordinary shares, dividends paid by us
to you in that taxable year or the following taxable year will not be eligible for the reduced rate
of taxation applicable to non-corporate U.S. Holders, including individuals. See “Taxation of
dividends and other distributions on the ordinary shares” above. Additionally, you will be subject
to special tax rules, discussed below, with respect to any “excess distribution” that you receive
and any gain you realize from a sale or other disposition (including a pledge) of the ordinary
shares, unless you make a timely “mark-to-market” election as discussed below. Distributions you
receive in a taxable year that are greater than 125% of the average annual distributions you
received during the shorter of the three preceding taxable years or your holding period prior to
the current year for the ordinary shares will be treated as an excess distribution. Under these
special tax rules:
|
•
|
|
the excess distribution or gain will be allocated ratably on a daily basis over your
holding period for the ordinary shares,
|
|
|
|
•
|
|
the amount allocated to the current taxable year, and any taxable year prior to the first
taxable year in which we became a PFIC, will be treated as ordinary income, and
|
|
|
|
•
|
|
the amount allocated to each other year will be subject to the highest tax rate in effect
for that year and the interest charge applicable to underpayments of tax will be imposed on
the resulting tax attributable to each such year.
|
For the purposes of the PFIC rules, if we are a PFIC for any taxable year during which you hold
ordinary shares, you generally would be treated as owning a proportional share of the stock of any
of our non-U.S. subsidiaries, or any non-U.S. corporation in which we have an equity investment,
that is a PFIC.
62
Alternatively, if the ordinary shares constitute “marketable stock” in a PFIC, you may make a
mark-to-market election for the ordinary shares to elect out of the tax treatment discussed above
with respect to the ordinary shares. Marketable stock is stock that is regularly traded in other
than de minimis quantities on a qualified exchange, which includes the New York Stock Exchange. We
expect that our ordinary shares will qualify as marketable stock for these purposes. If you make a
mark-to-market election for the ordinary shares, you will include in income each year an amount
equal to the excess, if any, of the fair market value of the ordinary shares as of the close of
your taxable year over your adjusted basis in such ordinary shares. You are allowed a deduction for
the excess, if any, of the adjusted basis of the ordinary shares over their fair market value as of
the close of the taxable year. However, deductions are allowable only to the extent of any net
mark-to-market gains on the ordinary shares included in your income for prior taxable years.
Amounts included in your income under a mark-to-market election, as well as gain on the actual sale
or other disposition of the ordinary shares, are treated as ordinary income. Ordinary loss
treatment also applies to the deductible portion of any mark-to-market loss on the ordinary shares,
as well as to any loss realized on the actual sale or disposition of the ordinary shares, to the
extent that the amount of such loss does not exceed the net mark-to-market gains previously
included for such ordinary shares. Your basis in the ordinary shares will be adjusted to reflect
any such income or loss amounts. You may make a timely mark-to-market election by filing Internal
Revenue Service From 8621 with your original or amended U.S. federal income tax return for the
first taxable year in which we are a PFIC and you hold ordinary shares by the due date of the
return (including extensions). If we are a PFIC for any taxable year, you would not be able to make
a mark-to-market election with respect to any of our non-U.S. subsidiaries, or any non-U.S.
corporation in which we have an equity investment, that is a PFIC that you would be treated as
indirectly owning under the PFIC rules.
In addition, we do not intend to prepare or provide you with the information necessary to make a
“qualified electing fund” election.
If you hold ordinary shares in any year in which we are a PFIC, you will be required to file
Internal Revenue Service Form 8621 regarding distributions received on the ordinary shares and any
gain realized on the disposition of the ordinary shares.
You are urged to consult your tax advisor regarding the application of the PFIC rules to your
investment in ordinary shares.
Information reporting and backup withholding
Dividend payments with respect to ordinary shares and proceeds from the sale, exchange or other
disposition of ordinary shares may be subject to information reporting to the Internal Revenue
Service and possible backup withholding at a current rate of 28%. Backup withholding will not
apply, however, if you are a corporation or other exempt recipient or if you furnish a correct
taxpayer identification number and make any other required certification. If you are required to
establish your exempt status, you must provide such certification on Internal Revenue Service Form
W-9. You are urged to consult your tax advisor regarding the application of the U.S. information
reporting and backup withholding rules.
Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited
against your U.S. federal income tax liability, and you may obtain a refund of any excess amounts
withheld under the backup withholding rules by filing the appropriate claim for refund with the
Internal Revenue Service and furnishing any required information in a timely manner.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
We previously filed with the SEC our registration statement on Form F-1 under the Securities Act
with respect to our ordinary shares.
In accordance with the New York Stock Exchange Listing Manual Rule 203.01, we will post this annual
report on Form 20-F on our website at www.qxmc.com. In addition, we will provide hard copies of our
annual report free of charge to shareholders upon request.
We are subject to the periodic reporting and other informational requirements of the Securities
Exchange Act of 1934, as amended, and are required to file reports and other information with the
SEC. Specifically, we are required to file annually a Form 20-F no later than six months after the
close of each fiscal year, which is December 31. Copies of reports and other information, when so
filed, may be inspected without charge and may be obtained at prescribed rates at the public
reference facilities maintained by the SEC 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. The SEC also maintains a web site at www.sec.gov that contains
reports, proxy and information statements, and other information regarding registrants that make
electronic filings with the SEC using its EDGAR system. As a foreign private issuer, we are exempt
from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports
and proxy statements, and officers, directors and principal shareholders are exempt from the
reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act.
I. Subsidiary Information
Not applicable.
63
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exchange Risk
The value of the Renminbi against the U.S. dollar and other currencies is affected by, among other
things, changes in China’s political and economic conditions. Since July 2005, the Renminbi has no
longer been pegged to the U.S. dollar. Although currently the Renminbi exchange rate versus the
U.S. dollar is restricted to a rise or fall by no more than 0.3% per day and the People’s Bank of
China regularly intervenes in the foreign exchange market to prevent significant short-term
fluctuations in the exchange rate, the Renminbi may appreciate or depreciate significantly in value
against the U.S. dollar in the medium to long term. This change in policy has resulted in an
approximately 20% appreciation of Renminbi against the U.S. dollar from July 2005 to June 12, 2009.
Moreover, it is possible that in the future, PRC authorities may lift restrictions on fluctuations
in the Renminbi exchange rate and lessen intervention in the foreign exchange market.
Because substantially all of our earnings are denominated in Renminbi, any appreciation or
depreciation in the value of the Renminbi relative to the U.S. dollar would affect our balance
sheet position and financial results reported in U.S. dollar terms without giving effect to any
underlying change in our business or results of operations. In addition, fluctuations in the
exchange rate between the U.S. dollar and the Renminbi would affect the relative purchasing power
of our U.S. dollar-denominated cash assets and the Renminbi value of our U.S. dollar-denominated
liabilities. Fluctuations in the exchange rate will also affect the relative value of any dividend
we may issue that will be exchanged into U.S. dollars and the earnings from and value of any U.S.
dollar-denominated investments we make in the future.
The net assets of Qiao Xing Mobile Communication Co., Ltd., whose functional currency is the U.S.
dollar, accounted for 8.2% of our consolidated net assets as of December 31, 2008, which results in
our exposure to foreign currency exchange risk. The translation of the net assets of Qiao Xing
Mobile Communication Co., Ltd. to Renminbi during consolidation resulted in a translation loss of
RMB7.8 million ($1.1 million) in 2008, which was recognized as a component of other comprehensive
loss as of December 31, 2008. In addition, Qiao Xing Mobile Communication Co., Ltd. also recorded
an exchange loss of RMB11.5 million ($1.7 million) on the revaluation of the principal amount of
the Notes outstanding as at December 31, 2008, which was recognized as an expense in 2008. If the
exchange rate of the Renminbi against the U.S. dollar as of December 31, 2008 had decreased by 10%
from 6.8225 to 6.1403, and the average exchange rate in 2008 had remained the same, the loss on the
translation of the net assets of Qiao Xing Mobile Communication Co., Ltd. in 2008 would have been
decreased by RMB31.7 million ($4.6 million) and the loss on revaluation of the Notes would have
increased by RMB47.6 million ($7.0 million).
Only limited hedging transactions are available in China to reduce our exposure to exchange rate
fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our
exposure to foreign currency exchange risk. While we may enter into hedging transactions in the
future, the availability and effectiveness of these transactions may be limited and we may not be
able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses
may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi
into foreign currencies.
Interest Rate Risk
Our exposure to interest rate risk primarily relates to the interest rates for our bank deposits
and borrowings. We have not used any derivative financial instruments to manage our interest risk
exposure. Interest-bearing instruments carry a degree of interest rate risk. We have not been
exposed, nor do we anticipate being exposed, to material risks due to changes in interest rates.
However, our future interest income may be lower, or interest expenses may be higher, than expected
due to changes in market interest rates.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not Applicable.
64
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
None.
ITEM 15T . CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, 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 within the meaning of Rules 13a-15(e) of
the Exchange Act.
Based upon that evaluation, our management has concluded that, as of December 31, 2008, 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 SEC’s rules and forms.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as defined in U.S. Securities Exchange Act Rules 13a-15(f) and 15d-15(f). For
the year ended December 31, 2008, under the supervision, and with the participation of our
company’s management, including our principal executive officer and principal financial officer, we
conducted an assessment of the effectiveness of our internal control over financial reporting based
on criteria established in the framework in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our
management has concluded that our internal control over financial reporting was effective as of
December 31, 2008.
Internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. Because of its
inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies and procedures may deteriorate.
This annual report does not include an attestation report of our registered public accounting firm
regarding internal control over financial reporting. Management’s report was not subject to
attestation by our registered public accounting firm pursuant to temporary rules of the SEC that
permit the company to provide only management’s report in this annual report.
Changes in Internal Control over Financial Reporting
There were no changes in our internal controls over financial reporting that occurred during the
period covered by this annual report on Form 20-F that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors has determined that Mr. Zacky Sun, an independent director and member of our
audit committee, is an audit committee financial expert.
ITEM 16B. CODE OF ETHICS
Our board of directors has adopted a code of ethics that applies to our directors, officers,
employees and advisors. We hereby undertake to provide to any person without charge, a copy of our
code of ethics within ten working days after we receive such person’s written request.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the aggregate fees by categories specified below in connection with
certain professional services rendered by our independent registered public accounting firm for the
periods indicated. We did not pay any other fees to our auditors during the periods indicated
below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
(Amounts in thousands)
|
|
2007
|
|
2008
(1)
|
|
|
|
(RMB)
|
|
(RMB)
|
|
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Audit fees
|
|
|
8,034
|
|
|
|
1,354
|
|
|
|
198
|
|
|
Audit-related fees
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
65
|
|
|
|
|
(1)
|
|
The audit fees billed by KPMG, our prior independent registered public accounting firm, in
connection with the re-issuance of their audit report on our financial statements for the
period from January 1, 2006 through November 30, 2006, the period from November 30, 2006 to
December 31, 2006 and the year ended December 31, 2007 was $48,000. The audit fees billed by
Crowe Horwath LLP, our independent registered public accounting firm, in connection with the
audit of our financial statements for the year ended December 31, 2008 was $150,000.
|
The policy of our Audit Committee is to pre-approve all audit and non-audit services provided by
our independent registered public accounting firm, other than those for de minimus services which
are approved by the Audit Committee prior to the completion of the audit.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
In connection with the issuance of the Notes on May 15, 2008, we issued approximately $48,349,000
in principal amount of the Notes in exchange for 6,966,666 of our ordinary shares that were then
owned by the Investors of the Notes. All ordinary shares submitted by the Investors in exchange for
the Notes were subsequently cancelled.
On September 17, 2008, our board of directors approved a share repurchase program under which we
may repurchase up to an aggregate of $20.0 million worth of our issued and outstanding ordinary
shares. The repurchases will be made from time to time on the open market at prevailing market
prices, in negotiated transactions off the market, in block trades, pursuant to a 10b5-1 plan or
otherwise. The repurchases will be made subject to restrictions relating to volume, price and
timing. The timing and extent of any purchases will depend upon market conditions, the trading
price of our shares and other factors. As of the date of this report, we have not made any
repurchase of our ordinary shares under the approved program.
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
On September 11, 2008, our board of directors, on the recommendation of our audit committee,
approved the appointment of Grobstein, Horwath & Company LLP, or GHC, to serve as our independent
registered public accounting firm. Our previous independent registered public accounting firm,
KPMG, was dismissed on the same date.
During each of the two most recent fiscal years ended December 31, 2007 and the subsequent interim
period through the date of appointment of GHC, we did not consult GHC with respect to the
application of accounting principles to a specified transaction, either completed or proposed, or
the type of audit opinion that might be rendered on our consolidated financial statements, or any
other matter that was either the subject of a disagreement, as that term is defined in Item
304(a)(1)(iv) of Regulation S-K, or a reportable event, as that term is defined in Item
304(a)(1)(v) of Regulation S-K.
The audit report of KPMG on our consolidated financial statements for the period from January 1,
2006 through November 30, 2006, the period from November 30, 2006 through December 31, 2006 and the
year ended December 31, 2007, did not contain any adverse opinion or disclaimer of opinion, nor
were they qualified or modified as to uncertainty, audit scope or accounting principles, except
that their report contained an explanatory paragraph that states that Xing acquired the remaining
20% equity interest in our company on November 30, 2006, resulting in our company becoming wholly
owned by Xing and accordingly the consolidated financial statements for the period from November
30, 2006 through December 31, 2006 and the year ended December 31, 2007 reflected the new basis of
accounting arising from the transaction, and that upon completion of our initial public offering in
May 2007 and conversion of the senior convertible notes issued by Xing into our ordinary shares
previously held by Xing, we ceased to be a wholly owned subsidiary of Xing.
During the periods covered by our consolidated financial statements for the period from January 1,
2006 through November 30, 2006, the period from November 30, 2006 through December 31, 2006 and the
year ended December 31, 2007, there were no disagreements with KPMG on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or procedures which, if
not resolved to the satisfaction of KPMG, would have caused KPMG to make reference to the matter in
their reports on the financial statements for such periods.
On January 8, 2009, we were notified that effective December 8, 2008, the personnel of GHC joined
Crowe Horwath LLP, or Crowe, resulting in the resignation of GHC as our independent registered
public accounting firm. On January 12, 2009, our board of directors appointed Crowe as our new
independent registered public accounting firm.
ITEM 16G. CORPORATE GOVERNANCE
There are no significant differences in the corporate governance practices followed by us as
compared to those followed by US domestic companies under the NYSE Listing Standards, except as
follows:
|
•
|
|
As a “controlled company” as defined under Section 303A of the NYSE Listed Company Manual,
we are exempt from certain corporate governance requirements. Relying on this exemption, Mr.
Zhi Yang Wu, who does not satisfy the “independence” requirements of Section 303A of the NYSE
Listed Company Manual, serves as a member of our nominating and corporate governance committee
and compensation committee;
|
|
|
|
•
|
|
We do not have formal corporate governance guidelines similar to those required for U.S.
domestic companies; and
|
|
|
|
•
|
|
Our non-management directors do not schedule regular executive sessions similar to those
followed by U.S. domestic companies.
|
66
PART III
ITEM 17. FINANCIAL STATEMENTS
We have elected to provide financial statements pursuant to Item 18.
ITEM 18. FINANCIAL STATEMENTS
The consolidated financial statements of Qiao Xing Mobile Communication Co., Ltd. and its
subsidiaries are included at the end of this annual report.
ITEM 19. EXHIBITS
|
|
|
|
|
Exhibit
|
|
|
|
Number
|
|
Description
|
|
|
|
|
|
1.1
|
|
Amended and Restated Memorandum of Association
(1)
|
|
|
|
|
|
1.2
|
|
Second Amended and Restated Memorandum and Articles of Association of the Registrant
(1)
|
|
|
|
|
|
4.1
|
|
Equity Incentive Plan
(1)
|
|
|
|
|
|
4.2
|
|
Form of Employment Agreement between the Registrant and a Senior Executive Officer of the Registrant
(1)
|
|
|
|
|
|
4.3
|
|
Software License Agreement, dated October 8, 2005
(1)
, which was renewed on March 10, 2008
(2)
|
|
|
|
|
|
4.4
|
|
Non-Competition Agreement
(1)
|
|
|
|
|
|
4.5
|
|
Technology Licenses Agreement, dated June 13, 2007
(2)
|
|
|
|
|
|
4.6
|
|
Securities Purchase Agreement, dated May 15, 2008
(3)
|
|
|
|
|
|
4.7
|
|
Registration Rights Agreement, dated May 15, 2008
(3)
|
|
|
|
|
|
8.1
|
|
Subsidiaries of the Registrant
|
|
|
|
|
|
12.1
|
|
Certification of Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
12.2
|
|
Certification of Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
13.1
|
|
Certification of Chief Executive Officer and Chief Financial Officer required by 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
15.1
|
|
Consent of Crowe Horwath LLP, dated June 30, 2009
|
|
|
|
|
|
15.2
|
|
Consent of KPMG, dated
June 30, 2009
|
|
|
|
|
|
(1)
|
|
Incorporated by reference from the Registrant’s F-1 registration statement (File No.
333-142162), as amended, first filed with the SEC on April 17, 2007.
|
|
|
|
(2)
|
|
Incorporated by reference from the Registrant’s annual report on Form 20-F for the year ended
December 31, 2007 (File Na 1-33430) filed with the SEC on June 26, 2008.
|
|
|
|
(3)
|
|
Incorporated by reference from the Registrant’s 6-K furnished on May 19, 2008.
|
67
SIGNATURE
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and
that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
|
|
|
|
|
|
|
|
QIAO XING MOBILE COMMUNICATION CO., LTD.
|
|
|
Date: June 30, 2009
|
By:
|
/s/ Zhi Yang Wu
|
|
|
|
|
Name:
|
Zhi Yang Wu
|
|
|
|
|
Title:
|
Chairman
|
|
|
|
68
QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
Page
|
|
|
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
|
|
|
|
|
|
|
F-3
|
|
|
|
|
|
|
|
|
|
|
|
F-4
|
|
|
|
|
|
|
|
|
|
|
|
F-5
|
|
|
|
|
|
|
|
|
|
|
|
F-6
|
|
|
|
|
|
|
|
|
|
|
|
F-8
|
|
|
|
|
|
|
|
|
|
|
|
F-9
|
|
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Qiao Xing Mobile Communication Co., Ltd.
We have audited the accompanying consolidated balance sheet of Qiao Xing Mobile Communication Co.,
Ltd. and subsidiaries (the “Company”) as of December 31, 2008, and the related consolidated
statements of operations, cash flows and shareholders’ equity and comprehensive income for the year
then ended. These financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial statements reporting based
on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit 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 Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Qiao Xing Mobile Communication Co., Ltd.
and subsidiaries as of December 31, 2008, and the consolidated results of their operations and their cash
flows for the year then ended in conformity with U.S. generally accepted accounting principles.
Our audit also included the translation of Renminbi (RMB) amounts into United States dollar (US$)
amounts and, in our opinion, such translation, where provided, has been made in conformity with the
basis stated in the last paragraph of Note 2(q) to the consolidated financial statements. Such
United States dollar amounts are presented for the convenience of the readers.
/s/ Crowe Horwath LLP
Sherman Oaks, California
June 27, 2009
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Qiao Xing Mobile Communication Co., Ltd.:
We have audited the accompanying consolidated balance sheet of Qiao Xing Mobile Communication Co.,
Ltd. and subsidiaries (the “Company”) as of December 31, 2007 and the related consolidated
statements of operations, cash flows and shareholders’ equity and comprehensive income for the
period from January 1, 2006 through November 30, 2006 (all “Old Basis”), the period from November
30, 2006 through December 31, 2006 and the year ended December 31, 2007 (all “New Basis”). These
consolidated financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Qiao Xing Mobile Communication Co., Ltd. and
subsidiaries as of December 31, 2007, and the results of their operations and their cash flows for
the period from January 1, 2006 through November 30, 2006, the period from November 30, 2006
through December 31, 2006, and the year ended December 31, 2007, in conformity with U.S. generally
accepted accounting principles.
As described in Note 2(a) and Note 3, Qiao Xing Universal Telephone, Inc. (“Xing”) acquired the
remaining 20% equity interest of the Company on November 30, 2006, resulting in the Company
becoming wholly owned by Xing at the time. Accordingly, the Company’s consolidated financial
statements as of December 31, 2006 and 2007, for the period from November 30, 2006 through December
31, 2006 and the year ended December 31, 2007 reflect the new basis of accounting arising from this
transaction. As described in Note 1(b) and Note 21(b), upon completion of the Company’s initial
public offering in May 2007 and conversion of the senior convertible notes issued by Xing into the
Company’s ordinary shares previously held by Xing, the Company ceased to be a wholly-owned
subsidiary of Xing.
/s/ KPMG
Hong Kong, China
June 25, 2008
F-3
QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share and per share data
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
2008
|
|
|
|
RMB
|
|
RMB
|
|
US$
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
2,729,982
|
|
|
|
2,907,148
|
|
|
|
426,112
|
|
|
Restricted cash
|
|
|
94,384
|
|
|
|
136,299
|
|
|
|
19,978
|
|
|
Accounts receivable, net
|
|
|
418,564
|
|
|
|
462,282
|
|
|
|
67,758
|
|
|
Bills receivable
|
|
|
—
|
|
|
|
43,516
|
|
|
|
6,378
|
|
|
Inventories
|
|
|
177,279
|
|
|
|
183,169
|
|
|
|
26,848
|
|
|
Prepayments to suppliers
|
|
|
155,993
|
|
|
|
363,907
|
|
|
|
53,339
|
|
|
Prepaid expenses and other current assets
|
|
|
19,295
|
|
|
|
38,996
|
|
|
|
5,716
|
|
|
Deferred income taxes
|
|
|
5,685
|
|
|
|
6,994
|
|
|
|
1,025
|
|
|
Deferred debt issuance costs, net
|
|
|
—
|
|
|
|
34,689
|
|
|
|
5,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
3,601,182
|
|
|
|
4,177,000
|
|
|
|
612,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, machinery and equipment, net
|
|
|
175,469
|
|
|
|
167,233
|
|
|
|
24,512
|
|
|
Land use rights
|
|
|
36,106
|
|
|
|
35,304
|
|
|
|
5,175
|
|
|
Equity investment, at cost
|
|
|
7,803
|
|
|
|
7,803
|
|
|
|
1,144
|
|
|
Goodwill
|
|
|
112,814
|
|
|
|
112,814
|
|
|
|
16,536
|
|
|
Other intangible assets, net
|
|
|
60,728
|
|
|
|
22,766
|
|
|
|
3,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
3,994,102
|
|
|
|
4,522,920
|
|
|
|
662,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities, minority interests and shareholders’ equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
|
983,904
|
|
|
|
983,950
|
|
|
|
144,221
|
|
|
Accounts payable
|
|
|
107,990
|
|
|
|
52,047
|
|
|
|
7,629
|
|
|
Prepayments from customers
|
|
|
4,585
|
|
|
|
42,551
|
|
|
|
6,237
|
|
|
Accrued liabilities
|
|
|
41,401
|
|
|
|
50,014
|
|
|
|
7,331
|
|
|
Amounts due to related parties
|
|
|
4,532
|
|
|
|
11,155
|
|
|
|
1,635
|
|
|
Other payables and current liabilities
|
|
|
58,630
|
|
|
|
7,227
|
|
|
|
1,059
|
|
|
Income taxes payable
|
|
|
38,722
|
|
|
|
38,462
|
|
|
|
5,638
|
|
|
Embedded derivative liability
|
|
|
—
|
|
|
|
124,130
|
|
|
|
18,194
|
|
|
Convertible notes
|
|
|
—
|
|
|
|
206,211
|
|
|
|
30,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,239,764
|
|
|
|
1,515,747
|
|
|
|
222,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
5,561
|
|
|
|
320
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,245,325
|
|
|
|
1,516,067
|
|
|
|
222,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interests
|
|
|
78,235
|
|
|
|
92,065
|
|
|
|
13,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Par value: nil
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized: Unlimited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued and outstanding: 47,609,731 (2007: 52,500,000) shares
|
|
|
1,316,726
|
|
|
|
1,064,421
|
|
|
|
156,016
|
|
|
Additional paid-in capital
|
|
|
802,892
|
|
|
|
883,410
|
|
|
|
129,485
|
|
|
Retained earnings
|
|
|
574,004
|
|
|
|
997,808
|
|
|
|
146,253
|
|
|
Accumulated other comprehensive loss
|
|
|
(23,080
|
)
|
|
|
(30,851
|
)
|
|
|
(4,522
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity
|
|
|
2,670,542
|
|
|
|
2,914,788
|
|
|
|
427,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, minority interests
and shareholders’ equity
|
|
|
3,994,102
|
|
|
|
4,522,920
|
|
|
|
662,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
F-4
QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Old Basis
|
|
|
|
|
|
|
(Note 2(a))
|
|
|
New Basis (Note 2(a))
|
|
|
|
January 1,
|
|
|
November
|
|
|
|
|
|
2006 to
|
|
|
30, 2006 to
|
|
|
|
|
|
November
|
|
|
December
|
|
Year ended December 31,
|
|
|
|
30, 2006
|
|
|
31, 2006
|
|
2007
|
|
2008
|
|
|
|
RMB
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External parties
|
|
|
2,277,112
|
|
|
|
|
255,154
|
|
|
|
3,127,780
|
|
|
|
2,147,300
|
|
|
|
314,738
|
|
|
Related parties
|
|
|
4,086
|
|
|
|
|
859
|
|
|
|
13,314
|
|
|
|
6,573
|
|
|
|
963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
2,281,198
|
|
|
|
|
256,013
|
|
|
|
3,141,094
|
|
|
|
2,153,873
|
|
|
|
315,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
(1,843,327
|
)
|
|
|
|
(218,882
|
)
|
|
|
(2,255,844
|
)
|
|
|
(1,287,096
|
)
|
|
|
(188,654
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
437,871
|
|
|
|
|
37,131
|
|
|
|
885,250
|
|
|
|
866,777
|
|
|
|
127,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and distribution
|
|
|
(12,054
|
)
|
|
|
|
(2,707
|
)
|
|
|
(36,322
|
)
|
|
|
(146,551
|
)
|
|
|
(21,481
|
)
|
|
General and administrative
|
|
|
(19,879
|
)
|
|
|
|
(1,170
|
)
|
|
|
(69,032
|
)
|
|
|
(44,231
|
)
|
|
|
(6,483
|
)
|
|
Research and development
|
|
|
(15,131
|
)
|
|
|
|
(1,161
|
)
|
|
|
(18,599
|
)
|
|
|
(29,242
|
)
|
|
|
(4,286
|
)
|
|
In-process research and development
|
|
|
—
|
|
|
|
|
(41,739
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Amortization of other intangible assets
|
|
|
(10,890
|
)
|
|
|
|
(4,288
|
)
|
|
|
(32,280
|
)
|
|
|
(11,727
|
)
|
|
|
(1,719
|
)
|
|
Impairment of other intangible assets
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(26,235
|
)
|
|
|
(3,845
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
379,917
|
|
|
|
|
(13,934
|
)
|
|
|
729,017
|
|
|
|
608,791
|
|
|
|
89,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
5,320
|
|
|
|
|
631
|
|
|
|
16,373
|
|
|
|
24,405
|
|
|
|
3,577
|
|
|
Interest expense
|
|
|
(27,115
|
)
|
|
|
|
(2,213
|
)
|
|
|
(47,034
|
)
|
|
|
(165,506
|
)
|
|
|
(24,259
|
)
|
|
Foreign currency exchange gain (loss), net
|
|
|
9,628
|
|
|
|
|
1,502
|
|
|
|
12,022
|
|
|
|
(5,142
|
)
|
|
|
(754
|
)
|
|
Gain on remeasurement of embedded derivatives
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
144,939
|
|
|
|
21,244
|
|
|
Loss on extinguishment of convertible debts
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(10,634
|
)
|
|
|
(1,559
|
)
|
|
Gain on disposal of subsidiaries
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,269
|
|
|
|
333
|
|
|
Other income (loss), net
|
|
|
3,857
|
|
|
|
|
579
|
|
|
|
873
|
|
|
|
(3,700
|
)
|
|
|
(541
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before income tax
expense, minority interests, and
extraordinary items
|
|
|
371,607
|
|
|
|
|
(13,435
|
)
|
|
|
711,251
|
|
|
|
595,422
|
|
|
|
87,274
|
|
|
Income tax expense
|
|
|
(55,991
|
)
|
|
|
|
(4,251
|
)
|
|
|
(113,377
|
)
|
|
|
(155,717
|
)
|
|
|
(22,824
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before minority
interests, and extraordinary items
|
|
|
315,616
|
|
|
|
|
(17,686
|
)
|
|
|
597,874
|
|
|
|
439,705
|
|
|
|
64,450
|
|
|
Minority interests
|
|
|
(27,260
|
)
|
|
|
|
(1,799
|
)
|
|
|
(33,074
|
)
|
|
|
(15,901
|
)
|
|
|
(2,331
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before extraordinary items
|
|
|
288,356
|
|
|
|
|
(19,485
|
)
|
|
|
564,800
|
|
|
|
423,804
|
|
|
|
62,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extraordinary items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains on acquisitions of additional
equity interests in CECT, net of nil tax
|
|
|
17,796
|
|
|
|
|
—
|
|
|
|
28,689
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
306,152
|
|
|
|
|
(19,485
|
)
|
|
|
593,489
|
|
|
|
423,804
|
|
|
|
62,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before extraordinary items
|
|
|
7.21
|
|
|
|
|
(0.49
|
)
|
|
|
11.69
|
|
|
|
7.52
|
|
|
|
1.10
|
|
|
Extraordinary gains
|
|
|
0.44
|
|
|
|
|
—
|
|
|
|
0.59
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share
|
|
|
7.65
|
|
|
|
|
(0.49
|
)
|
|
|
12.28
|
|
|
|
7.52
|
|
|
|
1.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before extraordinary items
|
|
|
7.21
|
|
|
|
|
(0.49
|
)
|
|
|
11.69
|
|
|
|
6.99
|
|
|
|
1.02
|
|
|
Extraordinary gains
|
|
|
0.44
|
|
|
|
|
—
|
|
|
|
0.59
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share
|
|
|
7.65
|
|
|
|
|
(0.49
|
)
|
|
|
12.28
|
|
|
|
6.99
|
|
|
|
1.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
F-5
QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Old Basis
|
|
|
|
|
|
|
(Note 2(a))
|
|
|
New Basis (Note 2(a))
|
|
|
|
January 1,
|
|
|
November
|
|
|
|
|
|
2006 to
|
|
|
30, 2006 to
|
|
|
|
|
|
|
|
November
|
|
|
December
|
|
Year ended December 31,
|
|
|
|
30, 2006
|
|
|
31, 2006
|
|
2007
|
|
2008
|
|
|
|
RMB
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
306,152
|
|
|
|
|
(19,485
|
)
|
|
|
593,489
|
|
|
|
423,804
|
|
|
|
62,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
5,271
|
|
|
|
|
499
|
|
|
|
10,754
|
|
|
|
11,957
|
|
|
|
1,753
|
|
|
Amortization of land use rights
|
|
|
—
|
|
|
|
|
69
|
|
|
|
817
|
|
|
|
802
|
|
|
|
117
|
|
|
In-process research and development
|
|
|
—
|
|
|
|
|
41,739
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Amortization of other intangible assets
|
|
|
10,890
|
|
|
|
|
4,288
|
|
|
|
32,280
|
|
|
|
11,727
|
|
|
|
1,719
|
|
|
Impairment of other intangible assets
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
26,235
|
|
|
|
3,845
|
|
|
Bad debt expense (recovery), net
|
|
|
(594
|
)
|
|
|
|
(1
|
)
|
|
|
3,384
|
|
|
|
682
|
|
|
|
100
|
|
|
Inventory write-downs
|
|
|
3,152
|
|
|
|
|
46
|
|
|
|
11,068
|
|
|
|
6,650
|
|
|
|
975
|
|
|
Foreign currency exchange gain (loss), net
|
|
|
(9,833
|
)
|
|
|
|
(1,498
|
)
|
|
|
(12,290
|
)
|
|
|
5,142
|
|
|
|
754
|
|
|
(Gain) loss on disposal of property,
machinery and equipment
|
|
|
8
|
|
|
|
|
—
|
|
|
|
57
|
|
|
|
(15
|
)
|
|
|
(2
|
)
|
|
Accretion of discount on convertible notes
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
70,512
|
|
|
|
10,335
|
|
|
Amortization of deferred debt issuance costs
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,851
|
|
|
|
1,590
|
|
|
Gain on remeasurement of embedded derivatives
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(144,939
|
)
|
|
|
(21,244
|
)
|
|
Loss on extinguishment of convertible debts
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,634
|
|
|
|
1,559
|
|
|
Accrued interest settled through the
issuance of ordinary shares on the
conversion of convertible notes
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
316
|
|
|
|
46
|
|
|
Gain on disposal of subsidiaries
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,269
|
)
|
|
|
(333
|
)
|
|
Minority interests
|
|
|
27,260
|
|
|
|
|
1,799
|
|
|
|
33,074
|
|
|
|
15,901
|
|
|
|
2,331
|
|
|
Deferred income taxes
|
|
|
260
|
|
|
|
|
(467
|
)
|
|
|
(6,237
|
)
|
|
|
(6,550
|
)
|
|
|
(960
|
)
|
|
Share-based compensation
|
|
|
3,522
|
|
|
|
|
—
|
|
|
|
38,626
|
|
|
|
14,668
|
|
|
|
2,150
|
|
|
Extraordinary gains on acquisitions of
additional equity interests in CECT,
net of nil tax
|
|
|
(17,796
|
)
|
|
|
|
—
|
|
|
|
(28,689
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and
liabilities, net of effects of push-down
accounting adjustments in 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
106,019
|
|
|
|
|
(139,282
|
)
|
|
|
124,945
|
|
|
|
(53,844
|
)
|
|
|
(7,892
|
)
|
|
Bills receivable
|
|
|
179,098
|
|
|
|
|
14,425
|
|
|
|
27,635
|
|
|
|
(43,516
|
)
|
|
|
(6,378
|
)
|
|
Inventories
|
|
|
106,883
|
|
|
|
|
(102,105
|
)
|
|
|
(24,012
|
)
|
|
|
(15,527
|
)
|
|
|
(2,276
|
)
|
|
Prepayments to suppliers
|
|
|
(24,302
|
)
|
|
|
|
552
|
|
|
|
71,909
|
|
|
|
(195,018
|
)
|
|
|
(28,585
|
)
|
|
Prepaid expenses and other current assets
|
|
|
6,586
|
|
|
|
|
2,956
|
|
|
|
18,898
|
|
|
|
(13,684
|
)
|
|
|
(2,006
|
)
|
|
Accounts payable
|
|
|
(135,197
|
)
|
|
|
|
(12,283
|
)
|
|
|
(57,336
|
)
|
|
|
(50,844
|
)
|
|
|
(7,452
|
)
|
|
Prepayments from customers
|
|
|
(24,898
|
)
|
|
|
|
(3,146
|
)
|
|
|
(10,804
|
)
|
|
|
37,966
|
|
|
|
5,565
|
|
|
Accrued liabilities
|
|
|
12,112
|
|
|
|
|
(6,565
|
)
|
|
|
6,041
|
|
|
|
9,213
|
|
|
|
1,350
|
|
|
Other payables and current liabilities
|
|
|
(33,564
|
)
|
|
|
|
(1,370
|
)
|
|
|
6,136
|
|
|
|
(20,488
|
)
|
|
|
(3,003
|
)
|
|
Income taxes payable
|
|
|
(7,651
|
)
|
|
|
|
4,718
|
|
|
|
15,779
|
|
|
|
(260
|
)
|
|
|
(38
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
operating activities
|
|
|
513,378
|
|
|
|
|
(215,111
|
)
|
|
|
855,524
|
|
|
|
110,106
|
|
|
|
16,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-6
QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Old Basis
|
|
|
|
|
|
|
(Note 2(a))
|
|
|
New Basis (Note 2(a))
|
|
|
|
January 1,
|
|
|
November
|
|
|
|
|
|
2006 to
|
|
|
30, 2006 to
|
|
|
|
|
|
|
|
|
|
November
|
|
|
December
|
|
Year ended December 31,
|
|
|
|
30, 2006
|
|
|
31, 2006
|
|
2007
|
|
2008
|
|
|
|
RMB
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property, machinery and equipment
|
|
|
(161,467
|
)
|
|
|
|
(2
|
)
|
|
|
(1,944
|
)
|
|
|
(14,895
|
)
|
|
|
(2,183
|
)
|
|
Purchase of land use rights
|
|
|
(39,004
|
)
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Deposit for purchase of property, machinery and
equipment
|
|
|
(133,085
|
)
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Refund of deposit for purchase of property,
machinery and equipment
|
|
|
66,542
|
|
|
|
|
66,543
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Restricted cash related to new bank borrowings
|
|
|
(67,999
|
)
|
|
|
|
(8,864
|
)
|
|
|
(222,870
|
)
|
|
|
(108,858
|
)
|
|
|
(15,956
|
)
|
|
Release of restricted cash upon repayment of
bank borrowings
|
|
|
78,255
|
|
|
|
|
5,754
|
|
|
|
247,788
|
|
|
|
66,943
|
|
|
|
9,812
|
|
|
Collection of amounts due from China
Electronics Financial Co. Ltd.
|
|
|
7,030
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Net cash outflow on disposal of subsidiaries
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,162
|
)
|
|
|
(170
|
)
|
|
Proceeds from disposal of property, machinery
and equipment
|
|
|
411
|
|
|
|
|
—
|
|
|
|
42
|
|
|
|
309
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)investing
activities
|
|
|
(249,317
|
)
|
|
|
|
63,431
|
|
|
|
23,016
|
|
|
|
(57,663
|
)
|
|
|
(8,452
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of common stock
|
|
|
—
|
|
|
|
|
—
|
|
|
|
1,026,611
|
|
|
|
—
|
|
|
|
—
|
|
|
Net proceeds from issuance of convertible notes
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
128,887
|
|
|
|
18,891
|
|
|
Capital contributed by a minority shareholder
of a subsidiary
|
|
|
—
|
|
|
|
|
—
|
|
|
|
2,100
|
|
|
|
—
|
|
|
|
—
|
|
|
Proceeds received from exercise of share options
|
|
|
—
|
|
|
|
|
—
|
|
|
|
30,911
|
|
|
|
—
|
|
|
|
—
|
|
|
Proceeds from short-term borrowings
|
|
|
1,089,219
|
|
|
|
|
23,883
|
|
|
|
1,496,963
|
|
|
|
1,650,123
|
|
|
|
241,865
|
|
|
Repayments of short-term borrowings
|
|
|
(1,116,271
|
)
|
|
|
|
(31,100
|
)
|
|
|
(1,108,831
|
)
|
|
|
(1,643,314
|
)
|
|
|
(240,867
|
)
|
|
Proceeds from borrowings from Xing or from
related parties on behalf of Xing
|
|
|
593,578
|
|
|
|
|
242,814
|
|
|
|
396,998
|
|
|
|
57,681
|
|
|
|
8,455
|
|
|
Repayments of borrowings from Xing or from
related parties on behalf of Xing
|
|
|
(496,865
|
)
|
|
|
|
(34,930
|
)
|
|
|
(727,425
|
)
|
|
|
(49,639
|
)
|
|
|
(7,276
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
69,661
|
|
|
|
|
200,667
|
|
|
|
1,117,327
|
|
|
|
143,738
|
|
|
|
21,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign exchange rate changes
|
|
|
—
|
|
|
|
|
—
|
|
|
|
(27,971
|
)
|
|
|
(19,015
|
)
|
|
|
(2,787
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
|
333,722
|
|
|
|
|
48,987
|
|
|
|
1,967,896
|
|
|
|
177,166
|
|
|
|
25,968
|
|
|
Cash, beginning of year/period
|
|
|
379,377
|
|
|
|
|
713,099
|
|
|
|
762,086
|
|
|
|
2,729,982
|
|
|
|
400,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, end of year/period
|
|
|
713,099
|
|
|
|
|
762,086
|
|
|
|
2,729,982
|
|
|
|
2,907,148
|
|
|
|
426,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow
information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
|
24,394
|
|
|
|
|
3,555
|
|
|
|
45,576
|
|
|
|
77,622
|
|
|
|
11,377
|
|
|
Income tax paid
|
|
|
63,382
|
|
|
|
|
—
|
|
|
|
103,835
|
|
|
|
162,527
|
|
|
|
23,822
|
|
|
Share issuance costs in the form of share-based
payment
|
|
|
—
|
|
|
|
|
—
|
|
|
|
12,859
|
|
|
|
—
|
|
|
|
—
|
|
|
Warrant issuance costs in the form of
share-based payment
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,500
|
|
|
|
366
|
|
|
Convertible note issuance costs in the form of
share-based payment
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
31,451
|
|
|
|
4,610
|
|
|
Ordinary shares repurchased through the
issuance of convertible notes
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
338,165
|
|
|
|
49,566
|
|
|
Ordinary shares issued on partial conversion of
convertible notes
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
55,054
|
|
|
|
8,070
|
|
Additional supplemental cash flow information is set out in Note 5.
See accompanying notes to the consolidated financial statements.
F-7
QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
(amounts in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Ordinary shares
|
|
Additional
|
|
earnings
|
|
other
|
|
|
|
|
|
Total
|
|
|
|
Number
|
|
|
|
|
|
paid-in
|
|
(accumulated
|
|
comprehensive
|
|
|
|
|
|
comprehensive
|
|
|
|
of shares
|
|
Amount
|
|
capital
|
|
deficit)
|
|
loss
|
|
Total
|
|
income
|
|
|
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Old Basis (Note 2(a))
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2006
|
|
|
40,000,000
|
|
|
|
83
|
|
|
|
308,283
|
|
|
|
261,597
|
|
|
|
—
|
|
|
|
569,963
|
|
|
|
|
|
|
Net income for the period from January 1
to November 30, 2006
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
306,152
|
|
|
|
—
|
|
|
|
306,152
|
|
|
|
306,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
306,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
3,522
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of November 30, 2006
|
|
|
40,000,000
|
|
|
|
83
|
|
|
|
311,805
|
|
|
|
567,749
|
|
|
|
—
|
|
|
|
879,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Basis (Note 2(a))
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Basis accounting adjustments (Note 3)
|
|
|
—
|
|
|
|
—
|
|
|
|
747,885
|
|
|
|
(567,749
|
)
|
|
|
—
|
|
|
|
180,136
|
|
|
|
|
|
|
Net loss for the period from November 30
to December 31, 2006
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(19,485
|
)
|
|
|
—
|
|
|
|
(19,485
|
)
|
|
|
(19,485
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,485
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006
|
|
|
40,000,000
|
|
|
|
83
|
|
|
|
1,059,690
|
|
|
|
(19,485
|
)
|
|
|
—
|
|
|
|
1,040,288
|
|
|
|
|
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
593,489
|
|
|
|
—
|
|
|
|
593,489
|
|
|
|
593,489
|
|
|
Foreign currency translation adjustments
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(23,080
|
)
|
|
|
(23,080
|
)
|
|
|
(23,080
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
570,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer of additional paid-in capital to share capital
|
|
|
—
|
|
|
|
308,283
|
|
|
|
(308,283
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Issuance of ordinary shares
|
|
|
12,500,000
|
|
|
|
1,021,219
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,021,219
|
|
|
|
|
|
|
Share-based compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— options granted to a director and employees
|
|
|
—
|
|
|
|
—
|
|
|
|
38,626
|
|
|
|
—
|
|
|
|
—
|
|
|
|
38,626
|
|
|
|
|
|
|
— options granted to a consultant as ordinary share issuance cost
|
|
|
—
|
|
|
|
(12,859
|
)
|
|
|
12,859
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
|
52,500,000
|
|
|
|
1,316,726
|
|
|
|
802,892
|
|
|
|
574,004
|
|
|
|
(23,080
|
)
|
|
|
2,670,542
|
|
|
|
|
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
423,804
|
|
|
|
—
|
|
|
|
423,804
|
|
|
|
423,804
|
|
|
Foreign currency translation adjustments
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(7,771
|
)
|
|
|
(7,771
|
)
|
|
|
(7,771
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
416,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of ordinary shares
|
|
|
2,076,397
|
|
|
|
85,860
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
85,860
|
|
|
|
|
|
|
Cancellation of ordinary shares
|
|
|
(6,966,666
|
)
|
|
|
(338,165
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(338,165
|
)
|
|
|
|
|
|
Issuance of stock purchase warrants to convertible note
investors and external consultants
|
|
|
—
|
|
|
|
—
|
|
|
|
70,012
|
|
|
|
—
|
|
|
|
—
|
|
|
|
70,012
|
|
|
|
|
|
|
Warrant issuance costs
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,162
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,162
|
)
|
|
|
|
|
|
Share-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
14,668
|
|
|
|
—
|
|
|
|
—
|
|
|
|
14,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
|
47,609,731
|
|
|
|
1,064,421
|
|
|
|
883,410
|
|
|
|
997,808
|
|
|
|
(30,851
|
)
|
|
|
2,914,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US$
|
|
|
|
|
|
|
156,016
|
|
|
|
129,485
|
|
|
|
146,253
|
|
|
|
(4,522
|
)
|
|
|
427,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
F-8
QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
|
|
|
|
|
1
|
|
Principal activities, organization and significant concentrations and risks
|
|
(a)
|
|
Principal activities
|
|
|
|
|
|
Qiao Xing Mobile Communication Co., Ltd. (the “Company”) and its subsidiaries (collectively,
the “Group”) are principally engaged in the production and sale of mobile phones and
accessories in the People’s Republic of China (the “PRC”).
|
|
(b)
|
|
Organization
|
|
|
|
|
|
The Company was incorporated in the British Virgin Islands (the “BVI”) on January 31, 2002.
The Company listed its ordinary shares on the New York Stock Exchange (the “NYSE”) under the
symbol “QXM” on May 3, 2007. On May 8, 2007, the Company and certain selling shareholders
completed an initial public offering (the “IPO”) of 13,333,334 ordinary shares. The IPO,
which was priced at US$12 per share, consisted of 12,500,000 new ordinary shares issued by
the Company and 833,334 ordinary shares offered by the selling shareholders.
|
|
|
|
|
|
As of December 31, 2008, the Company was 67.6% (2007: 61.3%) owned by Qiao Xing Universal
Telephone, Inc. (“Xing”), a company listed on the Nasdaq National Market.
|
|
|
|
|
|
Details of the Group’s subsidiaries are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of equity interest
|
|
|
|
|
|
|
|
Place of
|
|
attributable to the Group
|
|
Name of subsidiary
|
|
Note
|
|
incorporation
|
|
as of December 31,
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CEC Telecom Co., Ltd. (“CECT”)
|
|
|
|
|
|
PRC
|
|
|
96.6
|
%
|
|
|
96.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beijing CECT Yitong Technology Co., Ltd (“BCYT”)
|
|
|
(i
|
)
|
|
PRC
|
|
|
64.4
|
%
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Huizhou CEC Telecom Co., Ltd. (“HCECT”)
|
|
(ii)
|
|
PRC
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
(i)
|
|
The Group’s interest in BCYT as of December 31, 2007 was held through CECT, which
owned a 66.7% equity interest in BCYT. The Group’s interest in BCYT was disposed of
during the year ended December 31, 2008.
|
|
|
|
(ii)
|
|
HCECT was incorporated in January 2008 and was owned as to 100% by CECT. The
Group’s interest in HCECT was disposed of subsequently during the year ended December
31, 2008.
|
|
(c)
|
|
Significant concentrations and risks
|
|
|
|
|
|
The Group is subject to, among others, the following significant concentrations and risks:
|
Country
|
|
|
As substantially all of the Group’s operations are conducted in the PRC, the Group is subject
to special considerations and significant risks not typically associated with companies
operating in North America and Western Europe. These include risks associated with, among
others, the political, economic and legal environments and foreign currency exchange. The
Group’s results may be adversely affected by changes in the political and social conditions
in the PRC, and by changes in governmental policies with respect to laws and regulations,
anti-inflationary measures, foreign currency exchange and remittance abroad, and rates and
methods of taxation, among other things.
|
F-9
QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
|
|
|
|
|
1
|
|
Principal activities, organization and significant concentrations and risks (continued)
|
|
(c)
|
|
Significant concentrations and risks (continued)
|
|
|
|
|
|
Revenue concentrations
|
|
|
|
|
|
Individual customers accounting for more than 10% of the Group’s revenue for the period from
January 1, 2006 through November 30, 2006, the period from November 30, 2006 through December
31, 2006, and the years ended December 31, 2007 and 2008, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Old Basis
|
|
|
New Basis
|
|
|
|
January 1,
|
|
|
November
|
|
|
|
|
|
2006 to
|
|
|
30, 2006 to
|
|
|
|
|
|
November
|
|
|
December
|
|
Year ended December 31,
|
|
|
|
30, 2006
|
|
|
31, 2006
|
|
2007
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beijing U-life International Technology Co., Ltd.
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
53
|
%
|
|
Shenzhen Laidi Technical Co., Ltd.
|
|
|
30
|
%
|
|
|
|
13
|
%
|
|
|
12
|
%
|
|
|
—
|
|
|
Shenzhen Siecom Communication Technology
Development Co., Ltd.
|
|
|
11
|
%
|
|
|
|
23
|
%
|
|
|
12
|
%
|
|
|
—
|
|
|
Beijing Beidou Communication & Equipment Co.,
Ltd.
|
|
|
—
|
|
|
|
|
—
|
|
|
|
12
|
%
|
|
|
—
|
|
|
Beijing Jinsheng Technical Co., Ltd.
|
|
|
16
|
%
|
|
|
|
19
|
%
|
|
|
—
|
|
|
|
—
|
|
|
Beijing Jiasheng Ruitong Electronics Co., Ltd.
|
|
|
15
|
%
|
|
|
|
—
|
|
|
|
—
|
|
|
|
12
|
%
|
|
Xi’an Ruiqiao Electronics Co., Ltd.
|
|
|
—
|
|
|
|
|
15
|
%
|
|
|
—
|
|
|
|
—
|
|
|
Jinan Qiaoxing Telecommunication Co., Ltd.
|
|
|
—
|
|
|
|
|
14
|
%
|
|
|
—
|
|
|
|
—
|
|
|
Wuhan Jiajiali Electronics Co., Ltd.
|
|
|
—
|
|
|
|
|
12
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
72
|
%
|
|
|
|
96
|
%
|
|
|
36
|
%
|
|
|
65
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007 and 2008, the Group’s five largest accounts receivable accounted for
approximately 67% and 91%, respectively, of the Group’s total accounts receivable.
|
Concentrations of cash balances held at financial institutions
|
|
|
As of December 31, 2007 and 2008, cash of RMB2,711,907
and RMB2,904,187 (US$425,678),
respectively, was held in uninsured accounts at major financial institutions located in the
PRC, and cash of RMB17,512 and RMB2,961 (US$434), respectively, was held in uninsured
accounts at major financial institutions located in the Hong Kong Special Administrative
Region (the “HK SAR”). Further, as of December 31, 2007 and 2008, the Company’s cash balance
included U.S. dollar denominated bank deposits of US$44,517 and
US$5,196 (equivalent to
RMB324,737 and RMB35,450), respectively, in uninsured accounts at major institutions located
in the PRC, and US$2,323 and US$429 (equivalent to RMB16,946 and RMB2,928), respectively, in
uninsured accounts at major financial institutions located in the HK SAR. Management
believes that these major financial institutions are of high credit quality.
|
Technology
|
|
|
The Group is developing products which incorporate complex and evolving technologies that
require substantial expenditures and resources. These new products may fail to be accepted
at the rates or levels the Group anticipates and the Group may fail to realize the expected
benefits from its investments in these new technologies. Further, the Group may experience
greater variability in its operating results than in the past, particularly depending on the
general economic conditions and the pace of development and acceptance of new technologies.
Changes in the communication industry are expected to increase competition and change the
competitive landscape and may adversely affect the Group’s operating results.
|
Suppliers
|
|
|
The Group purchases materials and components from various suppliers in the PRC. The Group
believes that there are a number of suppliers in the PRC with the ability to consistently
supply materials and components that meet the Group’s quality standards and requirements. In
the event that a major supplier ceases to sell to the Group, the Group believes that it could
shift to other suppliers without incurring undue costs.
|
F-10
QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
|
|
|
|
|
2
|
|
Summary of significant accounting policies
|
|
(a)
|
|
Basis of presentation
|
|
|
|
|
|
The Group’s consolidated financial statements are presented in accordance with accounting
principles generally accepted in the United States of America (“U.S. GAAP”).
|
|
|
|
|
|
Prior to November 30, 2006, the Company was 80% owned by Xing. The Company became a wholly
owned subsidiary of Xing on November 30, 2006 when Xing acquired the remaining 20% equity
interest in the Company from Galbo Enterprise Limited (“Galbo”). Xing’s acquisition of the
20% minority interest in the Company has been accounted for by Xing using the purchase
method. Accordingly, the purchase accounting adjustments as a result of Xing’s acquisition
of the 20% minority interest in the Company have been pushed-down and reflected in the
accompanying financial statements.
|
|
|
|
|
|
Due to the impact of the changes arising from the push-down accounting adjustments (Note 3),
the 2006 statements of operations presentation separates the results into two periods: (1)
the period from January 1, 2006 through November 30, 2006 (“Old Basis”) and (2) the period
from November 30, 2006 through December 31, 2006 (“New Basis”). A vertical black line is
inserted to indicate the application of a new basis of accounting and separate the Old Basis
and the New Basis presentations in the consolidated financial statements.
|
|
(b)
|
|
Principles of consolidation
|
|
|
|
|
|
The consolidated financial statements include the financial statements of the Company and its
majority-owned subsidiaries. All significant inter-company balances and transactions have
been eliminated upon consolidation.
|
|
(c)
|
|
Cash, restricted cash and related party cash management arrangement
|
|
|
|
|
|
Cash consists of cash on hand and interest-bearing deposits placed with banks.
|
|
|
|
|
|
Cash that is restricted as to withdrawal for use or pledged as security is disclosed
separately on the face of the consolidated balance sheet, and is not included in cash in the
consolidated statements of cash flows. Restricted cash of RMB94,384 and RMB136,299
(US$19,978) as of December 31, 2007 and 2008, respectively, represents pledged deposits for
securing short-term bank borrowings.
|
|
|
|
|
|
The Group participates in a cash management arrangement at the direction and discretion of
Xing. Consequently, the Group periodically both transfers cash to and receives cash from
certain related parties. These cash flows are unrelated to the production and delivery of
the Group’s products and services and are not derived from transactions or other events that
enter into the determination of the Group’s net income (loss). For purposes of the
consolidated statements of cash flows, the cash inflows and outflows under this related party
financing arrangement are presented under “cash flows from financing activities”.
|
|
(d)
|
|
Accounts and bills receivables
|
|
|
|
|
|
Accounts receivable are recorded at invoiced amount net of deductions for trade discounts.
The Group maintains an allowance for doubtful accounts for estimated losses resulting from
the inability of its customers to make required payments. The Group determines the allowance
for doubtful accounts based on the age of the accounts receivable balance, the customer’s
payment history and its current credit-worthiness and current economic trends. Account
balances are charged off against the
allowance after all means of collection have been exhausted and the potential for recovery is
considered remote. The Group does not have any off-balance-sheet credit exposure related to
its customers.
|
|
|
|
|
|
To reduce the Group’s credit risk, the Group has required certain customers to pay for the
sale of the Group’s products by bills receivable. Bills receivable represents interest-free
short-term notes receivable issued by a financial institution that entitles the Group to
receive the full face amount from the financial institution at a stated maturity date, which
is within one year from the date of issuance.
|
|
|
|
|
|
In certain circumstances, the Group has sold, with recourse, bills receivables to banks. The
recourse obligation represents the amount the Group would be obligated to repay to the extent
that the issuing financial institution does not make payment upon maturity. Because the
discounted bills receivables have not been legally isolated from the Group, the discounted
bills receivables sold with recourse have been accounted for as short-term secured borrowings
until the bills receivable are paid. Upon payment of bills receivable, the discounted bills
receivables and related short-term secured borrowings are derecognized. Historically, the
Group has experienced no losses on bills receivable. As of December 31, 2007 and 2008,
discounted bills of nil and RMB40,000 (US$5,863), respectively are included in short-term
borrowings.
|
F-11
QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
|
|
|
|
|
2
|
|
Summary of significant accounting policies (continued)
|
|
(e)
|
|
Inventories
|
|
|
|
|
|
Inventories are stated at the lower of cost or market value. Cost is determined using the
first-in, first-out method. Costs of finished goods are composed of direct materials, direct
labor and an attributable portion of manufacturing overhead based on normal operating
capacity. Adjustments are recorded to write-down damaged, obsolete and slow-moving items to
their estimated net residual value based on the ageing of the inventories, current and
expected future market trends and conditions, and the physical condition of the inventory.
|
|
(f)
|
|
Prepayments to suppliers
|
|
|
|
|
|
Advance payments for purchases of raw materials are included in “prepayments to suppliers”
and represent cash deposits paid to vendors for future purchases. The Group is required to
make advance payments for certain new suppliers. Advanced payments are unsecured,
non-interest bearing and expected to be utilized within one year.
|
|
|
|
|
|
The outstanding balance of “prepayments to suppliers” is reduced and reclassified to
“inventories” when inventory is received and passes quality inspection based on the terms of
the purchase order. Such reclassifications of RMB1,178,203, RMB125,528, RMB1,909,685 and
RMB1,492,267 (US$218,727) for the period from January 1, 2006 through November 30, 2006, the
period from November 30, 2006 through December 31, 2006, and the years ended December 31,
2007 and 2008, respectively, are not reflected as cash outflows from operating activities.
|
|
(g)
|
|
Property, machinery and equipment
|
|
|
|
|
|
Property, machinery and equipment are stated at cost less accumulated depreciation and
impairment. Property, machinery and equipment acquired in a purchase business combination
and upon acquisitions of minority interest are initially recorded based on a purchase price
allocation. In addition, as a result of the application of push-down accounting (Note 3),
the Group’s property, machinery and equipment have been adjusted to a new cost basis, which
reflects Xing’s original 80% interest at depreciated cost and Xing’s 20% acquired interest at
fair value as of November 30, 2006.
|
|
|
|
|
|
Major expenditures for betterments and renewals are capitalized. All ordinary repair and
maintenance costs are expensed as incurred. Depreciation on property, machinery and
equipment is provided using the straight-line method (after taking into account their
respective estimated residual values) over the following estimated useful lives:
|
|
|
|
|
|
|
|
Buildings and improvements
|
|
5 - 30 years
|
|
Machinery and equipment
|
|
5 - 12 years
|
|
Furniture and office equipment
|
|
5 - 10 years
|
|
Motor vehicles
|
|
5 - 8 years
|
|
|
|
Depreciation of property, machinery and equipment attributable to manufacturing activities is
capitalized as part of inventory and expensed to cost of goods sold when the inventory is
sold. Depreciation related to abnormal amounts from idle capacity is charged to cost of
goods sold in the period. When items are retired or otherwise disposed of, income is charged
or credited for the difference between the net book value and proceeds received thereon.
Assets to be disposed of are separately presented on the consolidated balance sheet and
reported at the lower of their carrying amount or fair value less costs to sell, and are no
longer depreciated.
|
|
(h)
|
|
Land use rights
|
|
|
|
|
|
Land use rights represent the exclusive right to occupy and use a piece of land in the PRC
during the contractual period of the rights. Land use rights are carried at cost, subject to
adjustments resulting from the effects of purchase accounting and push-down accounting, and
are charged to expense on a straight-line basis over 50 years, the contractual period of the
rights.
|
F-12
QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
|
|
|
|
|
2
|
|
Summary of significant accounting policies (continued)
|
|
(i)
|
|
Goodwill and other intangible assets
|
|
|
|
|
|
Goodwill represents the excess of the cost of an acquisition over the fair value of net
assets acquired. Goodwill is not amortized, but is instead tested for impairment at least
annually.
|
|
|
|
|
|
Acquired intangible assets are recognized if it satisfies either the “contractual-legal” or
“separability” criterion specified under U.S. GAAP. Such intangible assets are initially
measured and recorded at fair value. As a result of the application of push-down accounting,
other intangible assets have been adjusted to a new cost basis, which reflects Xing’s
original 80% interest at amortized cost and the 20% acquired interest at fair value as of
November 30, 2006.
|
|
|
|
|
|
Intangible assets with determinable useful lives are amortized as follows:
|
|
|
|
|
|
|
|
Customer relationships
|
|
3 - 5 years
|
|
Completed technology
|
|
1.8 - 5 years
|
|
Core technology
|
|
4 - 5 years
|
|
Backlog
|
|
4 - 5 months
|
|
Licenses
|
|
5 years
|
|
|
|
Management has determined that the Group’s “CECT” brand name held by its subsidiary, CECT,
does not have a determinable useful life. Consequently, the carrying amount of this brand
name is not amortized but is tested for impairment annually or more frequently if events or
changes in circumstances indicate that the assets might be impaired. Such impairment test
consists of a comparison of the fair value of the brand name with its carrying amount, and an
impairment loss is recognized if and when the carrying amount of the brand name exceeds its
fair value.
|
|
(j)
|
|
Impairment of long-lived assets
|
|
|
|
|
|
Long-lived assets with determinable useful lives, such as property, machinery and equipment
and amortizable intangible assets, are tested for impairment if events or changes in
circumstances indicate that the asset might be impaired. Recoverability of such assets to be
held and used is measured by a comparison of the carrying amount of the asset to the
estimated undiscounted future cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future undiscounted cash flows, an
impairment charge is recognized by the amount by which the carrying amount of the asset
exceeds the fair value of the asset.
|
|
|
|
|
|
Goodwill and the CECT brand name which are not subject to amortization are tested annually
for impairment, and are tested for impairment more frequently if events and circumstances
indicate that the asset might be impaired. An impairment loss would be recognized on the
CECT brand name to the extent that the carrying amount of the CECT brand name exceeds its
fair value. For goodwill, the impairment determination is made at the reporting unit level
and consists of two steps. In the first step, the Company determines the fair value of its
reporting unit and compares it to its carrying amount, including goodwill. Second, if the
carrying amount of the reporting unit exceeds its fair value, an impairment loss is
recognized for any excess of the carrying amount of the reporting unit’s goodwill over the
implied fair value of that goodwill. The implied fair value of goodwill is determined by
allocating the fair value of the reporting unit in a manner similar to a purchase price
allocation. The residual fair value after this allocation is the implied fair value of the
reporting unit goodwill. Management has determined that CECT is the reporting unit for
testing goodwill impairment. The fair value of the CECT is determined based on the market
approach, under which the fair value is estimated based on market multiples of earnings for
comparable companies.
|
|
(k)
|
|
Revenue recognition
|
|
|
|
|
|
The Group derives revenues principally from the sales of mobile phones and accessories in the
PRC, and to a lesser extent the rendering of technical, processing and other related
services.
|
|
|
|
|
|
Sales of mobile phones and accessories
|
|
|
|
|
|
Sales represent the invoiced amount, net of discounts, returns, volume rebates and price
guarantees granted to customers. The Group recognizes revenue when products are received by
the customers at the location designated by the customer and the customer takes ownership and
assumes risk of loss, collection of the relevant receivable is probable, persuasive evidence
of an arrangement exists and the selling price is fixed or determinable.
|
F-13
QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
|
|
|
|
|
2
|
|
Summary of significant accounting policies (continued)
|
|
(k)
|
|
Revenue recognition (continued)
|
|
|
|
|
|
The Group recognizes a liability for price guarantees, which generally cover a period of
between three to four months, based on management’s estimates of future price reductions and
the level of unsold inventories held by customers at the dates of expected price adjustments.
Price guarantees reported as a reduction of revenues amounted to RMB26,619, RMBNil, RMB2,943
and RMB91 (US$13) for the period from January 1, 2006 through November 30, 2006, the period
from November 30, 2006 through December 31, 2006, and the years ended December 31, 2007 and
2008, respectively.
|
|
|
|
|
|
In the PRC, value-added-tax (“VAT”), at a rate of 17% of invoiced amount is collected on
behalf of the PRC tax authorities. Revenue is recorded net of VAT. VAT collected from
customers is offset against VAT paid for purchases and is recorded as a liability on the
consolidated balance sheet until paid.
|
|
|
|
|
|
Provision of services
|
|
|
|
|
|
Revenues from the provision of technical, processing and other related services are
recognized in the period when performance of the service is completed as agreed to in each
written service agreement, the fee is fixed or determinable, and collection of relevant
receivable is reasonably assured.
|
|
(l)
|
|
Product warranties
|
|
|
|
|
|
The Group provides a warranty to customers that its products will meet the functionality
standards agreed to in each sales arrangement. The Group provides for the estimated warranty
costs under these guarantees based upon historical experience and management’s estimate of
the level of future claims, and accrues for specific items at the time their existence is
known and the amounts are estimable. Provisions of product warranty costs, which are charged
to cost of goods sold, are analyzed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Old Basis
|
|
|
New Basis
|
|
|
|
January 1,
|
|
|
November
|
|
|
|
|
|
2006 to
|
|
|
30, 2006 to
|
|
|
|
|
|
November
|
|
|
December
|
|
Year ended December 31,
|
|
|
|
30, 2006
|
|
|
31, 2006
|
|
2007
|
|
2008
|
|
|
|
RMB
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
beginning of
period/year
|
|
|
3,922
|
|
|
|
|
6,905
|
|
|
|
6,809
|
|
|
|
8,097
|
|
|
|
1,187
|
|
|
Provision
|
|
|
13,751
|
|
|
|
|
908
|
|
|
|
14,960
|
|
|
|
7,485
|
|
|
|
1,097
|
|
|
Utilization
|
|
|
(10,768
|
)
|
|
|
|
(1,004
|
)
|
|
|
(13,672
|
)
|
|
|
(10,553
|
)
|
|
|
(1,547
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end
of period/year
|
|
|
6,905
|
|
|
|
|
6,809
|
|
|
|
8,097
|
|
|
|
5,029
|
|
|
|
737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(m)
|
|
Research and development costs, advertising costs, and shipping and handling costs
|
|
|
|
|
|
Research and development costs are expenses as incurred.
|
|
|
|
|
|
Adverting costs are charged to selling and distribution expenses when incurred. Advertising
costs amounted to RMB10,382, RMB2,491, RMB26,445 and RMB137,166 (US$20,105) for the period
from January 1, 2006 through November 30, 2006, the period from November 30, 2006 through
December 31, 2006, and the years ended December 31, 2007 and 2008, respectively.
|
|
|
|
|
|
The costs of shipping and distributing products are included in cost of sales.
|
|
(n)
|
|
Retirement and other postretirement benefits
|
|
|
|
|
|
Pursuant to relevant PRC regulations, the Group’s subsidiaries are required to make
contributions to various defined contribution plans organized by the PRC government. The
contributions are made for each qualifying PRC employee at 20% of a standard salary base as
determined by the PRC governmental authority. Contributions to the defined contribution
plans are charged to expense as the service is provided. For the period from January 1, 2006
through November 30, 2006, the period from November 30, 2006 through December 31, 2006, and
the years ended December 31, 2007 and 2008, contributions to the defined contribution plans
were RMB606, RMB45, RMB624 and RMB2,228 (US$327), respectively. The Group has no other
obligation for the payment of employee benefits associated with these plans beyond the
contributions described above.
|
F-14
QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
|
|
|
|
|
2
|
|
Summary of significant accounting policies (continued)
|
|
(o)
|
|
Share-based payments
|
|
|
|
|
|
The Group accounts for share based payments under the provisions of Statement of Financial
Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS No.
123R”). SFAS No. 123R requires that all compensation cost related to share options or
similar equity instruments be measured at the fair value of the award and recognized over the
requisite service period, which is generally the same as the vesting period. When no future
services are required to be performed by the employee in exchange for the reward, and if such
award does not contain a performance or market condition, the cost of the award (as measured
based on the grant-date fair value) is expensed on the grant date.
|
|
(p)
|
|
Income taxes
|
|
|
|
|
|
Income taxes are accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences
between the financial statements carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carry forwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax rates or laws
is recognized in the statement of operations in the period that the change in tax rates or
tax laws is enacted. Interest and penalties related to unrecognized tax benefits, if and when
required, are classified as part of income tax expense in the statement of operations.
|
|
(q)
|
|
Foreign currency transactions
|
|
|
|
|
|
The reporting currency of the Group is Renminbi (“RMB”).
|
|
|
|
|
|
Through May 2, 2007, the Company’s functional currency was RMB. Effective May 3, 2007, the
Company changed its functional currency to United States dollars (“U.S. dollar” or “US$”) due
to the significant changes in the Company’s economic facts and circumstances upon the
completion of the Company’s listing on the NYSE, which resulted in the Company’s financing
activity being predominately denominated in and expected to continue to be predominately
denominated in U.S. dollar. The corresponding adjustment attributable to current-rate
translation of non-monetary assets
as of the date of the change was immaterial and has been recorded as accumulated other
comprehensive loss, a separate component within shareholders’ equity.
|
|
|
|
|
|
The functional currency of all other companies within the Group is the RMB. Monetary assets
and liabilities which are denominated in currencies other than RMB are translated into RMB
using the applicable exchange rates quoted by the People’s Bank of China (the “PBOC”) at each
balance sheet date. Transactions of the Company through May 2, 2007 and of all other
companies within the Group denominated in currencies other than RMB are translated into RMB
at the exchange rates quoted by the PBOC prevailing at the dates of transactions. Foreign
exchange gains or losses resulting from the settlement of foreign currency transactions and
from the translation at each period of assets and liabilities denominated in foreign
currencies are recorded as foreign currency exchange gain, net in the consolidated statements
of operations.
|
|
|
|
|
|
Effective from May 3, 2007, assets and liabilities of the Company are translated into RMB
using the exchange rate as of the balance sheet date. Income and expenses are translated at
the average exchange rate prevailing during the reporting period. The gains and losses
resulting from translation of financial statements of the Company are recorded as accumulated
other comprehensive loss, a separate component within shareholders’ equity.
|
|
|
|
|
|
RMB is not freely convertible into foreign currencies. All foreign exchange transactions
involving RMB must take place either through the PBOC or other institutions authorized to buy
and sell foreign currency. The exchange rate adopted for foreign exchange transactions are
the rates of exchange quoted by the PBOC which are determined largely by supply and demand.
|
|
|
|
|
|
For the convenience of readers, certain 2008 RMB amounts included in the accompanying
consolidated financial statements have been translated into U.S. dollars at the rate of
US$1.00 = RMB6.8225, being the noon buy rate for U.S. dollars in effect on December 31, 2008
in the City of New York for cable transfer in RMB per U.S. dollar as certified for custom
purposes by the Federal Reserve Bank. No representation is made that RMB amounts could have
been, or could be, converted into U.S. dollars at that rate or at any other certain rate on
December 31, 2008, or at any other date.
|
F-15
QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
|
2
|
|
Summary of significant accounting policies (continued)
|
|
|
|
(r)
|
|
Earnings (loss) per share
|
|
|
|
|
|
Basic earnings (loss) per share is computed using the “two-class” method by dividing net
income allocated to ordinary shareholders by the weighted average number of ordinary shares
outstanding during the year/period. Diluted earnings per share is calculated by dividing net
income by the weighted average number of ordinary and dilutive ordinary shares equivalents
outstanding during the year/period. Potential dilutive securities are not included in the
calculation of diluted earnings (loss) per share if the impact is anti-dilutive.
|
|
|
|
(s)
|
|
Use of estimates
|
|
|
|
|
|
The preparation of the consolidated financial statements in accordance with U.S. GAAP requires
management of the Group to make a number of estimates and assumptions relating to the reported
amounts of assets and liabilities and the disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Significant items subject to estimates and assumptions
in the Group’s consolidated financial statements include determining the fair values of assets
and liabilities acquired in business combinations and purchase of additional equity interests
in CECT from the minority interest holder, the estimated useful lives of property, machinery
and equipment and intangible assets with determinable lives, recoverability of the carrying
values of property, machinery and equipment, goodwill and other intangible assets, the fair
value of share-based payments, the fair values of conversion options and other derivatives
embedded in convertible notes, the fair value of ordinary share warrants granted in connection
with the issuance of the convertible notes, allowances for doubtful receivables, realizable
value of inventories, and deferred income tax assets, warranty obligations and price
guarantees. Actual result could differ from those estimates.
|
|
|
|
(t)
|
|
Segment information
|
|
|
|
|
|
The Group uses the “management approach” in determining reportable operating segments. The
management approach considers the internal organization and reporting used by the Group’s
chief operating decision maker for making operating decisions and assessing performance as the
source for determining the Group’s operating segments. Management, including the chief
operating decision maker, reviews operating results solely by monthly revenue and operating
results of CECT, the operating subsidiary in the PRC. As such, management has determined that
CECT is the Group’s only operating segment, as that term is defined by SFAS No. 131,
“Disclosures about Segments of an Enterprise and Related Information.” As the Group’s
operations and customers are principally all located in the PRC, no geographic information has
been presented.
|
|
|
|
(u)
|
|
Contingencies
|
|
|
|
|
|
In the normal course of business, the Group is subject to contingencies, including legal
proceedings and claims arising out of the business that relate to a wide range of matters.
The Group recognizes a liability for such contingency if it determines it is probable that a
loss has occurred and a reasonable estimate of the loss can be made. The Group may consider
many factors in making these assessments including past history and the specifics of each
matter. As the Group has not become aware of any claims since operations commenced, the Group
has not recognized a liability for any claims.
|
|
|
|
(v)
|
|
Recently issued accounting standards
|
|
|
|
|
|
In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No.
157, “Fair Value Measurements,” which defines fair value, provides a framework for measuring
fair value, and expands the disclosures required for assets and liabilities measured at fair
value. SFAS No. 157 applies to existing accounting pronouncements that require fair value
measurements; it does not require any new fair value measurements. In February 2008, FASB
issued FASB Staff Position (“FSP”) No. FAS 157-2, “Effective Date of FASB Statement No. 157”
(“FSP 157-2”), which delays the effective date of SFAS No. 157 for all nonfinancial assets and
nonfinancial liabilities, except for items that are recognized or disclosed at fair value in
the financial statements on a recurring basis (at least annually), until fiscal years
beginning after November 15, 2008, and interim periods within those fiscal years. The Company
adopted the effective portions of SFAS No. 157 beginning the year ended December 31, 2008,
with no material impact to its consolidated financial statements. Management does not expect
the adoption of FSP 157-2 to have a material impact on the Group’s consolidated financial
statements.
|
|
|
|
|
|
In December 2007, the FASB issued SFAS No. 141R, a revision of SFAS No. 141, “Business
Combinations”. SFAS No. 141R establishes requirements for the recognition and measurement of
acquired assets, liabilities, goodwill, and non-controlling interests (formerly minority
interests). SFAS No. 141R also provides disclosure requirements related to business
combinations. SFAS No. 141R is effective for fiscal years beginning after December 15, 2008.
SFAS No. 141R will be applied prospectively to business combinations with an acquisition date
on or after the effective date.
|
F-16
QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
|
2
|
|
Summary of significant accounting policies (continued)
|
|
|
|
(v)
|
|
Recently issued accounting standards (continued)
|
|
|
|
|
|
In December 2007, the FASB issued SFAS No. 160, “Non-Controlling Interests in Consolidated
Financial Statements — an amendment of ARB No. 51”. SFAS No. 160 establishes new standards
for the accounting for and reporting of non-controlling interests and for the loss of control
of partially owned and consolidated subsidiaries. SFAS No. 160 does not change the criteria
for consolidating a partially owned entity. SFAS No. 160 is effective for fiscal years
beginning after December 15, 2008. The provisions of SFAS No. 160 will be applied
prospectively upon adoption except for the presentation and disclosure requirements, which
will be applied retrospectively. SFAS No. 160 states that accounting and reporting for
minority interests will be recharacterized as non-controlling interests and classified as a
component of equity. The calculation of earnings per share will continue to be based on
income amounts attributable to the parent. SFAS No. 160 applies to all entities that prepare
consolidated financial statements, except not-for-profit organizations, but will affect only
those entities that have an outstanding non-controlling interest in one or more partially
owned and consolidated subsidiaries. Except for the classification of minority interest as a
component of equity, management does not expect the initial adoption of SFAS No. 160 will have
a material impact on the Group’s consolidated financial statements.
|
|
|
|
|
|
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and
Hedging Activities — an amendment of FASB Statement No. 133.” This statement requires
enhanced disclosures for derivative instruments and hedging activities that include how and
why an entity uses derivatives, how these instruments and the related hedged items are
accounted for under SFAS 133 and related interpretations, and how derivative instruments and
related hedged items affect the entity’s financial position, results of operations and cash
flows. SFAS 161 is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008. Management does not expect the adoption of SFAS 161
to have a material impact on the Group’s consolidated financial statements.
|
|
|
|
|
|
In April 2008, the FASB issued FSP No. FAS 142-3, “Determination of the Useful Life of
Intangible Assets” (“FSP 142-3), which amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of a recognized
intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets.” FSP 142-3 is
effective for fiscal years beginning after December 15, 2008 and interim periods within those
fiscal years. Early adoption is prohibited. The guidance for determining the useful life of a
recognized intangible asset in FSP 142-3 shall be applied prospectively to intangible assets
acquired after the effective date. Management does not expect the adoption of FSP 142-3 to
have a material impact on Group’s consolidated financial statements.
|
|
|
|
|
|
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting
Principles,” which identifies the sources of accounting principles and the framework for
selecting the principles used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with U.S. GAAP. SFAS No. 162 became effective
November 15, 2008. Management does not expect the adoption of SFAS No. 162 to have a material
impact on the Group’s consolidated financial statements.
|
|
|
|
|
|
In May 2008, the FASB issued FSP No. APB 14-1, “Accounting for Convertible Debt Instruments
That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP 14-1”),
which requires the issuer of convertible debt instruments with cash settlement features to
account separately for the liability and equity components of the instrument. The debt would
be recognized at the present value of its cash flows discounted using the issuer’s
nonconvertible debt borrowing rate at the time of issuance. The equity component would be
recognized as the difference between the proceeds from the issuance of the note and the fair
value of the liability. FSP 14-1 will also require an accretion of the resultant debt
discount over the expected life of the debt. The proposed transition guidance requires
retrospective application to all periods presented, and does not grandfather existing
instruments. FSP 14-1 is effective for fiscal years beginning after December 15, 2008.
Management does not expect the adoption of FSP 14-1 to have a material impact on the Group’s
consolidated financial statements.
|
|
|
|
|
|
In June 2008, the Emerging Issue Task Force (“EITF”) issued EITF Issue No. 07-5, “Determining
Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock” (“EITF
07-5”). EITF 07-5 clarifies the determination of whether an instrument (or an embedded
feature) is indexed to an entity’s own stock, which would qualify as a scope exception under
SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” EITF 07-5 is
effective for financial statements issued for fiscal years beginning after December 15, 2008.
EITF 07-5 does not permit early adoption for an existing instrument. Management does not
expect the adoption of EITF 07-5 to have a material effect on the Group’s consolidated
financial statements.
|
F-17
QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
|
2
|
|
Summary of significant accounting policies (continued)
|
|
|
|
(v)
|
|
Recently issued accounting standards (continued)
|
|
|
|
|
|
In June 2008, the FASB issued FSP EITF Issue No. 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP 03-6-1”). FSP
03-6-1 clarifies that share-based payment awards that entitle their holders to receive
non-forfeitable dividends or dividend equivalents before vesting should be considered
participating securities. FSP 03-6-1 is effective for fiscal years beginning after December
15, 2008 on a retrospective basis. The Company has not granted any share-based payment awards
that contain non-forfeitable rights to dividends or dividend equivalents before vesting since
incorporation. Management does not expect the adoption of FSP 03-6-1 to have a material
impact on Group’s consolidated financial statements.
|
|
|
|
|
|
On October 10, 2008, the FASB issued FSP No. FAS 157-3, “Determining the Fair Value of a
Financial Asset When the Market for that Asset is Not Active” (FSP 157-3), which clarifies the
application of SFAS No. 157 in a market that is not active. Additional guidance is provided
regarding how the reporting entity’s own assumptions should be considered when relevant
observable inputs do not exist, how available observable inputs in a market that is not active
should be considered when measuring fair value, and how the use of market quotes should be
considered when assessing the relevance of inputs available to measure fair value. FSP 157-3
became effective immediately upon issuance. Its adoption did not have a material effect on the
Group’s consolidated financial statements.
|
|
|
|
|
|
In November 2008, the FASB ratified EITF Issue No. 08-7, “Accounting for Defensive Intangible
Assets” (“EITF 08-7”). EITF 08-7 applies to defensive intangible assets, which are acquired
intangible assets that the acquirer does not intend to actively use but intends to hold to
prevent its competitors from obtaining access to them. As these assets are separately
identifiable, EITF 08-7 requires an acquiring entity to account for defensive intangible
assets as a separate unit of accounting. Defensive intangible assets must be recognized at
fair value in accordance with SFAS No. 141R and SFAS No. 157. EITF 08-7 is effective for
defensive intangible assets acquired in fiscal years beginning on or after December 15, 2008.
Management does not expect the adoption of EITF 08-7 to have a material impact on Group’s
consolidated financial statements.
|
F-18
QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
|
3
|
|
New Basis accounting adjustments
|
|
|
|
|
|
On November 30, 2006, Xing acquired the remaining 20% equity interest in the Company from
Galbo for a total consideration of RMB356,064. As a result, the Company became a wholly owned
subsidiary of Xing at the time and a new basis of accounting in the Group’s consolidated
financial statements was required to push-down the effect of Xing’s acquisition of the 20%
equity interest in the Company.
|
|
|
|
|
|
The original 80% equity interest held by Xing had no significant effect on the application of
push-down accounting since it was obtained by Xing in 2002 in connection with the formation of
the Company for which no purchase adjustments were recorded. The cost of the acquisition of
the 20% equity interest has been allocated by Xing to the fair value of the Company’s
identifiable net assets at the date of the acquisition based on the additional 20% ownership
interest acquired.
|
|
|
|
|
|
The following presents the fair values attributable to the assets acquired and liabilities
assumed by Xing. These values exclude the historical carrying values attributable to Xing’s
original 80% equity interest in the Company:
|
|
|
|
|
|
|
|
|
|
November 30,
2006
|
|
|
|
|
RMB
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
28,530
|
|
|
Property, machinery and equipment
|
|
|
36,737
|
|
|
Net deferred income tax liabilities
|
|
|
(8,746
|
)
|
|
Other tangible assets and liabilities acquired
|
|
|
100,048
|
|
|
Intangible assets:
|
|
|
|
|
|
— In-process research and development
|
|
|
41,739
|
|
|
— Other intangible assets
|
|
|
63,656
|
|
|
Goodwill (Note 9)
|
|
|
94,100
|
|
|
|
|
|
|
|
|
Purchase price allocated
|
|
|
356,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Satisfied by:
|
|
|
|
|
|
— Cash consideration
|
|
|
170,343
|
|
|
— Fair value of Xing’s share issued (1,562,348 shares @ US$15.17 each)
|
|
|
185,721
|
|
|
|
|
|
|
|
|
Total consideration
|
|
|
356,064
|
|
|
|
|
|
|
|
|
|
|
The effects of the push-down accounting adjustments consist of the following:
|
|
|
(i)
|
|
Fair value adjustments to the extent of Xing’s additional 20% acquired interest
relating to inventories of RMB1,053, property, machinery and equipment of RMB1,478 and
other intangible assets of RMB55,247. In addition, the accumulated depreciation and
accumulated amortization balances as of November 30, 2006 related to Xing’s original 80%
ownership interest in the Company have been eliminated against the gross carrying value
of the respective property, machinery and equipment, and other intangible assets to
establish a new cost basis of these assets.
|
|
|
|
|
(ii)
|
|
In-process research and development of RMB41,739, representing Xing’s acquired
interest in the estimated fair value of product technologies under development as of
November 30, 2006. These product development projects and related research and
development activities have no alternative future use, and were charged to expense by
Xing and pushed down to the Group’s consolidated statements of operations for the period
from November 30, 2006 to December 31, 2006. In-process research and development as of
November 30, 2006 was valued using the multi-period excess earnings method. Under this
method, the value of the in-process research and development asset is determined as the
present value of the incremental after-tax cash flows attributable only to that asset.
|
|
|
|
|
(iii)
|
|
Adjustments to deferred income taxes related to the temporary differences
resulting from the above push-down accounting adjustments. In accordance with EITF Issue
No. 96-7, “Accounting for Deferred Taxes on In-Process Research and Development
Activities Acquired in a Purchase Business Combination”, in-process research and
development is charged to expense on a gross basis and does not reflect any tax benefit.
|
F-19
QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
|
3
|
|
New Basis accounting adjustments (continued)
|
|
|
(iv)
|
|
Adjustments to goodwill under the new basis of accounting, which represented the
sum of 80% of the goodwill arising from the initial acquisition of CECT on February 8,
2003 and the goodwill arising from Xing’s acquisition of the remaining 20% interest in
the Company. In addition, retained earnings of the Group as of November 30, 2006,
excluding the effect of the in-process research and development charge, have been
eliminated with a corresponding adjustment to additional paid-in capital.
|
|
4
|
|
Acquisitions
|
|
|
|
|
|
Additional capital injection into CECT on July 31, 2006
|
|
|
|
|
|
On July 31, 2006, the Company injected additional capital of US$18,750 (RMB149,600) into CECT
in the form of cash. The minority shareholder did not participate in the capital injection
and as a result, the Company’s equity interest in CECT increased from 90% to 93.41%.
|
|
|
|
|
|
Additional capital injection into CECT on June 30, 2007
|
|
|
|
|
|
On June 30, 2007, the Company injected additional capital of US$50,000 (RMB380,425) into CECT
in the form of cash. The minority shareholder did not participate in the capital injection
and as a result, the Company’s equity interest in CECT increased from 93.41% to 96.55%.
|
|
|
|
|
|
The Company accounted for the above step-up acquisitions of the equity interests in CECT using
the purchase method. This method requires the acquisition cost to be allocated to the assets
acquired, including separately identifiable intangible assets, and liabilities assumed, based
on a pro-rata share of their estimated fair values. The Company makes estimates and judgments
in determining the fair value of the assets acquired and liabilities assumed based on
independent appraisal reports as well as its experience in the valuation of similar assets and
liabilities. If different judgments or assumptions were used, the amounts assigned to the
individual acquired assets or liabilities could be materially different. For each of the
Group’s acquisitions, the fair value of the underlying net assets, representing the Company’s
additional equity interest acquired in CECT, exceeded the Company’s purchase price, giving
rise to negative goodwill. Such negative goodwill was first allocated to reduce the purchase
price allocated to certain assets. The remaining unallocated negative goodwill has been
recognized as an extraordinary gain in the consolidated statements of operations in the year
of acquisition.
|
F-20
QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
|
4
|
|
Acquisitions (continued)
|
|
|
|
|
|
The following table summarizes the purchase price allocated to the fair value of the Company’s
share of net assets acquired for each acquisition at the respective acquisition date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
June 30,
|
|
|
|
2006
|
|
2007
|
|
|
|
RMB
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
|
Consideration:
|
|
|
|
|
|
|
|
|
|
Total cash consideration
|
|
|
149,600
|
|
|
|
380,425
|
|
|
Less: Ownership interest in cash consideration
|
|
|
(139,742
|
)
|
|
|
(367,295
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash consideration
|
|
|
9,858
|
|
|
|
13,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of assets acquired:
|
|
|
|
|
|
|
|
|
|
Property, machinery and equipment
|
|
|
1,511
|
|
|
|
5,929
|
|
|
Land use rights
|
|
|
—
|
|
|
|
1,222
|
|
|
Other tangible assets and liabilities acquired
|
|
|
27,654
|
|
|
|
41,819
|
|
|
In-process research and development
|
|
|
6,287
|
|
|
|
7,981
|
|
|
Other intangible assets
|
|
|
13,914
|
|
|
|
16,009
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of net assets acquired
|
|
|
49,366
|
|
|
|
72,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Negative goodwill
|
|
|
39,508
|
|
|
|
59,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of negative goodwill:
|
|
|
|
|
|
|
|
|
|
Property, machinery and equipment
|
|
|
(1,511
|
)
|
|
|
(5,929
|
)
|
|
Land use rights
|
|
|
—
|
|
|
|
(1,222
|
)
|
|
In-process research and development
|
|
|
(6,287
|
)
|
|
|
(7,981
|
)
|
|
Other intangible assets
|
|
|
(13,914
|
)
|
|
|
(16,009
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Negative goodwill allocated to fair
value of long-term assets
|
|
|
(21,712
|
)
|
|
|
(31,141
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extraordinary item — gain on
acquisition of additional
equity interest in CECT
|
|
|
17,796
|
|
|
|
28,689
|
|
|
|
|
|
|
|
|
|
|
|
F-21
QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
|
5
|
|
Disposals
|
|
|
|
|
|
The Group disposed of its interests in BCYT and HCECT during the year ended December 31, 2008.
The condensed historical balances of the subsidiaries’ assets and liabilities that were
disposed of consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BCYT
|
|
HCECT
|
|
Total
|
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
924
|
|
|
|
238
|
|
|
|
1,162
|
|
|
Other current assets
|
|
|
20,866
|
|
|
|
14,616
|
|
|
|
35,482
|
|
|
Property, machinery and equipment
|
|
|
—
|
|
|
|
10,876
|
|
|
|
10,876
|
|
|
Current liabilities
|
|
|
—
|
|
|
|
(5,808
|
)
|
|
|
(5,808
|
)
|
|
Minority interests
|
|
|
(2,071
|
)
|
|
|
—
|
|
|
|
(2,071
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets disposed of
|
|
|
19,719
|
|
|
|
19,922
|
|
|
|
39,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The gain on disposal of subsidiaries reflected in the consolidated statement of operations for
the year ended December 31, 2008 is calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BCYT
|
|
HCECT
|
|
Total
|
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consideration
|
|
|
20,000
|
|
|
|
21,910
|
|
|
|
41,910
|
|
|
Net assets disposed of
|
|
|
(19,719
|
)
|
|
|
(19,922
|
)
|
|
|
(39,641
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on disposal
|
|
|
281
|
|
|
|
1,988
|
|
|
|
2,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The net cash outflow in respect of the disposal of subsidiaries during the year ended December
31, 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BCYT
|
|
HCECT
|
|
Total
|
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consideration
|
|
|
20,000
|
|
|
|
21,910
|
|
|
|
41,910
|
|
|
Cash disposed of
|
|
|
(924
|
)
|
|
|
(238
|
)
|
|
|
(1,162
|
)
|
|
Consideration paid
for through set-off
of payables
|
|
|
(20,000
|
)
|
|
|
(13,146
|
)
|
|
|
(33,146
|
)
|
|
Unpaid consideration
as at December 31,
2008
|
|
|
—
|
|
|
|
(8,764
|
)
|
|
|
(8,764
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash outflow
|
|
|
(924
|
)
|
|
|
(238
|
)
|
|
|
(1,162
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-22
QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
|
6
|
|
Accounts receivable, net
|
|
|
|
|
|
Accounts receivable, net consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
2008
|
|
|
|
RMB
|
|
RMB
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
423,993
|
|
|
|
468,325
|
|
|
|
68,644
|
|
|
Less: Allowance for doubtful accounts
|
|
|
(5,429
|
)
|
|
|
(6,043
|
)
|
|
|
(886
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
418,564
|
|
|
|
462,282
|
|
|
|
67,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the movement of the allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Old Basis
|
|
|
New Basis
|
|
|
|
January 1,
|
|
|
November
|
|
|
|
|
|
2006 to
|
|
|
30, 2006 to
|
|
|
|
|
|
November
|
|
|
December
|
|
Year ended December 31,
|
|
|
|
30, 2006
|
|
|
31, 2006
|
|
2007
|
|
2008
|
|
|
|
RMB
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
beginning of
period/year
|
|
|
2,640
|
|
|
|
|
2,046
|
|
|
|
2,045
|
|
|
|
5,429
|
|
|
|
796
|
|
|
Bad debt expense
|
|
|
—
|
|
|
|
|
—
|
|
|
|
3,384
|
|
|
|
1,277
|
|
|
|
187
|
|
|
Bad debt recovery
|
|
|
(594
|
)
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(595
|
)
|
|
|
(87
|
)
|
|
Bad debt write-off
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(68
|
)
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end
of period/year
|
|
|
2,046
|
|
|
|
|
2,045
|
|
|
|
5,429
|
|
|
|
6,043
|
|
|
|
886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Group has a credit policy in place and the exposure to credit risk is monitored on an
ongoing basis. Credit evaluations are performed on all customers requiring credit over a
certain amount. These receivables are due within 30 to 90 days from the date of billing.
Normally, the Group does not obtain collateral from customers.
|
|
|
|
7
|
|
Inventories
|
|
|
|
|
|
Inventories by category consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
2008
|
|
|
|
RMB
|
|
RMB
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
|
119,373
|
|
|
|
116,195
|
|
|
|
17,031
|
|
|
Finished goods
|
|
|
57,906
|
|
|
|
66,974
|
|
|
|
9,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
|
177,279
|
|
|
|
183,169
|
|
|
|
26,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories write-downs of RMB3,152, RMB46, RMB11,068 and RMB6,650 (US$975) were charged to
cost of goods sold during the period from January 1, 2006 through November 30, 2006, the
period from November 30, 2006 through December 31, 2006, and the years ended December 31, 2007
and 2008, respectively.
|
|
|
|
|
|
Inventories sold during the period from January 1, 2006 through November 30, 2006, the period
from November 30, 2006 through December 31, 2006, and the years ended December 31, 2007 and
2008, include recovery of previously written down inventory of
RMB16,033, nil, RMB266 and
RMB1,228 (US$180), respectively, as a result of the subsequent sale of such inventory at
amounts that were higher than the written down value.
|
F-23
QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
|
8
|
|
Property, machinery and equipment, net
|
|
|
|
|
|
Property, machinery and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
2008
|
|
|
|
RMB
|
|
RMB
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buildings and improvements
|
|
|
148,956
|
|
|
|
148,956
|
|
|
|
21,833
|
|
|
Machinery and equipment
|
|
|
32,915
|
|
|
|
32,554
|
|
|
|
4,772
|
|
|
Furniture and office equipment
|
|
|
1,948
|
|
|
|
2,407
|
|
|
|
353
|
|
|
Motor vehicles
|
|
|
1,728
|
|
|
|
3,483
|
|
|
|
510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property, machinery, and equipment
|
|
|
185,547
|
|
|
|
187,400
|
|
|
|
27,468
|
|
|
Less: accumulated depreciation
|
|
|
(10,078
|
)
|
|
|
(20,167
|
)
|
|
|
(2,956
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, machinery, and equipment, net
|
|
|
175,469
|
|
|
|
167,233
|
|
|
|
24,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All the Group’s property, machinery and equipment are located in the PRC.
|
|
|
|
|
|
Depreciation charge for each of the year/period was allocated to the following expenses items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Old Basis
|
|
|
New Basis
|
|
|
|
January 1,
|
|
|
November
|
|
|
|
|
|
2006 to
|
|
|
30, 2006 to
|
|
|
|
|
|
November
|
|
|
December
|
|
Year ended December 31,
|
|
|
|
30, 2006
|
|
|
31, 2006
|
|
2007
|
|
2008
|
|
|
|
RMB
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
3,584
|
|
|
|
|
344
|
|
|
|
9,192
|
|
|
|
10,134
|
|
|
|
1,485
|
|
|
Selling and distribution expenses
|
|
|
53
|
|
|
|
|
—
|
|
|
|
6
|
|
|
|
4
|
|
|
|
1
|
|
|
General and administrative
expenses
|
|
|
1,634
|
|
|
|
|
155
|
|
|
|
1,556
|
|
|
|
1,819
|
|
|
|
267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
5,271
|
|
|
|
|
499
|
|
|
|
10,754
|
|
|
|
11,957
|
|
|
|
1,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
Goodwill
|
|
|
|
|
|
On February 8, 2003, the Company completed the acquisition of its initial 65% equity interest
in CECT which resulted in the recognition of goodwill of RMB23,393 (“Old Basis”). Such
historical goodwill was subsequently adjusted to RMB18,714 to reflect the effects of the
application of push-down accounting on November 30, 2006 (“New Basis”). Goodwill also includes
RMB94,100, which arose from Xing’s acquisition of the remaining 20% interest in the Company,
which upon application of push-down accounting was recognized on the Company’s consolidated
financial statements (Note 3).
|
|
|
|
|
|
The impairment tests conducted by the Group on goodwill for the years ended December 31, 2006,
2007 and 2008 did not result in any impairment charges.
|
F-24
QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
|
10
|
|
Other intangible assets, net
|
|
|
|
|
|
Intangible assets, which arose from the acquisition of the Group’s initial 65% equity interest
in CECT on February 8, 2003, and from the push-down accounting adjustments on November 30,
2006 upon Xing’s acquisition of an additional 20% equity interest in the Company (as discussed
in Note 3), comprise the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
Gross
|
|
|
|
|
|
Other
|
|
|
|
carrying
|
|
Accumulated
|
|
intangibles
|
|
|
|
amount
|
|
amortization
|
|
assets, net
|
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
“CECT” brand
|
|
|
39,835
|
|
|
|
—
|
|
|
|
39,835
|
|
|
Customer relationships
|
|
|
5,418
|
|
|
|
(4,470
|
)
|
|
|
948
|
|
|
Completed technology
|
|
|
16,950
|
|
|
|
(10,866
|
)
|
|
|
6,084
|
|
|
Core technology
|
|
|
24,193
|
|
|
|
(10,455
|
)
|
|
|
13,738
|
|
|
Backlog
|
|
|
9,175
|
|
|
|
(9,175
|
)
|
|
|
—
|
|
|
Licenses
|
|
|
1,725
|
|
|
|
(1,602
|
)
|
|
|
123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
97,296
|
|
|
|
(36,568
|
)
|
|
|
60,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
carrying
|
|
Accumulated
|
|
Accumulated
|
|
|
|
|
|
amount
|
|
amortization
|
|
impairment
|
|
Other intangible assets, net
|
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
“CECT” brand
|
|
|
39,835
|
|
|
|
—
|
|
|
|
(26,235
|
)
|
|
|
13,600
|
|
|
|
1,993
|
|
|
Customer relationships
|
|
|
5,418
|
|
|
|
(5,118
|
)
|
|
|
—
|
|
|
|
300
|
|
|
|
44
|
|
|
Completed technology
|
|
|
16,950
|
|
|
|
(16,950
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Core technology
|
|
|
24,193
|
|
|
|
(15,327
|
)
|
|
|
—
|
|
|
|
8,866
|
|
|
|
1,300
|
|
|
Backlog
|
|
|
9,175
|
|
|
|
(9,175
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Licenses
|
|
|
1,725
|
|
|
|
(1,725
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
97,296
|
|
|
|
(48,295
|
)
|
|
|
(26,235
|
)
|
|
|
22,766
|
|
|
|
3,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of the “CECT” brand name was estimated using the Relief-from-Royalty Method, a
discounted cash flow approach which brings into play, in the case of CECT, a single set of
estimated cash flows and a discount rate commensurate with the risk. The cash flow
contribution from the brand name comes from savings in royalty that CECT would have to pay to
a third party for the use of its brand name if CECT had not had the right to use it but
nevertheless had wanted its products to have a recognized brand. The cash flow contribution
of the “CECT” brand name is linked to the cash inflow from the sales revenue of CECT. As
there is a lack of publicly available information about comparable licensing transactions in
the PRC suitable for the Group’s purpose, the royalty savings as a percentage of sales revenue
is estimated by comparing the operational profit margin as a percentage of sales revenue of
CECT with its superior “CECT” brand name with those of comparable companies in the PRC which
operate on an OEM sub-contractor basis or with an inferior brand. Also, marketing expense is
required to maintain the brand name for CECT. An average of marketing expense as a percentage
of sales revenue is taken from the statements of operations of CECT in the medium term
forecast. This percentage is then used to estimate cash outflow relating to marketing expense
in the cash flow forecast under the Relief-from-Royalty Method.
|
|
|
|
|
|
The impairment tests conducted by the Group on the “CECT” brand name for the years ended
December 31, 2006 and 2007 did not result in any impairment charges. For the year ended
December 31, 2008, due to the Group’s strategic shift to focus more on its high-end
VEVA-branded handsets, the Group recorded an impairment charge of RMB26,235 (US$3,845) on its
“CECT” brand name.
|
|
|
|
|
|
Amortization of other intangible assets is recognized on a straight-line basis over the
estimated useful lives. The expected future amortization expense is as follows:
|
|
|
|
|
|
|
|
|
|
RMB
|
|
|
|
|
|
|
|
Year ending December 31,
|
|
|
|
|
|
— 2009
|
|
|
4,733
|
|
|
— 2010
|
|
|
4,433
|
|
|
|
|
|
|
|
|
Total
|
|
|
9,166
|
|
|
|
|
|
|
|
F-25
QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
|
11
|
|
Short-term borrowings
|
|
|
|
|
|
Short-term borrowings consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
2008
|
|
|
|
RMB
|
|
RMB
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bills payable
|
|
|
197,335
|
|
|
|
39,850
|
|
|
|
5,841
|
|
|
Bank loans
|
|
|
786,569
|
|
|
|
904,100
|
|
|
|
132,517
|
|
|
Other borrowings, secured by bills receivable
|
|
|
—
|
|
|
|
40,000
|
|
|
|
5,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term borrowings
|
|
|
983,904
|
|
|
|
983,950
|
|
|
|
144,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bills payable represents bank borrowings with payment terms of not more than 180 days and are
non-interest bearing unless they become trust receipt loans which then bear interest at the
prevailing bank lending rates.
|
|
|
|
|
|
During each of the periods presented, the Group entered into various loan agreements with
commercial banks in the PRC at terms ranging from three months to one year. The weighted
average interest rate on bank loans outstanding as of December 31, 2007 and 2008 was 6.8% and
7.3%, respectively. The principal amounts of these short-term loans are repayable at the end
of the loan period, while the related interest expense of these short-term loans is payable on
a monthly or quarterly basis.
|
|
|
|
|
|
Short-term borrowings of RMB73,046 and RMB68,000 (US$9,967) as of December 31, 2007 and 2008,
respectively are subject to certain financial covenants relating to certain of the Group’s and
Xing’s tangible net worth, borrowing to tangible net worth plus minority interest, current
ratio, and interest to earnings before interest and taxes ratios. If the Group were to breach
the covenants, the drawn down facilities would become payable on demand. The Group was in
compliance with these financial covenants as of December 31, 2007 and 2008.
|
|
|
|
|
|
Short-term borrowings are secured by the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
2008
|
|
|
|
RMB
|
|
RMB
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pledged by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— Bank deposits
|
|
|
94,384
|
|
|
|
136,299
|
|
|
|
19,978
|
|
|
— Bills receivable
|
|
|
—
|
|
|
|
40,000
|
|
|
|
5,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantees provided by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— Qiao Xing Group Limited (“QXGL”)
|
|
|
160,000
|
|
|
|
160,000
|
|
|
|
23,452
|
|
|
— QXGL and directors of the Company
|
|
|
570,000
|
|
|
|
360,000
|
|
|
|
52,767
|
|
|
— Xing
|
|
|
338,006
|
|
|
|
336,000
|
|
|
|
49,249
|
|
|
— directors of the Company
|
|
|
—
|
|
|
|
218,500
|
|
|
|
32,026
|
|
F-26
QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
|
12
|
|
Convertible notes
|
|
|
|
|
|
Pursuant to a Securities Purchase Agreement and Registration Rights Agreement signed on May
15, 2008, the Company issued to two existing shareholders of the Company (the “Investors”)
US$70,000 of senior convertible notes (the “Notes”) that came with warrants to purchase
1,648,721 ordinary shares of the Company (the “Investor Warrants”). The consideration paid on
May 15, 2008 by the Investors for the Notes comprised a combination of 6,966,666 ordinary shares of the Company that were owned by the Investors, valued at approximately US$48,349
based on the closing market price of the Company’s ordinary shares on May 14, 2008, and cash
of US$21,651. All ordinary shares submitted by the Investors in exchange for the Notes were
cancelled. In addition, the Company also issued warrants to its placement agent to purchase
up to 942,127 ordinary shares of the Company at terms identical to the Investor Warrants (the
“Agent Warrants” and collectively with the Investor Warrants, the “Warrants”).
|
|
|
|
|
|
The material terms and conditions of the Notes are summarized as follows:
|
|
|
•
|
|
the Notes are unsecured and mature on May 15, 2011;
|
|
|
|
|
•
|
|
the Notes bear interest at a rate of 4.0% per annum, payable in cash in arrears on a
calendar semi-annual basis beginning June 30, 2008 and the default rate is 15%;
|
|
|
|
|
•
|
|
the Notes are convertible at the holders’ option into ordinary shares of the Company
at an initial conversion price of $7.43 per share. The conversion price is subject to
reset if the average of the daily volume weighted average price (“VWAP”) of the Company’s
ordinary shares for the five consecutive trading days ending on each three-month
anniversary of the issuance date of the Notes until maturity (each a “Reset Date”) is
less than $6.76. In that event, the conversion price is reset to a price equal to the
greater of US$4.05 or 92.5% of the arithmetic average of the daily VWAP of the Company’s
ordinary shares for the five trading days ending on the applicable Reset Date. The
conversion price of the Notes was reset to US$4.05 on November 15, 2008;
|
|
|
|
|
•
|
|
the Notes cannot be converted if, after giving effect to such conversion, the holders
of the Notes (together with their affiliates) would beneficially own in excess of 9.99%
of the Company’s ordinary shares outstanding immediately after giving effect to the
conversion;
|
|
|
|
|
•
|
|
the Notes require an automatic re-pricing of the conversion price if the Company make
certain sales of its ordinary shares or ordinary share equivalents in a capital-raising
transaction at a price below the conversion price;
|
|
|
|
|
•
|
|
the holders of the Notes have the right to require the Company to redeem the Notes at
any time on or after the 18 month anniversary of the issuance date of the Notes in an
amount equal to the sum of (a) the outstanding principal of the Notes, and (b) the
accrued and unpaid interest thereon. Accordingly, the Notes were classified as current
liabilities on the consolidated balance sheet as of December 31, 2008;
|
|
|
|
|
•
|
|
in the event of a default, change of control and certain other fundamental
transactions, the holders of the Notes have the right to require the Company to redeem
all or any portion of the Notes at a price equal to the greater of (i) the amount to be
redeemed multiplied by a redemption premium of 125% and (ii) the amount to be redeemed
multiplied by the quotient determined by dividing the closing bid price of the Company’s
ordinary shares on the date immediately preceding such event by the conversion price of
the Notes;
|
|
|
|
|
•
|
|
all principal, interest, late charges and other amounts due under the Notes that are
payable in cash shall be settled in U.S. dollars in an amount equal to the applicable
U.S. dollar cash payment due under the terms of the Notes multiplied by 6.99 and divided
by the exchange rate of one U.S. dollar to RMB on the date such payment is due; and
|
|
|
|
|
•
|
|
the Company is required under the terms of the Registration Rights Agreement to file
with the Securities and Exchange Commission (“SEC”) a registration statement to register
the ordinary shares issuable upon the conversion of the Notes and the exercise of the
Warrants to permit the resale of such ordinary shares to the public. The registration
statement was filed by the Company on June 27, 2008 and was declared effective by the SEC
on July 11, 2008.
|
|
|
|
The material terms and conditions of the Warrants are summarized as follows:
|
|
|
•
|
|
the initial exercise price of each Warrant is $8.91 per share, subject to adjustments
as provided for in the Warrant;
|
|
|
|
|
•
|
|
the Warrants are exercisable at any time during a period of five years from May 15,
2008;
|
F-27
QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
|
12
|
|
Convertible notes (continued)
|
|
|
•
|
|
the Warrants contain a “cashless exercise” feature if the registration statement
covering the shares underlying the Warrants is not available for the resale upon the
exercise of the Warrants;
|
|
|
|
|
•
|
|
the Warrants contain certain limitations on the exercise thereof in the event that the
holder would beneficially own in excess of 9.99% of the Company’s ordinary shares
outstanding immediately after giving effect to such exercise; and
|
|
|
|
|
•
|
|
the Warrants require an automatic re-pricing of the exercise price if the Company
makes certain sales of its ordinary shares or ordinary share equivalents in a
capital-raising transaction at a price below the exercise price of the Warrants.
|
|
|
|
The Notes included on the consolidated balance sheet as of December 31, 2008 are analyzed as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RMB
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
Gross proceeds
|
|
|
489,601
|
|
|
|
71,763
|
|
|
Discount on notes:
|
|
|
|
|
|
|
|
|
|
— Equity-classified Investor Warrants
|
|
|
(36,062
|
)
|
|
|
(5,286
|
)
|
|
— Liability-classified embedded derivatives
|
|
|
(304,037
|
)
|
|
|
(44,564
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Value of debt component at date of issue
|
|
|
149,502
|
|
|
|
21,913
|
|
|
Foreign currency realignment
|
|
|
7,484
|
|
|
|
1,097
|
|
|
Accretion of discount
|
|
|
70,512
|
|
|
|
10,335
|
|
|
Partial conversion of Notes into ordinary shares
|
|
|
(21,287
|
)
|
|
|
(3,120
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net value at end of year
|
|
|
206,211
|
|
|
|
30,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The terms and features of the Investor Warrants were evaluated under the guidance set forth in
EITF Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to a Company’s
Own Stock” and the Company concluded that all indicators for equity classification provided in
EITF Issue No. 00-19 were present.
|
|
|
|
|
|
Pursuant to APB Opinion No. 14, “Accounting for Convertible Debt and Debt Issued with Stock
Purchase Warrants,” the gross proceeds from the issuance of the Notes were allocated to the
Investors Warrants and the Notes on a relative fair value basis. The fair value of the
Investors Warrants applied for the purposes of the aforementioned allocation was estimated
using a multi-period binomial option pricing model on the grant date of the warrants and
amounted to approximately RMB59,415 (US$8,709). As a result of the allocation, approximately
RMB36,062 (US$5,286) of the gross proceeds from the issuance of the Notes was allocated to the
value of the Investor Warrants, which was recorded as a discount to the face value of the
Notes and credited to additional paid-in capital.
|
|
|
|
|
|
The Notes are a form of hybrid instrument that comes with embedded derivatives, including the
right to convert the Notes into ordinary shares of the Company by the note holders, a put
option conditional upon certain events of default and a put option conditional upon a change
of control. In accordance with the guidance of SFAS No. 133, as amended, “Accounting for
Derivative Instruments and Hedging Activities,” and EITF Issue No. 00-19, the embedded
derivatives must be removed from the debt host and accounted for separately as derivative
instruments. Based on EITF No. 00-19, the embedded derivatives were determined to be
classified as liabilities on the balance sheet. The value of the embedded compound
derivatives on the date of initial recognition has been deducted as a discount to the face
value of the Notes and recorded as a liability on the balance sheet. Subsequent to initial
recognition, the liability-classified embedded derivatives are marked-to-market at the end of
each reporting period with the resulting gain or loss recognized in the consolidated statement
of operations. The valuation of the embedded derivatives at each period-end is derived from
various valuation methods which uses significant unobservable inputs (Level 3), including
Monte Carlo Simulation and Backward Dynamic Programming.
|
F-28
QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
|
12
|
|
Convertible notes (continued)
|
|
|
|
|
|
The embedded derivative liability included on the consolidated balance sheet as of December
31, 2008 is analyzed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RMB
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
Value on initial recognition
|
|
|
304,037
|
|
|
|
44,564
|
|
|
Foreign currency realignment
|
|
|
(6,551
|
)
|
|
|
(961
|
)
|
|
Gain on remeasurement included in earnings
|
|
|
(144,939
|
)
|
|
|
(21,244
|
)
|
|
Settled on conversion of Notes
|
|
|
(28,417
|
)
|
|
|
(4,165
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net value at end of year
|
|
|
124,130
|
|
|
|
18,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on remeasurement for the period
include in earnings attributable to the
change in unrealized gain of liabilities
still outstanding at end of year
|
|
|
(138,206
|
)
|
|
|
(20,257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The discount arising from the Investors Warrants and the embedded derivatives is accreted to
interest expense to the first put date of the Notes using the effective interest method.
|
|
|
|
|
|
Costs associated with the issuance of the Notes, which have been classified as deferred debt
issuance costs on the consolidated balance sheet, are analyzed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RMB
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
Amount attributed to Agent Warrants
|
|
|
31,451
|
|
|
|
4,610
|
|
|
Other cash costs
|
|
|
20,887
|
|
|
|
3,061
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred debt issuance costs on initial recognition
|
|
|
52,338
|
|
|
|
7,671
|
|
|
Foreign currency realignment
|
|
|
(1,198
|
)
|
|
|
(176
|
)
|
|
Amortization
|
|
|
(10,851
|
)
|
|
|
(1,590
|
)
|
|
Written-off on conversion of Notes
|
|
|
(5,600
|
)
|
|
|
(821
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net value at end of year
|
|
|
34,689
|
|
|
|
5,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of the Agent Warrants on the grant date, which was estimated using a
multi-period binomial option pricing model, amounted to approximately RMB33,951 (US$4,976). Of
this amount, RMB31,451 (US$4,610) was debited to deferred debt issuance costs as cost
associated with the issuance of the Notes and while the balance of
RMB2,500 (US$366) was
debited to additional paid-in capital as cost associated with the issuance of the Investor
Warrants.
|
|
|
|
|
|
The deferred debt issuance costs are amortized to expense to the first put date of the Notes
using the effective interest method.
|
|
|
|
|
|
On August 19, 2008, the holders of the Notes exercised the option to convert US$8,251 of the
principal amount of the Notes and accrued interest thereon of US$46
into 1,511,397 ordinary shares of the Company at a conversion price of US$5.49 per share. The extinguishment of the
convertible debts that arose from the conversion resulted in a loss of RMB10,634 (US$1,559)
computed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RMB
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of ordinary shares issued (@ US$5.31 per share)
|
|
|
55,054
|
|
|
|
8,069
|
|
|
(Less) add: Carrying amount of:
|
|
|
|
|
|
|
|
|
|
— Notes
|
|
|
(21,287
|
)
|
|
|
(3,120
|
)
|
|
— Accrued interest
|
|
|
(316
|
)
|
|
|
(46
|
)
|
|
— Embedded derivatives
|
|
|
(28,417
|
)
|
|
|
(4,165
|
)
|
|
— Deferred debt issuance costs
|
|
|
5,600
|
|
|
|
821
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on extinguishment of convertible debts
|
|
|
10,634
|
|
|
|
1,559
|
|
|
|
|
|
|
|
|
|
|
|
F-29
QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
|
|
|
The Group has one operating segment — CECT, the operating subsidiary in the PRC. The results
of CECT used by the management to evaluate business performance are based on U.S. GAAP and
those accounting policies are consistent with those used in the preparation of the
consolidated financial statements.
|
|
|
|
|
|
Segment income is determined based on income before income tax expense, minority interests and
extraordinary items and further excludes amortization of other intangible assets, impairment
of other intangible assets, in-process research and development, impairment of equity
investment, fair value adjustments on inventories, property, machinery and equipment, land use
rights, and income (loss) before income tax expense of the Company. Segment assets consist of
total assets of CECT excluding goodwill, other intangible assets, fair value adjustments on
property, machinery and equipment, land use rights, and other assets held by the Company.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Old Basis
|
|
|
New Basis
|
|
|
|
January 1,
|
|
|
November
|
|
|
|
|
|
2006 to
|
|
|
30, 2006 to
|
|
|
|
|
|
November
|
|
|
December
|
|
Year ended December 31,
|
|
|
|
30, 2006
|
|
|
31, 2006
|
|
2007
|
|
2008
|
|
|
|
RMB
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— Sales of mobile phones
and accessories
|
|
|
2,239,458
|
|
|
|
|
254,546
|
|
|
|
3,113,756
|
|
|
|
2,140,346
|
|
|
|
313,719
|
|
|
— Services and other revenues
|
|
|
41,740
|
|
|
|
|
1,467
|
|
|
|
27,338
|
|
|
|
13,527
|
|
|
|
1,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment and
consolidated revenue
|
|
|
2,281,198
|
|
|
|
|
256,013
|
|
|
|
3,141,094
|
|
|
|
2,153,873
|
|
|
|
315,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income
|
|
|
377,723
|
|
|
|
|
32,320
|
|
|
|
746,618
|
|
|
|
606,853
|
|
|
|
88,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets
|
|
|
1,927,111
|
|
|
|
|
2,136,120
|
|
|
|
3,492,959
|
|
|
|
4,327,502
|
|
|
|
634,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
5,320
|
|
|
|
|
631
|
|
|
|
10,619
|
|
|
|
22,758
|
|
|
|
3,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(27,115
|
)
|
|
|
|
(2,213
|
)
|
|
|
(47,034
|
)
|
|
|
(72,562
|
)
|
|
|
(10,636
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(6,677
|
)
|
|
|
|
(630
|
)
|
|
|
(12,504
|
)
|
|
|
(13,898
|
)
|
|
|
(2,037
|
)
|
F-30
QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
|
|
|
|
|
13
|
|
Segment information (continued)
|
|
|
|
A reconciliation of segment income to consolidated income (loss) before income tax expense,
minority interests and extraordinary items for the period from January 1, 2006 through
November 30, 2006, the period from November 30, 2006 through December 31, 2006 and the years
ended December 31, 2007 and 2008, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Old Basis
|
|
|
New Basis
|
|
|
|
January 1,
|
|
|
November
|
|
|
|
|
|
2006 to
|
|
|
30, 2006 to
|
|
|
|
|
|
November
|
|
|
December
|
|
Year ended December 31,
|
|
|
|
30, 2006
|
|
|
31, 2006
|
|
2007
|
|
2008
|
|
|
|
RMB
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income — CECT
|
|
|
377,723
|
|
|
|
|
32,320
|
|
|
|
746,618
|
|
|
|
606,853
|
|
|
|
88,949
|
|
|
In-process research
and development
|
|
|
—
|
|
|
|
|
(41,739
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Amortization of other
intangible assets
|
|
|
(10,890
|
)
|
|
|
|
(4,288
|
)
|
|
|
(32,280
|
)
|
|
|
(11,727
|
)
|
|
|
(1,719
|
)
|
|
Impairment of other
intangible assets
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(26,235
|
)
|
|
|
(3,845
|
)
|
|
Fair value adjustment
on property,
machinery and
equipment
|
|
|
1,406
|
|
|
|
|
131
|
|
|
|
1,750
|
|
|
|
1,941
|
|
|
|
285
|
|
|
Fair value adjustment
on inventories
|
|
|
—
|
|
|
|
|
(1,053
|
)
|
|
|
(502
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Fair value adjustment
on land use rights
|
|
|
—
|
|
|
|
|
—
|
|
|
|
13
|
|
|
|
26
|
|
|
|
4
|
|
|
Income (loss) before
income tax expense of
the Company
|
|
|
3,368
|
|
|
|
|
1,194
|
|
|
|
(4,348
|
)
|
|
|
24,564
|
|
|
|
3,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated earnings
(loss) before income
tax expense, minority
interests, and
extraordinary items
|
|
|
371,607
|
|
|
|
|
(13,435
|
)
|
|
|
711,251
|
|
|
|
595,422
|
|
|
|
87,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of segment assets to consolidated total assets as of December 31, 2007 and
2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
2008
|
|
|
|
RMB
|
|
RMB
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment assets — CECT
|
|
|
3,492,959
|
|
|
|
4,327,502
|
|
|
|
634,299
|
|
|
— Goodwill
|
|
|
112,814
|
|
|
|
112,814
|
|
|
|
16,536
|
|
|
— Other intangible assets, net
|
|
|
60,728
|
|
|
|
22,766
|
|
|
|
3,337
|
|
|
— Property, machinery and equipment, net
|
|
|
(14,042
|
)
|
|
|
(12,101
|
)
|
|
|
(1,774
|
)
|
|
— Land use rights
|
|
|
(1,169
|
)
|
|
|
(1,144
|
)
|
|
|
(168
|
)
|
|
— Assets held by the Company
|
|
|
342,812
|
|
|
|
73,083
|
|
|
|
10,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
3,994,102
|
|
|
|
4,522,920
|
|
|
|
662,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-31
QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
|
|
|
The Company and its subsidiaries are subject to income tax on an entity basis on income
arising in or derived from the tax jurisdictions in which they operate.
|
|
|
|
|
|
The Company was incorporated under the International Business Companies Act of the BVI and,
accordingly, is exempt from BVI income taxes.
|
|
|
|
|
|
Substantially all of the Group’s income before income tax expense, minority interests, and
extraordinary items is generated in the PRC by CECT. Prior to January 1, 2008, CECT was
regarded as a “high-tech enterprise” by the PRC government and was granted a preferential PRC
enterprise income tax rate of 15%. Further, CECT was granted a tax holiday from the PRC
enterprise income tax for the period from May 22, 2000 to December 31, 2002, and was entitled
to a 7.5% PRC enterprise income tax rate from January 1, 2003 through December 31, 2005.
Prior to January 1, 2008, the branch of CECT at Huizhou, the PRC, is subject to the PRC
enterprise income tax at a rate of 24% as the branch is regarded as a manufacturing entity
located at the coastal zone.
|
|
|
|
|
|
On March 16, 2007, the Fifth Plenary Session of the Tenth National People’s Congress passed
the Enterprise Income Tax Law of the PRC (the “New Tax Law”) which took effect on January 1,
2008. Under the New Tax Law, effective January 1, 2008, the applicable enterprise income tax
rates in the PRC was revised to 25%. However, certain qualifying high-technology enterprises
will be entitled to a reduced enterprise income tax rate of 15% if they are recognized and
obtain the approval as a “qualifying high-technology enterprise” under the New Tax Law.
|
|
|
|
|
|
Under the New Tax Law and before obtaining any “qualifying high-technology enterprise” status,
CECT, including its Huizhou branch, is subject to the enterprise income tax rate of 25%
commencing from the year beginning January 1, 2008. The deferred tax assets and liabilities
of CECT are measured using the enacted tax rate of 25% that is expected to apply in the years
in which those temporary differences are expected to be recovered or settled. In the event
that CECT is subsequently granted the “qualifying high-technology enterprise” status under the
New Tax Law, adjustments will be made to the deferred tax balance of CECT in the year that
such status is obtained.
|
|
|
|
|
|
The new Tax Law also imposes a 10% withholding income tax for dividends distributed by a
foreign invested enterprise to its immediate holding company outside China for distribution of
earnings generated after January 1, 2008. Under the New Tax Law, the distribution of earnings
generated prior to January 1, 2008 is exempt from the withholding tax. In addition, as CECT
will not be distributing its earnings for the year ended December 31, 2008 to the Company, no
deferred tax liability has been recognized for the undistributed earnings of CECT through
December 31, 2008.
|
|
|
|
|
|
Income tax expense consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Old Basis
|
|
|
New Basis
|
|
|
|
January 1,
|
|
|
November
|
|
|
|
|
|
2006 to
|
|
|
30, 2006 to
|
|
|
|
|
|
November
|
|
|
December
|
|
Year ended December 31,
|
|
|
|
30, 2006
|
|
|
31, 2006
|
|
2007
|
|
2008
|
|
|
|
RMB
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current expense
|
|
|
55,731
|
|
|
|
|
4,718
|
|
|
|
119,614
|
|
|
|
162,267
|
|
|
|
23,784
|
|
|
Deferred expense (benefit)
|
|
|
260
|
|
|
|
|
(467
|
)
|
|
|
(6,237
|
)
|
|
|
(6,550
|
)
|
|
|
(960
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
|
55,991
|
|
|
|
|
4,251
|
|
|
|
113,377
|
|
|
|
155,717
|
|
|
|
22,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-32
QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
|
|
|
|
|
14
|
|
Income taxes (continued)
|
|
|
|
Substantially all of the taxable income of the Group is generated by CECT, the Group’s
subsidiary located in the PRC that is subject to the PRC enterprise income tax. A
reconciliation of the expected income tax expense (based on the PRC statutory income tax
rate) to the actual income tax expense is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Old Basis
|
|
|
New Basis
|
|
|
|
January 1,
|
|
|
November
|
|
|
|
|
|
2006 to
|
|
|
30, 2006 to
|
|
|
|
|
|
November
|
|
|
December
|
|
Year ended December 31,
|
|
|
|
30, 2006
|
|
|
31, 2006
|
|
2007
|
|
2008
|
|
|
|
RMB
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected tax based on PRC
statutory income tax rate
at 25% (33% for periods
prior to 2008)
|
|
|
122,630
|
|
|
|
|
(4,434
|
)
|
|
|
234,713
|
|
|
|
148,855
|
|
|
|
21,818
|
|
|
Tax effect of preferential
tax rates
|
|
|
(67,160
|
)
|
|
|
|
(4,753
|
)
|
|
|
(134,627
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Tax rate differential of
the Company
|
|
|
(2,274
|
)
|
|
|
|
(394
|
)
|
|
|
2,189
|
|
|
|
(5,972
|
)
|
|
|
(875
|
)
|
|
Non-deductible expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— In-process research
and development
|
|
|
—
|
|
|
|
|
13,775
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
— Advertising expenses
|
|
|
1,239
|
|
|
|
|
54
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
— Share-based
compensation expenses
|
|
|
149
|
|
|
|
|
—
|
|
|
|
10,037
|
|
|
|
3,667
|
|
|
|
537
|
|
|
— Other
|
|
|
1,407
|
|
|
|
|
3
|
|
|
|
1,065
|
|
|
|
9,257
|
|
|
|
1,357
|
|
|
Non-taxable income
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(90
|
)
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual income tax expense
|
|
|
55,991
|
|
|
|
|
4,251
|
|
|
|
113,377
|
|
|
|
155,717
|
|
|
|
22,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax assets and liabilities reflect the net tax effect of temporary
differences between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of those
amounts shown on the consolidated balance sheets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
2008
|
|
|
|
RMB
|
|
RMB
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax losses carried forward
|
|
|
—
|
|
|
|
1,288
|
|
|
|
189
|
|
|
Allowance for doubtful accounts
|
|
|
868
|
|
|
|
1,033
|
|
|
|
151
|
|
|
Inventory write-off’s
|
|
|
3,602
|
|
|
|
3,919
|
|
|
|
574
|
|
|
Accrued product warranties
|
|
|
1,215
|
|
|
|
754
|
|
|
|
111
|
|
|
Property, machinery and equipment, net
|
|
|
3,268
|
|
|
|
2,821
|
|
|
|
414
|
|
|
Land use rights
|
|
|
281
|
|
|
|
275
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
9,234
|
|
|
|
10,090
|
|
|
|
1,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liability:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other intangible assets, net
|
|
|
(9,110
|
)
|
|
|
(3,416
|
)
|
|
|
(501
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
|
124
|
|
|
|
6,674
|
|
|
|
978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-33
QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
|
|
|
|
|
14
|
|
Income taxes (continued)
|
|
|
|
In assessing the realizability of deferred income tax assets, management considers whether it
is more likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in making this assessment.
|
|
|
|
|
|
Based upon the level of historical taxable income and projections for future taxable income
over the periods in which the deferred tax assets are deductible, management believes that it
is more likely than not that the Group will realize the benefits of the deductible
differences as of December 31, 2007 and 2008. The amount of the deferred tax assets
considered realizable, however, could be reduced in the near term if estimates of future
taxable income are reduced.
|
|
|
|
|
|
As of December 31, 2007 and 2008, the Group has no material unrecognized tax benefit which
would favorably affect the effective income tax rate in future periods and does not believe
that there will be any significant increases or decreases of unrecognized tax benefits within
the next twelve months. No interest or penalties relating to income tax matters have been
imposed on the Group during the year ended December 31, 2006, 2007 and 2008, and no provision
for interest and penalties is deemed necessary as of December 31, 2007 and 2008.
|
|
|
|
|
|
According to the PRC Tax Administration and Collection Law, the statute of limitations is
three years if the underpayment of taxes is due to computational errors made by the taxpayer
or its withholding agent. The statute of limitations extends to five years under special
circumstances, which are not clearly defined. In the case of a related party transaction, the
statute of limitation is ten years. There is no statute of limitation in the case of tax
evasion.
|
|
|
|
|
|
15
|
|
Distribution of income
|
|
|
|
For the period from January 1, 2006 through November 30, 2006, the period from November 30,
2006 through December 31, 2006, and the years ended December 31, 2007 and 2008, substantially
all of the Group’s income was contributed by CECT. Income of CECT, as determined under
generally accepted accounting principles in the PRC (the “PRC GAAP”), is distributable after
transfer to dedicated statutory reserve funds, namely, the general reserve, the enterprise
expansion fund, and the staff welfare and bonus fund, pursuant to the laws applicable to
Foreign Investment Enterprises in the PRC and the Company’s articles of association. These
reserve funds can only be used for specific purposes and are not distributable as cash
dividends. Under the relevant regulations, CECT is required to transfer at least 10% of its
annual PRC GAAP income to the general reserve until such reserve reaches 50% of its
registered capital.
|
|
|
|
|
|
Transfers to the enterprise expansion fund and the staff welfare and bonus fund are at the
discretion of the board of directors of CECT. For the period from January 1, 2006 through
November 30, 2006, the period from November 30, 2006 through December 31, 2006, and the years
ended December 31, 2007 and 2008, CECT made transfers to the general reserve of approximately
nil, RMB29,118, RMB65,796 and RMB46,429 (US$6,805), respectively. The board of directors
of CECT did not recommend any transfers to the enterprise expansion fund and the staff
welfare and bonus fund for the period from January 1, 2006 through November 30, 2006, the
period from November 30, 2006 through December 31, 2006 and the years ended December 31, 2007
and 2008. The accumulated balance of statutory reserve funds maintained at CECT as of
December 31, 2007 and 2008 were RMB137,126 and RMB183,555 (US$26,904), respectively.
|
F-34
QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
|
|
|
|
|
16
|
|
Earnings (loss) per share
|
|
|
|
The following represents a reconciliation from basic earnings (loss) per share to diluted
earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Old Basis
|
|
|
New Basis
|
|
|
|
January 1,
|
|
|
November
|
|
|
|
|
|
2006 to
|
|
|
30, 2006 to
|
|
|
|
|
|
November
|
|
|
December
|
|
Year ended December 31,
|
|
|
|
30, 2006
|
|
|
31, 2006
|
|
2007
|
|
2008
|
|
|
|
RMB
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before
extraordinary items
|
|
|
288,356
|
|
|
|
|
(19,485
|
)
|
|
|
564,800
|
|
|
|
423,804
|
|
|
|
62,119
|
|
|
Amount allocated to
participating convertible
notes
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(53,889
|
)
|
|
|
(7,899
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before
extraordinary items
available to ordinary
shareholders
|
|
|
288,356
|
|
|
|
|
(19,485
|
)
|
|
|
564,800
|
|
|
|
369,915
|
|
|
|
54,220
|
|
|
Extraordinary items
|
|
|
17,796
|
|
|
|
|
—
|
|
|
|
28,689
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss)
after extraordinary items
available to ordinary
shareholders
|
|
|
306,152
|
|
|
|
|
(19,485
|
)
|
|
|
593,489
|
|
|
|
369,915
|
|
|
|
54,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before
extraordinary items
available to common
stockholders
|
|
|
288,356
|
|
|
|
|
(19,485
|
)
|
|
|
564,800
|
|
|
|
369,915
|
|
|
|
54,220
|
|
|
Net income allocated to
participating convertible
notes
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
53,889
|
|
|
|
7,899
|
|
|
Interest on convertible notes
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
92,944
|
|
|
|
13,623
|
|
|
Exchange loss on revaluation
of convertible notes
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11,471
|
|
|
|
1,681
|
|
|
Loss on extinguishment of
convertible notes
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,634
|
|
|
|
1,559
|
|
|
Gain on remeasurement of
derivatives embedded in
convertible notes
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(144,939
|
)
|
|
|
(21,244
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fully diluted net income
(loss) before extraordinary
items
|
|
|
288,356
|
|
|
|
|
(19,485
|
)
|
|
|
564,800
|
|
|
|
393,914
|
|
|
|
57,738
|
|
|
Extraordinary items
|
|
|
17,796
|
|
|
|
|
—
|
|
|
|
28,689
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fully diluted net income
(loss) after extraordinary
items
|
|
|
306,152
|
|
|
|
|
(19,485
|
)
|
|
|
593,489
|
|
|
|
393,914
|
|
|
|
57,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ordinary
shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
40,000,000
|
|
|
|
|
40,000,000
|
|
|
|
48,322,000
|
|
|
|
49,216,000
|
|
|
|
49,216,000
|
|
|
Effect of dilutive ordinary
share equivalents
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,170,000
|
|
|
|
7,170,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
40,000,000
|
|
|
|
|
40,000,000
|
|
|
|
48,322,000
|
|
|
|
56,386,000
|
|
|
|
56,386,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per
common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before extraordinary items
|
|
|
7.21
|
|
|
|
|
(0.49
|
)
|
|
|
11.69
|
|
|
|
7.52
|
|
|
|
1.10
|
|
|
Extraordinary items
|
|
|
0.44
|
|
|
|
|
—
|
|
|
|
0.59
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After extraordinary items
|
|
|
7.65
|
|
|
|
|
(0.49
|
)
|
|
|
12.28
|
|
|
|
7.52
|
|
|
|
1.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings(loss) per
common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before extraordinary items
|
|
|
7.21
|
|
|
|
|
(0.49
|
)
|
|
|
11.69
|
|
|
|
6.99
|
|
|
|
1.02
|
|
|
Extraordinary items
|
|
|
0.44
|
|
|
|
|
—
|
|
|
|
0.59
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After extraordinary items
|
|
|
7.65
|
|
|
|
|
(0.49
|
)
|
|
|
12.28
|
|
|
|
6.99
|
|
|
|
1.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-35
QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
|
|
|
There were no ordinary share equivalents outstanding during the period from January 1, 2006
through November 30, 2006 and the period from November 30, 2006 through December 31, 2006.
Ordinary share equivalents outstanding during the year ended December 31, 2007, which consist
of share options issued pursuant to the Company’s stock option plan, were anti-dilutive and
accordingly, were excluded from the calculation of diluted earnings per share for the year
ended December 31, 2007. Except for the convertible notes issued in May 2008, all other
ordinary share equivalents outstanding during the year ended December 31, 2008, including
share options and warrants, were anti-dilutive and accordingly, were excluded from the
calculation of diluted earnings per share for the year ended December 31, 2008.
|
|
|
|
Pursuant to a shareholders’ resolution of the Company passed on January 8, 2007, the par
value of the Company’s shares was reduced to nil and the Company was authorized to issue an
unlimited number of ordinary shares. As a result, the Company’s additional paid-in capital
account as of January 8, 2007 of approximately RMB308,283, which relates to the proceeds from
issuance of ordinary shares in prior periods, was transferred to and became part of the
Company’s ordinary share capital.
|
|
|
|
|
|
On April 13, 2007, the Company’s Board of Directors and Xing approved and executed a
40-for-one split of the Company’s ordinary shares. All shares and per share amounts
presented in the accompanying consolidated financial statements have been presented on a
retroactive basis to reflect the effect of the share split.
|
|
|
|
|
|
On May 8, 2007, the Company issued 12,500,000 new ordinary shares at US$12 per share in
connection with its IPO on the NYSE. The net proceeds from the IPO, after deduction of
related expenses, amounted to approximately RMB1,021,219 (US$139,997).
|
|
|
|
|
|
On January 7, 2008, the Company issued 565,000 new ordinary shares at US$7.50 per share upon
the exercise of share options granted to a director and certain of the Company’s employees.
|
|
|
|
|
|
On May 15, 2008, the Company repurchased 6,966,666 of its issued ordinary shares at US$6.94
per share from two existing shareholders of the Company through the issuance of the Notes
discussed in note 12 to the consolidated financial statements. All ordinary shares
repurchased were subsequently cancelled.
|
|
|
|
|
|
On August 19, 2008, the holders of the Notes exercised the option to convert US$8,251 of the
principal amount of the Notes and accrued interest thereon of US$46
into 1,511,397 ordinary shares of the Company at a conversion price of US$5.49 per share. The stock price of the
Company’s ordinary shares was US$5.31 at the date of exercise of the option to convert.
|
|
|
|
|
|
18
|
|
Share options and warrants
|
|
(a)
|
|
Xing 2005 Stock Plan
|
|
|
|
|
|
On December 2, 2005, the shareholders of Xing approved and adopted the 2005 Stock
Compensation Plan of Xing (the “Xing 2005 Stock Plan”), which allows for the issuance of
either incentive stock options and or non-qualified stock options to certain directors,
employees and external advisors of Xing and its subsidiary companies. A total of 2,000,000
common shares were authorized and reserved for issuance under the Xing 2005 Stock Plan as of
December 31, 2005.
|
|
|
|
|
|
On February 24, 2006, pursuant to the Xing 2005 Stock Plan, Xing granted a total of 2,000,000
share options, of which 120,000 share options were granted to a director and 1,880,000 share
options were granted to certain employees of the Group, as compensation for services rendered
by them to the Group. The fair value of these options was estimated at the date of grant to
be US$3.6495 each by using the Black-Scholes option pricing model. These options, each of
which gives the holder the right to subscribe for one ordinary share of Xing at an exercise
price of US$7.00, vested immediately and were exercisable within a period of ten years from
the date of grant. The options granted are not exercisable into ordinary share of the
Company. The Group recorded share-based compensation expense of RMB3,522, being the fair
value of the options at the date of grant as computed using the Black-Scholes option pricing
model, in the period from January 1, 2006 through November 30, 2006 and a corresponding
credit to additional paid-in capital. No other options were granted to the directors or the
employees of the Group pursuant to the Xing 2005 Stock Plan for the period from November 30,
2006 to December 31, 2006 or for the years ended December 31, 2007 and 2008.
|
F-36
QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
|
|
|
|
|
18
|
|
Share options and warrants (continued)
|
|
(b)
|
|
QXMC 2007 Stock Plan
|
|
|
|
|
|
Pursuant to a shareholders’ resolution passed on March 19, 2007, the Company adopted an equity
incentive plan (the “QXMC 2007 Stock Plan”) under which the Company may grant incentive stock
options, nonstatutory stock options, restricted stock, stock appreciation rights, restricted
stock units, performance units, performance shares and other stock based awards to certain
qualifying directors, employees and consultants of the Group in accordance with the provisions
of the QXMC 2007 Stock Plan.
|
|
|
|
|
|
On March 19, 2007, the Company granted stock options to a director and various employees of
the Group to purchase 2,716,520 shares of the Company’s ordinary shares at an exercise price
of US$7.50 per share. The options granted have terms ranging from 2 to 6 years from the date
of grant and vest on various dates commencing from November 1, 2007.
|
|
|
|
|
|
The weighted-average fair value of the share options on the date of grant was US$5.23 per
share option, which was estimated by management using the Black-Scholes option pricing based
on the following assumptions:
|
|
|
|
|
|
|
|
Fair value of underlying ordinary shares on grant date
|
|
US$
|
10.43
|
|
|
Expected share price volatility
|
|
|
47.50
|
%
|
|
Expected dividend yield
|
|
|
0.0
|
%
|
|
Expected term (in years)
|
|
|
3.5
|
|
|
Risk-free interest rate
|
|
|
5.0
|
%
|
|
|
|
The estimated fair value of the Company’s underlying shares on the date of grant was
determined by management considering the valuation performed by American Appraisal China
Limited, an unrelated independent valuation firm. Because the Company did not have a trading
history at the time the options were issued, the weighted average expected volatility of
47.50% was estimated based on the average volatility of several comparable listed companies in
the telecommunication equipment sector. The risk-free rate for periods within the contractual
life of the options is based on the market yield of U.S. dollar China International Government
Bonds in effect at the time of grant. The expected dividend yield was based on historical
dividends. The expected term was estimated based on the average vesting and contractual terms
as the Company does not have sufficient data on which to estimate the expected future
exercises of the option granted. Changes in these subjective input assumptions could
materially affect the fair value estimates.
|
|
|
|
|
|
The Company recognizes compensation cost based on the grant date fair value over the period
that the employees are required to provide services in exchange for the award. The amount of
share-based compensation expense recognized for the options was approximately US$5,119
(RMB38,626) and US$2,111 (RMB14,668) during the years ended December 31, 2007 and 2008,
respectively. Of the expense recognized in 2007, 1% was charged to selling and distribution
expenses, 94% to general and administrative expenses and 5% to research and development
expenses. Of the expense recognized in 2008, 2% was charged to selling and distribution
expenses, 83% to general and administrative expenses and 15% to research and development
expenses. As of December 31, 2008, the total unrecognized compensation cost related to
unvested share options amounted to US$6,378, which is expected to be recognized over a
remaining weighted average vesting periods of 3.3 years.
|
|
|
|
|
|
In addition, on March 19, 2007, in consideration of services rendered in connection with the
Company’s IPO, the Company also granted an option to a consultant to purchase up to 1,200,000
shares of the Company’s common stock at an exercise price of US$18 per share with a term of
four years commencing from the grant date. The option vested on April 1, 2007 and will expire
on March 18, 2011. The estimated fair value of the option, which amounted to approximately
RMB12,859 (US$1,763) as computed using the Black-Scholes option-pricing model on the grant
date, was credited to additional paid-in capital and included as ordinary shares issuance
costs during the year ended December 31, 2007.
|
|
|
|
|
|
The fair value of the share options on the date of grant was US$1.385 per share option which
was estimated by management using the Black-Scholes option pricing based on the following
assumptions:
|
|
|
|
|
|
|
|
Fair value of underlying ordinary shares on grant date
|
|
US$
|
10.43
|
|
|
Expected share price volatility
|
|
|
48.90
|
%
|
|
Expected dividend yield
|
|
|
0.0
|
%
|
|
Expected term (in years)
|
|
|
2.0
|
|
|
Risk-free interest rate
|
|
|
5.1
|
%
|
F-37
QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
|
|
|
|
|
18
|
|
Share options and warrants (continued)
|
|
(b)
|
|
QXMC 2007 Stock Plan (continued)
|
|
|
|
|
|
Stock option activity of the Company during the year ended December 31, 2008 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
average
|
|
average
|
|
|
|
|
|
|
|
|
|
exercise
|
|
remaining
|
|
Aggregate
|
|
|
|
Number of
|
|
price
|
|
contractual
|
|
intrinsic
|
|
|
|
options
|
|
per share
|
|
term
|
|
value
|
|
|
|
|
|
|
|
US$
|
|
|
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2008
|
|
|
3,916,520
|
|
|
|
10.72
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(565,000
|
)
|
|
|
7.50
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(140,000
|
)
|
|
|
7.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
|
3,211,520
|
|
|
|
11.42
|
|
|
3.1 years
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest as of
December 31, 2008
|
|
|
3,211,520
|
|
|
|
11.42
|
|
|
3.1 years
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of December 31, 2008
|
|
|
1,847,680
|
|
|
|
14.32
|
|
|
2.3 years
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c)
|
|
Warrants
|
|
|
|
|
|
The Company did not have any outstanding warrants during the period from January 1, 2006
through November 30, 2006, the period from November 30, 2006 through December 31, 2006, and
the year ended December 31, 2007. Warrants outstanding during the year ended December 31,
2008 relates to the Warrants issued in connection with the issuance of the Notes discussed in
note 12 to the consolidated financial statements. Information about the warrants outstanding
as of December 31, 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
Weighted
|
|
|
|
|
|
|
|
average
|
|
average
|
|
|
|
|
|
|
|
exercise
|
|
remaining
|
|
|
|
Number of
|
|
price
|
|
contractual
|
|
|
|
warrants
|
|
per share
|
|
term
|
|
|
|
|
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investor Warrants
|
|
|
1,648,721
|
|
|
|
8.91
|
|
|
4.4 years
|
|
Agent Warrants
|
|
|
942,127
|
|
|
|
8.91
|
|
|
4.4 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,590,848
|
|
|
|
8.91
|
|
|
4.4 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of December 31, 2008
|
|
|
2,590,848
|
|
|
|
8.91
|
|
|
4.4 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of the Warrants on the date of grant was US$5.15 per warrant, which was
estimated by management using a multi-period binomial option pricing model based on the
following assumptions:
|
|
|
|
|
|
|
|
Stock price of underlying ordinary share on grant date
|
|
US$7.45
|
|
|
Risk-free interest rate
|
|
|
4.3
|
%
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
Expected term
|
|
5 years
|
|
|
Expected stock price volatility
|
|
|
65.38
|
%
|
F-38
QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
|
|
|
|
|
19
|
|
Fair value of financial instruments
|
|
|
|
The carrying amounts for cash, restricted cash, accounts receivable, bills receivable,
prepayments to suppliers, prepaid expenses and other current assets, short-term borrowings,
accounts payable, prepayments from customers, accrued liabilities, amounts due from related
parties, and other payables and current liabilities, approximate their fair values because of
the short maturity of these instruments.
|
|
|
|
|
|
The carrying amount and the estimated fair value of the Group’s convertible notes at December
31, 2008 was RMB206,211 (US$30,225) and RMB357,621 (US$52,418), respectively. The
liability-classified embedded derivatives relating to the convertible notes are measured at
fair value at the end of each reporting period (see note 12).
|
|
|
|
|
|
20
|
|
Commitments and contingencies
|
|
(a)
|
|
Operating lease commitments
|
|
|
|
|
|
The Group has operating lease agreements for office and factory premises which extend through
December 2010. As of December 31, 2008, the Group’s future minimum lease payments required
under non-cancellable operating leases are as follows:
|
|
|
|
|
|
|
|
|
|
RMB
|
|
|
|
|
|
|
|
Year ending December 31,
|
|
|
|
|
|
— 2009
|
|
|
4,362
|
|
|
— 2010
|
|
|
3,456
|
|
|
|
|
|
|
|
|
Total
|
|
|
7,818
|
|
|
|
|
|
|
|
|
|
|
Lease expenses of the Group for the period from January 1, 2006 through November 30, 2006, the
period from November 30, 2006 through December 31, 2006, and the years ended December 31, 2007
and 2008 were approximately, RMB3,347, RMB323, RMB4,560 and RMB4,998 (US$733), respectively.
|
|
(b)
|
|
Guarantees
|
|
|
|
|
|
The Group had provided guarantees to banks in respect of borrowings granted to QXCI to the
extent of RMB150,000 as of December 31, 2007 and 2008. Such borrowings were utilized by QXCI
to the extent of RMB107,550 and RMB105,655 (US$15,486) as of December 31, 2007 and 2008,
respectively.
|
|
|
|
|
|
21
|
|
Related party transactions
|
|
(a)
|
|
Name and relationship of related parties
|
|
|
|
|
|
Name of related party
|
|
Existing relationship with the Company
|
|
|
|
|
|
Qiao Xing Universal Telephone, Inc. (“Xing”)
|
|
Parent company
|
|
|
|
|
|
Huizhou Qiao Xing Communication Industry
Ltd. (“QXCI”)
|
|
Subsidiary of Xing
|
|
|
|
|
|
Qiao Xing Group Limited (“QXGL”)
|
|
A company controlled by certain directors of the
Company
|
|
(b)
|
|
Summary of related party transactions
|
|
|
(i)
|
|
During the period from January 1, 2006 through November 30, 2006, the Group sold
mobile phones and accessories to QXCI, a subsidiary of Xing, in the ordinary course of
its business at similar terms as the Group traded with its independent customers,
amounting to RMB1,377.
|
|
|
|
|
(ii)
|
|
During the period from January 1, 2006 through November 30, 2006, the period from
November 30, 2006 through December 31, 2006, and the years ended December 31, 2007 and
2008, the Group received processing fee income from QXCI for handset processing services
rendered, amounting to RMB2,709, RMB859, RMB13,314 and RMB6,573 (US$963), respectively.
|
F-39
QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
|
|
|
|
|
21
|
|
Related party transactions (continued)
|
|
(b)
|
|
Summary of related party transactions (continued)
|
|
|
(iii)
|
|
The Company provided guarantee in respect of US$40,000 of senior convertible notes
issued by Xing to two strategic investors in June 2006. Immediately prior to the listing
of the Company’s ordinary shares on the NYSE on May 3, 2007, the two strategic investors
converted the US$40,000 convertible notes into 7,800,000 ordinary shares of the Company
that were then owned by Xing.
|
|
|
|
The Group also participates in a cash management arrangement at the direction and discretion
of Xing as further described below. Other transactions with related parties are set out in
other Notes to the consolidated financial statements.
|
|
(c)
|
|
Summary of related party balances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
2008
|
|
|
|
RMB
|
|
RMB
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount due to Xing
|
|
|
(4,532
|
)
|
|
|
(11,155
|
)
|
|
|
(1,635
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount represents non-interest bearing net advances to and from Xing which are unsecured
and have no fixed repayment terms. The amount resulted principally from the Group’s
participation in a cash management arrangement at the direction and discretion of Xing (Note
2(c)) and represents the netting of the following advances to and from the related parties of
Xing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
2008
|
|
|
|
RMB
|
|
RMB
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts due (to) from related parties before
execution of netting arrangement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— Xing
|
|
|
(54,848
|
)
|
|
|
(14,047
|
)
|
|
|
(2,059
|
)
|
|
— QXGL
|
|
|
(1,914
|
)
|
|
|
(4,364
|
)
|
|
|
(640
|
)
|
|
— Director: Wu Zhi Yang
|
|
|
(737
|
)
|
|
|
(147
|
)
|
|
|
(21
|
)
|
|
— QXCI
|
|
|
52,967
|
|
|
|
7,403
|
|
|
|
1,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net advances from Xing
|
|
|
(4,532
|
)
|
|
|
(11,155
|
)
|
|
|
(1,635
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
On March 5, 2009, CECT incorporated a wholly-owned subsidiary, Beijing VEVA Technology Co.,
Ltd. (“BVT”), in the PRC to engage in the sale of mobile phones and accessories. The
registered and paid-up capital of BVT was RMB50,000.
|
|
|
|
(b)
|
|
On March 31, 2009, Xing and Mr. Wu Ruilin, the chairman of Xing and vice chairman of the
Company, entered into agreements to purchase the outstanding Notes of the Company of
approximately US$61,749 from the three holders of the Notes, DKR SoundShore Oasis Holding Fund
Ltd., CEDAR DKR Holding Fund Ltd. and Chestnut Fund Ltd. (collectively, the “Sellers”). Under
the terms of the agreements, Xing agreed to purchase US$30,000 of the outstanding Notes for an
aggregate purchase price of US$24,000, payable in three installments to the Sellers on or
before the close of business, New York time, on May 1, 2009. Mr. Wu Ruilin agreed to purchase
the remaining Notes for an aggregate purchase price of US$26 million, payable in full to the
Sellers on or before the close of business, New York time, on August 31, 2009.
|
F-40
Qiao Xing Mobile Communication Co., Ltd. Ordinary Shares (NYSE:QXM)
Historical Stock Chart
From Aug 2024 to Sep 2024
Qiao Xing Mobile Communication Co., Ltd. Ordinary Shares (NYSE:QXM)
Historical Stock Chart
From Sep 2023 to Sep 2024
