UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(Mark One)
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REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR (G) OF THE SECURITIES EXCHANGE ACT OF 1934
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OR
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2009.
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
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OR
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SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
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Date of event requiring this shell company report
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Commission file number: 000-51242
CHINA TECHFAITH WIRELESS COMMUNICATION TECHNOLOGY LIMITED
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrants name into English)
Cayman Islands
(Jurisdiction of incorporation or organization)
Building 1, No. 13, YongChang North Road
Beijing Economic-Technological Development Area (Yi Zhuang)
Beijing 100176
Peoples Republic of China
(Address of principal executive offices)
Jay Ji
Director of Investor Relations
China Techfaith Wireless Communication Technology Limited
Building 1, No. 13, YongChang North Road
Beijing Economic-Technological Development Area (Yi Zhuang)
Beijing 100176
Peoples Republic of China
Phone: +86 10 5822 8390
Email: Jay.ji@techfaith.cn
(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
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Title of each class
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Name of each exchange on which registered
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Ordinary shares, par value US$0.00002 per share*
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The NASDAQ Stock Market LLC
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(The NASDAQ Global Market)
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*
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Not for trading, but only in connection with the listing on The NASDAQ Global Market of
American depositary shares, each representing 15 ordinary shares.
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Securities registered or to be registered pursuant to Section 12(g) of the Act.
NONE
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
NONE
(Title of Class)
Indicate the number of outstanding shares of each of the issuers classes of capital or common
stock as of the close of the period covered by the annual report: 650,156,045 ordinary shares, par
value US$0.00002 per share.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes
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No
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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
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No
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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
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No
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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
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No
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Indicate by check mark which basis of accounting the registrant has used to prepare the
financial statements included in this filing:
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US GAAP
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International Financial Reporting Standards as issued by
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Other
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the International Accounting Standards Board
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If Other has been checked in response to the previous question, indicate by check mark which
financial statement item the registrant has elected to follow. Item 17
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Item 18
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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
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No
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(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be
filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes
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No
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INTRODUCTION
In this annual report, unless otherwise indicated,
China or PRC refers to the Peoples Republic of China, and solely for the purpose
of this annual report, excludes Taiwan, Hong Kong and Macau; and
Glomate refers to Glomate Mobile (Beijing) Co., Ltd., our 51% owned subsidiary in
China;
One Net refers to One Net Entertainment Limited (formerly known as Techfaith
Interactive Technology (Beijing) Limited, and before then, Techfaith Wireless Communication
Technology (Beijing) Limited II and Beijing Centel Technology R&D Co., Ltd.),our wholly owned
subsidiary in China;
QIGI Technology refers to QIGI&BODEE Technology (Beijing) Co., Ltd., our variable
interest entity in China;
RMB refers to Renminbi, the legal currency of China, and $, dollars, US$ and
U.S. dollars refer to the legal currency of the United States;
shares or ordinary shares refers to our ordinary shares and ADSs refers to our
American depositary shares, each of which represents 15 ordinary shares;
Techfaith China refers to Techfaith Wireless Communication Technology (Beijing)
Limited (formerly known as Beijing Techfaith R&D Co., Ltd.), our wholly owned subsidiary in China;
Techfaith Hangzhou refers to Techfaith Wireless Communication Technology (Hangzhou)
Limited, our wholly owned subsidiary in China;
Techfaith Intelligent Handset Beijing refers to Techfaith Intelligent Handset
Technology (Beijing) Limited, our wholly owned subsidiary in China;
Techfaith Interactive refers to Beijing Techfaith Interactive Internet Technology
Limited, our variable interest entity in China;
Techfaith Shanghai refers to Techfaith Wireless Communication Technology (Shanghai)
Limited (formerly known as Leadtech Communication Technology (Shanghai) Limited), our wholly owned
subsidiary in China;
Techfaith Shenzhen refers to Techfaith Wireless Communication Technology (Shenzhen)
Limited, our wholly owned subsidiary in China;
TechSoft refers to Techfaith Software (China) Limited, a wholly owned subsidiary,
located in China, of Techfaith Software (China) Holding Limited, our 70% owned joint venture with
QUALCOMM Incorporated in the Cayman Islands; and
we, us, our company, our and Techfaith refer to China Techfaith Wireless
Communication Technology Limited, its subsidiaries and variable interest entities.
We and certain selling shareholders of our company completed the initial public offering of
8,726,957 ADSs, each representing 15 of our ordinary shares, par value US$0.00002 per share, in May
2005. On May 5, 2005, we listed our ADSs on the NASDAQ Global Market, or NASDAQ, under the
symbol CNTF.
1
PART I
ITEM 1.
Identity of Directors, Senior Management and Advisers
Not Applicable.
ITEM 2.
Offer Statistics and Expected Timetable
Not Applicable.
ITEM 3.
Key Information
A.
Selected Financial Data
The following tables set forth our selected consolidated financial information. You should
read the following information in conjunction with Item 5. Operating and Financial Review and
Prospects. The selected consolidated statement of operations data for the years ended December 31,
2007, 2008 and 2009 and the selected consolidated balance sheet data as of December 31, 2008 and
2009 have been derived from our audited consolidated financial statements and should be read in
conjunction with those statements, which are included in this annual report beginning on page F-1.
The selected consolidated statement of operations data for the years ended December 31, 2005 and
2006 and the selected consolidated balance sheet data as of December 31, 2005, 2006 and 2007 have
been derived from our audited consolidated financial statements that are not included in this
annual report.
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For the Year Ended December 31,
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2005
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2006
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2007
(1)
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2008
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2009
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(In thousands, except share, per share and per ADS data)
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Consolidated Statement of Operations Data
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Net revenues
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$
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90,110
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$
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80,804
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$
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143,444
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$
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208,850
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$
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211,076
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Gross profit
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55,049
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25,699
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38,649
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41,165
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38,211
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Operating expenses
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(14,290
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(40,728
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(47,440
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(40,125
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(24,881
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Government subsidy income
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180
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1,734
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3,081
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481
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Other operating income
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2,443
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Income (Loss) from operations
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40,759
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(14,849
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(7,057
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6,564
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13,811
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Equity in loss of an affiliate
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(393
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(851
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Net income (loss)
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42,854
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(10,208
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(3,621
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7,349
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4,974
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Less: Net income (loss) attributable to
noncontrolling interest
(2)
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(1,469
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1,808
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1,200
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652
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1,363
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Net income (loss) attributable
to Techfaith
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$
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41,385
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$
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(8,793
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$
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(3,272
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$
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8,001
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$
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6,337
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Earnings per share:
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Net income (loss) per share attributable
to Techfaith
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Basic
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$
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0.07
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$
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(0.01
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$
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(0.01
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$
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0.01
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$
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0.01
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Diluted
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$
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0.07
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$
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(0.01
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$
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(0.01
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$
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0.01
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$
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0.01
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Shares used in per share computation
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Basic
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604,011,009
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656,255,882
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649,807,421
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649,972,306
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650,057,866
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Diluted
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626,626,671
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656,255,882
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649,807,421
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650,062,312
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720,889,120
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2
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As of December 31,
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2005
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2006
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2007
(1)
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2008
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2009
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(In thousands)
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Consolidated Balance Sheet
Data
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Cash and cash equivalents
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$
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137,207
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$
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113,172
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$
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84,754
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$
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78,926
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130,544
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Accounts receivable
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34,060
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37,229
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40,014
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37,804
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28,992
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Inventories
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4,974
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8,546
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50,763
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37,763
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22,937
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Total assets
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194,163
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207,714
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234,861
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220,064
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250,667
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Total current liabilities
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15,335
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37,123
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60,739
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28,248
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28,700
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Total non-current liabilities
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15,441
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Number of ordinary shares issued
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658,183,409
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649,692,954
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649,913,136
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650,034,590
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650,156,045
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Treasury stock
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8,655,000
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8,655,000
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918,000
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Total liabilities and equity
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194,163
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207,714
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234,861
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220,064
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250,667
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(1)
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We adopted authoritative guidance on accounting for uncertainty in income taxes on January 1,
2007, prospectively.
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(2)
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We adopted authoritative guidance on noncontrolling interests in consolidated financial
statements on January 1, 2009, retrospectively.
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B.
Capitalization and Indebtedness
Not Applicable.
C.
Reasons for the Offer and Use of Proceeds
Not Applicable.
3
D.
Risk Factors
Risks Related to Our Business
Our limited operating history makes evaluating our business and prospects difficult.
We commenced operations in July 2002 and completed our first mobile handset design project in
September 2003. We started selling completed handsets in 2006 and such product sales constituted
97.6% of our total net revenues in 2009. We started to develop our online and mobile game business
in 2008 and it constitutes less than 1.0% of our total revenues in 2009, but we expect it to become
an increasingly significant contributor to our total net revenues beginning in 2010. We have a
limited operating history, especially in the game business, which may not provide a meaningful
basis for evaluating our business, financial performance and prospects. We may not have sufficient
experience to address the risks frequently encountered by early stage companies, including our
potential inability to:
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achieve and maintain our profitability and margins;
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acquire and retain customers;
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attract, train and retain qualified personnel;
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maintain adequate control over our costs and expenses;
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keep up with evolving industry standards and market developments; or
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respond to competitive and changing market conditions.
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If we are unsuccessful in addressing any of these risks, our business may be materially and
adversely affected.
If we do not succeed in our expansions into new businesses, our future results of operations and
growth prospects may be materially and adversely affected.
As part of our growth strategy, we enter into new businesses from time to time, including
the branded mobile phone business and the game business, to generate additional revenue streams.
Expansions into new businesses may present operating and marketing challenges that are different
from those that we currently encounter. For each new business into which we enter, we face
competition from existing leading players in that business. If we cannot successfully address the
new challenges and compete effectively against the existing leading players in each new business,
we may not be able to develop a sufficiently large customer and user base, recover costs incurred
for developing and marketing new businesses, and eventually achieve profitability from these
businesses, and our future results of operations and growth prospects may be materially and
adversely affected.
The slow-down of economic growth in China and the global economic downturn have adversely affected
our business, and may materially and adversely affect our business growth and profitability.
Our business and operations are primarily based in China and the majority of our revenues are
derived from our operations in China. Accordingly, our financial results have been, and are
expected to continue to be, affected by the economy and the mobile handset and mobile and online
game industries in China. Although the economy in China has grown significantly in the past
decades, any slow-down of economic growth in China could reduce
expenditures for mobile handsets and mobile and online games, which in turn may adversely
affect our operating results and financial condition.
4
The global financial markets have experienced significant disruptions since 2008, and most of
the worlds major economies have entered into recession. Chinas economy has recently recovered
after a significant slowdown that began in the second half of 2008, but it is uncertain whether
such recovery will continue into the rest of 2010 and beyond. In addition, to cope with the global
economic downturn, we undertook a human resource restructuring throughout 2008. Under this plan,
we streamlined business processes to improve efficiency. As a result, the number of our employees
was reduced from 1,363 as of December 31, 2007 to 522 as of December 31, 2008. As of December 31,
2009, we had 518 employees. There is no assurance that we can continue to effectively meet market
demand with our current restructured work force. If we cannot timely and effectively meet market
demand with our restructured work force, our business may be materially and adversely affected.
Any persistent slow-down in Chinas economy or the recurrence of any financial disruptions may
materially and adversely affect our business, operating results and financial condition in a number
of ways. For example, the weakness in the economy could erode consumer confidence which, in turn,
could result in changes to consumer spending patterns relating to mobile handset and gaming
products and services. If consumer demand for products and services we offer decreases, our
revenues may decline. Furthermore, the recent financial turmoil affecting the financial markets and
banking system may significantly restrict our ability to obtain financing in the capital markets or
from financial institutions on commercially reasonable terms, or at all. Although we are uncertain
about the extent to which the recent global financial and economic crisis and slow-down of the
Chinese economy may impact our business in the short term and long term, there is a risk that our
business, results of operations and prospects would be materially and adversely affected by the
continuing global economic downturn and the slow-down of the Chinese economy.
If we cannot keep up with industry standards and design or offer for sale new mobile handset models
in a timely and cost-efficient manner to meet customer demand, our business will be materially and
adversely affected.
The mobile handset market is characterized by changing end-user preferences and demand for new
and advanced functions and applications on mobile handsets, rapid product obsolescence and price
erosion, intense competition, evolving industry standards and wide fluctuations in product supply
and demand. If we cannot design or offer for sale new mobile handset models in a timely and
cost-efficient manner to meet our customers demand, our business will be materially and adversely
affected.
As the market for 2.75G and third-generation, or 3G, mobile handsets continues to develop, our
existing and potential customers may increasingly demand 2.75G and 3G mobile handsets. Since 2006,
we have begun to design 2.75G, 3G and 3.5G mobile handsets. We have received orders for 3G and
3.5G mobile handset designs and in 2007 we launched the WCDMA/GSM dual mode dual standby phone. In
2009, we launched motion sensor gaming mobile devices and TV phones. During 2009 we have also
received increased sales orders from our customers for the above products. However, we cannot
assure you that there will be sufficient customer demand for such phones in the future. Further, we
cannot assure you that we will be able to successfully meet our customers demand with respect to
cost, quality and time to completion. Our failure to meet customer demand could hurt our reputation
and affect our business and results of operation.
If our customers fail to achieve success in their business, our business and results of operations
may be materially and adversely affected.
If any of our major customers is unsuccessful in its mobile handset sales, whether due to lack
of market acceptance of its products, shortage of component supplies, slowdown of replacement sales
of mobile handsets or otherwise, the customer may downsize or discontinue its mobile handset
business, which in turn could adversely affect our business in mobile handset design services and
product sales. Accordingly, our success depends on our customers success in their business. Our
largest customer in 2007, 2008 and 2009 contributed approximately 11.0%, 12.3% and 14.1%,
respectively, of our net revenues, and our largest three customers in 2007, 2008 and 2009
contributed approximately 25.0%, 28.8% and 34.2% of our net revenues, respectively. We are
not certain whether our customers will be able to achieve success in their business and how long
they will remain competitive in their business even if initially successful. If any of these
customers experiences financial difficulty or is otherwise unable to achieve success in its own
business, our business and results of operations may be materially and adversely affected.
5
We may cease to be profitable and experience net losses in the future.
Although we had recorded net income in 2008 and 2009, a net loss was recorded in 2006 and
2007. We cannot assure you that our return to profitability will continue in the future. We
continue to cut down our operating expenses in proportion to our sales to control cost, but any
decrease or delay in generating additional revenues could materially and adversely affect our
results of operations and lead to substantial operating losses as the operating expenses might not
decrease to the same extent that revenues decline. In addition, competition from other independent
mobile handset design service providers and original design manufacturers may exert downward
pressure on our prices. If we do not achieve profitability or otherwise meet the expectations of
securities analysts and investors, the market price of our ADSs will likely decline.
We are exposed to the inventory risk and the credit risk of our customers.
As our product sales constitute the majority of our revenues, we are correspondingly exposed
to inventory risks. Although we arrange with our electronics manufacturing services, or EMS,
providers for product manufacturing according to the sales orders we receive, we nevertheless need
to order some raw material and components in advance of assigning them to the EMS providers and to
build inventory in advance of customers orders to balance the longer lead time for components and
shorter delivery time requested by our customers. Because demand for our products is affected by a
number of factors, including competition and general economic conditions, there is a risk that we
may forecast customer demand incorrectly and order from third parties excess or insufficient
inventories of particular products.
In addition, credit risk of our customers may arise from events or circumstances beyond our
control. For instance, an economic downturn may cause our customers to default under the product
sales contracts with us and expose us to the risk that our customers may refuse to buy from us the
number of mobile handsets specified in their purchase orders or may not be able to pay us timely or
at all in accordance with the sales contracts. Even if we may sometimes be able to retain as
penalties the partial prepayments or deposits received from such defaulting customers, this might
not be sufficient to offset the resulting loss of profits and the increased cost of unsold
inventory. If our customers default in paying us, we would have to make provisions for doubtful
debts or incur bad debt write-offs and our business would be materially and adversely affected.
We are dependent on our suppliers and EMS providers for timely manufacturing and delivery of the
products sold to our customers.
We rely on our suppliers for procuring the raw materials and components required for the
manufacturing of the mobile handsets that we sell to our customers. As we do not have our own
manufacturing facilities, we rely on EMS providers for assembling and manufacturing these products.
If these suppliers or EMS providers fail to deliver their goods or services to us in a timely
manner, our ability to deliver the finished products to our customers on a timely basis will be
affected. If we fail to maintain our relationships with existing suppliers or EMS providers or fail
to find new suppliers or EMS providers on competitive terms, our business operations and financial
results may be materially and adversely affected.
6
The mobile handset market in China is highly competitive, and we cannot assure you that we will be
able to compete successfully against our competitors.
The mobile handset market in China is intensely competitive and highly fragmented. We face
current and potential competition from established suppliers of wireless communications solutions
to mobile device manufacturers. These competitors include original design manufacturers such as
Arima Communications, BenQ Corp., Compal Communications and Longcheer Holdings Limited.
We also face competitors who outsource the manufacturing to EMS providers as they, like us, do
not own the manufacturing facility. For this group of competitors, the outsourcing of the
manufacturing process allows lower operating costs and reduced capital investments and other fixed
costs. This in turn results in the low barriers of entry, and accordingly an increasing number of
new players may enter this market in the near future.
Many of our current and potential competitors have significantly greater financial, technical,
marketing, sales and other resources than we do. We cannot assure you that we will be able to
compete successfully against our current or future competitors.
We face the risks of uncertainties regarding the growth of the mobile and online games business and
market acceptance of our mobile and online games and in-game items.
The mobile and online games business, our newly developing business area, is a relatively new
and evolving industry and concept. The growth of the mobile and online games business and the
level of demand and market acceptance of our mobile and online games are subject to a high degree
of uncertainty. In spite of the significant resources we have devoted to this new business, our
future operating results with respect to mobile and online games will depend on numerous factors
beyond our control, including:
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the growth in mobile handset use, personal computer use, Internet use and broadband
users and mobile and online games penetration in China and other markets in which we
offer our mobile and online games, and the rate of any such growth;
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whether the mobile and online games business, particularly in China, continues to
grow and the rate of any such growth;
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general economic conditions, particularly economic conditions adversely affecting
discretionary consumer spending;
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the availability and popularity of other forms of entertainment;
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changes in consumer demographics and public tastes and preferences;
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the popularity and price of new mobile and online games and in-game items that our
competitors launch and distribute; and
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market acceptance of our newly designed games.
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Our ability to plan for product development and distribution and promotional activities will
be significantly affected by our ability to anticipate and adapt to relatively rapid changes in
consumer tastes and preferences. Currently, for instance, massive multiplayer online role-playing
games, or MMORPGs, are popular in China. However, there is no assurance that MMORPGs will continue
to be popular in China or elsewhere. A decline in the popularity of online games in general, or of
the MMORPGs that we offer, will likely adversely affect our business and prospects. There is no
assurance that we would able to track and respond to these changes in consumer preferences in a
timely and effective manner.
7
Our strategy to acquire or invest in complementary businesses and assets and establish strategic
alliances involves significant risk and uncertainty that may prevent us from achieving our
objectives and harm our financial condition and results of operations.
As part of our plan to expand our product and service offerings, we have made and intend to
make strategic acquisitions or investments in the highly fragmented mobile handset and mobile and
online game industries in China. Our strategic acquisitions and investments could subject us to
uncertainties and risks, including:
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high acquisition and financing costs;
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potential ongoing financial obligations and unforeseen or hidden liabilities;
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failure to achieve our intended objectives, benefits or revenue-enhancing opportunities;
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cost of, and difficulties in, integrating acquired businesses and managing a larger business;
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potential claims or litigation regarding our boards exercise of its duty of care and other
duties required under applicable law in connection with any of our significant acquisitions
or investments approved by the board; and
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diversion of our resources and management attention.
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Our failure to address these uncertainties and risks may have a material adverse effect on our
financial condition and results of operations. In addition, we establish strategic alliances with
various third parties to further our business purpose from time to time. Strategic alliances with
third parties could subject us to a number of risks, including risks associated with sharing
proprietary information, non-performance by the counter-party, and an increase in expenses incurred
in establishing new strategic alliances, any of which may materially and adversely affect our
business.
Our business depends substantially on the continued use of certain intellectual property rights,
and any termination of or infringement upon such rights may harm our business and competitive
position.
Our business depends substantially on the use of certain intellectual property rights. For
example, we are dependent on QUALCOMM Incorporated, or QUALCOMM, for CDMA- and WCDMA-related
technology we use in designing, manufacturing and selling CDMA- and WCDMA-based mobile handsets.
Suspension or termination of our CDMA and WCDMA license agreement by QUALCOMM could adversely
affect our business and prospects, because we may not be able to obtain alternative licenses in a
timely manner to meet our customers demands.
We rely on a combination of patent, trademark, trade secret laws and copyrights, as well as
nondisclosure agreements and other methods to protect our intellectual property rights.
Implementation of PRC intellectual property-related laws has historically been lacking, primarily
because of ambiguities in the 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. Policing unauthorized use of proprietary technology is difficult and
expensive, and the steps we have taken to protect our intellectual property may be inadequate to
prevent the misappropriation of our proprietary technology. Reverse engineering, unauthorized
copying or other misappropriation of our proprietary technologies could enable third parties to
benefit from our technologies without paying us, which could harm our business and competitive
position. Although we are not currently involved in any litigation, we may need to resort to court
action to enforce our intellectual property rights. Litigation relating to our intellectual
property might result in substantial costs and diversion of resources and management attention. See
Risks Related to Doing Business in China Uncertainties with respect to the PRC legal system
could adversely affect us.
8
We may face intellectual property infringement and other claims that could be time-consuming and
costly to defend and result in our loss of significant rights.
Other parties may assert intellectual property infringement and other claims against us.
Litigation is expensive and time-consuming and could divert managements attention from our
business. If there is a successful claim of infringement, we may be required to pay substantial
damages to the party claiming infringement, develop alternate non-infringing technology or enter
into royalty or license agreements that may not be available on acceptable terms, if at all. Our
failure to develop non-infringing technologies or license the proprietary rights on a timely basis
would harm our business. Parties asserting infringement claims may be able to obtain an injunction,
which could prevent us from providing our services or using technology that contains the allegedly
infringing intellectual property. While currently we do not have any on-going infringement claims
against us, we had in the past been, and may in the future be, subject to claims by other parties
alleging infringements of their intellectual property rights by our products. To resolve such
claims, we may be required to pay licensing fees to third parties, which could adversely affect our
financial condition. Any such claims against us could have a material adverse effect on our
business, operating results or financial condition.
Our business depends substantially on the continuing efforts of our senior executives, and our
business may be severely disrupted if we lose their services.
Our future success depends heavily upon the continued services of our senior executives,
especially our Chairman and Chief Executive Officer, Mr. Defu Dong. We rely on the experience of
our senior executives in mobile handset design and manufacturing, business operations and selling
and marketing and on their relationships with our customers. We do not maintain key-man life
insurance for any of our key executives. If one or more of our key executives are unable or
unwilling to continue in their present positions, we may not be able to replace them easily or at
all. Therefore, our business may be severely disrupted, and we may incur additional expenses to
recruit and retain new officers.
Several executives of our company, including Mr. Defu Dong, have been involved in litigation,
arbitration or administrative proceedings in the past. Although we are not aware of any pending
claims against us or our executives, any future litigation or administrative proceedings involving
any of our key executives may result in diversion of management attention away from our business,
or damage to our reputation. In addition, if any of our executives joins a competitor or forms a
competing company, we may lose our customers. If any disputes arise between our executive officers
and us, we cannot assure you the extent to which our rights could be enforced in China, where these
executive officers reside and hold most of their assets, in light of the uncertainties with PRC
legal system. See Risks Related to Doing Business in China Uncertainties with respect to the
PRC legal system could adversely affect us.
We may incur losses due to business interruptions resulting from the occurrence of adverse public
events such as outbreak of epidemics, acts of terrorism, fires and natural catastrophes such as
earthquakes.
In April 2009, influenza A, or H1N1, a new strain of flu virus, was discovered in North
America and quickly spread to other parts of the world, including China. In June 2009, the World
Health Organization formally declared a H1N1 pandemic. Any prolonged recurrence of an H1N1, avian
flu or SARS epidemic or other adverse public health developments in China may lead to, among other
events, quarantines or closures of our offices which could severely disrupt our operations or the
sickness or death of our key officers and employees, and a general slowdown in the Chinese economy.
Any of the foregoing events or other unforeseen consequences of public health problems could
adversely affect our business and results of operations. We have not adopted any written preventive
measures or contingency plans to combat any future outbreak of H1N1 influenza, avian flu, SARS or
any other epidemic.
9
In addition, acts of terrorism, fires or natural disasters such as earthquakes that affect
where our principal offices are located or other locations where we have substantial business
operations, may lead to significant loss of revenue by disrupting our business operations and may
also materially and adversely affect our business.
Failure to maintain effective internal controls could have a material and adverse effect on the
trading price of our ADSs.
We are subject to the reporting obligations under the U.S. securities laws. The Securities and
Exchange Commission, or the SEC, as required under Section 404 of the Sarbanes-Oxley Act of 2002,
has adopted rules requiring public companies to include a report of management on the effectiveness
of such companies internal control over financial reporting in each of their annual reports. In
addition, an independent registered public accounting firm must attest to and report on the
effectiveness of each public companys internal controls over financial reporting. These
requirements apply to this annual report on Form 20-F.
Our management has concluded that our internal control over financial reporting was effective
as of December 31, 2009. See Item 15. Controls and Procedures. However, we cannot assure you
that we will be able to maintain the effective internal controls in the future, and if we fail to
maintain effective internal controls in the future, our management and our independent registered
public accounting firm may not be able to conclude that we have effective internal controls over
financial reporting in accordance with the Sarbanes-Oxley Act of 2002. This could in turn result
in the loss of investor confidence in the reliability of our financial statements and negatively
impact the trading price of our ADSs. Furthermore, we have incurred and anticipate that we will
continue to incur considerable costs, management time and other resources in an effort to comply
with Section 404 and other requirements of the Sarbanes-Oxley Act of 2002.
We are subject to product liability or product recall exposure and have limited insurance coverage.
Our sales agreements with customers require us to recall products that we, a regulatory body
or any of our customers determine as failing to meet pre-determined specifications, standards,
laws, regulations or containing substantial defects or substantial product hazards which could
cause damage. These events may be considered a breach of our purchase agreement warranty to our
customers and we may be required to bear all costs related to the resulting product recalls.
As we continue to sell completed feature phones and smart phones to our customers in 2009, we
are exposed to potential product liability claims in the event that the use of our products causes
or is alleged to have caused personal injuries or other adverse effects. A successful product
liability claim against us could require us to pay substantial damages. Product liability claims
against us, whether successful or not, are costly and time-consuming to defend. Also, in the event
that our products prove to be defective, we may be required to recall or redesign such products,
which could result in substantial costs, diversion of management attention and resources and damage
to our reputation. However, as the insurance industry in China is still in an early stage of
development, product liability insurance available in China offers limited coverage compared to
coverage offered in many other countries.
We cannot assure you that product liability insurance will continue to be available to us on
commercially reasonable terms, if at all. A product liability claim, with or without merit, could
result in significant adverse publicity against us and could negatively impact the marketability of
our products and our reputation, which in turn could materially and adversely affect our business,
financial condition and results of operations. In addition, we do not have any business
interruption insurance coverage for our operations. Any business disruption or natural disaster
could result in substantial costs and diversion of resources and materially and adversely affect
our business.
10
We are subject to risks from customers claims for refund and liquidated damages.
Our agreements with many customers contain refund and liquidated damages provisions, which
entitle the customers to demand a refund and liquidated damages if we cannot complete a mobile
handset design by a specified deadline, or if the requisite certifications cannot be obtained, or
if we cannot timely deliver our smart phone or feature phone products to our customers. We cannot
assure you that we will be able to successfully perform under every customer contract, or that
costs associated with refunds and liquidated damages will not be material. Under the realigned
business of providing turn-key solutions to our smart phone customers, we will outsource the
assembly of final handset products to third-party companies. Any failure of such assembly companies
in timely delivering to us the finished products with the stipulated quality will cause us to be
liable to our customers.
Defects in our mobile handset designs could result in loss of customers and claims against us.
Our mobile handset designs are complex and must meet stringent quality requirements. Complex
designs such as mobile handset designs sometimes contain defects, errors and bugs when they are
first introduced. If any of our designs have reliability, quality or compatibility problems, we may
not be able to correct these problems on a timely basis. Consequently, our reputation may be
damaged, and customers may be reluctant to continue to contract with us, which could harm our
ability to retain existing customers and attract new customers. Because we cannot test for all
possible scenarios, our designs may contain errors that are not discovered until mass production of
mobile handsets. These problems may result in a loss of our customers as well as claims against us.
We face such risk not only in the case of the customers for our handset design services, but also
in the case of the customers for our product sales. As our revenues continue to be increasingly
dominated by product sales, any design defects in the mobile handsets that we sell to such
customers may subject us to liability. We cannot assure you that we will not be subject to claims
by our customers in the future, and if we fail on the merits of these claims, our business and
results of operations could be materially and adversely affected.
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
services and materially and adversely affect our competitive position.
Our business operations are primarily conducted in China and we believe that a significant
portion of the mobile handsets we design are sold to end users in China. Accordingly, our results
of operations, financial condition and prospects are subject to a significant degree to the
economic, political and legal developments of China. Since the late 1970s, the PRC government has
been reforming the economic system in China. These reforms have resulted in significant economic
growth. However, we cannot predict the future direction of economic reforms or the effects such
measures may have on our business, financial position or results of operations. Any adverse change
in the economic conditions in China, in policies of the PRC government or in laws and regulations
in China, could have a material adverse effect on the overall economic growth of China and
investment in the mobile handset industry. Such developments could materially and adversely affect
our business, lead to reduction in demand for our services and materially and adversely affect our
competitive position.
If the PRC government finds that the agreements that establish the structure for operating our
China business do not comply with PRC government restrictions on foreign investment in the online
game and mobile game industry, we could be subject to severe penalties and our business, financial
condition and results of operations may be materially and adversely affected.
As a Cayman company, we are classified as a foreign enterprise under PRC laws and regulations.
Certain PRC regulations restrict foreign ownership of companies that operate mobile games or
online games and prohibit foreign and foreign-invested enterprises from applying for or holding the
licenses required to operate online games in China or to provide Internet information content, such
as online advertising. In light of these regulations, we
entered into contractual arrangements with our variable interest entity in the PRC, Techfaith
Interactive, in May 2009, under which Techfaith Interactive is to operate all of our mobile and
online game business in China. Techfaith Interactive holds the necessary license to operate our
mobile and online game business in China. For details of our arrangement with Techfaith
Interactive, see Item 4. Information on the CompanyA. History and Development of the Company and
footnote 1 to our consolidated financial statements as attached to this annual report on Form 20-F.
11
We currently conduct our mobile and online game business entirely through contractual
arrangements with Techfaith Interactive. These contractual arrangements include exclusive business
cooperation agreements where we provide complete business support services and consulting services
to Techfaith Interactive in exchange for a fee that constitutes substantially all of the net income
of Techfaith Interactive. If the relevant government authorities finds that these agreements that
establish the structure for operating our China game business do not comply with the above
restrictions on foreign investment in the online game and mobile game business, we could be subject
to severe penalties and our business, financial condition and results of operations may be
materially and adversely affected.
The laws and regulations governing the online and mobile game industry and related businesses in
China are developing and subject to future changes. If we or any of our PRC operating subsidiaries
or variable interest entities fail to obtain or maintain all applicable permits and approvals, our
business and operations would be materially and adversely affected.
All Internet-related businesses in China, including the operation of online games, is highly
regulated by the PRC government. See Item 4. Information on the CompanyB. Business
OverviewRegulation. Techfaith Interactive, through which we operate our online games business in the
PRC, is required to obtain applicable permits or approvals from different regulatory authorities in
order to operate online games. If Techfaith Interactive fails to obtain or maintain any of the
required permits or approvals or if any of our practice is later challenged by government
authorities, we may also be subject to various penalties, including fines and the discontinuation
of or restriction on our operations. Any such disruption in business operations would materially
and adversely affect our financial condition and results of operations.
As the online game industry is at an early stage of development in China, new laws and
regulations may be adopted in the future to address new issues that arise from time to time, such
as online advertising and the use of virtual currency in online games. Also, different regulatory
authorities may have different views regarding the licensing requirements for the operation of
online games and related businesses. As a result, there is, and will continue to be, substantial
uncertainty in the interpretation and implementation of current and any future PRC laws and
regulations applicable to the online game industry and related businesses. While we believe that we
are in material compliance with all applicable PRC laws and regulations currently in effect, we
cannot assure you that we will not be found in violation of any current or future PRC laws and
regulations in the future.
Additional government regulations resulting from negative publicity in China regarding online
games or otherwise may have a material adverse effect on our business, financial condition and
results of operations.
Currently there are no laws or regulations in the PRC specifically governing virtual asset property
rights and if we, as an online game operator, are found to have liabilities regarding losses of
virtual assets, our business and operations maybe materially and adversely affected.
In the course of playing online games, some virtual assets, such as special equipment, player
experience grades and other features of a users game characters, are acquired and accumulated.
Such virtual assets can be important to online game players and in some cases are exchanged between
players for monetary value. Virtual assets can be lost for various reasons, often through
unauthorized use of the game account of one user by other users and occasionally through data loss
caused by a delay of network service or by a network crash. It is unclear under PRC law whether an
operator of online games such as Techfaith Interactive would have any liability to game players or
other interested parties (whether in contract, tort or otherwise) for loss of such virtual assets
by game players. Several past judgments by PRC courts have required the online game operators to
return the virtual items or be liable for the loss and damage incurred from the loss of the virtual
items. In case of a loss of virtual assets, Techfaith Interactive may be sued and may be held
liable for damages, which may negatively affect our business,
financial condition and results of operations. See Item 4. Information on the CompanyB. Business
OverviewRegulationsVirtual Assets.
12
Our business benefits from certain tax incentives, and changes to these tax incentives could
adversely affect our operating results.
Our business tax is primarily governed by the new Enterprise Income Tax Law, or the EIT Law,
which became effective on January 1, 2008. Prior to December 31, 2008, Techfaith China and
Techfaith Intelligent Handset Beijing applied for High and New Tech Enterprises, or HNTE, status
that would allow for a reduced applicable tax rate under the EIT Law. The official HNTE
certificates were issued to Techfaith China and Techfaith Intelligent Handset Beijing on December
24, 2008. While the certificates are valid for three years, we believe we will be able to reapply
successfully for the renewal of the current certificates as we believe we will continue to meet the
published criteria. Accordingly, Techfaith China and Techfaith Intelligent Handset Beijing have
used the reduced applicable tax rate in calculating deferred tax balances for the foreseeable
future.
Some of our Chinese subsidiaries, including Techfaith Shanghai, Techfaith Shenzhen, TechSoft
and Techfaith Hangzhou, also enjoyed various tax exemptions because they were qualified as
production enterprises before January 1, 2008 . Based on the transition rules of the EIT Law,
those Chinese subsidiaries continue to enjoy preferential tax rates from 2008 through 2011 due to
the preferential tax qualification obtained prior to January 1, 2008. Those subsidiaries in China
will not continue to receive such preferential tax treatment after the transition period. There is
no assurance that our subsidiaries in China will continue to receive any other preferential tax
treatment. If any of these incentives are reduced or eliminated by government authorities in the
future, the effective tax rates of our subsidiaries in China and our effective tax rates on a
consolidated basis could increase significantly. Any such change could adversely affect our
operating results. See Item 4. Information on the CompanyB. Business OverviewRegulationsTax.
Under the EIT Law and its implementation rules, dividends payable by a foreign-invested
enterprise in China to its foreign investors who are non-resident enterprises are subject to a 10%
withholding tax, unless any such foreign investors jurisdiction of incorporation has a tax treaty
or similar arrangement with China that provides for a different withholding arrangement. Dividends
of our PRC subsidiaries that are directly held by our Hong Kong subsidiary historically benefited
from a reduced withholding tax rate of 5% under the arrangement to avoid double taxation between
Hong Kong and the PRC. However, under recently implemented PRC regulations, now our Hong Kong
subsidiary must obtain approval from the competent local branch of the State Administration of
Taxation in order to enjoy the 5% preferential withholding tax rate in accordance with the
double-taxation agreement between the PRC and Hong Kong. As
stipulated in implementing rules published in
year 2009, our Hong Kong subsidiary shall fulfill the requirement for beneficial owner of the
dividend to enjoy the preferential withholding tax rate but given the
relatively short history of these
implementing rules, we cannot assure you that our Hong Kong subsidiary would be able to qualify for the 5%
preferential withholding tax rate in the future.
Our subsidiaries in China are subject to restrictions on dividend payments, or making other
payments to us or any other affiliated company.
We are a holding company incorporated in the Cayman Islands. We conduct substantially all of
our operations through our subsidiaries in China. Current PRC regulations permit our subsidiaries
in China to pay dividends only out of their respective accumulated profits, if any, determined in
accordance with PRC accounting standards and regulations. In addition, our subsidiaries in China
are each required to set aside at least 10% of their respective accumulated profits each year, if
any, to fund certain reserve funds. These reserves are not distributable as cash dividends. In
addition, if any of our subsidiaries in China incurs debt on its own behalf in the future, the
instruments governing the debt may restrict its ability to pay dividends or make other payments to
us.
13
We may be treated as a resident enterprise for PRC tax purposes under the EIT Law, which may
subject us to PRC income tax for our income originated both within and outside the PRC and PRC
income tax withholding for any dividends we pay to our non-PRC shareholders.
Under the EIT Law and relevant implementing rules, enterprises established under the laws of
non-PRC jurisdictions, but whose
de facto
management body is located in the PRC, may be treated as
resident enterprises for PRC tax purposes. The implementing rules of the EIT Law define
de facto
management as having substantial and overall management and control over the production and
operations, personnel, accounting, and properties of the enterprise. Based on our analysis of the
current facts, we believe that Techfaith, and its overseas subsidiaries should not be treated as
resident enterprises for PRC tax purposes. It continues to be unclear as to how tax authorities
will determine tax residency based on the facts of each case. For the years ended December 31, 2008
and 2009, our calculation of income taxes generally reflects our status as a non-China tax resident
company. If the PRC governmental authorities hold that Techfaith or its overseas subsidiaries
should be treated as a resident enterprise for PRC tax purposes after January 1, 2008, the
effective date of the EIT Law, our worldwide income will be subject to PRC income tax at the 25%
uniform tax rate, which will include any dividend income we receive from our subsidiaries, unless
such dividend income is otherwise exempted from taxable income under the EIT Law. If we and our
overseas subsidiaries are treated as resident enterprises and are required to pay income tax for
dividends received from subsidiaries, it will materially and adversely affect our financial
condition and results of operations.
With the 10% PRC dividend withholding tax imposed by the EIT Law in 2008, we will incur an
incremental PRC tax cost when PRC profits are distributed to ultimate shareholders. In addition, if
we are determined to be a PRC resident enterprise under the new PRC tax system and receive income
other than dividends, our profitability and cash flow would be adversely impacted due to our
worldwide income being taxed in China under the new PRC tax law.
Moreover, under the EIT Law, foreign ADS holders may be subject to a 10% withholding tax upon
dividends payable by us and gains realized on the sale or other disposition of ADSs or ordinary
shares, if such income is sourced from within the PRC. Although our company is incorporated in the
Cayman Islands, it remains unclear whether the dividends payable by us or the gains our foreign ADS
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 on our dividend payments will reduce the returns of your
investment.
Fluctuation in the value of the Renminbi may have a material adverse effect on your investment.
The value of the Renminbi against the U.S. dollar, Euro and other currencies is affected by,
among other things, changes in Chinas political and economic conditions and Chinas foreign
exchange policies. On July 21, 2005, the PRC government changed its decade-old policy of pegging
the value of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi was permitted to
fluctuate within a narrow and managed band against a basket of certain foreign currencies. This
change in policy caused the Renminbi to appreciate approximately 21.5% against the U.S. dollar over
the following three years. Since reaching a high against the U.S. dollar in July 2008, however, the
Renminbi has traded within a narrow band against the U.S. dollar, remaining within 1% of its July
2008 high but never exceeding it. It is difficult to predict how long the current situation may
last and when and how it may change again.
14
Although our reporting and financial statements are expressed in the U.S. dollar, the majority
of our revenues are denominated in Renminbi and only a small portion of our cost of revenues is
denominated in U.S. dollars. Fluctuations in exchange rates, primarily those involving the U.S.
dollar, may affect our cost of revenues and profit margins as well as our net income. In addition,
these fluctuations could result in exchange losses and increased costs in Renminbi terms. Also, as
dividends might be paid to us in the future by our subsidiaries in China, any significant
revaluation of the Renminbi may have a material adverse effect on the value of and any dividends
payable on our ADSs in foreign currency terms. If we decide to convert Renminbi we receive from our
subsidiaries
into U.S. dollars for the purpose of distributing dividends on our ordinary shares or for
other purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect
on the U.S. dollar amount available to us. Conversely, to the extent that we need to convert U.S.
dollars into Renminbi for our operations, appreciation of Renminbi against the U.S. dollar would
have an adverse effect on the Renminbi amount we receive from the conversion. Very 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 to reduce our exposure to foreign currency
exchange risk. In addition, our currency exchange losses may be magnified by Chinas exchange
control regulations that restrict our ability to convert Renminbi into U.S. dollars.
The M&A Rule sets forth complex procedures for acquisitions conducted by foreign investors which
could make it more difficult to pursue growth through acquisitions.
The Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or
the M&A Rule, sets forth complex procedures and requirements that could make merger and acquisition
activities by foreign investors more time-consuming and complex, including requirements in some
instances that the Ministry of Commerce be notified in advance of any change-of-control transaction
in which a foreign investor takes control of a PRC domestic enterprise. We may expand our business
in part by acquiring complementary businesses or assets in China. Complying with the requirements
of the M&A Rule to complete such transactions could be time-consuming, and any required approval
processes, including obtaining approval from the Ministry of Commerce, may delay or inhibit our
ability to complete such transactions, which could affect our ability to expand our business or
maintain our market share.
Restrictions on currency exchange may limit our ability to receive and use our revenues
effectively.
The principal regulation governing foreign currency exchange in China is the Foreign Currency
Administration Rules, as amended. Under these rules, RMB are freely convertible for trade and
service-related foreign exchange transactions, but not for direct investment, loan or investment in
securities outside China unless the prior approval of the State Administration of Foreign Exchange,
or SAFE, is obtained. Although the PRC government regulations now allow greater convertibility of
RMB for current account transactions, significant restrictions still remain. For example, foreign
exchange transactions under our subsidiaries capital account, including principal payments in
respect of foreign currency-denominated obligations, remain subject to significant foreign exchange
controls and the approval of SAFE.
SAFE issued regulations that require approvals from, and registrations with, PRC government
authorities in connection with direct or indirect offshore investment activities by PRC residents
and PRC corporate entities. The SAFE regulations retroactively require approval and registration of
direct or indirect investments previously made by PRC residents in offshore companies. In the event
that a PRC shareholder with a direct or indirect stake in an offshore parent company fails to
obtain the required SAFE approval and make the required registration, the PRC subsidiaries of such
offshore parent company may be prohibited from making distributions of profit to the offshore
parent and from paying the offshore parent proceeds from any reduction in capital, share transfer
or liquidation in respect of the PRC subsidiaries. Further, failure to comply with the various SAFE
approval and registration requirements described above, as currently drafted, could result in
liability under PRC law for foreign exchange evasion.
Because a majority of our business operations is in China, these regulations could result in
the relevant PRC government authorities limiting or eliminating our ability to purchase and retain
currencies other than the RMB in the future, which could limit or eliminate our ability to fund any
business activities we may have outside China or to make dividend payments in U.S. dollars in the
future.
15
PRC regulations relating to the establishment of offshore special purpose companies by PRC
residents may subject our PRC resident shareholders to personal liability and limit our ability to
inject capital into our PRC subsidiaries, limit our subsidiaries ability to distribute profits to
us, or otherwise adversely affect us.
SAFE issued a public notice in November 2005 requiring PRC residents to register with the
local SAFE branch before establishing or controlling any company outside of China for the purpose
of capital financing, referred to in the notice as a special purpose offshore company. PRC
residents that are shareholders of special purpose offshore companies established before November
1, 2005 were required to register with the local SAFE branch before March 31, 2006.
We have notified beneficial owners of our company who we know are PRC residents to register
with the local SAFE branch if they are required to register under the SAFE notice. The failure or
inability of beneficial owners of our company resident in the PRC to comply with the registration
procedures set forth therein may subject such beneficial owners to fines and legal sanctions and
may also limit our ability to contribute additional capital into our PRC subsidiary and our PRC
subsidiarys ability to distribute profits to our company or otherwise materially and adversely
affect our business.
Uncertainties with respect to the PRC legal system could adversely affect us.
We conduct substantially all of our business through our subsidiaries established in China.
Our subsidiaries are generally subject to laws and regulations applicable to foreign investment in
China and, in particular, PRC laws applicable to wholly foreign-owned enterprises and Sino-foreign
joint ventures. The PRC legal system is based on written statutes. Prior court decisions may be
cited for reference but have limited precedential value. Since 1979, PRC legislation and
regulations have significantly enhanced the protections afforded to various forms of foreign
investments in China. However, since the PRC legal system is still evolving, the interpretations of
many laws, regulations and rules are not always uniform and enforcement of these laws, regulations
and rules involve uncertainties, which may limit legal protections available to us. In addition,
any litigation in China may be protracted and result in substantial costs and diversion of
resources and management attention.
Risks Related to Shares and ADSs
The future sales by our existing shareholders of a substantial number of our ADSs in the public
market could adversely affect the price of our ADSs.
If our existing shareholders sell substantial amounts of our ADSs in the public market, the
market price of our ADSs could fall. Such sales also might make it more difficult for us to sell
equity or equity-related securities in the future at a time and price that we deem appropriate.
As of the date of this annual report, our management collectively beneficially owns
approximately 34.9% of our outstanding shares, or approximately 29.5% of our total issued and
outstanding shares in the event of a full conversion of the notes held by entities affiliated with
IDGVC Partners into a maximum of 129,941,915 ordinary shares, or 20.0% of our current total issued
and outstanding shares as of the date of the note issuance. They may cause us to register the sale
of their shares under the Securities Act. Registration of these shares under the Securities Act
would result in these shares becoming freely tradable without restriction under the Securities Act
immediately upon the effectiveness of the registration. Sales of these registered shares in the
public market could cause the price of our ADSs to decline.
16
The market price for our ADSs has been and may continue to be volatile.
The market price for our ADSs has been and may continue to be highly volatile and subject to
wide fluctuations in response to factors including the following:
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actual or anticipated fluctuations in our quarterly operating results;
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changes in financial estimates by securities research analysts;
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conditions in the mobile handset and mobile and online games markets;
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changes in the economic performance or market valuations of other mobile handset
design houses, original design product providers or manufacturers;
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performance of other China-based companies that are listed on NASDAQ;
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announcements by us or our competitors of new products, acquisitions, strategic
partnerships, joint ventures or capital commitments;
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addition or departure of key personnel; and
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fluctuations of exchange rates between the RMB and U.S. dollar.
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In addition, the securities market has from time to time experienced significant price and
volume fluctuations that are not related to the operating performance of particular companies. In
particular, the global financial crisis and the ensuing deteriorating global economic conditions
have caused and may continue to cause extreme volatility in the global stock markets. These market
fluctuations may also materially and adversely affect the market price of our ADSs, regardless of
our operating performance. Volatility or a lack of positive performance in our stock price may
also adversely affect our ability to retain key employees, some of whom have been granted options
or other equity incentives.
Our subsidiary has issued convertible notes to certain third-party investors, and the conversion of
such notes could result in substantial dilution to the holders of our ordinary shares and ADSs and
may depress the price of our ADSs.
On June 9, 2009, to finance the development of our game business, our subsidiary Leo
Technology Limited, now renamed 798 Entertainment Limited, issued US$10 million of common equity to
the Hong Kong-based venture capital firm Infiniti Capital Limited and US$10 million aggregate
principal amount of 8% senior secured convertible promissory notes with a maturity date of three
years to certain entities affiliated with IDGVC Partners, a leading venture capital firm. At the
earlier of (i) 30 months after the note issuance date if a qualified initial public offering of Leo
Technology Limited has not occurred by that time, or (ii) the occurrence of an event of default,
the note holders may also require Leo Technology Limited to redeem the notes in cash equal to the
principal amount plus an annual return of 20% compounded annually on the principal amount, accrued
but unpaid dividends (if any) and late charges (if any). The notes are convertible into our
ordinary shares or Leo Technology Limiteds ordinary shares at the option of the note holders. In
the event of a full conversion of the notes, a total of 126,103,405 ordinary shares of our company
(subject to adjustment but in any event not exceeding 129,941,915 ordinary shares, or 20.0% of our
current total and issued outstanding shares as of the date of such note issuance) may be issued to
the holders of the notes. As of the date of this annual report, no such notes are converted. If
the convertible notes are converted into our ordinary shares, the holders of our ordinary shares
and ADSs may experience substantial dilution and the market price of our ADSs could decline. The
sale of the ordinary shares issued upon such conversion, or the perception that such convertible
notes might be converted, or the ordinary shares issued upon such conversion might be sold, could
also adversely affect the market price of our ADSs.
17
We may need additional capital, and the sale of additional ADSs or other equity securities could
result in additional dilution to our shareholders.
We believe that our current cash and cash equivalents and cash flow from operations will be
sufficient to meet our anticipated cash needs for the next 12 months. 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
additional dilution to our shareholders. The incurrence of indebtedness would result in increased
debt service obligations and could result in operating and financing covenants that would restrict
our operations. We cannot assure you that financing will be available in amounts or on terms
acceptable to us, if at all.
You may face difficulties in protecting your interests, and our ability to protect our rights
through the U.S. federal courts may be limited, because we are incorporated under Cayman Islands
law.
Our corporate affairs are governed by our memorandum and articles of association and by the
Companies Law and common law of the Cayman Islands. The rights of our shareholders and the
fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established
as they would be under statutes or judicial precedents in the United States. In particular, the
Cayman Islands has a less developed body of securities laws as compared to the United States, and
provides significantly less protection to investors. Therefore, our public shareholders may have
more difficulties in protecting their interests in the face of actions by our management, directors
or controlling shareholders than would public shareholders of a corporation incorporated in a
jurisdiction in the United States. In addition, Cayman Islands companies may not have standing to
initiate a shareholder derivative action before the federal courts of the United States. As a
result, we may not be able to protect our interests if we are harmed in a manner that would
otherwise enable us to sue in a United States federal court.
Your ability to bring an action against us or against our directors and officers, or to enforce a
judgment against us or them, will be limited because we are incorporated in the Cayman Islands,
because we conduct a substantial portion of our operations in China and because the majority of our
directors and officers reside outside of the United States.
We are incorporated in the Cayman Islands, and we conduct a substantial portion of our
operations in China through our wholly owned subsidiaries and variable interest entities in China.
Most of our directors and officers reside outside of the United States and most of the assets of
those persons are located outside of the United States. As a result, it may be difficult or
impossible for you to bring an action against us or against these individuals in the event that you
believe that your rights have been infringed under the securities laws or otherwise. Even if you
are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may
render you unable to enforce a judgment against our assets or the assets of our directors and
officers.
You may not be able to exercise your right to vote.
As a holder of ADSs, you may instruct the depositary of our ADSs to vote the shares underlying
your ADSs but only if we ask the depositary to ask for your instructions. Otherwise, you will not
be able to exercise your right to vote unless you withdraw the shares. However, you may not know
about the meeting enough in advance to withdraw the shares. If we ask for your instructions, the
depositary will notify you of the upcoming vote and arrange to deliver our voting materials to you.
We cannot assure you that you will receive the voting materials in time to ensure that you can
instruct the depositary to vote your shares. In addition, the depositary and its agents are not
responsible for failing to carry out voting instructions or for the manner of carrying out voting
instructions. This means that you may not be able to exercise your right to vote and there may be
nothing you can do if the shares underlying your ADSs are not voted as you requested.
18
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 Securities Act, or an
exemption from the registration requirements is available. Also, under the deposit agreement, the
depositary bank will not make those rights available to you unless the distribution to ADS holders
of both the rights and any related securities are either registered under the Securities Act, or
exempt from registration under the Securities Act. 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, you may be unable to participate
in our rights offerings and may experience dilution in your holdings.
You may not receive distributions on ordinary shares or any value for them if it is illegal or
impractical to make them available to you.
The depositary of our ADSs has agreed to pay to you the cash dividends or other distributions
it or the custodian receives on ordinary shares or other deposited securities after deducting its
fees and expenses. You will receive these distributions in proportion to the number of ordinary
shares your ADSs represent. However, the depositary is not responsible if it decides that it is
unlawful or impractical to make a distribution available to any holders of ADSs. We have no
obligation to register ADSs, ordinary shares, rights or other securities under U.S. securities
laws. We also have no obligation to take any other action to permit the distribution of ADSs,
ordinary shares, rights or anything else to holders of ADSs. This means that you may not receive
the distribution we make on our ordinary shares or any value for them if it is illegal or
impractical for us to make them available to you. These restrictions may have a material adverse
effect on the value of your ADSs.
You may be subject to limitations on transfer of your ADSs.
Your ADSs are transferable on the books of the depositary. However, the depositary may close
its transfer books at any time or from time to time when it deems expedient in connection with the
performance of its duties. In addition, the depositary may refuse to deliver, transfer or register
transfers of ADSs generally when our books or the books of the depositary are closed, or at any
time if we or the depositary thinks it advisable to do so because of any requirement of law or of
any government or governmental body, or under any provision of the deposit agreement, or for any
other reason.
We are controlled by a small group of our existing shareholders, whose interests may differ from
other shareholders.
As of the date of this annual report, our directors and executive officers as a group
beneficially own 249,268,454 ordinary shares of our company, of which Mr. Defu Dong, our Chairman
and Chief Executive Officer, beneficially owns 249,250,000 ordinary shares (constituting
approximately 34.9% of our current total issued and outstanding shares, or approximately 29.5% of
our total issued and outstanding shares in the event of a full conversion of the notes held by
entities affiliated with IDGVC Partners into the maximum of 129,941,915 ordinary shares, or 20.0%
of our current total issued and outstanding shares) and has power to vote on behalf of the record
holders of these shares over matters requiring approval by our shareholders, including electing
directors and approving mergers or other business combination transactions. 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 ADSs. These actions may be taken even if they are opposed
by our other shareholders.
19
We may be classified as a passive foreign investment company, which could result in adverse United
States federal income tax consequences to U.S. Holders.
Based on the price of the ADSs and our ordinary shares, the composition of our income and
assets and our operations, we believe that we may have been a passive foreign investment company,
or PFIC, for United States federal income tax purposes for our taxable year ended December 31,
2009. We must make a separate determination each year as to whether we are a PFIC (after the close
of each taxable year). We expect that even if we were not a PFIC for our taxable year ended
December 31, 2009, we will very likely be a PFIC for our current taxable year ending December 31,
2010 unless our share value increases and/or we invest a substantial amount of the cash and other
passive assets we hold in assets that produce or are held for the production of active income. A
non-U.S. corporation will be considered a PFIC for any taxable year if either (1) at least 75% of
its gross income is passive income or (2) at least 50% of the value of its assets (based on an
average of the quarterly values of the assets during a taxable year) is attributable to assets that
produce or are held for the production of passive income. The value of our assets is generally
determined by reference to the market price of our ADSs and ordinary shares. If we were treated as
a PFIC for any taxable year during which a U.S. Holder held an ADS or an ordinary share, certain
adverse United States federal income tax consequences could apply to the U.S. Holder. See Item 10.
Additional Information E. Taxation United States Federal Income Taxation Passive Foreign
Investment Company.
ITEM 4.
Information on the Company
A.
History and Development of the Company
We commenced operations in July 2002 through Techfaith Wireless Communication Technology
(Beijing) Limited, or Techfaith Beijing, formerly known as Beijing Techfaith R&D Co., Ltd., a
limited liability company established in China. We created a holding company structure by
incorporating Techfaith Wireless Technology Group Limited in July 2003. We incorporated China
Techfaith Wireless Communication Technology Limited on June 25, 2004 under the Companies Law of the
Cayman Islands. As part of a restructuring in anticipation of our initial public offering, China
Techfaith Wireless Communication Technology Limited became our ultimate holding company in November
2004.
Our principal executive offices are located at Building 1, No. 13, YongChang North Road,
Beijing Economic-Technological Development Area (Yi Zhuang), Beijing 100176, Peoples Republic of
China. Our telephone number at this address is +86 10 5822-8288. Our registered office in the
Cayman Islands is located at Maples Corporate Services Limited, PO Box 309, Ugland House, Grand
Cayman, KY1-1104 Cayman Islands. Our telephone number at this address is +1 (345) 949-8066. Our
agent for service of process in the U.S. is CT Corporation System located at 111 Eighth Avenue,
New York, New York 10011.
In May 2010, we sold 49% equity interest of our wholly-owned subsidiary, Time Spring Limited
(Time Spring) to Billion Team Asia Limited (Billion Team), an affiliate of D Magic Mobile
(Shanghai) Incorporation, or D Magic Mobile for $0.05. Time Spring was a shell company without any
substantial operations prior to May 2010. After this transaction, Time Spring was 51% owned by us.
Time Spring owns Media Chance Limited, an entity in Hong Kong, which owns 100% of Glomate. Glomate will
focus on license well-known, international brands for high-end, brand-name mobile phones and add to
part of our effort to maintain our existing strong presence in the market for original developed
products, or ODP, in China.
From 2008, we began to develop our game business, with mobile and online games that are
self-developed by our subsidiary and those licensed from third parties. To finance the development
of our game business, on June 9, 2009, our subsidiary Leo Technology Limited, now renamed 798
Entertainment Limited, issued US$10 million of common equity to the Hong Kong-based venture capital
firm Infiniti Capital Limited and US$10 million aggregate principal amount of 8% senior secured
convertible promissory notes with a maturity date of three years to certain entities affiliated
with IDGVC Partners, a leading venture capital firm. Mobile game services generated US$488,000 in
revenues in 2009; with the launch of new online games in 2010, we expect revenues generated from
games to increase in 2010.
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On May 14, 2009, we entered into contractual arrangements with Techfaith Interactive for the
operation of our online game business. Through exclusive business cooperation agreements with
Techfaith Interactive, we provide complete business support services and consulting services to
Techfaith Interactive in exchange for substantially all of the net income of Techfaith Interactive;
through a series of contractual arrangements with Techfaith Interactives equity owners, we have
the ability to effectively control Techfaith Interactives daily operations and financial affairs.
Therefore, we are the primary beneficiary of Techfaith Interactive. Techfaith Interactive currently
holds necessary license to operate our online game business in China, and our entire online game
business in China is currently operated through Techfaith Interactive. For details of our
arrangement with Techfaith Interactive, see footnote 1 to our consolidated financial statements as
attached to this annual report.
Our capital expenditures mainly relate to our purchase of plant, machinery and equipment
related to our business operations. Our capital expenditures amounted to US$13.8 million, US$14.8
million and US$1.4 million in 2007, 2008 and 2009 respectively. Our capital expenditures for 2009
were mainly financed from our existing cash balance.
B.
Business Overview
We are a China-based ODP provider focused on the original design and development of handsets
and sales of finished products to our local and international customers. While we maintain the
stable growth of product sales, we enter into new businesses, including the branded mobile phone
business and the game business, to generate additional revenue streams as part of our growth
strategy.
In 2009, our business comprised the following three areas: (1) sales of products; (2) handset
design services; and (3) game business. In 2008 and 2009, product sales contributed over 90% of our
revenues, while our game business was in the start-up stage and generated small revenues
Since our inception in 2002, we have been providing complete handset design services spanning
the entire handset design cycle, which involves industrial design, hardware design, component
selection and sourcing, prototype testing, pilot production and production support. We design
mobile handsets based on major technology platforms including GSM/GPRS, CDMA1X, CDMA EVDO,
WCDMA/UMTS, HSDPA, and TD-SCDMA.
In 2006, we expanded our business from an independent design house to an ODP provider. As an
ODP provider, we not only provide handset design services but also sell finished products by
subcontracting EMS providers to assemble or manufacture mobile phone handsets to meet the demand of
our customers. Currently, our revenues from product sales comprise the majority of our total net
revenues. Our revenues from product sales as a percentage of our total net revenues increased from
over 46% in 2006, through over 70% in 2007, to over 90% in 2008 and 2009.
Our strong technological capabilities, high-quality design capabilities, strong customer
relationships, strategic relationships with leading technology providers and ample skilled,
low-cost engineering resources enable us to deliver our services and products at competitive costs
and with relatively shorter product cycles when compared to our competitors.
In an effort to minimize the adverse effects of the global financial crisis and weakening
economic conditions, we have strengthened our position through cooperation agreements with Beijing
Huaqi Information Digital Technology Co., Ltd., or Beijing Huaqi, which owns aigo, a leading
brand in consumer digital products market in China for the operator-tailored market in China, and
with QIGI Technology for the smart phone business in China in 2008. These and similar strategic
collaborations have helped and will continue to help promote our products in China and swiftly
bring them to market. Under the strategic cooperation agreement with Beijing Huaqi,
we will provide total solutions products, including CDMA1X/EVDO and UMTS/HSDPA, under the
aigo brand name and through the sales channels of aigo for operator-tailored market in China.
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We put emphasis on the branding of our mobile handset products because branded
productsespecially products bearing well-known brands and imagesoffer a higher profit margin
compared with other mobile handsets we sell. For instance, in the first quarter of 2010, we
obtained control of QIGI Technology which becomes one of our variable interest entities. QIGI
Technology is a company based in China and focused on the sale of smart phones. After the
acquisition, QIGI Technology will operate largely independent of our existing operations; we intend
to focus on promoting QIGI as an important Techfaith brand, with emphasis on QIGI brand smart
phones.
In February 2009, we launched, under the aigo brand name, nine new mobile phones designed
specifically for the 3G network in China. The nine new models are from three different product
lines which include dual mode GSM phones, modem card phones and DVDO phones. Of the five dual-mode
GSM phones, three are WCDMA plus GSM phones designed for new China Unicom subscribers and two are
CDMA plus GSM phones designed for China Telecom CDMA subscribers. There are two modem card phones,
one of which utilizes a HSDPA modem card and the other uses an EVDO modem card. The final two
models have GPS functionality and run on CDMA1X and EVDO. These nine different models cover CDMA1X,
WCDMA, GSM and EVDO technologies and encompass a broad range of subscriber demands from the
different telecom operators in China.
In May 2010, we sold 49% equity interest of our wholly owned subsidiary Time Spring to Billion
Team, an affiliate of D Magic Mobile for $0.05. Time Spring was a shell company without any
substantial operations prior to May 2010. After this transaction, Time Spring was 51% owned by us.
Time Spring owns Media Chance Limited, an entity in Hong Kong, which owns 100% of Glomate. D Magic
Mobile is a cooperative licensee of a number of renowned international brands in the mobile
telecommunications industry. The primary business of Glomate is to license well-known,
international brands for high-end, brand-name mobile phones in China targeted at high-end mobile
phone users, teenagers and sports fans.
In 2008, we started to develop our online and mobile game business through One Net. One Net
made significant progress in 2008, and set up Radiation studio, Star studio and Mythos studio to
develop games. We also outsourced the development of online games to another independent studio
and set up an in-house studio to design and develop mobile games. In 2009, we provided mobile game
services and began to earn revenues in the fourth quarter of that year. We launched one MMORPG game
in January 2010 and expect to launch more games during 2010. We expect an increasing portion of
our revenues to come from this part of our business.
Products and Services
Our products and services comprise: (1) sales of products; (2) mobile handset design services;
and (3) game.
Sales of Products
When we started our operations in 2002, we focused primarily on providing mobile handset
design services. However, as a result of increasing customers requests for finished products from
us, we have been involved in the mass production phase of the product cycle since 2006. The
products provided to our customers include feature phones and smart phones designed by us, wireless
modules and other electronic components. We do not have our own production facilities, however,
and instead outsource such production to EMS providers.
After our customers specify the required products from among our existing range of
self-designed mobile handset models (along with some possible customized modifications or
additions), we enter into sales contracts with each customer and begin procuring raw materials and
components from our suppliers, capitalizing on our materials procurement and inventory management
expertise. Then we enter into contracts with EMS providers, which are provided with the raw
materials we procure for their production of the mobile handsets. We also provide supervisory
and technical support to such EMS providers to ensure product quality in accordance with our
customers specifications and to control the use of our intellectual property.
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Our EMS providers engage in assembly and manufacturing operations and also offer testing
services for the assembled printed circuit boards, systems and subsystems to ensure the requisite
consistent high product quality. We send our employees to the production sites of our EMS providers
to inspect the finished products before we accept and make payment. For efficient inventory
management, these finished products are usually arranged to be collected by courier service
providers for direct delivery to locations designated by our customers.
We provide certain primary types of products to our customers: feature phones, smart phones,
wireless modules and data card, other components such as printed circuit board assemblies as well
as wireless software and applications.
Mobile Handset Design Services
Historically, we commenced operations as a mobile handset design house. We also provide
production support to facilitate our customers manufacturing and supply chain management
processes. In addition, since 2006, we have also begun to work with our customers in providing
customized handset design services to mobile service operators. Though we have expanded our
business operations by extending our production support to also include the actual production and
sales of finished products, we retain our strong technological capabilities to design mobile
handsets to support a broad range of wireless communications standards, baseband platforms and
technologies.
We provide the following three types of mobile handset design services to our customers:
Mobile Handset Design Services Based on Existing Platforms
We design a new model of
mobile handset based on our existing design platform.
Successor Model Design Services
We design a successor model of an existing
customers mobile handset previously designed by us to incorporate additional functions and/or
industrial design.
Mobile Handset Design Services Based on New Platforms
We design a new model of
mobile handset based on a new design platform specified by the customer.
All three types of handset design services cover all major aspects of the design process,
including industrial design, mechanical design, software design, hardware design, sourcing of
hardware components and software, testing, quality assurance, assisting our customers in obtaining
requisite certifications, setting up pilot production lines and production support.
In addition, for our design contracts, after we deliver our design products to our customers,
our customers are required to purchase certain components (such as chips used in mobile handsets)
through us to manufacture the designed products. As this type of components is built in to the
design contracts, we included these component sales in the design contract related revenue, rather
than product sales.
Game
We began to develop mobile games and online games in 2008, and have launched multiple products
in this business. Our online games are large-scale MMORPG games which are free for consumers to
sign up and play but
charge for the purchase of tools and weapons used in the games. We launched one MMORPG game
in January 2010 and expect to launch more games in 2010.
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We also provide mobile game services to manufacturers of branded mobile phones. Under this
type of arrangements, we maintain a mobile phone web page so the end users of the manufacturers of
branded mobile phones can access the web page and download mobile phone games free of charge during
the contract period, usually one year. This part of our business contributed less than 1.0% of our
total revenues in 2009.
We also provide mobile phone game design services to manufacturers of branded mobile phones.
Under this type of arrangements, we are required to design mobile phone games according to
customers specification for a fixed price in a period, usually
less than one year. Revenues from
this type of contracts is recognized under the proportional performance method using an output
measure determined by achievement of milestones which include planning documentation and testing
reports.
Customers
Mobile handset brand owners are customers for both of our product sales business and handset
design services business. Our customers include leading Chinese mobile handset brand owners and
international mobile handset brand owners.
For each manufacturing and design project, we have a designated account manager who directly
interacts with the customer throughout the manufacturing and design process to report project
progress and handle customers input and comments. We provide technical support and production
support to assist customers of our handset design services in designing the manufacturing process.
A small number of customers have historically accounted for a substantial portion of our net
revenue. In 2007, 2008 and 2009, our largest three customers collectively accounted for
approximately 25.0%, 28.8% and 34.2%, of our net revenues, respectively.
We normally have multiple on-going contracts with each customer, and each contract may
correspond to more than one mobile handset model. While our contracts vary by customer and by
mobile handset model, each of our product sales contracts typically requires us to sell finished
products based on our pre-existing self-designed handset models along with some possible modified
or additional features, and each of our handset design services contracts typically requires us to
develop and design the mobile handset model, assist the customer in designing the manufacturing
process, obtain necessary certifications and provide technical and production support.
For our product sales, we typically charge payments based on the per unit price multiplied by
the total number of handsets. A portion of the total purchase price is usually payable at the
execution of the sales contracts as prepayment and full payment is required before the products are
delivered to our customers.
We typically charge two types of payment for our handset design services: design fee and
royalty. The design fee is a fixed amount paid in installments according to pre-agreed milestones.
In addition to the design fee, we also charge royalty to certain customers. The royalty is
calculated at a variable rate based on the volume of mobile handsets manufactured or sold by a
customer.
24
Our contracts with many customers contain refund and liquidated damages provisions. These
provisions provide the customer with a right to demand a refund and liquidated damages if we cannot
complete a mobile handset design by the deadline mutually agreed between us and the customer, the
requisite certifications cannot be
obtained, or if our products sold to the customers contain defects or are otherwise not in
compliance with the specifications agreed in the contracts. Under the sales contracts with our
customers, we are required to provide warranty and after-sales services. These warranty and
after-sales services will be performed either by EMS providers or by us.
Our customers with respect to our mobile game business are manufacturers of branded mobile
phones. We maintain a mobile phone web page so the end users of the manufacturers of branded mobile
phones can access the web page and download mobile phone games free of charge during the contract
period, which is usually one year.
Sales and Marketing
Our sales and marketing activities are substantially the same for both the product sales
business and handset design services business. We sell and market our product sales and mobile
handset design services through a sales force in China and direct marketing efforts. We maintain
sales and marketing staff in Beijing and Shanghai, covering the major cosmopolitan regions in China
where most of our customers are located. We also maintain sales and marketing staff to cover
Southeast Asia, India, America, Africa, Middle East, Asia and Europe, as we provide middle- to
high-end products to these markets; these staff members periodically travels to various trade shows
to promote our products in those markets.
We engage in marketing activities to promote our services. We frequently attend conferences,
exhibitions and trade fairs to promote our products and services. We attend the GSMA Mobile World
Congress (formerly 3GSM World Congress) exhibition in Barcelona and the CTIA Wireless exhibition in
Las Vegas every year. In addition, we view our strategic relationships with leading technology
companies and platform providers as part of our efforts to promote our company. We believe that
some of the leading technology companies with which we have strategic relationships will be
instrumental in helping us secure our targeted multinational customers by providing us opportunity
referrals, since such referrals may also promote the use of their technology. We also introduced
additional baseband platforms to our existing customers to attract new product sales and design
contracts from them.
Technology
We build our successful product sales business upon the strong foundation of our technological
expertise gained in the process of designing a wide range of mobile handset models by the effective
and efficient deployment of our in-house research and development team.
We have extensive experience in designing 2.5G GSM/GPRS mobile handsets based on major
baseband platforms. To expand our design capabilities, in 2007 we acquired the technologies
necessary for the design and development of 3.5G and 3.75G mobile handsets based on
EVDO/WCDMA/HSDPA/HSUPA standards. We further expanded our design capabilities by launching WiFi
enabled smart phones and dual mode dual card phones.
We rely on third-party licensors for key technologies and other technologies embedded in our
mobile handset designs. These licenses are typically non-exclusive under royalty-accruing and/or
paid-up contracts. Among licenses, we have obtained licenses for GSM-related intellectual property
from Philips, Texas Instruments and Skyworks Solutions. We are the first independent mobile handset
design house in China to have obtained licenses from QUALCOMM to use its CDMA/WCDMA/HSDPA/HSUPA
technology and patent to develop relevant handsets.
25
We have a high degree of technological expertise in major areas of mobile handset design,
development and production. Our engineers are skilled at designing mobile handsets that integrate
many different functions and features in common or differentiated hardware and software
architectures. We have also developed a design
approach that allows the production of enhanced mobile handset models with minimal
modifications and slight adjustments on the existing mass production lines of our customers or the
EMS providers that manufacture the products for our customers. This allows our customers to launch
new handset models at a relatively faster time-to-market and with lower manufacturing costs.
We use advanced methodologies to design mobile handsets for our customers. We use
industry-standard, state-of-the-art design tools in our design process which we believe provides us
significant flexibility to adapt our research, development and product design work to new
manufacturing processes and technology platforms when desirable.
We launched GPS/GSM-CDMA dual module/GSM-GSM dual card phones and WiFi smart phones based on
the Windows Mobile 6 operating system handsets in 2007. We have developed handsets with
technologies such as GSM/WCDMA, GSM/TD-SCDMA and UMTS/CDMA and are capable of developing middleware
MMI/UI software on 2.5G(GSM/GPRS, CDMA1X), 3G(EV-DO, WCDMA/UMTS, TD-SCDMA) and 3.5G(HSDPA)
communication technologies that fulfill the specifications of handset brand owners and carriers in
the global market. During 2009, we also commercialized several promising products including our
dual-GSM SIM card G6, a device designed to serve as a feature-rich mobile phone, a durable mobile
games platform and a remote control for PC games. In addition, during 2009, we launched our HSUPA
data modem card in the U.S. market and shipped mobile phones with TV functions to markets in Latin
America and Southeast Asia.
We are also focusing our efforts to develop mobile games and online games, making progress in
implementing new technologies such as motion sensor games for online game. During January 2010, we
launched our first MMORPG PC online game, developed entirely by our own studios; we expect to
launch more online games in 2010 after our researchers finish the beta versions.
Research and Development
We believe that our future success primarily depends on our ability to efficiently design and
develop: (1) new models of mobile handsets and manufacturing processes that meet our customers
demand for cost-competitive, high-quality and technologically advanced mobile handsets and, to a
lesser degree, (2) new mobile and online games with, among other characteristics, authentic action
design as well as unique technology and programming. We seek to continue to enhance and expand our
design capability through in-house research and development efforts and strategic partnerships. The
goals of our research and development efforts include the following:
to keep abreast of the advanced technologies in the mobile handset and mobile and
online game industry;
to emphasize cost-effectiveness and manufacturability of our designs;
to develop high-quality handsets based on various commonly adopted platforms and to
ensure flexibility of design and production modifications; and
to make effective use of the technologies licensed from leading global technology
companies.
As part of our newly developed mobile and online game business, we set up three online games
studios and one mobile games studio for research and development purposes. We also outsource part
of our online game design to an independent studio.
26
As of December 31, 2009, our research and development staff and supportive function consisted
of 361 engineers, representing approximately 69% of our total staff. All of our engineers are based
in China and most of our senior engineers have extensive experience in the mobile handset industry.
For the years ended December 31, 2007, 2008 and 2009, we had research and development expenses of
US$30.9 million, US$18.2 million and US$12.0 million, respectively.
Intellectual Property
We also rely on third-party licensors for design cell phone and module card technologies and
other technologies embedded in our designs. These licenses are typically non-exclusive and
royalty-accruing. If we are unable to continue to have access to these licensed technologies, our
success could be adversely affected. In addition, we rely on commercially available third-party
software applications in carrying on our business operations. We generally obtain these software
applications from retail outlets or through third-party vendors who bundle them together with PCs
and servers purchased by us. We make efforts to ensure that we have proper licenses for software
applications used by us, including those provided by third-party vendors.
Competition
The mobile handset market is intensely competitive and highly fragmented. We face current and
potential future competition from established mobile device manufacturers. These include original
design manufacturers, such as Arima Communications, BenQ Corp., Compal Communications and Longcheer
Holdings Limited, who compete with our product sales business by offering their own production
services to brand name owners. These original design manufacturers may also compete with us in the
mobile handset design business as they may be in a position to design mobile handsets on their own.
We also face worldwide competition from in-house design teams of original equipment manufacturers.
In addition, new players may enter the independent mobile handset production and design market in
the near future.
We compete in varying degrees on the basis of the following factors:
ability to effectively and efficiently provide know-how and support to our EMS
providers which manufacture handsets for our customers;
ability to design and integrate many hardware and software functions and features
based on different platforms;
product quality and reliability;
cost-effectiveness;
economies-of-scale;
ability to rapidly complete a design;
service and customer support capabilities; and
customer base and customer loyalty.
27
Competition in the mobile and online game market in China is intense. We believe that the key
competitive factors include the design, quality, popularity and price of online games and in-game
items, the ability to rapidly update and upgrade games, marketing activities, sales and
distribution network and customer service.
Many of our competitors have significantly greater financial, technical, manufacturing,
marketing, sales and other resources than we do. We cannot assure you that we will be able to
compete successfully against our current or future competitors.
Regulation
This section sets forth, in the opinion of our PRC counsel, Genland Law Firm, 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.
CTA Certification
The Ministry of Informational Industry, or MII, promulgated the Administration Measures of the
Network Entry of Telecommunication Equipment, which state that all telecommunication terminal
equipment subject to the network entry permit system, including mobile handsets, must obtain a
certification commonly known as China Type Approval, or CTA, from the MII before mass production.
CTA certifies that the use of telecommunication terminal equipment in the national
telecommunications network has been approved and complies with the requirements for network access
and the national standards established by the MII. Our customers generally require us to provide
technical support to assist them in obtaining CTA certification.
Tax
As a business enterprise operating in China, we are subject to the EIT Law, which became
effective on January 1, 2008. Prior to December 31, 2008, Techfaith China and Techfaith
Intelligent Handset Beijing applied for HNTE status that would allow for a reduced applicable tax
rate under the EIT Law, however, Techfaith China and Techfaith Intelligent Handset Beijing are also
required to confirm and record the HTNE certificate with the competent tax bureau to enjoy the
reduced tax rate. The official HNTE certificates were issued to Techfaith China and Techfaith
Intelligent Handset Beijing on December 24, 2008. While the certificates are valid for three
years, we believe we will be able to reapply successfully for the renewal of the current
certificates as we believe we will continue to meet the published criteria. Accordingly, Techfaith
China and Techfaith Intelligent Handset Beijing have used the reduced applicable tax rate in
calculations of deferred tax balances for the foreseeable future. Techfaith Shanghai is qualified
as a production enterprise and the relevant tax authorities has approved it for a two-year
exemption from income tax in 2005 and 2006, followed by a 50% reduction in tax rates for the
succeeding three years in 2007, 2008 and 2009. Techfaith Shenzhen is also qualified as a
production enterprise and the relevant tax authorities have agreed that it is entitled to a
two-year exemption from income tax in 2007 and 2008, followed by a 50% reduction in tax rate for
the succeeding three years in 2009, 2010 and 2011. Techfaith Hangzhou is also qualified as a
production enterprise and the relevant tax authorities have agreed that it is entitled to a
two-year exemption from income tax in 2007 and 2008, followed by a 50% reduction in tax rate for
the succeeding three years in 2009, 2010 and 2011. Based on the transition rules of the EIT Law,
those companies qualified as production enterprise and can continue to enjoy preferential tax
rates from 2008 through 2011 due to the preferential tax qualification obtained prior to January 1,
2008.
The EIT Law includes a provision specifying that legal entities organized outside China will be
considered residents for Chinese income tax purposes if their place of effective management or
control is within China. If legal entities organized outside China were considered residents for
Chinese income tax purpose, they would become subject to the EIT Law on their worldwide income.
This would cause any income legal entities organized outside China earned to be subject to Chinas
25% EIT. The Implementation Rules to EIT Law provide that non-resident legal entities will be
considered China residents if substantial and overall management and control over the manufacturing
and business operations, personnel, accounting and properties resides within China. The State
Administration of Taxation issued a notice in 2009 that sets out detailed rules for determining
whether a Chinese-controlled offshore incorporated enterprise is a tax resident of China, describes
the tax implications of such an enterprise being regarded as a tax resident and sets out the
procedures for an assessment of residence status by the relevant local tax bureau. Pursuant to
this notice, we do not believe that the legal entities of our group organized outside China would
be considered China tax residents for EIT Law purposes.
28
Under the EIT and its implementation rules, dividends payable by a foreign-invested enterprise in
China to its foreign investors who are non-resident enterprises are subject to a 10% withholding
tax, unless any such foreign investors jurisdiction of incorporation has a tax treaty or similar
arrangement with China that provides for a different withholding arrangement. Dividends of our PRC
subsidiaries that are directly held by our Hong Kong subsidiary historically benefited from a
reduced withholding tax rate of 5% under the arrangement to avoid double taxation between Hong Kong
and the PRC. However, in August 2009, the State Administration of Taxation released the
Administrative Measures for Non-Residents Enjoying Tax Treaty Benefits (Trial Implementation),
which took effect on October 1, 2009. Under these measures, our Hong Kong subsidiary needs to
obtain approval from the competent local branch of the State Administration of Taxation in order to
enjoy the preferential withholding tax rate of 5% in accordance with the double-taxation agreement
between the PRC and Hong Kong. In addition, the State Administration of Taxation has published
certain procedures and document requirements as well as sample tax resident certificates of certain
countries (regions) including Hong Kong, to be submitted to the competent tax bureau when claiming
the preferential withholding tax rate. As stipulated in rules published in year 2009, our Hong
Kong subsidiary shall fulfill the requirement for beneficial owner of the dividend to enjoy the
preferential withholding tax rate. However, given the relatively short history of these
implementation rules and procedures and document requirements, it is not clear our Hong Kong
subsidiary would be able to qualify for the 5% preferential withholding tax rate in the future.
Aggregate undistributed earnings of our subsidiaries located in the PRC that are taxable upon
distribution to us of approximately US$95.1 million at December 31, 2009 are considered to be
indefinitely reinvested, because we do not have any present plan to pay any cash dividends on its
ordinary shares in the foreseeable future and intends to retain most of our available funds and any
future earnings for use in the operation and expansion of our business. Accordingly, no deferred
tax liability has been accrued for the Chinese dividend withholding taxes that would be payable
upon the distribution of those amounts to us as of December 31, 2009.
We sell a significant portion of wireless modules and smart phones from our Hong Kong subsidiary,
and currently the statutory income tax rate in Hong Kong is 16.5%. The Inland Revenue Department of
Hong Kong approved our Hong Kong subsidiary to be effectively exempt from income tax in Hong Kong.
No provision for Hong Kong profits tax was made for the years ended December 31, 2007, 2008 and
2009 on the basis that Techfaith Intelligent Handset Technology (Hong Kong) Limited did not have
any assessable profits arising in or derived from Hong Kong for the years.
According to the Circular on Tax Issues Related to the Implementation of the Decision of the CPC
Central Committee and State Council on Strengthening Technical Innovation issued by the Ministry of
Finance and the State Administration of Taxation, Revenue generated under technology transfer
agreements or technology development that has been registered with relevant authorities, as well as
revenue generated from technology and consulting services associated with these two types of
arrangements, could be exempted from business tax.
Our subsidiaries in China are also entitled to a business tax exemption relating to their income
derived from any technology development agreement and technical transfer agreement that has been
registered with relevant government authorities.
Pursuant to the Provisional Regulation of China on Value Added Tax and their implementing rules,
except as stipulated otherwise, our PRC subsidiaries are required to pay value added tax, or VAT,
at a rate of 17% of the gross sales proceeds received, called output VAT. On the other hand, input
VAT paid on the purchased goods or received VAT taxable labor services is used as a credit against
the output VAT levied on the gross sales.
Online Game and Mobile Game
All
Internet-related businesses in China, including the operation of
online games, are highly
regulated by the PRC government. Various regulatory authorities of the PRC government, such as the
State Council, the Ministry of Industry and Information Technology, the State Administration of
Industry and Commerce, the Ministry of Culture, the General Administration of Press and
Publication, the State Administration of Radio, Film and Television and the Ministry of Public
Security, are empowered to promulgate and implement regulations governing various aspects of the
Internet and the online game industry. Our PRC operating companies are required to obtain
applicable permits or approvals from different regulatory authorities in order to operate online
games.
29
As the online game industry is at an early stage of development in China, new laws and
regulations may be adopted in the future to address new issues that arise from time to time, such
as online advertising and the use of virtual currency in online games. Also, different regulatory
authorities may have different views regarding the licensing requirements for the operation of
online games and related businesses. As a result, there is, and will continue to be, substantial
uncertainty in the interpretation and implementation of current and any future PRC laws and
regulations applicable to the online game industry and related businesses.
On December 11, 2001, the PRC State Counsel promulgated the Regulations for the Administration
of Foreign-invested Telecommunications Enterprises, or the FITE Regulations, which became effective
on January 1, 2002 and were subsequently amended on September 10, 2008. Under the FITE Regulations,
foreign ownership of companies that provide value-added telecommunication services, which includes
online game operation, is limited to 50%. In addition, foreign and foreign-invested enterprises are
currently not able to apply for the licenses required to operate online games in China or to
provide Internet information content, such as online advertising.
On July 13, 2006, the Ministry of Industry and Information Technology issued the Circular on
Strengthening the Administration of Foreign Investment in Value-added Telecommunication Services,
or the MIIT Circular 2006. According to the MIIT Circular 2006, since the FITE Regulations went
into effect, some foreign investors had engaged in value-added telecom services illegally by
conspiring with domestic value-added telecom enterprises to circumvent the requirements of the FITE
Regulations by delegating domain names and licensing trademarks. In order to further strengthen the
administration of foreign investors that conduct value-added telecommunications business, the MIIT
Circular 2006 provides that any domain name or trademark used by a value-added telecom carrier
shall be legally owned by such carrier or its shareholders. The MIIT Circular 2006 also provides
that the operation site and facilities of a value- added telecom carrier shall be installed within
the scope as prescribed by operating licenses obtained by the carrier and shall correspond to the
value-added telecom services that the carrier has been approved to provide. In addition,
value-added telecom carriers are required to establish or improve the measures of ensuring network
security. As to the companies which have obtained the operating licenses for value-added telecom
services, they are required to conduct self-examination and self-correction according to the said
requirements and report the result of such self-examination and self-correction to the provincial
branches of the Ministry of Industry and Information Technology.
Virtual Assets
In the course of playing online games, some virtual assets, such as special equipment, player
experience grades and other features of a users game characters, are acquired and accumulated.
Such virtual assets can be important to online game players and in some cases are exchanged between
players for monetary value. In practice, virtual assets can be lost for various reasons, often
through unauthorized use of the game account of one user by other users and occasionally through
data loss caused by a delay of network service or by a network crash. On June 4, 2009, the Ministry
of Culture and Ministry of Commerce of the PRC jointly issued a Notice on Reinforce Management
about the Virtual Asset Property of Online Games, which restricts the market access and publishes
more requirements for the on line games operators. However, it is still unclear who are the legal
owners of virtual assets and whether and how the ownership of virtual assets is protected by law.
It is unclear under PRC law whether an operator of online games such would have any liability to
game players or other interested parties (whether in contract, tort or otherwise) for loss of such
virtual assets by game players. Based on several judgments by PRC courts regarding the liabilities
of online game operators for loss of virtual assets by game players, the courts have generally
required the online game operators to return the virtual items or be liable for the loss and damage
incurred there from.
Foreign Currency Exchange
The principal regulation governing foreign currency exchange in China is the Foreign Currency
Administration Rules (1996), as amended. Under these rules, RMB is freely convertible for trade and
service-related foreign exchange transactions, but not for direct investment, loan or investment in
securities outside China unless the prior approval of SAFE is obtained.
30
Pursuant to the Administration of the Settlement, Sale and Payment of Foreign Exchange
Provisions, promulgated by the Peoples Bank of China (1996), foreign investment enterprises in
China may purchase foreign currency without the approval from SAFE for trade and service-related
foreign exchange (subject to a cap approved by SAFE) to satisfy foreign exchange liabilities or to
pay dividends. In addition, if and when they acquire companies in the middle and western areas of
China and the foreign investment accounts for not less than 25% of the registered capital of such
acquired companies, such acquired companies will also be entitled to enjoy the policies granted to
foreign investment enterprises. However, the relevant PRC government authorities may limit or
eliminate the ability of foreign investment enterprises to purchase and retain foreign currencies
in the future. In addition, foreign exchange transactions for direct investment, loan and
investment in securities outside China are still subject to limitations and require approvals from
SAFE.
Dividend Distribution
The principal regulations governing distribution of dividends by wholly foreign-owned
enterprises and the Chinese-foreign equity joint ventures include the Wholly Foreign-owned
Enterprise Law (1986), as amended by the Decision on Amending the Law of the Peoples Republic of
China on Foreign-funded Enterprises (2000), and the Implementing Rules of the Wholly Foreign-owned
Enterprise Law (1990), as amended by the Decision of the State Council on amending of the Rules for
the Implementation of the Law of the Peoples Republic of China on Foreign-funded Enterprises
(2001).
Under these regulations, foreign invested enterprises in China may pay dividends only out of
their accumulated profits, if any, determined in accordance with Chinese accounting standards and
regulations. In addition, foreign invested enterprises in China are required to set aside at least
10% of their respective accumulated profits each year, if any, to fund certain reserve funds, until
the cumulative amount of such fund reaches 50% of its registered capital. These funds are not
distributable as cash dividends.
31
C.
Organizational Structure
|
The following chart illustrates our corporate structure, our equity interest in each of our
principal operating subsidiaries and variable interest entity as of the date of this annual report:
Note:
|
|
|
(1)
|
|
Dotted line denotes variable interest entities. We have contractual arrangements with QIGI
Technology under which QIGI Technology focuses on smart phones under the QIGI brand.
|
|
(2)
|
|
Billion Team Asia Limited is an affiliate entity of D Magic Mobile (Shanghai) Incorporation.
|
|
(3)
|
|
Dotted line denotes variable interest entity. We have contractual arrangements with
Techfaith Interactive under which Techfaith Interactive operates our online and mobile game
business.
|
32
We conduct substantially all of our operations through the following subsidiaries and variable
interest entities in China:
|
|
Techfaith Wireless Communication Technology (Beijing) Limited, or Techfaith China, which
primarily designs GSM-based mobile handsets;
|
|
|
One Net Entertainment Limited, formerly known as Techfaith Interactive Technology (Beijing)
Limited, and before then, Techfaith Wireless Communication Technology (Beijing) Limited II and
Beijing Centel Technology R&D Co., Ltd., which primarily designs online games;
|
|
|
Beijing Techfaith Interactive Internet Technology Limited, or Techfaith Interactive, which has
exclusive contractual arrangements with us to operate our online and mobile game business;
|
|
|
Techfaith Wireless Communication Technology (Shanghai) Limited, formerly known as Leadtech
Communication Technology (Shanghai) Limited, which primarily designs CDMA mobile handsets
using technology licensed from QUALCOMM;
|
|
|
Techfaith Intelligent Handset Technology (Beijing) Limited, or Techfaith Intelligent
Handset Beijing, which focuses on smart phones and related products;
|
|
|
Techfaith Wireless Communication Technology (Hangzhou) Limited, or Techfaith Hangzhou,
which focuses on handsets and smart phones sales;
|
|
|
Techfaith Intelligent Handset Technology (Hong Kong) Limited, which focuses on smart phones
and handsets sales;
|
|
|
QIGI&BODEE Technology (Beijing) Co., Ltd., or QIGI Technology, which focuses on smart
phones under the QIGI brand; and
|
|
|
Glomate Mobile (Beijing) Co., Ltd., or Glomate, which will focus on licensing well-known
brands for high-end mobile phones.
|
Except for TechSoft, One Net, Techfaith Interactive, and Glomate, all of our subsidiaries in
China are wholly owned. TechSoft is wholly owned by a Cayman Islands holding company, which is a
joint venture that is 70%-owned by us and 30%-owned by QUALCOMM. Infiniti Capital Limited owns
25.7% of One Net and Techfaith Interactive through its US$10 million cash investment in 798
Entertainment Limiteds common equity under a definitive agreement entered in 2009. Glomate is a
subsidiary that is 51%-owned by us and 49%-owned by Billion Team Asia Limited, an affiliate of D Magic Mobile.
33
D.
Property, Plant and Equipment
|
As of December 31, 2009, our principal executive offices were located on premises comprising
24,000 square meters in Beijing, China. We have regional offices in Shanghai, Hangzhou and
Shenzhen. We plan to establish our dedicated mobile handset pilot production facilities in
Hangzhou. On February 11, 2007, we contracted
with a third party construction company to construct a building in Hangzhou for a provisional
consideration of approximately US$26.4 million (RMB192.0 million). As of December 31, 2009, we had
paid a total of US$23.7 million (RMB161.6 million) for the construction. Construction of this
facility is expected to be completed in 2010 and the facility will be primarily used for research
and development. We believe that we will be able to obtain adequate facilities to accommodate our
future expansion plans.
16.1.1
Unresolved Staff Comments
Not applicable.
ITEM 5.
Operating and Financial Review and Prospects
The following discussion of our financial condition and results of operations is based upon
and should be read in conjunction with our consolidated financial statements and their related
notes included in this annual report on Form 20-F. This report contains forward-looking
information. See Item 5. Operating and Financial Review and ProspectsG. Safe Harbor. In
evaluating our business, you should carefully consider the information provided under the caption
Risk Factors in this annual report on Form 20-F. We caution you that our businesses and financial
performance are subject to substantial risks and uncertainties.
Since our inception in 2002, we have been providing complete handset design services spanning
the entire handset design cycle, which involves industrial design, hardware design, component
selection and sourcing, prototype testing, pilot production and production support. In 2009, we
re-organized our business operations and currently our business includes three segments, which were
(1) handset design, (2) sales of products, and (3) game.
Major Factors Affecting Our Results of Operations
Net Revenues.
We derive our current revenues primarily from sales of products, mobile handset
design services and game. Products we sell include smart phones and feature phones designed by us
and manufactured by EMS providers, wireless modules and other electronics components for mobile
handsets. Revenues from handset design services comprise design fees, royalty income, component
sales related to design, such as chips used in mobile handset we design, and service income.
Revenues from game comprise income from mobile phone game related service and mobile game design
service.
Our revenues from product sales as a percentage of our total net revenues increased from over
70% in 2007 to over 90% in both 2008 and 2009. However, as our new game business has already begun
generate revenues in 2009 and we expect it to generate more revenues in 2010 and beyond, revenues
from product sales as a percentage of our total net revenues in 2010 may fall in comparison. We
recognize revenues from sales of products after all the risks and rights have passed to our
customersas we outsource the production and assembly of our products to outside manufacturers, we
record revenue based on the gross amounts billed to our customers. We use this revenue-recording
method because our customers generally entrust everything involving production to us and pay us
fully and promptly upon being billed, for the following reasons: (1) we are the primary obligor in
these transactions, (2) we have latitude in establishing prices, (3) we are involved in the
determination of the service specifications, (4) we bear the
credit risk, (5) we bear the inventory
risk and (6) we have the right to select the suppliers and the manufacturers. Normally, full
payment is required before products are shipped. We recognize revenues for products shipped on
credit only after collection is reasonably assured.
34
We also provide mobile handset design services to mobile handset brand owners. Our revenues
from mobile handset design services as a percentage of our total net revenues decreased from over
29% in 2007 to 9% in 2008 and 2% in 2009 and the revenue amount decreased from US$41.7 million in
2007 to US$ 19.1 million in 2008 and US$ 4.5 million in 2009. The decrease in revenues from handset
design services is because that the demands from customers have changed, as well as the change in
our product strategy, and more and more customers prefer to buy the finished products from us.
From 2008, we started to put less emphasis on handset design service and focus more on product
sales. Our design gross margins have fluctuated since our inception and are expected to continue
to fluctuate as a result of a variety of factors, which include changes in the relative mix of our
services and the terms at which we offer them.
The mobile handset industry is characterized by relatively short product life cycles,
increasing competition, margin pressure for wireless handset brand owners and a growing trend
toward outsourcing. We expect our business to continue to be primarily driven by the industry trend
to outsource. Our net revenues from product sales are driven by the number of mobile handsets sold
to our customers as well as the average per unit price of such handsets. The number of mobile
handsets sold is in turn driven, in part, by the quality and reliability of our products, the
number of our customers and the number of product orders that our sales and marketing team is able
to obtain from each of our customers. We expect our business to continue to be primarily driven by
the growing mobile handset markets and the industry trend to outsource. Our net revenues from
product sales are driven by the number of mobile handsets sold to our customers as well as the
average per unit price of such handsets.
While the quality of our products and services is a key factor in attracting orders from our
customers, the number of orders we receive is also driven by the market demand for the specific
products we design and produce, and the level of competition from our competitors in terms of their
ability both to attract our target customers and to exert downward pressures on industry prices.
The market demand for mobile handsets is further influenced by the general economic conditions, the
level of disposable income of consumers and general consumer sentiment in China, and, to a lesser
extent, in other countries in which we sell our products. As we outsource the assembly and
manufacturing of our products to EMS providers, and as we believe it is relatively easy for us to
procure raw materials from existing and new suppliers and to procure manufacturing services from
existing and new EMS providers, we do not anticipate having any capacity problem in sales order
fulfillment as we are in a position to accept, and successfully fulfill, substantially more orders
than the volume that we have been handling so far.
Our revenues from design services are net of 5% local business taxes. We may, upon
application to and approval from relevant tax authorities, be eligible for full refunds of the
business taxes to the extent they related to the revenue generated under technology development
agreements and/or technical marketing agreements. We have applied for and received refunds in
connection with the revenues generated under several of our mobile handset design contracts. Our
revenues from sales of feature phones are net of value-added taxes which is 17% of the gross sales
proceeds received by our PRC subsidiaries.
Cost of Revenues.
Cost of revenues from our sales of products, including smart phones, feature
phones, wireless modules, consists primarily of the cost of acquiring the products from EMS
factories, and to a lesser extent, compensation and benefits to our staff associated with the ODP
business. The cost of acquiring the products from EMS factories include not only the service fees
paid to the EMS providers but also the cost of raw materials we buy from our suppliers and assign
to the EMS providers for processing and assembly. Our cost of revenues for product sales may be
lowered by our ability to source the required raw materials and components from our suppliers at
competitive cost due to established and stable supplier relationships and price discounts from bulk
purchases. Cost of revenues from mobile handset design services primarily consists of part of our
engineers compensation and benefits for the period during which they are involved in any mobile
handset design project and, to a lesser extent, product warranty expenses, costs of materials used
in making handset prototypes and depreciation and amortization of intangible assets including
technology licenses and royalty rights used in connection with our handset design services. Cost
of revenues for providing mobile game services to our customers primarily consists of compensation
and benefits for our game developers.
35
Operating Expenses.
Our operating expenses consist of general and administrative, research and
development and selling and marketing expenses and expenses related to impairment of acquired
intangible assets and impairment as a result of revaluation of long-lived fixed assets.
General and Administrative.
General and administrative expenses consist primarily of
compensation and benefits of administrative personnel, office expenses including staff traveling
expenses and other expenses for general and administrative purposes, as well as costs for
professional services, including legal and accounting services.
Research and Development.
Research and development expenses consist primarily of the portion
of our engineers compensation and benefits not attributable to any mobile handset design project
pursuant to a design contract or to the development of mobile and online games, amortization of
assets related to research and development, compensation and benefits to our engineers who are
involved in the development of wireless modules, and lease expenses for occupancy associated with
research and development.
Selling and Marketing.
Selling and marketing expenses consist primarily of expenses related to
marketing and promotion activities, compensation and benefits for sales and marketing personnel and
travel expenses of sales and marketing personnel. We expect our selling and marketing expenses to
increase in absolute terms as we hire additional sales and marketing personnel and expand our
selling and marketing network in Japan, Europe and North America to promote and sell our products
and services.
Income Taxes.
Under the current laws of the Cayman Islands, where we are located, and the
current laws of the British Virgin Islands, where our holding company and intermediate holding
companies are located, we are not subject to tax on our income or capital gains. In addition, our
payment of dividends is not subject to withholding tax in these jurisdictions.
For more information in connection with the tax status of our subsidiaries in China and Hong
Kong, see Item 5. Information On the Company B. Business Overview Regulation Tax.
Critical Accounting Policies
We prepare our financial statements in conformity with the Generally Accepted Accounting
Principles in the United States of America, or U.S. GAAP, which require us to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues and expenses in the
financial statements and the accompanying notes. The consolidated financial statements include the
financial statements of Techfaith, its subsidiaries and its variable interest entities. All
inter-company transactions and balances are eliminated upon consolidation. The preparation of
financial statements in conformity with U.S. GAAP requires our management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues and expenses in the
financial statements and accompanying notes. Significant accounting estimates reflected in our
financial statements include revenue recognition, allowance for doubtful accounts, provision for
inventory write-down, provision for warranty, useful lives and impairment for plant, machinery and
equipment and intangible assets, share based compensation expense and valuation allowance for
deferred tax assets. We continually evaluate these estimates and assumptions based on the most
recently available information, our own historical experience and various other assumptions that
are believed to be reasonable under the circumstances. Since the use of estimates is an integral
component of the financial reporting process, actual results could differ from those estimates.
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 assists management in making their business decisions.
36
Revenue Recognition
Our revenues are derived from sales of products, mobile handset design service and game
business. Revenue from handset design services comprises design fee, royalty income, component
sales and service income. Revenues from product sales include smart phones, feature phones,
wireless modules and other electronics components for mobile handsets. Revenues from game business
include mobile phone game related services and mobile phone game design service.
(1) Handset design services
Design fee
. Design fee is a fixed amount paid in instalments according to pre-agreed
milestones. In general, three milestones are identified in each of our design contracts with
customers. These three milestones are: (1) GSM-based handsets industry standard referred to as
full type approval; (2) the relevant regulatory approval for use in the intended countryfor
example, in the case of China, a China type approval, or CTA; and (3) the beginning of mass
production referred to as shipping acceptance, or SA. We recognize revenues in accordance with
authoritative guidance regarding software revenue recognition, based on the proportional
performance method and using an output measure determined by the achievement of each milestone.
Royalty income.
In addition to design fee, we also charge royalty to certain customers. The
royalty is calculated at a variable rate based on the volume of mobile handsets manufactured or
sold by a customer. Royalty income is recognized when the confirmation of manufacturing or selling
volume is obtained from customers.
Component sales related to design.
After we have delivered design products to its customers,
customers are required to purchase certain components (such as chips used in mobile handsets)
through us to manufacture the designed products. As the component sales is built into the design
contracts, we include these component sales in the design contract related revenue rather than
product sales. We recognize the net revenue for component sales when the components are delivered
and the legal title directly passes from the suppliers to customers.
Service income.
We provide mobile handset testing services to other handset manufactures.
Service income is recognized when persuasive evidence of an arrangement exists, the fee is fixed or
determinable, collection is reasonably assured, and in the period in which performance has
occurred.
(2) Product sales
Product sales.
Revenue from sales of products, including feature phones and smart phones
designed by us and manufactured by EMS providers, wireless modules as well as other electronic
components is recognized when persuasive evidence of an arrangement exists, the fee is fixed or
determinable, collection is reasonably assured, and in the period in which delivery or performance
has occurred.
37
(3) Mobile game design and other related services
We also provide mobile phone game design services to manufacturers of branded mobile phones.
Under this type of arrangements, we are required to design mobile phone games according to customer
specifications for a fixed price, generally over a period of less than one year. Revenue from this
type of contracts are recognized under the proportional performance method using an output measure
determined by achievement of milestones which include planning documentation and testing reports.
We provide other mobile phone game related services to manufacturers of branded mobile phones.
Under these arrangements, we maintain a mobile phone web page so the end users for the
manufacturers of branded mobile phones can access the web page and download mobile phone games free
of charge during the contract period, usually one year. Revenue is recognized rateably over the
contract period.
Income taxes
Current income taxes are provided for in accordance with the laws of the relevant tax
authorities. Deferred income taxes are recognized when temporary differences exist between the tax
bases of assets and liabilities and their reported amounts in the consolidated financial
statements. Net operating loss carry forwards and credits are applied using enacted statutory tax
rates applicable to future years. Deferred tax assets are reduced by a valuation allowance when, in
the opinion of management, it is more likely than not that a portion or all of the deferred tax
assets will not be realized. The components of the deferred tax assets and liabilities are
individually classified as current and non-current based on their characteristics.
Goodwill
The excess of the purchase price over the fair value of net assets acquired is recorded on the
consolidated balance sheet as goodwill
.
Goodwill is not amortized but is tested for impairment
annually or more frequently if events or changes in circumstances indicate that it might be
impaired.
We test goodwill for impairment on an annual basis. In this process, we rely on a number of
factors, including operating results, business plans as well as future cash flows. Recoverability
of goodwill is evaluated using a two-step process. The first step compares the fair value of each
reporting unit to its carrying amount, including goodwill. If the fair value of each reporting unit
exceeds its carrying amount, goodwill is not considered to be impaired and the second step will not
be required. If the carrying amount of a reporting unit exceeds its fair value, the second step
compares the implied fair value of goodwill to the carrying value of a reporting units goodwill.
The implied fair value of goodwill is determined in a manner similar to accounting for a business
combination with the allocation of the assessed fair value determined in the first step to the
assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit
over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. An
impairment loss is recognized for any excess in the carrying value of goodwill over the implied
fair value of goodwill.
The total carrying amount of goodwill is $606,000 as of December 31, 2009; this amount is
allocated to product sales segment, which is the only reporting unit
which has goodwill allocated to it. For the year 2009, we performed the impairment assessment for
goodwill for product sales segment. The fair value of the reporting units is substantially higher
than their carrying value. Therefore, we recognized no impairment loss of goodwill in 2009.
38
In applying the income approach to the valuation of product sales unit, the discounted cash
flow methodology was used. The following are critical assumptions in determining the fair value of
the reporting unit:
|
|
|
The revenue growth is projected at a compound annual growth rate, or CAGR, of
approximately 5% for 2009-2014, which is within the range of comparable companies at the
time of valuation.
|
|
|
|
In the projection period, the cost of revenues as a percentage of revenues is expected
to remain stable.
|
|
|
|
Operating expenses, including selling and marketing expenses and general and
administrative expenses, as a as percentage of sales is expected to remain stable.
|
|
|
|
Over the projection period, earnings before interest and tax, or EBIT margins will
remain stable at 11.3%.
|
|
|
|
To maintain normal operations, capital expenditures are estimated to be around 0.4% of revenue.
|
|
|
|
The working capital requirement is estimated based on main accounts turnover days.
|
|
|
|
A perpetual growth rate after 2014 is assumed to be at 3% per year.
|
|
|
|
The weighted average cost of capital, or WACC, used in the calculation is 23%.
|
Estimates of fair value result from a complex series of judgments about future events and
uncertainties and rely heavily on estimates and assumptions at a point in time. The judgments made
in determining an estimate of fair value can materially impact our results of operations. The
valuations are based on information available as of the impairment review date and are based on
expectations and assumptions that have been deemed reasonable by management. Any changes in key
assumptions, including unanticipated events and circumstances, may affect the accuracy or validity
of such estimates and could potentially result in an impairment charge.
Valuation of Long-lived assets and certain identifiable intangibles
Long-lived assets such as property and equipment and definite-lived intangible assets are
stated at cost or fair value for impaired assets.
We review long-lived assets for impairment whenever events or change in circumstances indicate
that the carrying amounts of an asset may no longer be recoverable. Impairment exists if estimated
future undiscounted cash flows associated with long-lived assets are not sufficient to recover the
carrying value of such assets. The long-lived assets are adjusted to their respective fair values
when impairment exists.
During the year ended December 31, 2007, there were no impairment of long-lived assets and
definite-lived intangible assets.
In light of the deteriorating economic environment in 2008, we assessed long-lived assets and
intangible assets subject to amortization for impairment at the asset group level. Assets are
grouped with other assets and liabilities at the lowest level for which identifiable cash flows are
largely independent of the cash flows of other assets and liabilities. For each asset group, we
compared the sum of the expected undiscounted future cash flows from the use of the assets in each
of the asset groups with the carrying amount of such assets. The expected future cash flows of
each of the asset groups are based on a financial projection management used for planning purpose.
When estimating the fair value of the asset, we considered value in use and value in exchange.
Value in use of the asset was derived through the application of income approach discounted cash
flow method, while value in exchange was derived by primarily using the cost approach as well as
the market approach. According to the high and best use concept in the authoritative
pronouncement on fair value, we used the higher of value in use or value in exchange to determine
the fair value of the asset. We recorded a total of $880 impairment of long-lived assets in 2008.
During the year ended December 31, 2009, there was no further impairment of long-lived assets
and definite-lived intangible assets.
39
Product warranty
Our product warranty relates to the provision of bug fixing services to our designed mobile
handset for a period of one to three years commencing upon the mass production of the mobile
handset, and warranties to our customers on the sales of products. Accordingly, our product
warranty accrual reflects managements best estimate of probable liability under its product
warranties. We determine the warranty based on historical experience and other currently available
evidence.
Results of Operations
The following table sets forth a summary of our consolidated statements of operations for the
periods indicated. Our business has evolved rapidly and significantly since we commenced operations
in July 2002. Our limited operating history makes the prediction of future operating results
relatively difficult. We believe that period-to-period comparisons of operating results should not
be relied upon as being indicative of future performance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands)
|
|
Consolidated Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Handset design
|
|
$
|
41,721
|
|
|
$
|
19,123
|
|
|
$
|
4,482
|
|
Product sales
|
|
|
101,723
|
|
|
|
189,727
|
|
|
|
206,106
|
|
Mobile game design and other related service
|
|
|
|
|
|
|
|
|
|
|
488
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$
|
143,444
|
|
|
$
|
208,850
|
|
|
$
|
211,076
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Handset design
|
|
$
|
25,239
|
|
|
$
|
10,308
|
|
|
$
|
4,425
|
|
Product sales
|
|
|
79,556
|
|
|
|
157,377
|
|
|
|
168,376
|
|
Mobile game design and other related service
|
|
|
|
|
|
|
|
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
$
|
104,795
|
|
|
$
|
167,685
|
|
|
$
|
172,865
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
38,649
|
|
|
$
|
41,165
|
|
|
$
|
38,211
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
$
|
(13,142
|
)
|
|
$
|
(15,553
|
)
|
|
$
|
(9,600
|
)
|
Research and development
|
|
|
(30,876
|
)
|
|
|
(18,195
|
)
|
|
|
(12,040
|
)
|
Selling and marketing
|
|
|
(3,422
|
)
|
|
|
(5,497
|
)
|
|
|
(3,241
|
)
|
Impairment of long-lived assets
|
|
|
|
|
|
|
(880
|
)
|
|
|
|
|
Total operating expenses
|
|
$
|
(47,440
|
)
|
|
$
|
(40,125
|
)
|
|
$
|
(24,881
|
)
|
Government subsidy income
|
|
|
1,734
|
|
|
|
3,081
|
|
|
|
481
|
|
Other operating income
|
|
|
|
|
|
|
2,443
|
|
|
|
|
|
(Loss) income from operations
|
|
$
|
(7,057
|
)
|
|
$
|
6,564
|
|
|
$
|
13,811
|
|
Interest expense
|
|
|
(166
|
)
|
|
|
(47
|
)
|
|
|
(623
|
)
|
Interest income
|
|
|
3,871
|
|
|
|
1,616
|
|
|
|
667
|
|
Other (expense) income, net
|
|
|
(220
|
)
|
|
|
(22
|
)
|
|
|
115
|
|
Change in fair value of put option
|
|
|
(43
|
)
|
|
|
(855
|
)
|
|
|
(84
|
)
|
Change in fair value of derivatives embedded in
convertible notes
|
|
|
|
|
|
|
|
|
|
|
(5,270
|
)
|
Income tax benefit (expenses)
|
|
|
(6
|
)
|
|
|
93
|
|
|
|
(3,642
|
)
|
Equity in loss of an affiliate, net of income taxes
|
|
|
(851
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(4,472
|
)
|
|
|
7,349
|
|
|
|
4,974
|
|
Less: net (loss) income attributable
to the noncontrolling interest
(1)
|
|
|
1,200
|
|
|
|
652
|
|
|
|
1,363
|
|
Net (loss) income attributable to Techfaith
|
|
$
|
(3,272
|
)
|
|
$
|
8,001
|
|
|
$
|
6,337
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
We adopted authoritative guidance on noncontrolling interests in consolidated financial
statements on January 1, 2009, retrospectively.
|
40
Comparison of the Year Ended December 31, 2008 and the Year Ended December 31, 2009
Net Revenues
Our net revenue increased by 1.1% from US$208.9 million in 2008 to US$211.1 million in 2009.
The increase was attributed to the increased sales of smart phones and feature phones.
Handset design.
Our net revenues from handset design decreased by 76.4% from US$19.1 million
in 2008 to US$4.5 million in 2009, due to the decrease in the volume of our design contracts. The
decrease was primarily due to our transformation of business model to an ODP provider as well as
our recent entry into the game business, and is expected to continue.
Product Sales.
Revenues from product sales increased by 8.6% from US$189.7 million in 2008 to
US$206.1 million in 2009. The increase was primarily due to the increase of sales orders for smart
phones from our customers. In addition, 3G wireless module card was introduced in 2009 and
contributed 10% of product sales revenue.
Product sales from our feature phones as a result of contracts for which the contract party
was incorporated inside the PRC increased by 60.4% from US$41.2 million in 2008 to US$66.1 million
in 2009. Product sales from our feature phone as a result of contracts for which the contract
party was incorporated outside the PRC decreased significantly from US$41.1 million in 2008 to
US$13.5 million in 2009, due to our business strategy to expand the domestic markets for feature
phones.
Product sales from our smart phones as a result of contracts for which the contract party was
incorporated inside the PRC increased significantly from US$93.2 million in 2008 to US$104.3
million in 2009. Products sales from our smart phones as a result of contracts for which the
contract party was incorporated outside the PRC decreased by 68.7% from US$6.7 million in 2008 to
US$2.1 million in 2009, due to our business strategy to continuously expand the domestic markets
for middle- and high-end smart phones.
Mobile game design and other related service.
Revenues from mobile game design and other
related service increased from nil in 2008 to US$488,000 in 2009. The increase was primarily due
to the fact that we started to provide mobile game services and mobile game design services during
2009 and began generating income from this business during 2009. We expect game revenues to
increase in the coming years as we continue our efforts to develop and launch more mobile and
online games.
Cost of Revenue
Cost of revenues increased by 3.1% from US$167.7 million in 2008 to US$172.9 million in 2009.
The increase was attributable to the increase in cost of revenues for product sales.
Handset design.
Cost of revenues for handset design decreased by 57.3% from US$10.3 million
in 2008 to US$4.4 million in 2009, due to the decrease in the volume of our design contracts. The
decrease is expected to continue due to our transformation of business model to an ODP provider as
well as our recent entry into the mobile and online game business.
41
Product sales.
Cost of revenue from products sales increased by 7.0% from US$157.4 million in
2008 to US$168.4 million in 2009. The increase was primarily due to the increase of sales orders
for smart phones, feature phones and wireless modules from our customers.
Mobile game design and other related service.
Cost of revenue from mobile game design and
other related service increased from nil in 2008 to US$64,000 in 2009. The increase was primarily
due to the fact that we began providing mobile game services and mobile game design services during
2009, and generated income from one mobile phone game we developed for a customer and the mobile
game services we provided to some manufacturers of branded mobile phones. We expect this cost will
increase in the year 2010 and beyond due to our continued efforts to develop and expand the mobile
and online games portion of our business.
Gross Profit
Our gross profit was US$ 38.2 million in 2009, compared to US$41.2 million in 2008,
representing gross margins of 18.1% and 19.7%, respectively. The gross margin for handset design
revenue decreased from 46.1% in 2008 to 1.3% in 2009. The decrease was primarily due to depressed
market prices for handset design in general in 2009. Gross margin for product sales increased from
17.0% in 2008 to 18.3% in 2009. This increase was primarily due to the fact that we had a
promotion sale with low margin that we had in the fourth quarter of 2008 which resulted in
abnormally low margin for product sales in 2008. The changes in the product mix also caused the
changes in gross margins for handset design and product sales. Revenue from product sales
increased from 90.8% of the total net revenue in 2008 to 97.6% in 2009. In addition, revenue from
handset design fees decreased from 9.1% of the total net revenue in 2008 to 2.1% of the total net
revenue in 2009. As a result of the foregoing, our gross margins decreased from 19.7% in 2008 to
18.1% in 2009.
Operating Expenses
Operating expenses decreased by 37.9% from US$40.1 million in 2008 to US$24.9 million in 2009.
The decrease was primarily due to a general decrease in research and development expenses, general
and administrative expenses and selling and marketing expenses.
During 2008, we approved and announced a restructure plan to streamline our business
processes. This plan included the termination of 841 employees. The office building where the
terminated employees used to work is owned by us. We assessed the fair value of the office
building and determined that there was no impairment of the carrying amount of the building as of
December 31, 2008. In March 2009, we relocated to another building in Beijing
Economic-Technological Development Area with the intention of leasing out our previous offices, but
these offices were not leased during 2009.
General and Administrative.
General and administrative expenses decreased from US$15.6 million
in 2008 to US$9.6 million in 2009. The decrease during 2009 was due primarily to the one-off
expenses in compensation for layoffs conducted in 2008, which was US$3.4 million; there was no such
expense in 2009. In addition, influenced by the financial crisis, we reduced employee salaries by
approximately 20% in comparison with 2008 figures, and reduced office expenses such as office
supplies and staff traveling expenses by US$0.5 million as a cost-control measure.
Research and Development.
Research and development expenses decreased substantially from
US$18.2 million in 2008 to US$12.0 million in 2009. The decrease was due primarily to the cost
savings resulting from the human resource restructuring that was initiated in 2008 and from the
reduction of relevant salaries by US$2.6 million as a cost-control measure.
42
Selling and Marketing.
Selling and marketing expenses decreased by 41.8% from US$5.5 million
in 2008 to US$3.2 million in 2009. The decrease was due primarily to the decline in the need for
large-scale sales and promotional campaigns in 2009 as well as the decrease in sales and marketing
personnel after the human resource restructuring that was initiated in 2008.
Impairment Loss.
Impairment loss was US$0.9 million in 2008, compared to nil in 2009. The
impairment loss in 2008 was incurred because the carrying amounts of certain fixed assets and
intangible assets were not recoverable as they exceeded the sum of the undiscounted cash flows
expected to result from the use and eventual disposition of assets; no such amount applied in 2009.
Government Subsidy Income
We recorded government subsidy income of US$3.1 million and US$0.5 million for the years ended
December 31, 2008 and 2009, respectively.
Some local governments in PRC give subsidies to companies as an incentive to establish
business in certain locales. These government subsidies are recognized as subsidy income when they
are received as we do not have further obligation to earn this subsidy once received. We recorded
a government subsidy income of US$2.3 million and US$0.3 million for the years ended December 31,
2008 and 2009, respectively for this type of government subsidy.
We also receive government grants as compensation of performing government endorsed projects.
The grants are refundable until we achieve certain performance measures. These government grants
are recorded as a liability until earned. We recognize these grants as subsidy income once we
complete the relevant projects and achieve the performance measures. We recorded a government
subsidy income of US$0.8 million and US$0.2 million for the years ended December 31, 2008 and 2009,
respectively for this type of government grants.
Net Income Attributable to Techfaith
As a result of the cumulative effect of the foregoing factors, we incurred a net income
attributable to Techfaith of US$6.3 million in 2009, as compared to a net income attributable to
Techfaith of US$8.0 million in 2008.
Comparison of the Year Ended December 31, 2007 and the Year Ended December 31, 2008
Net Revenues
Our net revenue increased by 45.6% from US$143.4 million in 2007 to US$208.9 million in 2008.
The increase was attributed to the increased sales of smart phones and feature phones.
Handset design.
Our net revenues from handset design decreased by 54.2% from US$41.7 million
in 2007 to US$19.1 million in 2008, due to the decrease in the volume of our design contracts. The
decrease is expected to continue due to our transformation of business model to an ODP provider as
well as our recent entry into the game business.
43
Product Sales.
Revenues from product sales increased by 86.5% from US$101.7 million in 2007 to
US$189.7 million in 2008. The increase was primarily due to the increase of sales orders for smart
phones and feature phones from our customers.
Product sales from our feature phones as a result of contracts for which the contract party
was incorporated inside the PRC increased by 25% from US$33.0 million in 2007 to US$41.2 million in
2008. Product sales from our feature phone as a result of contracts for which the contract party
was incorporated outside the PRC increased significantly from US$14.4 million in 2007 to US$41.1
million in 2008.
Product sales from our smart phones as a result of contracts for which the contract party was
incorporated inside the PRC increased significantly from US$25.9 million in 2007 to US$93.2 million
in 2008. Products sales from our smart phones as a result of contracts for which the contract
party was incorporated outside the PRC decreased by 35.8% from US$10.5 million in 2007 to US$6.7
million in 2008, due to our business strategy to expand the domestic markets for middle- and
high-end smart phones.
Cost of Revenue
Cost of revenues increased by 60% from US$104.8 million in 2007 to US$167.7 million in 2008.
The increase was attributable to the increase in cost of revenues for product sales.
Handset design.
Cost of revenues for handset design decreased by 59.2% from US$25.2 million in
2007 to US$10.3 million in 2008.
Product sales.
Cost of revenue from products sales increased by 97.8% from US$79.6 million in
2007 to US$157.4 million in 2008.
Gross Profit
Our gross profit was US$41.2 million in 2008, compared to US$38.6 million in 2007,
representing gross margins of 19.7% and 26.9%, respectively. The gross margin for handset design
revenue increased from 39.5% in 2007 to 46.1% in 2008. This was primarily because in 2008 we signed
eight contracts with a total amount of US$7.2 million with exceptionally high gross margin of more
than 90%. Gross margin for product sales decreased from 21.8% in 2007 to 17.1% in 2008. This was
the direct result of a promotion sale with low margin that we had in the fourth quarter of 2008.
The changes in the product mix also caused the changes in gross margins for handset design and
product sales. Revenue from product sales increased from 70.9 % of the total net revenue in 2007
to 90.8% of the total net revenue in 2008. In addition, revenue from handset design fees decreased
from 29.1% of the total net revenue in 2007 to 9.2% of the total net revenue in 2008. As a result
of the foregoing, our gross margins decreased from 26.9% in 2007 to 19.7% in 2008.
Operating Expenses
Operating expenses decreased by 15.4% from US$47.4 million in 2007 to US$40.1 million in 2008.
The decrease was primarily due to a decrease in research and development expenses, partially offset
by an increase in general and administrative expenses and an increase in selling and marketing
expenses.
During 2008, we approved and announced a restructure plan to streamline our business
processes. This plan included the termination of 841 employees. This plan was completed in 2008
and resulted in restructuring charges, including US$3.4 million reflected in the general and
administrative expenses for employee severance and
benefits in compliance with the New Labor Law of the PRC. The office building where the
terminated employees used to work is owned by us. We assessed the fair value of the office
building and determined that there was no impairment of the carrying amount of the building as of
December 31, 2008. In March 2009, we relocated to another building in Beijing
Economic-Technological Development Area with the intent of leasing out our previous offices, but
those offices were not leased during 2009.
44
General and Administrative.
General and administrative expenses increased from US$13.1 million
in 2007 to US$15.6 million in 2008. The increase during 2008 was due primarily to the one-off
expenses in compensation for layoff, which was US$3.4 million in 2008.
Research and Development.
Research and development expenses decreased substantially from
US$30.9 million in 2007 to US$18.2 million in 2008. The decrease was due primarily to the reduced
cost incurred as a result of the human resource restructuring throughout 2008 in the face of the
worsening global economic downturn.
Selling and Marketing.
Selling and marketing expenses increased by 60.6% from US$3.4 million
in 2007 to US$5.5 million in 2008. The increase was due primarily to an increase in our selling and
marketing activities for products promotion.
Impairment loss.
Impairment loss was US$0.9 million in 2008, compared to nil in 2007. The
impairment loss in 2008 was incurred because the carrying amounts of certain fixed assets and
intangible assets were not recoverable as they exceeded the sum of the undiscounted cash flows
expected to result from the use and eventual disposition of assets.
Government Subsidy Income
We recorded government subsidy income of US$1.7 million and US$3.1 million for the years ended
December 31, 2007 and 2008, respectively.
Some local governments in PRC give subsidies to companies as an incentive to establish
business in its jurisdiction. These government subsidies are recognized as subsidy income when
they are received as we do not have further obligation to earn this subsidy. We recorded a
government subsidy income of US$0.4 million and US$2.3 million for the years ended December 31,
2007 and 2008, respectively for this type of government subsidy.
We also receive government grants as compensation of performing government endorsed projects.
The grants are refundable until we achieve certain performance measures. These government grants
are recorded as a liability until earned. We recognize these grants as subsidy income once it
completes the relevant projects and achieves the performance measures. We recorded a government
subsidy income of US$1.3 million and US$0.8 million for the years ended December 31, 2007 and 2008,
respectively for this type of government grants.
Net Income Attributable to Techfaith
As a result of the cumulative effect of the foregoing factors, we incurred a net income of
US$8.0 million in 2008, as compared to a net loss of US$3.3 million in 2007.
45
Recent Accounting Pronouncements
In June 2009, the FASB issued an authoritative pronouncement that changes how a company
determines whether an entity should be consolidated when such entity is insufficiently capitalized
or is not controlled by the company through voting (or similar rights). The determination of
whether a company is required to consolidate an entity is based on, among other things, the
entitys purpose and design and the companys ability to direct the activities of the entity that
most significantly impact the entitys economic performance. The pronouncement retains the scope of
previously issued pronouncements but added entities previously considered qualifying special
purpose entities, since the concept of these entities was eliminated by FASB. The pronouncement is
effective as of the beginning of an entitys first fiscal year that begins after November 15, 2009.
We do not expect the adoption of this pronouncement to have a significant impact on our financial
condition or results of operations.
In October 2009, the FASB issued an authoritative pronouncement regarding the revenue
arrangements with multiple deliverables. This pronouncement was issued in response to practice
concerns related to the accounting for revenue arrangements with multiple deliverables under
existing pronouncement. Although the new pronouncement retains the criteria from exiting
pronouncement for when delivered items in a multiple-deliverable arrangement should be considered
separate units of accounting, it removes the previous separation criterion under existing
pronouncement that objective and reliable evidence of the fair value of any undelivered items must
exist for the delivered items to be considered a separate unit or separate units of accounting. The
new pronouncement is effective for fiscal years beginning on or after June 15, 2010. Entities can
elect to apply this pronouncement (1) prospectively to new or materially modified arrangements
after the pronouncements effective date or (2) retrospectively for all periods presented. Early
application is permitted; however, if the entity elects prospective application and early adopts
this pronouncement after its first interim reporting period, it must also do the following in the
period of adoption: (1) retrospectively apply this pronouncement as of the beginning of that fiscal
year and (2) disclose the effect of the retrospective adjustments on the prior interim periods
revenue, income before taxes, net income, and earnings per share. We are in the process of
evaluating the effect of adoption of this pronouncement.
In October 2009, the FASB issued an authoritative pronouncement regarding software revenue
recognition. This new pronouncement amends existing pronouncement to exclude from their scope all
tangible products containing both software and non-software components that function together to
deliver the products essential functionality. That is, the entire product (including the software
deliverables and non-software deliverables) would be outside the scope of software revenue
recognition and would be accounted for under other accounting literature. The new pronouncement
include factors that entities should consider when determining whether the software and
non-software components function together to deliver the products essential functionality and are
thus outside the revised scope of the authoritative literature that governs software revenue
recognition. The pronouncement is effective for fiscal years beginning on or after June 15, 2010.
Entities can elect to apply this pronouncement (1) prospectively to new or materially modified
arrangements after the pronouncements effective date or (2) retrospectively for all periods
presented. Early application is permitted; however, if the entity elects prospective application
and early adopts this pronouncement after its first interim reporting period, it must also do the
following in the period of adoption: (1) retrospectively apply this pronouncement as of the
beginning of that fiscal year and (2) disclose the effect of the retrospective adjustments on the
prior interim periods revenue, income before taxes, net income, and earnings per share. We are in
the process of evaluating the effect of adoption of this pronouncement.
In January 2010, the FASB issued authoritative guidance on accounting for distributions to
shareholders with components of stock and cash. The objective of this new guidance is to clarify
that the stock portion of a distribution to shareholders that allows them to elect to receive cash
or stock with a potential limitation on the total amount of cash that all shareholders can elect to
receive in the aggregate is considered a share issuance that is reflected prospectively in earnings
per share and is not considered a stock dividend for purposes of accounting treatment of equity and
earnings per share. This new guidance is effective for interim and annual periods ending on or
after December 15, 2009, and should be applied on a retrospective basis. We do not expect the
adoption of this guidance would have a significant effect on our consolidated financial position or
results of operations.
46
In January 2010, the FASB issued authoritative guidance to clarify the scope of accounting and
reporting for decreases in ownership of a subsidiary. The objective of this guidance is to address
implementation issues related to changes in ownership provisions. This guidance clarifies certain
conditions, which need to apply to this guidance, and it also expands disclosure requirements for
the deconsolidation of a subsidiary or derecognition of a group of assets. This guidance is
effective in the period in which an entity adopts the authoritative guidance on noncontrolling
interests in consolidated financial statements. If an entity has previously adopted the guidance on
noncontrolling interests in consolidated financial statements, the amendments in this update are
effective beginning in the first interim or annual reporting period ending on or after December 15,
2009. Retrospective application to the first period that an entity adopted the guidance on
noncontrolling interests in consolidated financial statements is required. We do not expect the
adoption of this guidance would have a significant effect on our consolidated financial position or
results of operations.
In April 2010, the FASB issued an authoritative pronouncement on milestone method of revenue
recognition. The scope of this pronouncement is limited to arrangements that include milestones
relating to research or development deliverables. The pronouncement specifies guidance that must be
met for a vendor to recognize consideration that is contingent upon achievement of a substantive
milestone in its entirety in the period in which the milestone is achieved. The guidance applies to
milestones in arrangements within the scope of this consensus regardless of whether the arrangement
is determined to have single or multiple deliverables or units of accounting. The pronouncement
will be effective for fiscal years, and interim periods within those years, beginning on or after
June 15, 2010. Early application is permitted. Companies can apply this guidance prospectively to
milestones achieved after adoption. However, retrospective application to all prior periods is also
permitted. We are in the process of evaluating the effect of adoption of this pronouncement.
In April 2010, the FASB issued an authoritative pronouncement on effect of denominating the
exercise price of a share-based payment award in the currency of the market in which the underlying
equity securities trades and that currency is different from (1) entitys functional currency, (2)
functional currency of the foreign operation for which the employee provides services, and (3)
payroll currency of the employee. The guidance clarifies that an employee share-based payment award
with an exercise price denominated in the currency of a market in which a substantial portion of
the entitys equity securities trades should be considered an equity award assuming all other
criteria for equity classification are met. The pronouncement will be effective for interim and
annual periods beginning on or after December 15, 2010, and will be applied prospectively. Affected
entities will be required to record a cumulative catch-up adjustment for all awards outstanding as
of the beginning of the annual period in which the guidance is adopted. We are in the process of
evaluating the effect of adoption of this pronouncement.
B.
Liquidity and Capital Resources
The following table sets forth a summary of our cash flows for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands)
|
|
Net cash provided by (used in) operating activities
|
|
$
|
(19,353
|
)
|
|
$
|
1,496
|
|
|
$
|
33,241
|
|
Net cash used in investing activities
|
|
|
(13,279
|
)
|
|
|
(11,409
|
)
|
|
|
(1,146
|
)
|
Net cash provided by financing activities
|
|
|
|
|
|
|
|
|
|
|
19,389
|
|
Effect of exchange rate changes
|
|
|
4,214
|
|
|
|
4,085
|
|
|
|
134
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(28,418
|
)
|
|
|
(5,828
|
)
|
|
|
51,618
|
|
Cash and cash equivalents at beginning of period
|
|
|
113,172
|
|
|
|
84,754
|
|
|
|
78,926
|
|
Cash and cash equivalents at end of period
|
|
$
|
84,754
|
|
|
$
|
78,926
|
|
|
$
|
130,544
|
|
We have financed our operations through cash generated from our operating activities and
securities issuances, including our initial public offering in May 2005. As of December 31, 2009
and December 31, 2008, we had US$130.5 million and US$78.9 million, respectively, in cash and cash
equivalents. Our cash and cash equivalents primarily consist of cash on hand and bank deposits with
terms of three months or less.
47
To develop our game business, on June 9, 2009, our subsidiary, Leo Technology Limited, now
renamed 798 Entertainment Limited, issued to certain entities affiliated with IDGVC Partners, a
leading venture capital firm, senior secured convertible promissory notes with an aggregate
principal amount of US$10 million, a maturity date of three years and an interest rate of 8% per
annum compounded annually. At the earlier of (i) 30 months after the note issuance date if a
qualified initial public offering of the note issuer has not occurred by that time, or (ii) the
occurrence of an event of default, the note holders may also require the note issuer to redeem the
notes in cash equal to the redemption amount plus an annual return of 20% compounded annually on
the redemption amount, accrued but unpaid dividend (if any) and late charges (if any). In addition,
Infiniti Capital Limited invested US$10 million cash in Leo Technologys common equity under a
definitive agreement entered in 2009.
We believe that our current cash and cash equivalents and cash flow from operations will be
sufficient to meet our anticipated cash needs, including our cash needs for working capital and
capital expenditures for the next 12 months. We may, however, require additional cash resources
beyond the next 12 months due to higher than expected growth in our business or other changing
business conditions or future developments, including any possible investments or acquisitions. If
our existing cash resources are insufficient to meet our requirements, we may seek to sell
additional equity securities, debt securities or borrow from banks. We cannot assure you that
financing will be available in the amounts we need or on terms acceptable to us, if at all. The
sale of additional securities, including convertible debt securities, in one or more public
offerings or private placements could result in additional dilution to our shareholders. The
incurrence of indebtedness would result in debt service obligations and could result in operating
and financial covenants that restrict our operations and our ability to pay dividends to our
shareholders. If we are unable to obtain additional equity or debt financing as required, our
business, operations and prospects may suffer.
The ability of our subsidiaries in China to convert Renminbi into U.S. dollars and make
payments to us is subject to PRC foreign exchange regulations. Under these regulations, Renminbi is
convertible for current account items, including the distribution of dividends, interest payments,
trade and service-related foreign exchange transactions. Conversion of Renminbi for capital account
items, such as direct investment, loan, security investment and repatriation of investment,
however, is still subject to the approval of relevant PRC government authorities. Techfaith is a
holding company and has no present plan to pay any cash dividends on its ordinary shares in the
foreseeable future. See Item 8. Financial Information A. Consolidated Statements and Other
Financial Information Dividend Policy. Nor does Techfaith have any loans or any other
outstanding debts except for the convertible notes with IDGVC Partners as set forth above,
evaluated at US$15.4 million as of December 31, 2009. Accordingly, we believe that the impact of
PRC foreign exchange regulations on Techfaiths ability to meet its cash obligations is minimal.
Operating Activities.
Net cash provided by operating activities was US$33.2 million in 2009 as
compared to US$1.5 million in 2008. The increase was mainly due to the operating profit from our
ODP business. Net cash provided by operating activities increased substantially; in 2007, net cash
used in
operating activities was US$19.4 million; in 2008, net cash
provided by
operating
activities was US$1.5 million. This increase is primarily due to operating profits from our ODP
business.
In connection with sales of products, our customers typically pay us a portion of the selling
price before the products are delivered. We account for such prepayment as advance from customers
until all the risks and rights associated with the products have been passed to our customers.
Advance from customers decreased from US$5.3 million in 2008 to US$4.7 million in 2009. The
decrease was due primarily to lower amount of prepayments paid by customers despite the increase of
sales of products from 2008 to 2009. Advance from customers decreased from US$7.5 million in 2007
to US$5.3 million in 2008. The decrease was due primarily to the lower amount of prepayments paid
by customers despite the increase of sales of products from 2007 to 2008.
48
In connection with our handset design services, our customers typically pay us a portion of
design fees immediately after the design contract is executed. Such design fee advances received
from customers are accounted for as deferred revenue and are not recognized until a pre-agreed
milestone has been reached. Along with the
substantial decrease of revenues from design fees from US$15.5 million in 2008 to US$1.8
million in 2009, deferred revenue decreased slightly from US$1.7 million in 2008 to US$0.8 million
in 2009. The decrease was due primarily to the significant decrease of revenues from design fees
and design contracts from 2008 to 2009. Deferred revenue increased slightly from US$1.5 million in
2007 to US$1.7 million in 2008. The increase of deferred revenue in 2008 from the amount in 2007
was mainly due to the recognition of revenue from more design projects in 2008 as a result of
meeting the required milestones right before the year end of 2008.
Our accounts receivable amounted to US$40.0 million, US$37.8 million and US$29.0 million as of
December 31, 2007, 2008 and 2009, respectively. Our inventories amounted to US$50.8 million,
US$37.8 million and US$22.9 million as of December 31, 2007, 2008 and 2009, respectively.
Investing Activities
. Net cash used in investing activities decreased from US$11.4 million in
2008 to US$1.1 million in 2009. The decrease in our investing activities in 2009 was due primarily
to reduced capital investment in 2009. Net cash used in investing activities decreased from
US$13.3 million in 2007 to US$11.4 million in 2008. The decrease in our investing activities in
2008 was due primarily to the reduced capital investment in 2008 and decreases in restricted cash,
partially offset by an increase in purchase of plant, machinery and equipment.
Financing Activities.
Net cash provided by financing activities was US$19.4 million in 2009.
Net cash used by financing activities were at nil in 2008 and 2007. In 2009, we undertook the
following financing activities: on June 9, 2009, our subsidiary, Leo Technology Limited, now
renamed 798 Entertainment Limited, issued to certain entities affiliated with IDGVC Partners senior
secured convertible promissory notes with an aggregate principal amount of US$10 million, and
Infiniti Capital Limited invested US$10 million cash in Leo Technology Limiteds common equity
under a definitive agreement entered into in 2009.
Our capital expenditures amounted to US$13.8 million, US$14.8 million and US$1.4 million in
2007, 2008 and 2009, respectively. Our historical capital expenditure consisted principally of
purchases of software, machinery, equipment and other items related to our mobile handset design
services. We incurred capital expenditures totaling approximately US$1.4 million in 2009, which
primarily consisted of plant and machinery, furniture, fixtures and equipment.
Our capital expenditure plan for 2010 is US$1.0 million, which primarily consists of the
purchase of license and equipment and construction of a plant.
C.
Research and Development, Patents and Licenses, etc.
See Item 4. Information on the Company B. Business Overview.
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, 2009 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.
49
E.
Off-Balance Sheet Arrangements
We do not have any outstanding off-balance sheet guarantees, interest rate swap transactions
or foreign currency forward contracts. We do not engage in trading activities involving
non-exchange traded contracts.
F.
Contractual Obligations
The following table sets forth our contractual obligations as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period
|
|
|
|
|
|
|
|
Less Than
|
|
|
1-3
|
|
|
3-5
|
|
|
More Than
|
|
Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
|
(In thousands of $)
|
|
Operating lease obligations
(1)
|
|
|
1,223
|
|
|
|
988
|
|
|
|
235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital obligations
(2)
|
|
|
461
|
|
|
|
461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase obligations
(3)
|
|
|
5,055
|
|
|
|
5,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,739
|
|
|
|
6,504
|
|
|
|
235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Operating lease obligations arise from operating lease agreements principally for office
spaces in China.
|
|
(2)
|
|
Capital obligations represent commitments for construction of property, purchase of plant,
machinery and equipment.
|
|
(3)
|
|
Purchase obligations represent commitments under non-cancellable contracts we entered into
with certain EMS providers that allow them to procure inventory required to provide the
manufacturing services for our products.
|
Other than the contractual obligations set forth above, we do not have any long-term
commitments.
G.
Safe Harbor
This annual report on Form 20-F contains statements of a forward-looking nature. These
statements are made under the safe harbor provisions of the U.S. Private Securities Litigation
Reform Act of 1995. You can identify these forward-looking statements by words or phrases such as
may, will, expects, anticipates, future, intend, plan, believe, estimate, is/are
likely to or other and similar expressions. A number of business risks and uncertainties could
cause actual results, performance or achievements to differ materially from those expressed or
implied by the forward-looking statements. These risks and uncertainties relate to:
|
|
our limited operating history as a mobile handset design and software solution provider
and, to an even larger extent, as a seller of completed handsets;
|
|
|
our ability to successfully expand into the new branded mobile phone and game businesses;
|
|
|
our ability to timely and cost-efficiently sell completed handsets to meet our customers
demands;
|
|
|
decrease in demand for completed handsets by mobile handset brand owners; and
|
|
|
other risks outlined in this annual report on Form 20-F.
|
50
We would like to caution you not to place undue reliance on these statements and you should
read these statements in conjunction with the risk factors disclosed in Item 3. Key InformationD.
Risk Factors. We do not undertake any obligation to update the forward-looking statements except
as required under applicable law.
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.
|
|
|
|
|
|
|
Directors and Executive Officers
|
|
Age
|
|
Position/Title
|
Defu Dong
|
|
|
39
|
|
|
Chairman and Chief Executive Officer
|
Deyou Dong
|
|
|
35
|
|
|
Director and Chief Operating Officer
|
Jy-Ber Gilbert Lee
|
|
|
54
|
|
|
Director
|
Hung Hsin (Robert) Chen
|
|
|
64
|
|
|
Independent Director
|
Ken Lu
|
|
|
47
|
|
|
Independent Director
|
Ling Sui
|
|
|
54
|
|
|
Independent Director
|
Hui (Tom) Zhang
|
|
|
37
|
|
|
Independent Director
|
Yuping Ouyang
|
|
|
35
|
|
|
Chief Financial Officer
|
Changke He
|
|
|
48
|
|
|
Chief Technology Officer
|
Yibo Fang
|
|
|
41
|
|
|
Senior Vice President
|
Shugang Li
|
|
|
42
|
|
|
President
|
Executive Directors
Mr. Defu Dong
has been the Chairman and Chief Executive Officer of our company since our
inception. Prior to founding our company in July 2002, Mr. Dong co-founded Beijing Sino-Electronics
Future Telecommunication R&D, Ltd., a mobile handset design house, in February 2001, and was that
companys director, shareholder and Chief Executive Officer from its inception until July 2002.
Mr. Dong worked at Motorola (China) as a sales manager from 1997 to 2001. Prior to joining Motorola
(China), Mr. Dong was a sales manager at Mitsubishi (China) for one year. Mr. Dong received his
bachelors degree in mechanical engineering from Chongqing University in China in 1994.
Mr. Deyou Dong
has been our director since August 2009. He joined Techfaith in 2007, acting as
general manager of sales department. Prior this, he served as director of marketing department and
finance department in Century Legend Technology Beijing Limited in 1998, and General Manager of
system integration department in China System Integration Technology Beijing Limited in 2003. Mr.
Dong received a diploma in accounting from the Jilin University of
Agricultural Science And Technology in 1997.
Dr. Jy-Ber Gilbert Lee
has been our director since May 2005. Mr. Lee was our President and
Chief Operating Officer from February 2006 to August 2008. Prior to joining our company, Dr. Lee
was the deputy general manager of the Guangdong branch of China Netcom Corp., a subsidiary of China
Netcom Group. From June 2001 to February 2004, Dr. Lee was the Managing Director of Sales of China
Netcom Corp. From July 2000 to May 2001, Dr. Lee was a Vice President of Motorola Inc., and Deputy
General Manager of Global Telecom Solution, Greater China. Dr. Lee received his bachelors degree
in mechanical engineering from National Taiwan University in 1977, his masters degree in energy
engineering and his Ph.D. degree in mechanical engineering from the University of Illinois in 1980
and 1984, respectively.
51
Independent Directors
Mr. Hung Hsin (Robert) Chen
has been our independent director since September 2005. Prior to
that, Mr. Chen had worked at SangFei Consumer Communications Co., Ltd, or SangFei, a joint venture
between Philips and China Electronics Corporation, which produces mobile phones and MP3 players for
original equipment manufacturers and original design manufacturers. Mr. Chen had been the general
manager of SangFei and a senior consultant of Philips China for nine years. Prior to joining
SangFei, Mr. Chen was a general manager of National Semiconductor China, a joint venture with
National Semiconductor. Mr. Chen has over 30 years experience in the consumer electronic products
and wireless terminals industries. Mr. Chen received his bachelors degree from Taiwan National
Cheng Kung University in 1969.
Dr. Ken Lu
has been our independent director since August 2006. Dr. Lu is a managing director
of Seres Asset Management Limited, an investment management company focusing on the Asian equity
markets. Prior to Seres, Dr. Lu founded and managed APAC Capital Advisors Limited, a Greater China
investment management company, from 2004 to early 2010. Dr. Lus extensive capital market
experience also includes research analyst roles at a number of leading investment banks, including
JP Morgan and Credit Suisse (formerly Credit Suisse First Boston, or CSFB). He served as the Head
of China Research at CSFB from October 2001 to May 2004, managing a team of over 10 research
analysts and directing CSFBs overall China research products. Mr. Lu also serves on the boards and
audit committees of Asia Info Holdings, Inc., a company listed on the NASDAQ, Enerchina Holdings
Ltd, a company listed on the Hong Kong Stock Exchange, and China Cord Blood Corporation, a company
listed on the main board of the New York Stock Exchange. Dr. Lu received his bachelors degree from
the Beijing University in 1985, his masters degree from Brigham Young University in 1988, and his
Ph. D. degree in finance from the University of California, Los Angeles in 1995.
Ms. Ling Sui
has been our independent director since August 2007. Ms. Sui is a partner and
general manager of CFO Resource, a financial consulting company since May 2008. From November 2007
to February 2008, Ms. Sui was vice president of Hangzhou Casa Limited, a heating equipment
manufacturing company. Prior to that, Ms. Sui was the vice chairman of the Human Resource
Association for Chinese & Foreign Enterprises in Beijing. Ms. Sui served as the assistant to the
chief executive officer and general manager of the group finance department of China Netcom (Group)
Company Ltd. from 2004 to 2007 and vice president and financial controller of China Netcom
Corporation Ltd. from 1999 to 2004. Prior to that, Ms. Sui worked with Motorola for six years as
the service operation controller in the personal communication sector. Ms. Sui received her
bachelors degree in finance and banking from Northeast University of Finance & Economics in China
in 1978.
Dr. Hui (Tom) Zhang
has been our independent director since March 2006. Dr. Zhang is a
co-founder and chief executive officer of Innofidei Inc., a fabless semiconductor company in China
founded in 2006. Dr. Zhang was a co-founder of Vimicro International (NASDAQ: VIMC). He also serves
as an independent director of KongZhong Corporation and Qiaoxing Mobile. He is secretary general of
the Mobile Multimedia Technology Alliance. Dr. Zhang received his bachelors degree from the
University of Science & Technology of China in 1993 and his Ph.D. degree in electrical engineering
from the University of California at Berkeley in 1999. He received the 2005 University of
California at Berkeley Outstanding Engineering Alumni Award.
Other Executive Officers
Ms. Yuping Ouyang
has been our Chief Financial Officer since August 2008. From September 2004
to August 2008, Ms. Ouyang was in various financial positions at our company, including US GAAP
reporting manager and chief accounting officer. Prior to joining our company, she served as an
accounting manager at Guangzhou Metro Corporation. Ms. Ouyang received her MBA from the Sun Yat-sen
University in 2006 and her bachelors degree in management from the Guangdong University of Foreign
Studies in 1996. Ms. Ouyang is also a member of the Association of Chartered Certified Accountants
in China.
52
Mr. Changke He
is the Chief Technology Officer of our company. He previously served as the
President of STEP Technologies (Beijing) Co., Ltd., a subsidiary of Techfaith, from May 2004 to
February 2005, and was a director of our company. Prior to joining us in September 2002, Mr. He
worked at Beijing Sino-Electronics Future Telecommunication R&D, Ltd. for three months. From 1995
to May 2002, Mr. He worked at Motorola (China) as a radio frequency engineer. Mr. He received his
bachelors degree in automatic control and computer engineering from China Central Polytechnic
College in 1982 and his masters degree in electronics and automatic engineering from Tianjin
University in China in 1990.
Mr. Yibo Fang
is the President of STEP Technologies (Beijing) Co., Ltd. From August 2002 to
March 2005, Mr. Fang was the Vice President and Chief Technology Officer of Techfaith China. Before
joining our company in August 2002, Mr. Fang worked at Beijing Sino-Electronics Future
Telecommunication R&D, Ltd. for five months as a hardware director. From August 2001 to
January 2002, Mr. Fang worked at ZT Telecom as a hardware engineer. From 1995 to July 2001, Mr.
Fang worked at Motorola (China) as a hardware engineer. Mr. Fang received his bachelors degree in
electrical engineering and applied electronic technology from Tsinghua University in China in 1991.
Mr. Shugang Li
is the President of Techfaith Electronics. From 2002 to August 2008, Mr. Li
served in several positions at our company, including vice president in charge of production
support, sourcing, project management and quality assurance and as president of Step Technologies
(Beijing) Co., Ltd. Prior to joining our company, Mr. Li served as an engineering department
manager at Motorola China for seven years. He received his bachelors degree in electronic
engineering from Tianjin University in China in 1990.
The business address of our directors and executive officers is c/o China Techfaith Wireless
Communication Technology Limited, Building 1, No. 13, YongChang North Road, Beijing
Economic-Technological Development Area (Yi Zhuang), Beijing 100176, Peoples Republic of China.
B.
Compensation of Directors and Executive Officers
In 2009, the aggregate cash compensation and benefits that we paid to our executive officers,
including all the directors, was approximately US$0.25 million. No executive officer is entitled
to any severance benefits upon termination of his or her employment with our company.
Share Incentives
In 2005, our board of directors and our shareholders approved a 2005 share incentive plan, or
the 2005 plan, in order to attract and retain the best available personnel for positions of
substantial responsibility, provide additional incentive to employees, directors and consultants
and promote the success of our business. A total of 40,000,000 ordinary shares have been reserved
for issuance under the 2005 plan, under which 131,636 options and 644,090 nonvested shares were
issued as of May 16, 2010. Our future grants of share incentives will be made pursuant to the 2005
plan.
The following table summarizes, as of May 16, 2010, the outstanding options granted under the
2005 plan to our directors and senior executive officer named below since our board of directors
adopted the 2005 plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
Underlying
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Date of
|
|
|
Date of
|
|
|
|
Granted
|
|
|
(US$/Share)
|
|
|
Grant
|
|
|
Expiration
|
|
Jy-Ber Gilbert Lee
|
|
|
131,636
|
|
|
|
1.083
|
|
|
August 13, 2005
|
|
|
August 13, 2015
|
|
|
|
|
|
Total
|
|
|
131,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
The following table summarizes, as of May 16, 2010, the nonvested shares granted under the
2005 plan to our directors and senior executive officer named below since our board of directors
adopted the 2005 plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underlying the
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted, as of the
|
|
|
Price
|
|
|
|
|
|
|
Vesting
|
|
|
|
Date of Grant
|
|
|
(US$/Share)
|
|
|
Date of Grant
|
|
|
Schedule
|
|
Hung Hsin (Robert) Chen
|
|
|
65,818
|
|
|
|
|
|
|
August 12, 2006
|
|
|
|
(1)
|
|
Ying Han
|
|
|
65,818
|
|
|
|
|
|
|
August 12, 2006
|
|
|
|
(2)
|
|
Hui (Tom) Zhang
|
|
|
65,818
|
|
|
|
|
|
|
August 12, 2006
|
|
|
|
(2)
|
|
Ken Lu
|
|
|
65,818
|
|
|
|
|
|
|
November 11, 2006
|
|
|
|
(3)
|
|
Sui Ling
|
|
|
65,818
|
|
|
|
|
|
|
August 11, 2007
|
|
|
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
329,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
100% of the shares vested immediately on the grant date.
|
|
(2)
|
|
50% of the nonvested shares vested immediately on the grant date, and the remaining 50% of
the nonvested shares vested on April 1, 2007.
|
|
(3)
|
|
50% of the nonvested shares vested immediately on the grant date, and the remaining 50% of
the nonvested shares vested on November 1, 2007.
|
|
(4)
|
|
One quarter of the nonvested shares vested immediately on the grant date, and the remaining
three quarters to be vested on August 12, 2008, 2009 and 2010 averagely.
|
The following paragraphs describe the principal terms of the 2005 plan.
Types of Awards.
We may grant the following types of awards under our 2005 plan:
|
|
|
options to purchase our ordinary shares;
|
|
|
|
nonvested shares, which are non-transferable ordinary shares, subject to
forfeiture upon termination of a grantees employment or service;
|
|
|
|
nonvested share units, which represent the right to receive our ordinary
shares at a specified date in the future, subject to forfeiture upon
termination of a grantees employment or service;
|
|
|
|
share appreciation rights, which provide for the payment to the grantee
based upon increases in the price of our ordinary shares over a set base
price; and
|
|
|
|
dividend equivalent rights, which represent the value of the dividends
per share that we pay.
|
54
Awards may be designated in the form of ADSs instead of ordinary shares. If we designate an
award in the form of ADSs, the number of shares issuable under the 2005 plan will be adjusted to
reflect that one ADS represents 15 ordinary shares.
Plan Administration.
Our board of directors, or a committee designated by our board or
directors, will administer the 2005 plan. The committee or the full board of directors, as
appropriate, will determine the provisions and terms and conditions of each award grant.
Award Agreement.
Awards granted under our 2005 option plan are evidenced by an award agreement
that sets forth the terms, conditions and limitations for each award. In addition, in the case of
options, the award agreement also specifies whether the option constitutes an incentive stock
option, or ISO, or a non-qualifying stock option.
Eligibility.
We may grant awards to employees, directors and consultants of our company or any
of our related entities, which include our subsidiaries or any entities in which we hold a
substantial ownership interest. However, we may grant options that are intended to qualify as ISOs
only to our employees.
Acceleration of Awards upon Corporate Transactions.
The outstanding awards will accelerate
upon occurrence of a change-of-control corporate transaction where the successor entity does not
assume our outstanding awards under the 2005 plan. In such event, each outstanding award will
become fully vested and immediately exercisable, and the transfer restrictions on the awards will
be released and the repurchase or forfeiture rights will terminate immediately before the date of
the change-of-control transaction. If the successor entity assumes our outstanding awards and later
terminates the grantees service without cause within 12 months of the change-of-control
transaction, the outstanding awards will automatically become fully vested and exercisable.
Terms of Awards.
In general, the plan administrator determines the exercise price of an option
or the purchase price of the nonvested shares and sets forth the price in the award agreement. The
exercise price may be a fixed or variable price related to the fair market value of our ordinary
shares. If we grant an ISO to an employee, who, at the time of that grant, owns shares representing
more than 10% of the voting power of all classes of our share capital, the exercise price cannot be
less than 110% of the fair market value of our ordinary shares on the date of that grant. The term
of each award shall be stated in the award agreement. The term of an award shall not exceed 10
years from the date of the grant.
Vesting Schedule.
In general, the plan administrator determines, or the award agreement
specifies, the vesting schedule.
Amendment and Termination.
Our board of directors may at any time amend, suspend or terminate
the 2005 plan. Amendments to the 2005 plan are subject to shareholder approval to the extent
required by law, or stock exchange rules or regulations. Additionally, shareholder approval is
specifically required to increase the number of shares available for issuance under the 2005 plan
or to extend the term of an option beyond 10 years. Unless terminated earlier, the 2005 plan will
expire and no further awards may be granted after the tenth anniversary of the shareholder approval
of the 2005 plan.
C.
Board Practices
In 2009, our directors held four meetings. Each director participated in all the meetings of
our board and its committees on which he served after becoming a member of our board. No director
is entitled to any severance benefits upon termination of his directorship with us. As of the date
of this annual report, a majority of our directors
meet the independence definition under The NASDAQ Stock Market, Inc. Marketplace Rules, or
the NASDAQ Rules.
55
Committees of the Board of Directors
Audit Committee
. Our audit committee reports to the board regarding the appointment of our
independent auditors, the scope of the annual audits, the fees paid to our independent auditors,
the results of our annual audits, compliance with our accounting and financial policies and
managements procedures, policies relating to the adequacy of our internal accounting controls and
pre-approval of non-audit services rendered to us by our independent auditors. In 2009, our audit
committee held four meetings.
Our audit committee currently consists of Dr. Ken Lu, Mr. Robert Chen and Ms. Ling Sui, all of
whom meet the audit committee independence standard under Rule 10A-3 under the Securities Exchange
Act. Each of them also meets the independence definition under Rule 5605 of the NASDAQ Rules.
Mr. Ken Lu and Ms. Ling Sui are financial experts as defined under the NASDAQ Rules.
Compensation Committee
. Our compensation committee reviews and evaluates and, if necessary,
revises the compensation policies adopted by the management. Our compensation committee also
determines all forms of compensation to be provided to our three most senior executive officers. In
addition, the compensation committee reviews all annual bonuses, long-term incentive compensation,
share options, employee pension and welfare benefit plans. Our Chief Executive Officer may not be
present at any committee meeting during which his compensation is deliberated.
Our compensation committee currently consists of Dr. Hui (Tom) Zhang, Dr. Ken Lu and Mr.
Robert Chen, all of whom meet the independence definition under the NASDAQ Rules. In 2009, our
compensation committee did not hold any meetings.
Corporate Governance and Nominating Committee
. Our corporate governance and nominating
committee assists our board of directors in identifying individuals qualified to become our
directors and in determining the composition of the board and its committees. The corporate
governance and nominating committee monitor compliance with the code of business conduct and ethics
and applicable laws and practice of corporate governance.
Our corporate governance and nominating committee currently consists of Dr. Hui (Tom) Zhang,
Dr. Ken Lu and Mr. Robert Chen, all of whom meet the independence definition under the NASDAQ
Rules. In 2009, our corporate governance and nominating committee held one meeting.
Duties of Directors
Under Cayman Islands laws, our directors have a fiduciary duty to act honestly in good faith
with a view to our best interests. Our directors also have a duty to exercise the skill they
actually possess and such care and diligence that a reasonably prudent person would exercise in
comparable circumstances. In fulfilling their duty of care to us, our directors must ensure
compliance with our memorandum and articles of association.
Terms of Directors and Officers
All directors hold office until the expiration of their terms and until their successors have
been duly elected and qualified. A director may only be removed by our shareholders at any time
before the expiration of his term. Officers are elected by and serve at the discretion of the board
of directors.
56
D.
Employees
As of December 31, 2009, we had 518 employees, including 361 in research and development and
supportive function, 90 in selling and marketing and 67 in management and administration.
E.
Share Ownership
As of December 31, 2009 and May 16, 2010, 650,156,045 ordinary shares and 715,172,111 ordinary
shares, respectively, of our company were outstanding, excluding shares issuable upon exercise of
outstanding options and shares that may be issued to holders of the notes held by certain entities
affiliated with IDGVC Partners. Our shareholders are entitled to vote together as a single class on
all matters submitted to shareholders vote. No shareholder has different voting rights from other
shareholders. We are not aware of any arrangement that may, at a subsequent date, result in a
change of control of our company.
As of May 16, 2010, approximately 70.0% of the issued and outstanding shares were held by two
record shareholders in the United States, including 26,699,225 ADSs held by our ADS depositary.
The following table sets forth information with respect to our directors and executive
officers beneficial ownership of our ordinary shares as of May 16, 2010, to the extent such
ownership exists.
|
|
|
|
|
|
|
|
|
|
|
Ordinary Shares Beneficially Owned
(1)
|
|
|
|
Number
|
|
|
%
(2)
|
|
Directors and Executive Officers:
|
|
|
|
|
|
|
|
|
Defu Dong
(3)
|
|
|
249,250,000
|
|
|
|
34.9
|
%
|
Jy-Ber Gilbert Lee
(4)
|
|
|
131,636
|
|
|
|
*
|
|
Hung Hsin (Robert) Chen
(5)
|
|
|
65,818
|
|
|
|
*
|
|
Hui (Tom) Zhang
(6)
|
|
|
65,818
|
|
|
|
*
|
|
Ken Lu
(7)
|
|
|
65,818
|
|
|
|
*
|
|
Sui Ling
(8)
|
|
|
49,364
|
|
|
|
*
|
|
All
directors and executive officers as a group
(9)
|
|
|
249,628,454
|
|
|
|
34.9
|
%
|
|
|
|
*
|
|
Less than 1%.
|
|
(1)
|
|
Beneficial ownership is determined in accordance with the rules of the Securities and
Exchange Commission, or the SEC, and includes voting or investment power with respect to the
securities.
|
|
(2)
|
|
For each person and group included in this table, percentage ownership is calculated by
dividing the number of shares beneficially owned by such person or group by the sum of (1)
715,172,111, being the number of ordinary shares outstanding as of May 16, 2010 and (2) the
number of ordinary shares underlying share options held by such person or group, if any, that
were exercisable within 60 days after May 16, 2010, or the number of nonvested shares held by
such person or group, if any, that will fully vest within 60 days after May 16, 2010, or
the number of other securities of the company that such person or group otherwise has the
right to acquire, if any, within 60 days after May 16, 2010 by option or other agreement.
|
|
(3)
|
|
Includes 165,750,000 ordinary shares held by Oasis Land Limited, which is ultimately owned by
Dongs Family Trust, and 83,500,000 ordinary shares held by Helio Glaze Limited, which is
ultimately owned by Huos Offshore Trust. Mr. Defu Dong is the sole director of each of Oasis
Land Limited and Helio Glaze Limited, with the sole power to vote on behalf of Oasis Land
Limited and Helio Glaze Limited on all matters of Techfaith requiring shareholder approval.
The business address for Mr. Defu Dong is Building 1, No. 13, YongChang North Road, Beijing
Economic-Technological Development Area (Yi Zhuang), Beijing 100176, Peoples Republic of
China.
|
|
(4)
|
|
Includes 131,636 ordinary shares that were issuable upon exercise of options exercisable
within 60 days after May 16, 2010 held by Mr. Lee.
|
57
|
|
|
(5)
|
|
Includes 65,818 nonvested shares that were granted to Robert Chen on August 12, 2006, the
previous granted 131,636 share options were cancelled accordingly.
|
|
(6)
|
|
Includes 65,818 nonvested shares that were granted to Hui (Tom) Zhang on August 12, 2006.
|
|
(7)
|
|
Includes 65,818 nonvested shares that were granted to Ken Lu on November 11, 2006.
|
|
(8)
|
|
Includes 49,364 nonvested shares that were granted to Sui Ling on August 11, 2007.
|
|
(9)
|
|
Shares owned by all of our directors and executive officers as a group include shares
beneficially owned by Defu Dong,
Jy-Ber
Gilbert Lee, Hung Hsin
(Robert) Chen, Sui Ling, Hui (Tom) Zhang and Ken Lu.
|
The following table sets forth information with respect to the beneficial ownership of our
ordinary shares, as of December 31, 2009, by our other principal shareholder.
|
|
|
|
|
|
|
|
|
|
|
Ordinary Shares Beneficially Owned
(1)
|
|
|
|
Number
|
|
|
%
(2)
|
|
Other Principal Shareholder:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fidelity Low-Priced Stock Fund
(3)
|
|
|
33,782,055
|
|
|
|
4.7
|
%
|
|
|
|
(1)
|
|
Beneficial ownership is determined in accordance with the rules of the SEC, and includes
voting or investment power with respect to the securities.
|
|
(2)
|
|
For each person and group included in this table, percentage ownership is calculated by
dividing the number of shares beneficially owned by such person or group by the sum of (1)
715,172,111, being the number of ordinary shares outstanding as of May 16, 2010 and (2) the
number of ordinary shares underlying share options held by such person or group, if any, that
were exercisable within 60 days after May 16, 2010 or the number of nonvested shares held by
such person or group, if any, that will fully vest within 60 days after May 16, 2010 or the
number of other securities of the company that such person or group otherwise has the right to
acquire, if any, within 60 days after May 16, 2010 by option or other agreement.
|
|
(3)
|
|
Includes 33,782,055 ordinary shares held by Fidelity Low-Priced Stock Fund, or Fidelity Fund.
The business address for Fidelity Fund is
82 Devonshire Street, Boston, Massachusetts 02109. According to the Schedule 13G, as amended,
filed by FMR LLC on February 12, 2010, as of December 31, 2009, Fidelity Fund hold
33,782,055 ordinary shares.
Fidelity Management & Research Company, a wholly-owned subsidiary of FMR LLC and an investment adviser registered under Section 203 of the Investment Advisers Act of 1940, is the beneficial owner of the 33,782,055 ordinary shares held by Fidelity Fund as a result of acting as investment adviser to Fidelity Fund.
Each of Edward C. Johnson 3d, chairman of FMR LLC, FMR LLC and the various
funds with right to receive or the power to direct the receipt of dividends from, or the
proceeds from the sale of, the ordinary shares of our company, each has sole power to dispose
of the 33,782,055 shares held by Fidelity Fund.
|
On June 9, 2009, our subsidiary Leo Technology Limited, now renamed 798 Entertainment Limited,
issued US$10 million aggregate principal amount of 8% senior secured convertible promissory notes
with a maturity date of three years to certain entities affiliated with IDGVC Partners, a leading
venture capital firm. The notes are convertible into our ordinary shares or Leo Technology
Limiteds ordinary shares at the option of the note holders.
In the event of a full conversion of the notes, a total of 126,103,405 ordinary shares of our
company (subject to adjustment but in any event not exceeding 129,941,915 ordinary shares, or
20.00% of our current total and issued outstanding shares as of the date of such note issuance) may
be issued to the holders of the notes.
58
In addition, in January 2010, we entered into an agreement to obtain control of QIGI
Technology in a stock-plus-cash transaction valued at approximately US$12.5 million; the
consideration for this transaction is 65,934,066 of our ordinary shares, which share number are
subject to an earnings adjustment pending the audited net profit of QIGI Technology for the year
2010 and 2011.
ITEM 7.
Major Shareholders and Related Party Transactions
A.
Major Shareholders
Please
refer to Item 6. Directors, Senior Management and Employees E. Share Ownership.
B.
Related Party Transactions
Transactions with QUALCOMM
In March 2006, we entered into a joint venture with QUALCOMM by incorporating a Cayman Islands
holding company named Techfaith Software (China) Holding Limited. QUALCOMM and we hold 30% and 70%,
respectively, of this holding companys shares. In May 2006, Techfaith Software (China) Holding
Limited formed TechSoft in China to develop application software for wireless devices. Pursuant to
an agreement entered into on March 22, 2006 in relation to this joint venture with QUALCOMM,
TechSoft will receive a total of US$25 million in funding from QUALCOMM and us and non-cash in-kind
contributions including software and licenses. TechSoft is based in Beijing and Hangzhou, China. Up
to December 31, 2008, TechSoft has received total cash injection of US$10 million.
We became QUALCOMMs first independent handset design house partner in China, following an
investment announced in April 2004. Initially focusing on 3G CDMA mobile handsets, TechSoft will
operate as an independent entity.
Transactions with Techfaith Technology and De Ming
In 2007, we purchased raw materials from related parties, Techfaith Technology (Shenyang)
Ltd., or Techfaith Technology, and De Ming Technology (Hangzhou) Ltd. (formerly known as Kang Mu Ni
Electronics (Hangzhou) Ltd.), or De Ming, for US$34,000 and US$0.5 million, respectively. Techfaith
Technology and De Ming are subsidiaries of Techfaith Electronics Limited, a company established in
September 2007, of which our founder and chief executive officer, Mr. Defu Dong, holds 43% equity
interest.
In 2008, Techfaith Technology became one of our EMS providers. During the year ended December
31, 2008, we sold raw materials to Techfaith Technology for US$18.8 million and purchased products
from Techfaith Technology for US$17.0 million. In 2008, we purchased raw materials from De Ming
for US$2.4 million. In 2009, we sold raw materials to Techfaith Technology for US$0.8 million and
purchased products from Techfaith Technology for US$3.5 million. In 2009, we also purchased raw
materials from De Ming for US$1.2 million.
59
As of December 31, 2009, amounts due from related parties are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands of US$)
|
|
Techfaith Technology
|
|
$
|
1,047
|
|
|
$
|
5,537
|
|
|
$
|
9,941
|
|
De Ming
|
|
$
|
54
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,101
|
|
|
$
|
5,537
|
|
|
$
|
9,941
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, amount due to related party is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands of US$)
|
|
Techfaith Technology
|
|
$
|
|
|
|
$
|
|
|
|
$
|
7
|
|
De Ming
|
|
|
201
|
|
|
|
419
|
|
|
|
259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
201
|
|
|
$
|
419
|
|
|
$
|
266
|
|
|
|
|
|
|
|
|
|
|
|
C.
Interests of Experts and Counsel
Not applicable.
ITEM 8.
Financial Information
A.
Consolidated Statements and Other Financial Information
We have appended consolidated financial statements filed as part of this annual report.
Legal Proceedings
We are not currently involved in any litigation or other legal matters that would have a
material adverse impact on our business or operations.
Dividend Policy
We do not 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 for use in the operation and expansion of our business.
Subject to the Cayman Islands Companies Law (2009 Revision), our board of directors may from
time to time declare dividends on shares in issue. Even if our board of directors determines to
distribute dividends, the form, frequency and amount of our dividends will depend upon our future
operations and earnings, capital requirements and surplus, general financial condition, contractual
restrictions and other factors as the board of directors may deem relevant. Any dividend we declare
will be paid to the holders of ADSs, subject to the terms of the deposit agreement, to the same
extent as holders of our ordinary shares, less the fees and expenses payable under the deposit
agreement. Any dividend we declare will be distributed by the depositary to the holders of our
ADSs. Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.
60
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.
Offer and Listing Details
Our ADSs, each representing 15 of our ordinary shares, have been listed on the NASDAQ since
May 5, 2005. Our ADSs are traded under the symbol CNTF.
For 2009, the trading price of our ADSs on the NASDAQ ranged from $1.11 to $3.93 per ADS.
The following table provides the high and low trading prices for our ADSs on the NASDAQ for
(1) the years 2005, 2006, 2007, 2008 and 2009; (2) the first quarter in 2010, all quarters in 2008
and 2009; and (3) each of the past six months.
|
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|
|
|
|
|
|
|
|
|
Sales Price
|
|
|
|
High
|
|
|
Low
|
|
Annual High and Low
|
|
|
|
|
|
|
|
|
2005
|
|
|
19.88
|
|
|
|
7.8
|
|
2006
|
|
|
18.00
|
|
|
|
6.58
|
|
2007
|
|
|
11.13
|
|
|
|
4.01
|
|
2008
|
|
|
6.98
|
|
|
|
0.71
|
|
2009
|
|
|
3.93
|
|
|
|
1.11
|
|
|
|
|
|
|
|
|
|
|
Quarterly Highs and Lows
|
|
|
|
|
|
|
|
|
First Quarter 2008
|
|
|
6.79
|
|
|
|
3.40
|
|
Second Quarter 2008
|
|
|
6.98
|
|
|
|
4.00
|
|
Third Quarter 2008
|
|
|
4.60
|
|
|
|
0.85
|
|
Fourth Quarter 2008
|
|
|
1.33
|
|
|
|
0.71
|
|
First Quarter 2009
|
|
|
1.94
|
|
|
|
1.11
|
|
Second Quarter 2009
|
|
|
2.69
|
|
|
|
1.31
|
|
Third Quarter 2009
|
|
|
3.85
|
|
|
|
1.95
|
|
Fourth Quarter 2009
|
|
|
3.93
|
|
|
|
2.88
|
|
First Quarter 2010
|
|
|
3.65
|
|
|
|
2.58
|
|
|
|
|
|
|
|
|
|
|
Monthly Highs and Lows
|
|
|
|
|
|
|
|
|
November 2009
|
|
|
3.85
|
|
|
|
2.97
|
|
December 2009
|
|
|
3.93
|
|
|
|
3.05
|
|
January 2010
|
|
|
3.65
|
|
|
|
3.08
|
|
February 2010
|
|
|
3.25
|
|
|
|
2.58
|
|
March 2010
|
|
|
3.37
|
|
|
|
2.68
|
|
April 2010
|
|
|
2.75
|
|
|
|
2.35
|
|
May 2010 (through May 13, 2010)
|
|
|
2.43
|
|
|
|
1.91
|
|
B.
Plan of Distribution
Not applicable.
61
C.
Markets
Our ADSs, each representing 15 of our ordinary shares, have been listed on the NASDAQ since
May 5, 2005 under the symbol CNTF.
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.
333-123921) filed with the Commission on April 20, 2005. Our shareholders had in 2005 approved an
amended and restated memorandum and articles of association of our company, which became effective
immediately upon the trading of our ADSs on the NASDAQ.
C.
Material Contracts
Investor Rights Agreement
In connection with the issuance by our wholly owned subsidiary, Leo Technology Limited, now
renamed 798 Entertainment Limited, of (1) a US$10 million aggregate principal amount of 8% senior
secured convertible promissory notes to certain entities affiliated with IDGVC Partners, or the
IDGVC Investors, and (2) US$10 million of the common equity in Leo Technology Limited to Infiniti
Capital Limited, we and certain of our subsidiaries entered into an investor rights agreement with
the IDGVC Investors and Infiniti Capital Limited. Under this investor rights agreement dated June
9, 2009, the notes are convertible into our ordinary shares or Leo Technology Limiteds ordinary
shares at the option of the note holders. In the event of a full conversion of the notes, a total
of 126,103,405 ordinary shares of our company (subject to adjustment but in any event not exceeding
129,941,915 ordinary shares, or 20.0% of our current total and issued outstanding shares as of the
date of the note issuance) may be issued to the holders of the notes. In addition, we provided
guarantees in favor of the IDGVC Investors and
Infiniti Capital Limited in relation to the convertible notes and pursuant to the Convertible
Note and Share Purchase Agreement, the investor rights agreement and other relevant transaction
documents relating to their investments.
62
Pursuant to this investor rights agreement, we have also granted certain registration rights
to holders of our outstanding registrable securities (as defined below). Set forth below is a
summary of the registration rights granted under the agreement.
Demand Registration Rights
Holders of at least 30% or more of our then outstanding registrable securities may request us
in writing to file a registration statement providing for the resale of their securities. The term
registrable securities herein include our ordinary shares issued or issuable upon conversion of the
notes issued to IDGVC Investors.
We are not obligated to effect more than one such registration statement within any 12-month
period. Such registration statement should be on Form F-3, unless we are not then eligible to use
Form F-3, in which case Form F-1 other appropriate form should be used.
We are also not obligated to effect a demand registration if (1) we notify the requesting
holder or holders of the registrable securities of our intention to file for our own account a
registration statement within sixty days of receiving the request, (2) the reasonably anticipated
aggregate price to the public, net of selling expenses would not be more than US$1,000,000 or (3)
we provide a certified signed by our chief executive officer stating that our board of directors
concludes in good faith that the filing of such registration statement would be materially
detrimental to us and our shareholders in the near future. In the case of (3), we cannot exercise
the deferral right more than once in any 12-month period.
Piggyback Registration Rights
If we propose to file a registration for a public offering of our securities other than
relating to an employee benefit plan or to a corporate reorganization, we must offer holders of
registrable securities an opportunity to include in the registration all or any part of their
registrable securities. The underwriters of any underwritten offering will have the right to limit
the number of shares with registration rights to be included in the registration statement.
Expenses of Registration
We will pay all expenses relating to any demand, piggyback or Form F-3 registrations, other
than brokers commission, underwriters discount, concession or commission in connection with the
sale of the registrable securities.
For more detailed information relating to the registration rights, see the investor rights
agreement filed as an exhibit to this annual report on Form 20-F.
Other than this investor rights agreement, we have not entered into any material contracts
other than in the ordinary course of business and other than those described in Item 4.
Information on the Company or elsewhere in this annual report on Form 20-F.
63
D.
Exchange Controls
See Item 4.B. Information on the CompanyBusiness OverviewRegulationForeign Currency
Exchange.
E.
Taxation
The following summary of the material Cayman Islands and United States federal income tax
consequences of an investment in our ADSs or ordinary shares is based upon laws and relevant
interpretations thereof in effect as of the date of this report, all of which are subject to
change. This summary does not deal with all possible tax consequences relating to an investment in
our ADSs or ordinary shares, such as the tax consequences under state, local and other tax laws.
Cayman Islands Taxation
According to our Cayman Islands counsel, Maples and Calder, the Cayman Islands currently
levies no taxes on individuals or corporations based upon profits, income, gains or appreciation
and there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes
likely to be material to us levied by the government of the Cayman Islands except for stamp duties
which may be applicable on instruments executed in, or brought within the jurisdiction of, the
Cayman Islands. The Cayman Islands is not party to any double tax treaties. There are no exchange
control regulations or currency restrictions in the Cayman Islands.
United States Federal Income Taxation
The following discussion describes the material United States federal income tax consequences
to U.S. Holders (defined below) under present law of an investment in the ADSs or ordinary shares.
This summary applies only to investors that hold the ADSs or ordinary shares as capital assets and
that have the U.S. dollar as their functional currency. This discussion is based on the tax laws
of the United States as in effect on the date of this annual report on Form 20-F and on United
States Treasury regulations in effect or, in some cases, proposed, as of the date of this annual
report, as well as judicial and administrative interpretations thereof available on or before such
date. All of the foregoing authorities are subject to change, which change could apply
retroactively and could affect the tax consequences described below.
The following discussion does not deal with the tax consequences to any particular investor or
to persons in special tax situations such as:
banks;
financial institutions;
insurance companies;
broker dealers;
traders that elect to mark to market;
64
tax-exempt entities;
persons liable for alternative minimum tax;
persons holding an ADS or ordinary share as part of a straddle, hedging, conversion or
integrated transaction;
persons that actually or constructively own 10% or more of our voting shares;
persons holding ADSs or ordinary shares through partnerships or other pass-through
entities; or
persons who acquired ADSs or ordinary shares pursuant to the exercise of any employee
share option or otherwise as consideration.
U.S. Holders are urged to consult their tax advisors about the application of the United States
federal tax rules to their particular circumstances as well as the state and local and foreign tax
consequences to them of the purchase, ownership and disposition of ADSs or ordinary shares.
The discussion below of the United States federal income tax consequences to U.S. Holders
will apply if you are the beneficial owner of ADSs or ordinary shares and you are, for United
States federal income tax purposes,
a citizen or individual resident of the United States;
a corporation (or other entity taxable as a corporation for United States federal
income tax purposes) organized under the laws of the United States, any State or the District of
Columbia;
an estate whose income is subject to United States federal income taxation regardless
of its source; or
a trust that (1) is subject to the supervision of a court within the United States and
the control of one or more United States persons or (2) has a valid election in effect under
applicable United States Treasury regulations to be treated as a United States person.
The discussion below assumes that the representations contained in the deposit agreement are
true and that the obligations in the deposit agreement and any related agreement will be complied
with in accordance with their terms. If you hold ADSs, you will be treated as the holder of the
underlying ordinary shares represented by those ADSs for United States federal income tax purposes.
The U.S. Treasury has expressed concerns that parties to whom ADSs are pre-released may be
taking actions that are inconsistent with the claiming, by U.S. Holders of ADSs, of foreign tax
credits for United States federal income tax purposes. Such actions would also be inconsistent with
the claiming of the reduced rate of tax applicable to dividends received by certain non-corporate
U.S. Holders, as described below. Accordingly, the availability of the reduced tax rate for
dividends received by certain non-corporate U.S. Holders could be affected by future actions that
may be taken by the U.S. Treasury or parties to whom ADSs are pre-released.
65
Taxation of Dividends and Other Distributions on the ADSs or 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 ADSs or ordinary shares will be included in your
gross income as dividend income on the date of receipt by the depositary, in the case of ADSs, or
by you, in the case of ordinary shares, but only to the extent that the distribution is paid out of
our current or accumulated earnings and profits (computed under United States 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.
With respect to non-corporate U.S. Holders (including individuals) for taxable years beginning
before January 1, 2011, dividends may be taxed at the lower applicable capital gains rate
(qualified dividend income) provided that (1) the ADSs or ordinary shares are readily tradable on
an established securities market in the United States or we are eligible for the benefit of the
income tax treaty between the United States and the PRC, (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. For this
purpose, ADSs listed on the NASDAQ will be considered to be readily tradable on an established
securities market in the United States. You should consult your tax advisor regarding the
availability of the lower rate for dividends paid with respect to our ADSs or ordinary shares.
Dividends will constitute foreign source income for foreign tax credit limitation purposes. If
the dividends are qualified dividend income (as discussed above), the amount of the dividend taken
into account for purposes of calculating the foreign tax credit limitation will be limited to the
gross amount of the dividend, multiplied by the reduced rate divided by the highest rate of tax
normally applicable to dividends. The limitation on foreign taxes eligible for credit is calculated
separately with respect to specific classes of income. For this purpose, dividends distributed by
us with respect to ADSs or ordinary shares generally will constitute passive category income but
could, in the case of certain U.S. Holders, constitute general category income. If PRC
withholding taxes apply to dividends paid to you with respect to the ADSs or ordinary shares, you
may be able to obtain a reduced rate of PRC withholding taxes under the income tax treaty between
the United States and the PRC if certain requirements are met. In addition, subject to certain
conditions and limitations, PRC withholding taxes on dividends 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.
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 ADSs or
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, a U.S. Holder should expect that a distribution will
be reported as a dividend even if that distribution would otherwise be treated as a non-taxable
return of capital or as capital gain under the rules described above.
Taxation of Disposition of 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 ADS or ordinary share
equal to the difference between the amount realized (in U.S. dollars) for the ADS or ordinary share
and your tax basis (in U.S. dollars) in the ADS or ordinary share. The gain or loss will be capital
gain or loss. If you are a non-corporate U.S. Holder, including an individual, who has held the ADS
or ordinary share for more than one year, you will be eligible for reduced tax rates for gains
recognized for taxable years beginning before January 1, 2011. The deductibility of capital losses
is subject to limitations. Any such gain or loss that you recognize generally will be treated as
U.S. source income or loss. However, in the event we are deemed to be a Chinese resident
enterprise under PRC tax law, we may be eligible for the benefits of the income tax treaty between
the United States and the PRC. In such event, if PRC tax were to be imposed on any gain from the
disposition of the ADSs or ordinary shares, a U.S. Holder that is eligible for the benefits of the income tax treaty between the United States
and the PRC may elect to treat such gain as PRC source income. U.S. Holders should consult their
own tax advisors regarding the creditability of any PRC tax.
66
Passive Foreign Investment Company
Due to the price of our ADSs and ordinary shares during 2009 and the composition of our assets
(in particular, the retention of a large amount of cash), we believe that for our taxable year
ended December 31, 2009, we may have been a passive foreign investment company (PFIC) for United
States federal income tax purposes. A non-U.S. corporation is considered a PFIC for any taxable
year if either:
|
|
|
at least 75% of its gross income is passive income (the income test), or
|
|
|
|
at least 50% of the value of its assets (based on an average of the quarterly values of
the assets during a taxable year) is attributable to assets that produce or are held for
the production of passive income (the asset test).
|
We will be treated as owning our proportionate share of the assets and earning our
proportionate share of the income of any other corporation in which we own, directly or indirectly,
more than 25% (by value) of the shares.
The total value of our assets for purposes of the asset test generally will be calculated
using the market price of our ADSs and ordinary shares. Because of our share value during 2009 and
our retention of a significant amount of cash, more than 50% of the value of our assets during 2009
may be viewed as passive for purposes of the asset test and, as a result we may have been a PFIC
during 2009.
We must make a separate determination each year as to whether we are a PFIC (after the close
of each taxable year). We expect that even if we were not a PFIC for the taxable year ended
December 31, 2009, we will very likely be a PFIC for our current taxable year ending December 31,
2010 unless our share value increases and/or we invest a substantial amount of the cash and other
passive assets we hold in assets that produce or are held for the production of active income. If
we are a PFIC for any year during which you hold ADS or ordinary shares, we will continue to be
treated as a PFIC for all succeeding years during which you hold ADS or ordinary shares. However,
if we cease to be a PFIC, provided that you have not made a mark-to-market election, as described
below, you may avoid some of the adverse effects of the PFIC regime by making a deemed sale
election with respect to the ADSs or ordinary shares, as applicable. If such election is made, you
will be deemed to have sold our ADSs or shares you hold at their fair market value and any gain
from such deemed sale would be subject to the consequences described in the following paragraph.
After the deemed sale election, you ADSs or shares with respect to which the deemed sale election
was made would not be treated as shares in a PFIC unless we subsequently became a PFIC
.
The rules
dealing with deemed sale elections are very complex. You are strongly encouraged to consult your
tax advisor about the deemed sale election with regard to our company and subsidiaries.
If we are a PFIC for any taxable year and any of our non-U.S. subsidiaries is also a PFIC, a
U.S. Holder would be treated as owning a proportionate amount (by value) of the shares of the
lower-tier PFIC for purposes of the application of these rules, and could incur liability for the
deferred tax and interest charge described below if either (1) we receive a distribution from, or
dispose of all or part of our interest in, the lower-tier PFICs or (2) you dispose of all or part
of your ADSs or ordinary shares.
67
If we are a PFIC for any taxable year during which you hold ADSs or ordinary shares, you will
be subject to special tax rules with respect to any excess distribution that you receive and any
gain you realize from a sale or other disposition (including a pledge) of the ADSs or ordinary
shares, unless you make a mark-to-market election
as discussed below. Distributions you receive in a taxable year that are greater than 125% of
the average annual distributions you received during the shorter of the three preceding taxable
years or your holding period for the ADSs or ordinary shares will be treated as an excess
distribution. Under the PFIC rules:
such excess distribution or gain will be allocated ratably over your holding period
for the ADSs or ordinary shares,
such 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
such amount allocated to each other taxable year will be subject to the highest tax
rate in effect for that taxable year and an interest charge generally applicable to underpayments
of tax will be imposed on the resulting tax attributable to each such taxable year.
The tax liability for amounts allocated to years prior to the year of disposition or excess
distribution cannot be offset by any net operating losses for such years, and gains (but not
losses) realized on the sale of the ADSs or ordinary shares cannot be treated as capital, even if
you hold the ADSs or ordinary shares as capital assets.
Alternatively, a U.S. Holder of marketable stock (as defined below) in a PFIC may make a
mark-to-market election for such stock of a PFIC to elect out of the tax treatment discussed in the
two preceding paragraphs. If you make a valid mark-to-market election for the ADSs or ordinary
shares, you will include in income each year an amount equal to the excess, if any, of the fair
market value of the ADSs or ordinary shares as of the close of your taxable year over your adjusted
basis in such ADSs or ordinary shares. You are allowed a deduction for the excess, if any, of the
adjusted basis of the ADSs or 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 ADSs or 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 ADSs or ordinary shares, are treated as ordinary income. Ordinary loss treatment
also applies to the deductible portion of any mark-to-market loss on the ADSs or ordinary shares,
as well as to any loss realized on the actual sale or disposition of the ADSs or ordinary shares,
to the extent that the amount of such loss does not exceed the net mark-to-market gains previously
included for such ADSs or ordinary shares. Your basis in the ADSs or ordinary shares will be
adjusted to reflect any such income or loss amounts. If you make such a mark-to-market election,
tax rules that apply to distributions by corporations which are not PFICs would apply to
distributions by us (except that the lower applicable capital gains rate would not apply).
The mark-to-market election is available only for marketable stock which is stock that is
traded in other than de minimis quantities on at least 15 days during each calendar quarter
(regularly traded) on a qualified exchange or other market, as defined in applicable Treasury
regulations. We expect that the ADSs will continue to be listed on the NASDAQ, which is a qualified
exchange for these purposes, and, consequently, assuming that the ADSs are regularly traded, if you
are a holder of ADSs, it is expected that the mark-to-market election would be available to you
were we to become a PFIC. If any of our subsidiaries are or become PFICs, the mark-to-market
election will likely not be available with respect to the shares of such subsidiaries that are
treated as owned by you. Consequently, you could be subject to the PFIC rules with respect to
income of the lower-tier PFICs the value of which already had been taken into account indirectly
via mark-to-market adjustments.
Under recently enacted legislation, if you hold ADSs or ordinary shares in any year in which
we are a PFIC, you are required to file an annual report containing such information as the U.S.
Treasury may require. In addition, if you hold ADSs or 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 ADSs or ordinary shares and any gain realized on the disposition of the ADSs or
ordinary shares.
68
Information Reporting and Backup Withholding
Backup Withholding and Information Reporting
Pursuant to recently enacted legislation, you may be required to submit to the Internal
Revenue Service certain information with respect to an investment in the ADSs or ordinary shares
not held through an account with a financial institution. This new legislation also imposes
penalties if you are required to submit such information to the Internal Revenue Service and fail
to do so. In addition, you may be subject to information reporting to the Internal Revenue Service
with respect to dividends on and proceeds from the sale or other disposition of our ADSs or
ordinary shares. Dividend payments with respect to our ADSs or ordinary shares and proceeds from
the sale or other disposition of our ADSs or ordinary shares are not generally subject to U.S.
backup withholding (provided that certain certification requirements are satisfied). You should
consult their tax advisors regarding the application of the United States information reporting and
backup rules.
F.
Dividends and Paying Agents
Not applicable.
G.
Statement by Experts
Not applicable.
H.
Documents on Display
We have previously filed with the Commission our registration statement on Form F-1, as
amended and prospectus under the Securities Act of 1933, with respect to our ordinary shares.
We are subject to the periodic reporting and other informational requirements of the
Securities Exchange Act of 1934, as amended, or the Exchange Act. Under the Exchange Act, we are
required to file reports and other information with the Securities and Exchange Commission.
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 Securities and Exchange Commission at 100 F. Street, N.E., Washington,
D.C. 20549, and at the regional office of the Securities and Exchange Commission located at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. The public may
obtain information regarding the Washington, D.C. Public Reference Room by calling the Commission
at 1-800-SEC-0330. The SEC also maintains a 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.
We will furnish The Bank of New York, the depositary of our ADSs, with our annual reports,
which will include a review of operations and annual audited consolidated financial statements
prepared in conformity with U.S. GAAP, and all notices of shareholders meetings and other reports
and communications that are made generally available to our shareholders. The depositary will make
such notices, reports and communications available to holders of ADSs and, upon our request, will
mail to all record holders of ADSs the information contained in any notice of a shareholders
meeting received by the depositary from us.
69
I.
Subsidiary Information
For a listing of our subsidiaries, see Item 4. Information on the Company C. Organizational
Structure.
ITEM 11.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk.
Our risk exposure from changes in interest rates relates primarily to the
interest income generated by excess cash invested in short-term bank deposits. Interest-earning
instruments carry a degree of interest rate risk. We have not been nor do we anticipate being
exposed to material risks due to changes in interest rates.
Foreign Exchange Risk.
Substantially all of our revenues and substantially all our cost of
revenues are denominated in RMB, with an immaterial portion of our cost of revenues denominated in
the U.S. dollar, for which we have not incurred any material foreign exchange gains or losses. In
2006, we invested US$39 million in Techfaith Hangzhou and TechSoft in China. We have had
increasingly smaller amounts of U.S. currency deposits over the years. As of December 31, 2009, we
had U.S. currency deposits of US$ 27 million in China. Our exchange gains were approximately
US$25,000 in 2009 due to the U.S. currency deposited in China. We believe that we currently have
significant direct foreign exchange risk.
The value of the Renminbi against the U.S. dollar, Euro and other currencies is affected by,
among other things, changes in Chinas political and economic conditions and Chinas foreign
exchange policies. On July 21, 2005, the PRC government changed its decade-old policy of pegging
the value of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi was permitted to
fluctuate within a narrow and managed band against a basket of certain foreign currencies. This
change in policy caused the Renminbi to appreciate approximately 21.5% against the U.S. dollar over
the following three years. Since reaching a high against the U.S. dollar in July 2008, however, the
Renminbi has traded within a narrow band against the U.S. dollar, remaining within 1% of its July
2008 high but never exceeding it. As a consequence, the Renminbi has fluctuated sharply since July
2008 against other freely traded currencies, in tandem with the U.S. dollar. It is difficult to
predict how long the current situation may last and when and how it may change again. Any
significant revaluation of RMB may materially and adversely affect our cash flows, revenues,
earnings and financial position, and the value of, and any dividends payable on, our ADS in U.S.
dollars. For example, an appreciation of RMB against the U.S. dollar would make any new RMB
denominated investments or expenditures more costly to us, to the extent that we need to convert
U.S. dollars into RMB for such purposes.
Inflation Risk.
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 4.8%, 5.9% and -0.7% in 2007, 2008 and 2009, respectively. Although we were not
materially affected by inflation in the past, we can provide no assurance that we will not be
affected in the future by potentially higher rates of inflation in China. For example, certain
operating costs and expenses, such as employee compensation and office operating expenses may
increase as a result of higher inflation. Additionally, because a substantial portion of our assets
consists of cash and cash equivalents and short-term investments, high inflation could
significantly reduce the value and purchasing power of these assets. We are not able to hedge our
exposure to higher inflation in China.
ITEM 12.
Description of Securities Other than Equity Securities
A.
Debt Securities
Not applicable.
70
B.
Warrants and Rights
Not applicable.
C.
Other Securities
Not applicable.
D.
American Depositary Shares
Fees and Charges Our ADS holders May Have to Pay
The Bank of New York, the depositary of our ADS program, collects its fees for delivery and
surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of
withdrawal or from intermediaries acting for them. The depositary collects fees for making
distributions to investors by deducting those fees from the amounts distributed or by selling a
portion of distributable property to pay the fees. The depositary may collect its annual fee for
depositary services by deductions from cash distributions or by directly billing investors or by
charging the book-entry system accounts of participants acting for them. The depositary may
generally refuse to provide fee-attracting services until its fees for those services are paid.
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Persons depositing or withdrawing shares must pay:
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For:
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US$5.00 or less per 100 ADSs (or portion of 100 ADSs)
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Issuance of ADSs, including issuances
resulting from a distribution of shares or rights or
other property
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Cancellation of ADSs for the purpose of
withdrawal, including if the deposit agreement
terminates
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US$0.02 or less per ADS
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Any cash distribution to registered ADS
holders
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A fee equivalent to the fee that would be payable if
securities distributed had been shares and the
shares had been deposited for issuance of ADSs
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Distribution of securities distributed to
holders of deposited securities which are distributed
by the depositary to registered ADS holders
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US$0.02 per ADSs per calendar year (if the
depositary has not collected any cash distribution
fee during that year)
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Depositary services
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Expenses of the depositary
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Cable, telex and facsimile transmissions (as
expressly provided in the deposit agreement)
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Converting foreign currency to U.S. dollars
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Registration or transfer fees
|
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Transfer and registration of shares on our
share register to or from the name of the depositary
or its agent or the custodian or its nominee when you
deposit or withdraw shares
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Taxes, stamp duty and other governmental charges the
depositary or the custodian have to pay on any ADS
or share underlying an ADS
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As necessary
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Any charges incurred by the depositary or its agents
for servicing the deposited securities
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As necessary
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71
Fees and Other Payments Made by the Depositary to Us
The depositary has agreed to reimburse us annually for our expenses incurred in connection
with the administration and maintenance of our ADS facility including, but not limited to, investor
relations expenses, exchange listing fees or any other program related expenses. The depositary has
also agreed to provide additional payments to us based on the applicable performance indicators
relating to our ADS facility. There are limits on the amount of expenses for which the depositary
will reimburse us, but the amount of reimbursement available to us is not necessarily tied to the
amount of fees the depositary collects from investors. For the year ended December 31, 2009, we
were entitled to receive US$40,619.72 (after withholding tax) from the depositary as reimbursement
for our expenses incurred in connection with, among other things, investor relationship programs
related to the ADS facility. This amount has been paid as of the date of this annual report.
PART II
ITEM 13.
Defaults, Dividend Arrearages and Delinquencies
Not Applicable.
ITEM 14.
Material Modifications to the Rights of Security Holders and Use of
Proceeds
Not Applicable.
ITEM 15.
Controls and Procedures
Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial
officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in
Rules 13a-15(e) of the Exchange Act) as of the end of the period covered by this annual report.
Based upon this evaluation, our management has concluded that our disclosure controls and
procedures was effective as of the end of the period ended December 31, 2009 were effective.
Managements Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Rules 13a-15(f) under the Exchange Act, as amended,
for our company. Internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
consolidated financial statements in accordance with generally accepted accounting principles, and
includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of a companys
assets, (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of consolidated financial
statements in accordance with generally accepted accounting principles, and that a companys
receipts and expenditures are being made only in accordance with authorizations of a companys
management and directors, and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of a companys assets that could have a
material effect on the consolidated financial statements.
72
Because of its inherent limitations, a system of internal control over financial reporting can
provide only reasonable assurance with respect to consolidated financial statement preparation and
presentation, and 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.
As required by Section 404 of the Sarbanes-Oxley Act of 2002 and related rules as promulgated
by the Securities and Exchange Commission, our management assessed the effectiveness of the
internal control over financial reporting as of December 31, 2009 using criteria established in
Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this evaluation, management concluded that our internal control over
financial reporting was effective as of December 31, 2009.
Our independent registered public accounting firm has issued an attestation report on our
internal control over financial reporting. The attestation report appears below:
Report of the Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
China Techfaith Wireless Communication Technology Limited
We have audited the internal control over financial reporting of China Techfaith Wireless
Communication Technology Limited, its subsidiaries and variable interest entities (collectively,
the Group) as of December 31, 2009, based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Groups management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Managements Annual Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the Groups internal control
over financial 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 effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed by, or under the
supervision of, the companys principal executive and principal financial officers, or persons
performing similar functions, and effected by the companys board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A companys internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the companys assets that could have a material
effect on the financial statements.
73
Because of the inherent limitations of internal control over financial reporting, including
the possibility of collusion or improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Group maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2009, based on the criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements and financial statement
schedule as of and for the year ended December 31, 2009 of the
Group and our report dated May 19,
2010 expressed an unqualified opinion on those financial statements and financial statement
schedule and included an explanatory paragraph regarding the Groups adoption of the authoritative
guidance on noncontrolling interests in consolidated financial statements, effective on January 1,
2009.
/s/ Deloitte Touche Tohmatsu CPA, Ltd.
Beijing, the Peoples Republic of China
May 19, 2010
Changes in internal control over financial reporting
In 2008, we had identified three material weaknesses, which are described below, during our
assessment of the internal control over financial reporting as defined in Audit Standard No. 5 of
the Public Company Accounting Oversight Board. After the material weaknesses were reported to our
audit committee, the audit committee approved an action plan that required the management to
remediate the weaknesses.
The steps we took to remediate the material weaknesses include:
(1) In response to the lack of sufficient personnel with the necessary knowledge on internal
control, we provided training to the personnel who are in charge of internal control.
Meanwhile, we had engaged an external professional firm to assist our internal auditor to
perform the internal control function. During 2009, there were no material weaknesses
detected in this area.
(2) In
response to the insufficient inventory management controls over sample phones which resulted in
late significant adjustments to the Groups recording of inventory, we had examined and strengthened
our control procedures over sample phones. We strengthened the implementation of quarterly
inventory physical count and reconciliation with management review procedures. During 2009,
there were no additional material weaknesses detected in this area and not any late
adjustments to the recording of inventory.
(3) In response to the operating ineffectiveness of revenue contracts review and revenue
recognition procedures
which resulted in late significant adjustments to the Groups
recognition of revenue, we assigned qualified and experienced personnel to perform the
relevant contracts review. During 2009, there were no additional material weaknesses
detected in this area.
74
ITEM 16A.
Audit Committee Financial Expert
See Item 6. Directors, Senior Management and Employees C. Board Practices.
ITEM 16B.
Code of Ethics
Our board of directors has adopted a code of ethics that applies to our directors, officers,
employees and agents, including certain provisions that specifically apply to our chief executive
officer, chief financial officer, chief operating officer, financial controller, vice presidents
and any other persons who perform similar functions for us. We have filed our code of business
conduct and ethics as an exhibit to our registration statement on Form F-1, and posted the code on
our www.techfaithwireless.com website. We hereby undertake to provide to any person without charge,
a copy of our code of business conduct and ethics within ten working days after we receive such
persons 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 Deloitte Touche Tohmatsu, our independent registered
public accounting firm, for the periods indicated. We did not pay any tax related or other fees to
our independent registered public accounting firm during the periods indicated below.
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For the Year Ended December 31,
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2008
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2009
|
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(In thousands of US$)
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Audit fees
(1)
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992
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942
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Audit-related fees
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Tax fees
(2)
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17
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18
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All other fees
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(1)
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Audit fees means the aggregate fees billed in each of the fiscal years listed for
professional services rendered by our principal auditors for the audit of our annual financial
statements.
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(2)
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Tax fees means the aggregate fees billed in each of the fiscal years listed for
professional services rendered by the principal accountant for tax compliance, tax advice, and
tax planning.
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All audit and non-audit services provided by our independent auditors must be pre-approved by
our audit committee. Our audit committee has adopted a combination of two approaches in
pre-approving proposed services: general pre-approval and specific pre-approval. With general
approval, proposed services are pre-approved without consideration of specific case-by-case
services; with specific approval, proposed services require the specific pre-approval of the audit
committee. Unless a type of service has received general pre-approval, it will require specific
pre-approval by our audit committee. Any proposed services exceeding pre-approved cost levels or
budgeted amounts will also require specific pre-approval by our audit committee.
75
All requests or applications for services to be provided by our independent auditors that do
not require specific approval by our audit committee will be submitted to our chief financial
officer and must include a detailed description of the services to be rendered. The chief
financial officer will determine whether such services are included within the list of services
that have received the general pre-approval of the audit committee. The audit
committee will be informed on a timely basis of any such services. Requests or applications
to provide services that require specific approval by our audit committee will be submitted to the
audit committee by both our independent auditors and our chief financial officer and must include a
joint statement as to whether, in their view, the request or application is consistent with the
SECs rules on auditor independence.
ITEM 16D.
Exemptions from the Listing Standards for Audit Committees
We are in compliance with Rule 10A-3 under the Exchange Act and The Nasdaq Stock Market, Inc.
Marketplace Rules with respect to the audit committee.
ITEM 16E.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
In September 2008, our board of directors approved a share repurchase program pursuant to
authorization previously obtained from our shareholders. Under the program, our company is
authorized, but not obligated, to repurchase up to US$10 million worth of our outstanding ADSs from
time to time, depending on market conditions, share price and other factors, as well as subject to
the relevant rules under United States securities regulations and are subject to restrictions
relating to volume, price and timing. From September 2008 to the date of this annual report, a
total of 61,200 shares have been purchased under this program, all during December 2009. Pursuant
to the board resolutions, our board will review this share repurchase program periodically and may
adjust its terms and size accordingly, including suspending or discontinuing the program altogether
at anytime.
The following tables set forth some additional information about our repurchases made in the
fiscal years ended December 31, 2008 and 2009. The ordinary shares underlying the repurchased ADSs
have been canceled pursuant to Cayman Islands law.
Issuer Repurchases in the Years Ended December 31, 2008 and 2009
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Maximum Number (or
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Total Number of ADSs
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Approximate Dollar
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Purchased as Part of
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Value) of ADSs that May
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(a) Total Number of
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Average Price Paid per
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Publicly Announced
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Yet be Purchased Under
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Period
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ADSs Purchased
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ADS
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Program
(1)
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the Program
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December 2009
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61,200
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3.2191
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61,200
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$
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9,802,991
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Total
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61,200
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3.2191
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61,200
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$
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9,802,991
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ITEM 16F.
Change in Registrants Certifying Accountant
Not applicable.
76
ITEM 16G.
Corporate Governance
Nasdaq Marketplace Rule 5620(a) requires each issuer to hold an annual meeting of shareholders
no later than one year after the end of the issuers fiscal year-end. However, Nasdaq Marketplace
Rule 5615(a)(3) permits foreign private issuers like us to follow home country practice in
certain corporate governance matters. Maples
and Calder, our Cayman Islands counsel, has provided a letter to the Nasdaq Stock Market
certifying that under Cayman Islands law, we are not required to hold annual shareholder meetings
every year.
We intend to follow home country practice with respect to annual meetings. We did not hold
any annual meeting of shareholders in 2009. We may hold additional annual shareholder meetings in
the future if there are significant issues that require shareholders approvals.
Other than the annual meeting requirements, we have followed and intend to continue to follow
the applicable corporate governance standards under Nasdaq Marketplace Rules.
In accordance with Nasdaq Marketplace Rule 5250(d), we will post this annual report on Form
20-F on our www.techfaithwireless.com website. In addition, we will provide hardcopies of our
annual report free of charge to shareholders and ADS holders upon request.
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 for China Techfaith Wireless Communication Technology
Limited and its subsidiaries are included at the end of this annual report.
ITEM 19.
Exhibits
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Exhibit
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Number
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Document
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1.1
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Amended and Restated Memorandum and Articles of Association of the
Registrant (incorporated by reference to Exhibit 3.2 from our Registration
Statement on Form F-1 (file no. 333-123921) filed with the Securities and
Exchange Commission on April 20, 2005).
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2.1
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Registrants Specimen American Depositary Receipt (incorporated by
reference to Exhibit 4.1 from our Registration Statement on Form F-1 (file
no. 333-123921) filed with the Securities and Exchange Commission on
April 7, 2005).
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2.2
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Registrants Specimen Certificate for Ordinary Shares (incorporated by
reference to Exhibit 4.2 from our Registration Statement on Form F-1 (file
no. 333-123921) filed with the Securities and Exchange Commission on
April 20, 2005).
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2.3
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Note Subscription and Rights Agreement, dated as of April 9, 2004, among
the Registrant and other parties therein (incorporated by reference to
Exhibit 4.4 from our Registration Statement on Form F-1 (file no.
333-123921) filed with the Securities and Exchange Commission on April 7,
2005).
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77
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Exhibit
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Number
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Document
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2.4
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Transfer and Assumption Agreement dated November 9, 2004 among the
Registrant and other parties thereto (incorporated by reference to Exhibit
4.5 from our Registration Statement on Form F-1 (file no. 333-123921) filed
with the Securities and Exchange Commission on April 7, 2005).
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2.5
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Share Swap Agreement dated November 9, 2004 among the Registrant and other
parties thereto (incorporated by reference to Exhibit 4.6 from our
Registration Statement on Form F-1 (file no. 333-123921) filed with the
Securities and Exchange Commission on April 7, 2005).
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2.6
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*
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Investor Rights Agreement dated June 9, 2009 among the Registrant, Leo
Technology Limited, now renamed 798 Entertainment Limited, affiliates of
IDGVC Partners, Infiniti Capital Limited and other parties thereto.
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4.1
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2005 Share Incentive Plan (incorporated by reference to Exhibit 10.1 from
our Registration Statement on Form F-1 (file no. 333-123921) filed with the
Securities and Exchange Commission on April 20, 2005).
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4.2
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|
|
Form of Indemnification Agreement with the Registrants directors
(incorporated by reference to Exhibit 10.2 from our Registration Statement
on Form F-1 (file no. 333-123921) filed with the Securities and Exchange
Commission on April 7, 2005).
|
|
|
|
|
|
|
4.3
|
|
|
Form of Employment Agreement between the Registrant and a Senior Executive
Officer of the Registrant (incorporated by reference to Exhibit 10.3 from
our Registration Statement on Form F-1 (file no. 333-123921) filed with the
Securities and Exchange Commission on April 7, 2005).
|
|
|
|
|
|
|
4.4
|
|
|
Memorandum of Understanding dated December 24, 2003 between a subsidiary of
the Registrant and QUALCOMM (incorporated by reference to Exhibit 99.1 from
our Registration Statement on Form F-1 (file no. 333-123921) filed with the
Securities and Exchange Commission on April 7, 2005).
|
|
|
|
|
|
|
4.5
|
|
|
CDMA Modem Card License Agreement dated March 9, 2004 between a subsidiary
of the Registrant and QUALCOMM (incorporated by reference to Exhibit 99.2
from our Registration Statement on Form F-1 (file no. 333-123921) filed
with the Securities and Exchange Commission on April 7, 2005).
|
|
|
|
|
|
|
4.6
|
|
|
Joint Venture Agreement dated September 26, 2003 between the Registrant and
NEC (incorporated by reference to Exhibit 99.3 from our Registration
Statement on Form F-1 (file no. 333-123921) filed with the Securities and
Exchange Commission on April 7, 2005).
|
|
|
|
|
|
|
4.7
|
|
|
Lease Agreement dated July 31, 2004 between the Registrant and Beijing
Sino-Electronics Future Telecommunication R&D, Ltd. (incorporated by
reference to Exhibit 99.4 from our Registration Statement on Form F-1 (file
no. 333-123921) filed with the Securities and Exchange Commission on
April 7, 2005).
|
|
|
|
|
|
|
4.8
|
|
|
Agreement dated June 29, 2004 between the Registrant and a PRC subsidiary
of NEC (translation) (incorporated by reference to Exhibit 99.6 from our
Registration Statement on Form F-1 (file no. 333-123921) filed with the
Securities and Exchange Commission on April 7, 2005).
|
|
|
|
|
|
|
4.9
|
|
|
Agreement dated December 20, 2004 between the Registrant and a PRC
subsidiary of NEC (translation) (incorporated by reference to Exhibit 99.7
from our Registration Statement on Form F-1 (file no. 333-123921) filed
with the Securities and Exchange Commission on April 7, 2005).
|
|
|
|
|
|
|
4.10
|
|
|
Series A Preferred Share Purchase and Sale Agreement dated March 22, 2006
among the Registrant, QUALCOMM and Techfaith Software (China) Holding
Limited (incorporated by reference to Exhibit 4.11 from our Registration
Statement on Form 20-F (file no. 000-51242) filed with the Securities and
Exchange Commission on June 29, 2006).
|
78
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Document
|
|
|
|
|
|
|
4.11
|
|
|
Contract for Purchase of Building dated March 23, 2006 between Beijing
Electronics City Co., Ltd. and Techfaith Wireless Communication Technology
(Beijing) Limited (English translation of the Chinese language document)
(incorporated by reference to Exhibit 4.12 from our Registration Statement
on
Form 20-F
(file no. 000-51242) filed with the Securities and Exchange
Commission on June 29, 2006).
|
|
|
|
|
|
|
4.12
|
|
|
Contract for Purchase of Building dated March 23, 2006 between Beijing
Electronics City Co., Ltd. and Techfaith Intelligent Handset Technology
(Beijing) Limited (English translation of the Chinese language document)
(incorporated by reference to Exhibit 4.13 from our Registration Statement
on Form 20-F (file no. 000-51242) filed with the Securities and Exchange
Commission on June 29, 2006).
|
|
|
|
|
|
|
4.13
|
|
|
Construction Contract dated February 11, 2007 between Techfaith Wireless
Communication Technology (Hangzhou) Limited and Hangzhou Jiang Qian
Construction Engineering Co., Ltd. (incorporated by reference to
Exhibit 4.14 from our Annual Report on Form 20-F (file no. 000-51242) filed
with the Securities and Exchange Commission on June 29, 2007.
|
|
|
|
|
|
|
8.1
|
*
|
|
Subsidiaries of the Registrant.
|
|
|
|
|
|
|
11.1
|
|
|
Code of Business Conduct and Ethics of the Registrant, as amended
(incorporated by reference to Exhibit 4.8 from our Annual Report on
Form 20-F (file no. 000-51242) filed with the Securities and Exchange
Commission on June 25, 2009).
|
|
|
|
|
|
|
12.1
|
*
|
|
CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
12.2
|
*
|
|
CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
13.1
|
*
|
|
CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
13.2
|
*
|
|
CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
15.1
|
*
|
|
Consent of Maples and Calder.
|
|
|
|
|
|
|
15.2
|
*
|
|
Consent of Genland Law Firm.
|
|
|
|
*
|
|
Filed with this annual report on Form 20-F.
|
79
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing its annual
report on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual
report on its behalf.
|
|
|
|
|
|
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
|
|
|
By:
|
/s/ Defu Dong
|
|
|
|
Name:
|
Defu Dong
|
|
|
|
Title:
|
Chief Executive Officer
|
|
Date: May 18, 2010
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
F - 1
|
|
|
|
|
|
|
|
|
|
F - 2
|
|
|
|
|
|
|
|
|
|
F - 4
|
|
|
|
|
|
|
|
|
|
F - 5
|
|
|
|
|
|
|
|
|
|
F - 6
|
|
|
|
|
|
|
|
|
|
F - 8
|
|
|
|
|
|
|
|
|
|
F - 58
|
|
|
|
|
|
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
CHINA TECHFAITH WIRELESS COMMUNICATION TECHNOLOGY LIMITED
We have audited the accompanying consolidated balance sheets of China Techfaith Wireless
Communication Technology Limited, its subsidiaries and variable interest entities
(collectively, the Group) as of December 31, 2008 and 2009, and the related consolidated
statements of operations, changes in equity and comprehensive income, and cash flows for each
of the three years in the period ended December 31, 2009, and related financial statement
schedule included in Schedule 1. These financial statements and financial statement schedule
are the responsibility of the Groups management. Our responsibility is to express an opinion
on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the 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, such consolidated financial statements present fairly, in all material
respects, the financial position of the Group as of December 31, 2008 and 2009, and the results
of its operations and its cash flows for each of the three years in the period ended
December 31, 2009, in conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As discussed in Note 28, the financial statements have been adjusted for the retrospective
application of authoritative guidance regarding noncontrolling interests in consolidated
financial statements, which was adopted by the Group on January 1, 2009.
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Groups internal control over financial reporting as of
December 31, 2009, based on the criteria established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report
dated May 19, 2010 expressed an unqualified opinion on the Groups internal control over
financial reporting.
/s/ Deloitte Touche Tohmatsu CPA Ltd.
Beijing, the Peoples Republic of China
May 19, 2010
F-1
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
(As adjusted)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
78,926
|
|
|
$
|
130,544
|
|
Restricted cash
|
|
|
162
|
|
|
|
|
|
Accounts receivable, net of allowances of $7,128 and $9,151
in 2008 and 2009, respectively
|
|
|
37,804
|
|
|
|
28,992
|
|
Notes receivable
|
|
|
85
|
|
|
|
|
|
Amount due from a related party
|
|
|
5,537
|
|
|
|
9,941
|
|
Inventories
|
|
|
37,763
|
|
|
|
22,937
|
|
Prepaid expenses and other current assets
|
|
|
10,003
|
|
|
|
12,420
|
|
Deferred tax assets-current
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
170,363
|
|
|
|
204,834
|
|
|
|
|
|
|
|
|
Plant, machinery and equipment, net
|
|
|
48,125
|
|
|
|
44,582
|
|
Acquired intangible assets, net
|
|
|
921
|
|
|
|
645
|
|
Deferred tax assets-noncurrent
|
|
|
49
|
|
|
|
|
|
Goodwill
|
|
|
606
|
|
|
|
606
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
220,064
|
|
|
$
|
250,667
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current portion of long-term payable
|
|
$
|
1,211
|
|
|
$
|
799
|
|
Accounts payable
|
|
|
9,214
|
|
|
|
10,514
|
|
Amounts due to related parties
|
|
|
419
|
|
|
|
266
|
|
Accrued expenses and other current liabilities
|
|
|
9,074
|
|
|
|
9,227
|
|
Advance from customers
|
|
|
5,260
|
|
|
|
4,720
|
|
Deferred revenue
|
|
|
1,748
|
|
|
|
755
|
|
Income tax payable
|
|
|
149
|
|
|
|
1,162
|
|
Put option liability
|
|
|
1,173
|
|
|
|
1,257
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
28,248
|
|
|
|
28,700
|
|
|
|
|
|
|
|
|
Convertible notes and embedded derivatives
|
|
|
|
|
|
|
15,441
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
28,248
|
|
|
|
44,141
|
|
|
|
|
|
|
|
|
F-2
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
CONSOLIDATED BALANCE SHEETS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
(As adjusted)
|
|
|
|
|
Commitments (Note 21)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
Ordinary shares of par value $0.00002:
|
|
|
|
|
|
|
|
|
50,000,000,000,000 shares authorized; shares issued and
outstanding, 650,034,590 in 2008 and 650,156,045 in 2009
|
|
|
13
|
|
|
|
13
|
|
Additional paid-in capital
|
|
|
105,846
|
|
|
|
113,657
|
|
Treasury stock, at cost (nil and 918,000 shares as of
December 31, 2008 and 2009, respectively)
|
|
|
|
|
|
|
(199
|
)
|
Accumulated other comprehensive income
|
|
|
24,095
|
|
|
|
23,863
|
|
Statutory reserve
|
|
|
8,542
|
|
|
|
10,993
|
|
Retained earnings
|
|
|
51,980
|
|
|
|
55,866
|
|
|
|
|
|
|
|
|
Total China Techfaith Wireless Communication
Technology Limited shareholders equity
|
|
|
190,476
|
|
|
|
204,193
|
|
|
|
|
|
|
|
|
Noncontrolling interest
|
|
|
1,340
|
|
|
|
2,333
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
191,816
|
|
|
|
206,526
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND EQUITY
|
|
$
|
220,064
|
|
|
$
|
250,667
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-3
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(As adjusted)
|
|
|
(As adjusted)
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Handset design
|
|
$
|
41,721
|
|
|
$
|
19,123
|
|
|
$
|
4,482
|
|
Product sales
|
|
|
101,723
|
|
|
|
189,727
|
|
|
|
206,106
|
|
Mobile game design and other related services
|
|
|
|
|
|
|
|
|
|
|
488
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
143,444
|
|
|
|
208,850
|
|
|
|
211,076
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Handset design
|
|
|
25,239
|
|
|
|
10,308
|
|
|
|
4,425
|
|
Product sales
|
|
|
79,556
|
|
|
|
157,377
|
|
|
|
168,376
|
|
Mobile game design and other related services
|
|
|
|
|
|
|
|
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
104,795
|
|
|
|
167,685
|
|
|
|
172,865
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
38,649
|
|
|
|
41,165
|
|
|
|
38,211
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
(13,142
|
)
|
|
|
(15,553
|
)
|
|
|
(9,600
|
)
|
Research and development
|
|
|
(30,876
|
)
|
|
|
(18,195
|
)
|
|
|
(12,040
|
)
|
Selling and marketing
|
|
|
(3,422
|
)
|
|
|
(5,497
|
)
|
|
|
(3,241
|
)
|
Impairment of long-lived assets
|
|
|
|
|
|
|
(880
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
(47,440
|
)
|
|
|
(40,125
|
)
|
|
|
(24,881
|
)
|
|
|
|
|
|
|
|
|
|
|
Government subsidy income
|
|
|
1,734
|
|
|
|
3,081
|
|
|
|
481
|
|
Other operating income
|
|
|
|
|
|
|
2,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(7,057
|
)
|
|
|
6,564
|
|
|
|
13,811
|
|
|
|
|
|
|
|
|
|
|
|
Interest expenses
|
|
|
(166
|
)
|
|
|
(47
|
)
|
|
|
(623
|
)
|
Interest income
|
|
|
3,871
|
|
|
|
1,616
|
|
|
|
667
|
|
Other (expenses) income
|
|
|
(220
|
)
|
|
|
(22
|
)
|
|
|
115
|
|
Change in fair value of put option
|
|
|
(43
|
)
|
|
|
(855
|
)
|
|
|
(84
|
)
|
Change in fair value of derivatives embedded in
convertible notes
|
|
|
|
|
|
|
|
|
|
|
(5,270
|
)
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(3,615
|
)
|
|
|
7,256
|
|
|
|
8,616
|
|
Income tax benefit (expenses)
|
|
|
(6
|
)
|
|
|
93
|
|
|
|
(3,642
|
)
|
Equity in loss of an affiliate, net of income taxes
|
|
|
(851
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(4,472
|
)
|
|
|
7,349
|
|
|
|
4,974
|
|
Less: Net loss attributable to noncontrolling interest
|
|
|
1,200
|
|
|
|
652
|
|
|
|
1,363
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to China Techfaith Wireless
Communication Technology Limited
|
|
$
|
(3,272
|
)
|
|
$
|
8,001
|
|
|
$
|
6,337
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to China Techfaith
Wireless Communication Technology Limited:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.01
|
)
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.01
|
)
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
649,807,421
|
|
|
|
649,972,306
|
|
|
|
650,057,866
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
649,807,421
|
|
|
|
650,062,312
|
|
|
|
720,889,120
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-4
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
AND COMPREHENSIVE INCOME
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
share
|
|
|
Com-
|
|
|
|
Ordinary shares
|
|
|
paid-in
|
|
|
Treasury
|
|
|
comprehensive
|
|
|
Statutory
|
|
|
Retained
|
|
|
Noncontrolling
|
|
|
holders
|
|
|
prehensive
|
|
|
|
Number
|
|
|
Amount
|
|
|
capital
|
|
|
stock
|
|
|
income
|
|
|
reserve
|
|
|
earning
|
|
|
Interest
|
|
|
equity
|
|
|
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2007 (as adjusted)
|
|
|
649,692,954
|
|
|
$
|
13
|
|
|
$
|
109,833
|
|
|
$
|
(4,628
|
)
|
|
$
|
5,339
|
|
|
$
|
6,093
|
|
|
$
|
49,700
|
|
|
$
|
3,843
|
|
|
$
|
170,193
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,290
|
|
|
|
|
|
|
|
|
|
|
|
147
|
|
|
|
8,437
|
|
|
$
|
8,437
|
|
Share-based compensation
|
|
|
220,182
|
|
|
|
|
|
|
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94
|
|
|
|
|
|
Reduction in underwriters costs
for the IPO
|
|
|
|
|
|
|
|
|
|
|
400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
400
|
|
|
|
|
|
Purchase back of NCI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(983
|
)
|
|
|
(983
|
)
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,272
|
)
|
|
|
(1,200
|
)
|
|
|
(4,472
|
)
|
|
|
(4,472
|
)
|
Provision for statutory reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
720
|
|
|
|
(720
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007 (as adjusted)
|
|
|
649,913,136
|
|
|
|
13
|
|
|
|
110,327
|
|
|
|
(4,628
|
)
|
|
|
13,629
|
|
|
|
6,813
|
|
|
|
45,708
|
|
|
|
1,807
|
|
|
|
173,669
|
|
|
$
|
3,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancellation of treasury stock
|
|
|
|
|
|
|
|
|
|
|
(4,628
|
)
|
|
|
4,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,466
|
|
|
|
|
|
|
|
|
|
|
|
185
|
|
|
|
10,651
|
|
|
|
10,651
|
|
Share-based compensation
|
|
|
121,454
|
|
|
|
|
|
|
|
147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
147
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,001
|
|
|
|
(652
|
)
|
|
|
7,349
|
|
|
|
7,349
|
|
Provision for statutory reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,729
|
|
|
|
(1,729
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 (as adjusted)
|
|
|
650,034,590
|
|
|
|
13
|
|
|
|
105,846
|
|
|
|
|
|
|
|
24,095
|
|
|
|
8,542
|
|
|
|
51,980
|
|
|
|
1,340
|
|
|
|
191,816
|
|
|
$
|
18,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of ordinary shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(199
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(199
|
)
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77
|
|
|
|
77
|
|
Share-based compensation
|
|
|
121,455
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,337
|
|
|
|
(1,363
|
)
|
|
|
4,974
|
|
|
|
4,974
|
|
Provision for statutory reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,451
|
|
|
|
(2,451
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital contribution by
a noncontrolling shareholder
|
|
|
|
|
|
|
|
|
|
|
7,791
|
|
|
|
|
|
|
|
(309
|
)
|
|
|
|
|
|
|
|
|
|
|
2,356
|
|
|
|
9,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
650,156,045
|
|
|
$
|
13
|
|
|
$
|
113,657
|
|
|
$
|
(199
|
)
|
|
$
|
23,863
|
|
|
$
|
10,993
|
|
|
$
|
55,866
|
|
|
$
|
2,333
|
|
|
$
|
206,526
|
|
|
$
|
5,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-5
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(As adjusted)
|
|
|
(As adjusted)
|
|
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(4,472
|
)
|
|
$
|
7,349
|
|
|
$
|
4,974
|
|
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on disposal of plant, machinery and equipment
|
|
|
690
|
|
|
|
73
|
|
|
|
125
|
|
Impairment of long-lived assets
|
|
|
|
|
|
|
880
|
|
|
|
|
|
Amortization of acquired intangible assets
|
|
|
276
|
|
|
|
794
|
|
|
|
377
|
|
Inventory provision
|
|
|
911
|
|
|
|
648
|
|
|
|
409
|
|
Warranty provision
|
|
|
1,103
|
|
|
|
1,067
|
|
|
|
365
|
|
Bad debts expense
|
|
|
44
|
|
|
|
2,996
|
|
|
|
2,081
|
|
Depreciation of plant, machinery and equipment
|
|
|
7,145
|
|
|
|
6,103
|
|
|
|
4,213
|
|
Equity in loss of an affiliate
|
|
|
851
|
|
|
|
|
|
|
|
|
|
Change in fair value of put option
|
|
|
43
|
|
|
|
855
|
|
|
|
84
|
|
Amortization of share-based compensation
|
|
|
94
|
|
|
|
147
|
|
|
|
20
|
|
Change in fair value of derivatives associated with
convertible notes
|
|
|
|
|
|
|
|
|
|
|
5,270
|
|
Amortization of convertible notes interest
|
|
|
|
|
|
|
|
|
|
|
588
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(200
|
)
|
|
|
(1,536
|
)
|
|
|
2,385
|
|
Notes receivable
|
|
|
(1,568
|
)
|
|
|
4,212
|
|
|
|
85
|
|
Inventories
|
|
|
(41,096
|
)
|
|
|
15,877
|
|
|
|
14,417
|
|
Prepaid expenses and other current assets
|
|
|
399
|
|
|
|
(4,836
|
)
|
|
|
(2,498
|
)
|
Deferred tax assets
|
|
|
|
|
|
|
129
|
|
|
|
132
|
|
Accounts payable
|
|
|
26,677
|
|
|
|
(27,747
|
)
|
|
|
1,140
|
|
Notes payable
|
|
|
(148
|
)
|
|
|
|
|
|
|
|
|
Accrued expenses and other current liabilities
|
|
|
(8,094
|
)
|
|
|
(3,198
|
)
|
|
|
(406
|
)
|
Advance from customers
|
|
|
2,071
|
|
|
|
(2,423
|
)
|
|
|
(540
|
)
|
Deferred revenue
|
|
|
(4,073
|
)
|
|
|
106
|
|
|
|
(993
|
)
|
Income tax payable
|
|
|
(6
|
)
|
|
|
|
|
|
|
1,013
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(19,353
|
)
|
|
|
1,496
|
|
|
|
33,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits paid for acquisition of plant, machinery
and equipment, and acquired intangible assets
|
|
|
(4,271
|
)
|
|
|
|
|
|
|
|
|
Purchase of plant, machinery and equipment
|
|
|
(8,904
|
)
|
|
|
(13,389
|
)
|
|
|
(865
|
)
|
Proceeds from sale of plant, machinery and equipment
|
|
|
85
|
|
|
|
116
|
|
|
|
47
|
|
Purchase of intangible assets
|
|
|
(644
|
)
|
|
|
(1,364
|
)
|
|
|
(490
|
)
|
Purchase of noncontrolling interest of STEP Technologies
|
|
|
(1,361
|
)
|
|
|
|
|
|
|
|
|
Decrease in restricted cash
|
|
|
1,816
|
|
|
|
3,228
|
|
|
|
162
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(13,279
|
)
|
|
|
(11,409
|
)
|
|
|
(1,146
|
)
|
|
|
|
|
|
|
|
|
|
|
F-6
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from short-term bank borrowings
|
|
|
10,952
|
|
|
|
|
|
|
|
|
|
Repayment of short-term bank borrowings
|
|
|
(10,952
|
)
|
|
|
|
|
|
|
|
|
Capital contribution by a noncontrolling shareholder
|
|
|
|
|
|
|
|
|
|
|
9,838
|
|
Proceeds from issuance of convertible notes, net of
issuance cost paid of $250
|
|
|
|
|
|
|
|
|
|
|
9,750
|
|
Repurchase of ordinary shares from market
|
|
|
|
|
|
|
|
|
|
|
(199
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
|
|
|
|
|
|
|
|
19,389
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on
cash and cash equivalents
|
|
|
4,214
|
|
|
|
4,085
|
|
|
|
134
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(28,418
|
)
|
|
|
(5,828
|
)
|
|
|
51,618
|
|
Cash and cash equivalents at the beginning of the year
|
|
|
113,172
|
|
|
|
84,754
|
|
|
|
78,926
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of the year
|
|
$
|
84,754
|
|
|
$
|
78,926
|
|
|
$
|
130,544
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expenses
|
|
$
|
166
|
|
|
$
|
26
|
|
|
$
|
25
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
6
|
|
|
$
|
36
|
|
|
$
|
2,499
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-7
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
1.
|
|
ORGANIZATION AND PRINCIPAL ACTIVITIES
|
China Techfaith Wireless Communication Technology Limited (the Company) was incorporated
under the laws of the Cayman Islands on June 25, 2004 and its subsidiaries and variable
interest entities (the VIEs) include the following as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
Date of
|
|
Place of
|
|
Percentage of
|
|
Subsidiaries
|
|
incorporation/acquisition
|
|
incorporation
|
|
legal ownership
|
|
|
|
|
|
|
|
|
|
|
Techfaith Wireless Communication Technology
(Beijing) Limited (Techfaith China)
|
|
July 26, 2002
|
|
Peoples Republic of China (the PRC)
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Techfaith Wireless Technology Group Limited
(Techfaith BVI) (formerly known as Techfaith Wireless Communication Technology Limited)
|
|
July 8, 2003
|
|
British Virgin Islands
(the BVI)
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Great
Earnest Technology Limited (Great Earnest)
|
|
August 8, 2003
|
|
BVI
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
One Net Entertainment Limited (One Net)
(formerly
known as Techfaith Wireless Communication Technology (Beijing) Limited II)
|
|
September 5, 2003
|
|
PRC
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
798 Entertainment Limited (798 Entertainment)
|
|
October 15, 2003
|
|
BVI
|
|
|
100
|
%
|
(formerly known as Leo Technology Limited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STEP Technologies (Beijing) Co., Ltd.
|
|
November 20, 2003
|
|
PRC
|
|
|
100
|
%
|
(STEP Technologies)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Techfaith
Intelligent Handset Technology (Hong Kong) Limited (Techfaith HK)
(formerly known as First Achieve Technology Ltd.)
|
|
December 29, 2003
|
|
Hong Kong
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Finest Technology Limited (Finest Technology)
|
|
January 8, 2004
|
|
BVI
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Techfaith Wireless Communication Technology
|
|
March 22, 2004
|
|
PRC
|
|
|
100
|
%
|
(Shanghai) Limited (Techfaith Shanghai)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Infoexcel Technology Limited (Infoexcel Technology)
|
|
April 18, 2005
|
|
BVI
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Boost Time Limited (Boost Time)
|
|
August 25, 2005
|
|
BVI
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Techfaith Wireless Communication Technology
|
|
August 25, 2005
|
|
PRC
|
|
|
100
|
%
|
(Shenzhen) Limited (Techfaith Shenzhen)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Techfaith Intelligent Handset Technology (Beijing)
|
|
September 9, 2005
|
|
PRC
|
|
|
100
|
%
|
Limited (Techfaith Intelligent Handset Beijing)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charm Faith Limited (Charm Faith)
|
|
November 21, 2005
|
|
BVI
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Techfaith Wireless Communication Technology
|
|
April 24, 2006
|
|
PRC
|
|
|
100
|
%
|
(Hangzhou) Limited (Techfaith Hangzhou)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Nice Technology Limited (Fair Nice)
|
|
February 26, 2007
|
|
BVI
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Techfaith Wireless Communication Technology
|
|
March 27, 2007
|
|
PRC
|
|
|
100
|
%
|
(Shenyang) Limited (Techfaith Shenyang)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Techfaith Wireless Technology (HK) Limited
|
|
December 10, 2008
|
|
Hong Kong
|
|
|
100
|
%
|
(Technology HK)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Media Chance Limited (Media Chance)
|
|
August 13, 2009
|
|
Hong Kong
|
|
|
100
|
%
|
F-8
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
1.
|
|
ORGANIZATION AND PRINCIPAL ACTIVITIES continued
|
|
|
|
|
|
|
|
|
|
|
|
Date of
|
|
Place of
|
|
Percentage of
|
|
Subsidiaries
|
|
incorporation/acquisition
|
|
incorporation
|
|
legal ownership
|
|
|
|
|
|
|
|
|
|
|
Time Spring Limited (Time Spring)
|
|
October 28, 2009
|
|
BVI
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
UU Internet Technology (Shenyang) Limited
|
|
November 26, 2009
|
|
PRC
|
|
|
100
|
%
|
(UU Shenyang)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable interest entities and VIEs subsidiary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Techfaith Software (China) Holding Limited
|
|
March 17, 2006
|
|
Cayman Islands
|
|
|
70
|
%
|
(TechSoft Holding)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Techfaith Software (China) Limited (TechSoft)
|
|
May 26, 2006
|
|
PRC
|
|
|
70
|
%
|
|
|
|
|
|
|
|
|
|
Beijing
Techfaith Interactive Internet Technology Limited
|
|
May 14, 2009
|
|
PRC
|
|
nil
|
|
(Techfaith Interactive)
|
|
|
|
|
|
|
|
|
The Company and all of its subsidiaries and variable interest entities are collectively
referred to as the Group.
Prior to 2006, the Group was principally engaged in the provision of customized handset
design solutions, which span the entire handset development cycle, from market and industry
research, through detailed design and prototype testing, to pilot production and production
support. In 2006, the Group started to design and manufacture handsets and smart phones
through Electronics Manufacturing Service (EMS) providers for sales to mobile handset
brand owners and electronic products wholesale distributors. Since 2008, the Group
generated the majority of its revenue from sales of products. In 2009, the Group started
generating revenue from mobile game design and other related services.
Variable interest entities
In March 2006, the Group entered into Series A Preferred Shares Purchase and Sell Agreement
(the Agreement) with QUALCOMM Incorporated (QUALCOMM) to establish a 70%-owned
subsidiary, TechSoft Holding, which engaged in the business of developing software
applications for wireless communication devices. The Group and QUALCOMM subscribed 70% and
30% of the issued series A preferred shares of TechSoft Holding, respectively. QUALCOMM is
granted the right to, upon the occurrence of certain conditions, require the Group to
purchase back any or all of its Series A Preferred Shares (Put option); and the right to,
upon the occurrence of certain conditions, purchase any or all of the Series A Preferred
Shares held by the Group at the price and on the terms pre-defined (Call option). The
terms in the Agreement give QUALCOMM the unconditional right to exercise its put option at
its discretion, and the Group is expected to absorb the expected losses of TechSoft Holding.
Accordingly, the Group is the primary beneficiary of TechSoft Holding. Techsoft Holding set
up a wholly owned subsidiary, Techsoft, in PRC on May 26, 2006.
F-9
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
1.
|
|
ORGANIZATION AND PRINCIPAL ACTIVITIES continued
|
PRC laws and regulations restrict foreign ownership of
mobile and online game business. To comply with these
foreign ownership restrictions, on May 14, 2009, through series of contractual arrangements,
the Group obtained control of Techfaith Interactive, an entity already obtained the internet
content provider (ICP) license authorized by the PRC government for operating mobile and online game
business in the PRC. The Group extended interest-free loans with total principal of $1,465
to the nominee shareholders to finance their investments in Techfaith Interactive. The Group
has entered into Exclusive Business Agreement, with Techfaith Interactive, which entitles
the Group to receive all of Techfaith Interactives net income. The Group also entered
certain agreements with nominee shareholders of Techfaith Interactive, including Option
Agreement to acquire the shareholding of Techfaith Interactive at a nominal price or the
minimum price permitted under applicable laws; Voting Rights Agreements to delegate the
voting rights of the shareholders to the Group and Equity Pledge Agreements to pledge the
shares in Techfaith Interactive to the Group.
As a result of these contractual arrangements, the Group became the primary beneficiary of
Techfaith Interactive and pursuant to the authoritative literature relating to the
consolidation of variable interest entities, it has consolidated Techfaith Interactive from
May 14, 2009.
As of May 14, 2009, the net assets of Techfaith Interactive include an ICP licence with fair
value of $15 and cash of $1,450.
F-10
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
1.
|
|
ORGANIZATION AND PRINCIPAL ACTIVITIES continued
|
The following financial statement amounts and balances of the Groups VIEs were included in
the accompanying consolidated financial statements as of and for the years ended:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
5,216
|
|
|
$
|
7,090
|
|
Total liabilities
|
|
$
|
895
|
|
|
$
|
456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
|
|
|
$
|
155
|
|
|
$
|
740
|
|
Net loss
|
|
$
|
(3,137
|
)
|
|
$
|
(2,172
|
)
|
|
$
|
(127
|
)
|
|
|
|
|
|
|
|
|
|
|
2.
|
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis of presentation
The consolidated financial statements of the Group have been prepared in accordance with the
accounting principles generally accepted in the United States of America (U.S. GAAP).
Basis of consolidation
The consolidated financial statements include the financial statements of the Company, its
subsidiaries and its variable interest entities. All inter-company transactions and
balances are eliminated upon consolidation.
Noncontrolling interests
Effective January 1, 2009, the Group adopted an authoritative pronouncement issued by the
Financial Accounting Standards Board (the FASB) regarding noncontrolling interests in
consolidated financial statements. The pronouncement requires noncontrolling interests to be
separately presented as a component of equity in the consolidated financial statements. The
presentation regarding noncontrolling interests was retroactively applied for all the
presented periods.
F-11
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
2.
|
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued
|
Use of estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses in the financial statements and accompanying notes. Significant
accounting estimates reflected in the Groups financial statements include revenue
recognition, allowance for doubtful accounts, provision for inventory write-down, provision
for warranty, useful lives and impairment for plant, machinery and equipment and intangible
assets, share based compensation expense and valuation allowance for deferred tax assets.
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand, demand deposits and highly liquid
investments, which are unrestricted as to withdrawal and use, and which have maturities of
three months or less when purchased.
Restricted cash
The Groups restricted cash is related to deposits required by banks for issuing letters of
credit. The balance of restricted cash was $162 and $nil as of December 31, 2008 and 2009,
respectively.
Fair value
Fair value is the price that would be received from selling an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date.
When determining the fair value measurements for assets and liabilities required or
permitted to be recorded at fair value, the Group considers the principal or most
advantageous market in which it would transact and it considers assumptions that market
participants would use when pricing the asset or liability.
Notes receivable
Notes receivable represents bank acceptance drafts that are non-interest bearing and due
within one year.
F-12
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
2.
|
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued
|
Inventories
Inventories of the Group consist of work in progress, raw materials and finished goods.
Inventories are stated at the lower of cost or market. Inventory costs include expenses
that are directly or indirectly incurred in the acquisition, including shipping and handling
costs charged to us by suppliers, and production of manufactured products for sale.
Expenses include the cost of materials and supplies used in production, direct labour costs
and allocated overhead costs such as depreciation, insurance, employee benefits, and
indirect labour. Cost is determined using the weighted average method. Inventories are
written down for provisions for obsolescence to net realizable value based upon estimates of
future demand, technology developments, and market conditions. These provisions charged to
income were of $911, $648 and $409 in 2007, 2008 and 2009, respectively.
Plant, machinery and equipment, net
Plant, machinery and equipment are carried at cost less accumulated depreciation and
amortization. Assets under construction are not depreciated until construction is completed
and the assets are ready for their intended use. Depreciation and amortization are
calculated on a straight-line basis over the following estimated useful lives:
|
|
|
Office building
|
|
48 years
|
Plant and machinery
|
|
4 years
|
Furniture, fixtures and equipment
|
|
4 years
|
Motor vehicles
|
|
4 years
|
Software
|
|
3-4 years
|
Leasehold improvements
|
Shorter of the lease terms or 4 years
|
Impairment of long-lived assets and certain identifiable intangibles
The Group reviews its long-lived assets for impairment whenever events or change in
circumstances indicate that the carrying amounts of an asset may no longer be recoverable.
When these events occur, the Group measures impairment by comparing the carrying values of
the long- lived assets to the estimated undiscounted future cash flows expected to result
from the use of the assets and their eventual disposition. If the sum of the expected
undiscounted cash flows is less than the carrying amounts of the assets, the Group would
recognize an impairment loss based on the fair values of the assets.
F-13
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
2.
|
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued
|
Other acquired intangible assets, net
Other acquired intangible assets with definite lives are amortized on a straight-line basis
over their expected useful economic lives. The Group does not have intangible assets with
indefinite useful lives.
Goodwill
The excess of the purchase price over the fair value of net assets acquired is recorded on
the consolidated balance sheet as goodwill.
The Group completes a two-step goodwill impairment test. The first step compares the fair
value of each reporting unit (operating segment or one level below an operating segment) to
its carrying amount, including goodwill. If the fair value of each reporting unit exceeds
its carrying amount, goodwill is not considered to be impaired and the second step will not
be required. If the carrying amount of a reporting unit exceeds its fair value, the second
step compares the implied fair value of the affected reporting units goodwill to the
carrying value of that goodwill. The implied fair value of goodwill is determined in a
manner similar to accounting for a business combination with the allocation of the assessed
fair value determined in the first step to the assets and liabilities of the reporting unit.
The excess of the fair value of the reporting unit over the amounts assigned to the assets
and liabilities is the implied fair value of goodwill. This allocation process is only
performed for purposes of evaluating goodwill impairment and does not result in an entry to
adjust the value of any assets or liabilities. An impairment loss is recognized for any
excess in the carrying value of goodwill over the implied fair value of goodwill. The annual
impairment test is performed as of December 31of every year. During the years ended
December 31, 2007, 2008 and 2009, no goodwill impairment loss was recorded.
The total carrying amount of goodwill, $606 is allocated to product sales segment.
F-14
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
2.
|
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued
|
Long-term investments
A company that is not consolidated, but over which the Group exercises significant
influence, is accounted for under the equity method of accounting. Whether or not the Group
exercises significant influence with respect to an affiliate depends on an evaluation of
several factors including, among others, representation on the affiliated companys board of
directors and ownership level, which is generally a 20% to 50% interest in the voting
securities of the affiliated company. Under the equity method of accounting, the affiliated
companys accounts are not reflected within the Groups consolidated balance sheets and
statements of operations; however, the Groups share of the earnings or losses of the
affiliated company is reflected in the caption Equity in loss of an affiliate in the
consolidated statements of operations. The Groups carrying value in equity method
affiliated companies was $nil as of December 31, 2008 and 2009 (see Note 10).
When the Groups carrying value in an equity method affiliated company is reduced to zero,
no further losses are recorded in the Groups consolidated financial statements unless the
Group guaranteed obligations of the affiliated company or has committed additional funding.
When the affiliated company subsequently reports income, the Group will not record its share
of such income until it equals the amount of its share of losses not previously recognized.
When the Group cannot exercise significant influence over the investees operating and
financial policies, the Group records its investment as a cost method investment. The Group
carries the investment at cost and recognizes as income any dividends received from a
distribution of the investees earnings.
Deferred revenue
Deferred revenue represents design fee advances received from customers immediately after
the design contracts are executed. Such advances are not recognized as design fee revenue
until a pre-agreed milestone has been reached.
Revenue recognition
The Groups revenues are derived from sales of products, mobile handset design service and
mobile game design and other related services. Revenue from product sales includes sales
revenue from smart phones, feature phones, wireless modules and other electronics components
for mobile handsets. Revenue from handset design services comprises design fee, royalty
income, component sales and service income. Revenue from mobile game design and other
related services include service income from mobile phone game design service and mobile
phone game related services.
F-15
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
2.
|
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued
|
Revenue recognition
continued
(1) Handset design services
Design fee
Design fee is a fixed amount paid in instalments according to pre-agreed milestones. In
general, three milestones are identified in the Groups design contracts with customers.
Three milestones include: 1, GSM-based handsets industry based standard referring as full
type approval, or FTA; 2, the regulatory approval for its use in the intended country, in the case
of China, a China type approval, or CTA; and 3, the beginning of mass production refers to
as shipping acceptance, or SA. The Group recognizes revenues in accordance with
authoritative guidance regarding to software revenue recognition based on the proportional
performance method using an output measure determined by achievement of each milestone.
F-16
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
2.
|
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued
|
Revenue recognition
continued
(1) Handset design services
continued
Royalty income
In addition to design fee, the Group also charges royalty to certain customers. The royalty
is calculated at a variable rate based on the volume of mobile handsets manufactured or sold
by a customer. Royalty income is recognized when the confirmation of manufacturing or
selling volume is obtained from customers.
Component sales related to design
After the Group has delivered design products to its customers, customers are required to
purchase certain components (such as chips used in mobile handsets) through the Group to
manufacture the designed products. As the component sales are built into the design
contracts, the Group includes these component sales in the design contract related revenue
rather than product sales. The Group recognizes the net revenue for component sales when
the components are delivered and the legal title directly passes from the suppliers to
customers.
Service income
The Group provides mobile handset testing services to other handset manufactures. Service
income is recognized when persuasive evidence of an arrangement exists, the fee is fixed or
determinable, collection is reasonably assured, and in the period in which performance has
occurred.
(2) Product sales
Revenue from sales of products, including feature phones and smart phones designed by the
Group and manufactured by EMS providers, wireless modules as well as other electronic
components is recognized when persuasive evidence of an arrangement exists, the fee is fixed
or determinable, collection is reasonably assured, and in the period in which delivery or
performance has occurred.
F-17
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
2.
|
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued
|
Revenue recognition
continued
(3) Mobile game design and other services
Mobile phone game design service
The Group also provides mobile phone game design services to brand mobile phone
manufacturers. Under this type of arrangements, the Group is required to design mobile phone
games according to customers specification for a fixed price. Revenue from this type of
contracts is recognized under the proportional performance method using an output measure
determined by achievement of milestones which include planning documentation and testing
reports.
Mobile phone game related service
The Group provides mobile phone game related services to brand mobile phone manufacturers.
Under these arrangements, the Group maintains a mobile phone web page so the brand mobile
phone manufacturers end users can access the web page and download mobile phone games free
of charge during the contract period. In return, mobile phone manufactures pay the Group a
fixed fee for the contract period, usually one year. Revenue is recognized rateably over the
contract period.
Product warranty
The Groups product warranty relates to the provision of bug fixing services to Groups
designed mobile handset for a period of one to three years commencing upon the mass
production of the mobile handset, and warranties to the Groups customers on the sales of
products. Accordingly, the Groups product warranty accrual reflects managements best
estimate of probable liability under its product warranty. Management determines the
warranty based on historical experience and other currently available evidence.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
1,250
|
|
|
$
|
1,672
|
|
|
$
|
1,733
|
|
Current period provision
|
|
|
1,103
|
|
|
|
1,067
|
|
|
|
365
|
|
Utilized during the year
|
|
|
(730
|
)
|
|
|
(1,061
|
)
|
|
|
(1,720
|
)
|
Exchange difference
|
|
|
49
|
|
|
|
55
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
1,672
|
|
|
$
|
1,733
|
|
|
$
|
377
|
|
|
|
|
|
|
|
|
|
|
|
F-18
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
2.
|
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued
|
Government subsidies and grants
Some local governments in PRC give subsidies to companies as an incentive to establish
business in its jurisdiction. These government subsidies are recognized as subsidy income
when they are received as the Group does not have further obligation to earn these
subsidies. The Group recorded government subsidy income of $387, $2,318 and $282 for the
years ended December 31, 2007, 2008 and 2009, respectively for this type of government
subsidy.
The Group also receives government grants as compensation of performing government endorsed
projects. The grants are refundable until the Group achieves certain performance measures.
These government grants are recorded as a liability until earned. The Group recognizes
these grants as subsidy income once it completes the relevant projects and achieves the
performance measures. The Group recorded a government subsidy income of $1,347, $763 and
$199 for the years ended December 31, 2007, 2008 and 2009, respectively for this type of
government grants. The amount of $246 and $59 was recorded as a liability on the balance
sheet as of December 31, 2008 and 2009, respectively.
The Group recorded total government subsidy income of $1,734, $3,081 and $481 for the years
ended December 31, 2007, 2008 and 2009, respectively.
Research and development costs
Research and development expenses are incurred in the development of handset design and
wireless software application. Technological feasibility for the Groups internally
developed products is reached shortly before the products are released to customers. Costs
incurred after technological feasibility has historically been immaterial. Accordingly, the
Group has expensed all research and development costs when incurred.
Advertising costs
The Group expenses advertising costs as incurred. Total advertising expenses were $300,
$750 and $908 in 2007, 2008 and 2009, respectively, and have been included as part of
selling and marketing expenses.
Foreign currency translation
The functional currency of the Groups subsidiaries and VIEs established in PRC is Renminbi
(RMB). Transactions denominated in currencies other than RMB are translated into RMB at
the exchange rates quoted by the Federal Reserve Bank of New York at the balance sheet
dates. The resulting exchange differences are included in the statement of operations.
The Company has determined that the U.S. dollar is its functional and reporting currency.
Accordingly, assets and liabilities are translated using exchange rates in effect at each
year end and average exchange rates are used for the consolidated statements of operations.
Translation adjustments resulting from translation of these consolidated financial
statements are reflected as accumulated other comprehensive income included in the
shareholders equity.
F-19
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
2.
|
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued
|
Income taxes
Current income taxes are provided for in accordance with the laws of the relevant tax
authorities. Deferred income taxes are recognized when temporary differences exist between
the tax bases of assets and liabilities and their reported amounts in the consolidated
financial statements. Net operating loss carry forwards and credits are applied using
enacted statutory tax rates applicable to future years. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more-likely-than-not that a
portion of or all of the deferred tax assets will not be realized. The components of the
deferred tax assets and liabilities are individually classified as current and non-current
based on their characteristics.
The impact of an uncertain income tax position on the income tax return is recognized at the
largest amount that is more-likely-than-not to be sustained upon audit by the relevant tax
authority. An uncertain income tax position will not be recognized if it has less than a 50%
likelihood of being sustained. Interest and penalties on income taxes will be classified as
a component of the provisions for income taxes. The Group did not identify significant
unrecognized tax benefits for years ended December 31, 2008 and 2009. The Group did not
incur any interest and penalties related to potential underpaid income tax expenses and also
believed that the Groups unrecognized tax benefits did not change significantly within 12
months from December 31, 2009.
Value added tax (VAT) and VAT refund
VAT on sales is calculated at 17% on revenue from product and component sales and paid after
deducting input VAT on purchases.
For products sold to overseas customers by PRC entities, the Group can pay VAT at 17% first
and then receive a refund of 13% for module sales and 17% for other products sales after it
is paid. The Group records VAT refund receivables on accrual basis. VAT refund is recorded
as other current assets on the consolidated balance sheets. The Group reports revenue net
of VAT.
Business taxes
The Groups PRC subsidiaries and VIEs are subject to business taxes at the rate of 5% on
certain types of services and the related revenues are presented net of business taxes
incurred. The Group reports revenue net of business taxes. Business taxes deducted in
arriving net revenue during 2007, 2008, and 2009 totalled $194, $302 and $41, respectively.
Comprehensive income
Comprehensive income includes net income (loss) and foreign currency translation
adjustments. Comprehensive income for the years presented has been disclosed within the
consolidated statement of changes in equity and comprehensive income.
F-20
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
2.
|
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued
|
Financial instruments
Financial instruments consist of cash and cash equivalents, restricted cash, accounts
receivable, accounts payable, put option, convertible notes and derivatives embedded in the
convertible notes. The carrying values of all these financial instruments except
convertible notes approximate their fair values due to the short-term nature of these
instruments. The carrying value of convertible notes approximates to their fair value due
to the insignificant changes of interest rates since the issuance of the convertible notes.
The Group does not use derivative instruments to manage risks.
Concentration of credit risk
Financial instruments that potentially expose the Group to concentrations of credit risk
consist primarily of cash and cash equivalents, and accounts receivable. The Group places
its cash and cash equivalents with financial institutions with high-credit ratings and
quality.
The Group conducts credit evaluations of customers and generally does not require collateral
or other security from its customers; however, upfront deposit based on a portion of the
design fee under the contract will generally be required to be received when the design
contract is entered into. The Group establishes an allowance for doubtful accounts
primarily based upon the age of the receivables and factors surrounding the credit risk of
specific customers. Information relating to the Groups major customers is summarized in
Note 22.
Share-based payment
Share-based payment transactions with employees, such as share options and nonvested shares,
are measured based on the grant-date fair value of the equity instrument issued, and
recognized as compensation expense over the period during which an employee is required to
provide service in exchange for the award, which generally is the vesting period, based on
graded vesting attribution method, with a corresponding impact reflected in additional
paid-in capital.
Share-based payment transactions with nonemployees, such as nonvested shares granted, are
measured based on the grant-date fair value of the equity instrument issued, which is more
reliably measurable than the fair value of the goods or services received and recognized as
expense over the period during which the service is received, based on graded vesting
attribution method, with a corresponding impact reflected in additional paid-in capital.
Net income (loss) per share
Basic net income (loss) per ordinary share is computed by dividing net income (loss)
attributable to ordinary shareholders by the weighted average number of ordinary shares
outstanding during the period. Diluted net income (loss) per ordinary share reflects the
potential dilution that could occur if securities or other contracts to issue ordinary
shares were exercised or converted into ordinary shares. The convertible notes issued are
accounted for using if converted method when calculate diluted net income (loss) per
ordinary share. Ordinary share equivalents are excluded
from the computation of the diluted net loss per share in periods when their effect would be
anti-dilutive.
F-21
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
2.
|
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued
|
Business combinations
Business combinations are recorded using the purchase method of accounting. On January 1,
2009, the Group adopted a new accounting pronouncement with prospective application which
made certain changes to the previous authoritative literature on business combinations.
From January 1, 2009, the assets acquired, the liabilities assumed, and any noncontrolling
interest of the acquiree at the acquisition date, if any, are measured at their fair values
as of that date. Goodwill is recognized and measured as the excess of the total
consideration transferred plus the fair value of any noncontrolling interest of the
acquiree, if any, at the acquisition date over the fair values of the identifiable net
assets acquired. Previously, any non-controlling interest was reflected at historical cost.
Common forms of the consideration made in acquisitions include cash and common equity
instruments. Consideration transferred in a business acquisition is measured at the fair
value as at the date of acquisition. For shares issued in a business combination, the Group
has estimated the fair value as of the date of acquisition.
Where the consideration in an acquisition includes contingent consideration the payment of
which depends on the achievement of certain specified conditions post-acquisition, from
January 1, 2009, the contingent consideration is recognized and measured at its fair value
at the acquisition date and if recorded as a liability it is subsequently carried at fair
value with changes in fair value reflected in earnings. For periods prior to January 1,
2009, contingent consideration was not recorded until the contingency was resolved.
From January 1, 2009, changes in the Groups ownership interest while the Group retains its
controlling financial interest in its subsidiary are accounted for as equity transactions
(investments by owners and distributions to owners acting in their capacity as owners).
Therefore, no gain or loss is recognized in consolidated net income or comprehensive income.
The carrying amount of the noncontrolling interest is adjusted to reflect the change in its
ownership interest in the subsidiary. Any difference between the fair value of the
consideration received or paid and the amount by which the noncontrolling interest is
adjusted is recognized in equity attributable to the parent. For periods prior to
January 1, 2009, changes in the Groups ownership interest
while the Group retains its
controlling financial interest in its subsidiaries are accounted for using the purchase
method of accounting.
F-22
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
2.
|
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued
|
Recently issued accounting pronouncements
In June 2009, the FASB issued an authoritative pronouncement that changes how a company
determines whether an entity should be consolidated when such entity is insufficiently
capitalized or is not controlled by the company through voting (or similar rights). The
determination of whether a company is required to consolidate an entity is based on, among
other things, the entitys purpose and design and the companys ability to direct the
activities of the entity that most significantly impact the entitys economic performance.
The pronouncement retains the scope of previously issued pronouncements but added entities
previously considered qualifying special
purpose entities, since the concept of these entities was eliminated by FASB. The
pronouncement is effective as of the beginning of an entitys first fiscal year that begins
after November 15, 2009. The Group does not expect the adoption of this pronouncement to
have a significant impact on its financial condition or results of operations.
In October 2009, the FASB issued an authoritative pronouncement regarding the revenue
arrangements with multiple deliverables. This pronouncement was issued in response to
practice concerns related to the accounting for revenue arrangements with multiple
deliverables under existing pronouncement. Although the new pronouncement retains the
criteria from exiting pronouncement for when delivered items in a multiple-deliverable
arrangement should be considered separate units of accounting, it removes the previous
separation criterion under existing pronouncement that objective and reliable evidence of
the fair value of any undelivered items must exist for the delivered items to be considered
a separate unit or separate units of accounting. The new pronouncement is effective for
fiscal years beginning on or after June 15, 2010. Entities can elect to apply this
pronouncement (1) prospectively to new or materially modified arrangements after the
pronouncements effective date or (2) retrospectively for all periods presented. Early
application is permitted; however, if the entity elects prospective application and early
adopts this pronouncement after its first interim reporting period, it must also do the
following in the period of adoption: (1) retrospectively apply this pronouncement as of the
beginning of that fiscal year and (2) disclose the effect of the retrospective adjustments
on the prior interim periods revenue, income before taxes, net income, and earnings per
share. The Group is in the process of evaluating the effect of adoption of this
pronouncement.
F-23
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
2.
|
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued
|
|
|
Recently issued accounting pronouncements
continued
|
|
|
In October 2009, the FASB issued an authoritative pronouncement regarding software revenue
recognition. This new pronouncement amends existing pronouncement to exclude from their
scope all tangible products containing both software and non-software components that
function together to deliver the products essential functionality. That is, the entire
product (including the software deliverables and non-software deliverables) would be outside
the scope of software revenue recognition and would be accounted for under other accounting
literature. The new pronouncement include factors that entities should consider when
determining whether the software and non-software components function together to deliver
the products essential functionality and are thus outside the revised scope of the
authoritative literature that governs software revenue recognition. The pronouncement is
effective for fiscal years beginning on or after June 15, 2010. Entities can elect to apply
this pronouncement (1) prospectively to new or materially modified arrangements after the
pronouncements effective date or (2) retrospectively for all periods presented. Early
application is permitted; however, if the entity elects prospective application and early
adopts this pronouncement after its first interim reporting period, it must also do the
following in the period of adoption: (1) retrospectively apply this pronouncement as of the
beginning of that fiscal year and (2) disclose the effect of the retrospective adjustments
on the prior interim periods revenue, income before taxes, net income, and earnings per
share. The Group is in the process of evaluating the effect of adoption of this
pronouncement.
|
|
|
In January 2010, the FASB issued authoritative guidance on accounting for distributions to
shareholders with components of stock and cash. The objective of this new guidance is to
clarify that the stock portion of a distribution to shareholders that allows them to elect
to receive cash or stock with a potential limitation on the total amount of cash that all
shareholders can elect to receive in the aggregate is considered a share issuance that is
reflected prospectively in earnings per share and is not considered a stock dividend for
purposes of accounting treatment of equity and earnings per share. This new guidance is
effective for interim and annual periods ending on or after December 15, 2009, and should be
applied on a retrospective basis. The Group does not expect the adoption of this guidance
would have a significant effect on its consolidated financial position or results of
operations.
|
|
|
In January 2010, the FASB issued authoritative guidance to clarify the scope of accounting
and reporting for decreases in ownership of a subsidiary. The objective of this guidance is
to address implementation issues related to changes in ownership provisions. This guidance
clarifies certain conditions, which need to apply to this guidance, and it also expands
disclosure requirements for the deconsolidation of a subsidiary or derecognition of a group
of assets. This guidance is effective in the period in which an entity adopts the
authoritative guidance on noncontrolling interests in consolidated financial statements. If
an entity has previously adopted the guidance on noncontrolling interests in consolidated
financial statements, the amendments in this update are effective beginning in the first
interim or annual reporting period ending on or after December 15, 2009. Retrospective
application to the first period that an entity adopted the guidance on noncontrolling
interests in consolidated financial statements is required. The Group does not expect the adoption of this guidance would have a significant effect on its consolidated
financial position or results of operations.
|
F-24
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
2.
|
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued
|
|
|
Recently issued accounting pronouncements
continued
|
|
|
In April 2010, the FASB issued an authoritative pronouncement on milestone method of revenue
recognition. The scope of this pronouncement is limited to arrangements that include
milestones relating to research or development deliverables. The pronouncement specifies
guidance that must be met for a vendor to recognize consideration that is contingent upon
achievement of a substantive milestone in its entirety in the period in which the milestone
is achieved. The guidance applies to milestones in arrangements within the scope of this
consensus regardless of whether the arrangement is determined to have single or multiple
deliverables or units of accounting. The pronouncement will be effective for fiscal years,
and interim periods within those years, beginning on or after June 15, 2010. Early
application is permitted. Companies can apply this guidance prospectively to milestones
achieved after adoption. However, retrospective application to all prior periods is also
permitted. The Group is in the process of evaluating the effect of adoption of this
pronouncement.
|
|
|
In April 2010, the FASB issued an authoritative pronouncement on effect of denominating the
exercise price of a share-based payment award in the currency of the market in which the
underlying equity securities trades and that currency is different from (1) entitys
functional currency, (2) functional currency of the foreign operation for which the employee
provides services, and (3) payroll currency of the employee. The guidance clarifies that an
employee share-based payment award with an exercise price denominated in the currency of a
market in which a substantial portion of the entitys equity securities trades should be
considered an equity award assuming all other criteria for equity classification are met.
The pronouncement will be effective for interim and annual periods beginning on or after
December 15, 2010, and will be applied prospectively. Affected entities will be required to
record a cumulative catch-up adjustment for all awards outstanding as of the beginning of
the annual period in which the guidance is adopted. The Group is in the process of
evaluating the effect of adoption of this pronouncement.
|
F-25
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
|
|
On March 31, 2007, the Group acquired an additional 30% equity interest in STEP
Technologies, a subsidiary of the Group. Upon the completion of the transaction, the
Groups total equity interest in STEP Technologies increased from 70% to 100%. The acquired
net assets were recorded at their fair market value at the date of acquisition. The net
book value of the noncontrolling interest in STEP Technologies on the date of acquisition
totalled $983, which was acquired by the Group for $1,361 in cash. The following table
summarizes the estimated fair values of the assets acquired and liabilities assumed on the
acquisition of 30% equity interest in STEP Technologies:
|
|
|
|
|
|
Assets acquired
|
|
|
|
|
Current assets
|
|
$
|
693
|
|
Non-current assets
|
|
|
777
|
|
Goodwill
|
|
|
600
|
|
|
|
|
|
Total assets acquired
|
|
$
|
2,070
|
|
|
|
|
|
Liabilities assumed
|
|
|
|
|
Current liability
|
|
$
|
623
|
|
Non-current liability
|
|
|
86
|
|
|
|
|
|
Total liabilities assumed
|
|
$
|
709
|
|
|
|
|
|
Net assets acquired
|
|
$
|
1,361
|
|
|
|
|
|
|
|
The following unaudited pro forma information summarizes the results of operations for the
Group as if the acquisition of the additional 30% interest of STEP Technologies had
occurred as of January 1, 2007. The following pro forma financial information is not
necessarily indicative of the results that would have occurred had the acquisition been
completion at the beginning of the periods indicated, nor is it indicative of future
operating results:
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
Total revenue
|
|
$
|
143,444
|
|
Net loss attributable to China Techfaith Wireless
Communication Technology Limited
|
|
$
|
(3,552
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable to China Techfaith
Wireless Communication Technology Limited
|
|
|
|
|
Basic
|
|
$
|
(0.01
|
)
|
Diluted
|
|
$
|
(0.01
|
)
|
|
|
|
|
F-26
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
|
|
Accounts receivable consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Billed receivables
|
|
$
|
31,628
|
|
|
|
28,316
|
|
Unbilled receivables
|
|
|
6,176
|
|
|
|
676
|
|
|
|
|
|
|
|
|
|
|
$
|
37,804
|
|
|
$
|
28,992
|
|
|
|
|
|
|
|
|
|
|
Unbilled receivables represent amounts earned under handset design service contracts in
progress but not billable at the respective balance sheet dates. These amounts become
billable according to the contract terms, which usually consider the achievement of certain
milestones or completion of the project. The Group anticipates that substantially all of
such unbilled amounts will be billed and collected within twelve months of balance sheet
date.
|
|
|
Movement of allowance for doubtful accounts is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
4,448
|
|
|
$
|
3,838
|
|
|
$
|
7,128
|
|
Charge to expenses
|
|
|
44
|
|
|
|
2,996
|
|
|
|
2,081
|
|
Utilized during the year
|
|
|
(946
|
)
|
|
|
|
|
|
|
(62
|
)
|
Exchange difference
|
|
|
292
|
|
|
|
294
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
3,838
|
|
|
$
|
7,128
|
|
|
$
|
9,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Work in progress
|
|
$
|
1,055
|
|
|
$
|
480
|
|
Raw materials
|
|
|
31,037
|
|
|
|
21,443
|
|
Finished goods
|
|
|
5,671
|
|
|
|
1,014
|
|
|
|
|
|
|
|
|
Inventories, net
|
|
$
|
37,763
|
|
|
$
|
22,937
|
|
|
|
|
|
|
|
|
F-27
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
6.
|
|
PREPAID EXPENSES AND OTHER CURRENT ASSETS
|
|
|
Prepaid expenses and other current assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Advance to EMS providers
|
|
$
|
2,257
|
|
|
$
|
4,216
|
|
Value added taxes recoverable
|
|
|
4,207
|
|
|
|
3,739
|
|
Rebate receivable
|
|
|
305
|
|
|
|
2,817
|
|
Deposits
|
|
|
621
|
|
|
|
358
|
|
Prepaid software license fee
|
|
|
514
|
|
|
|
280
|
|
Prepaid testing and tooling fee
|
|
|
716
|
|
|
|
261
|
|
Staff advances
|
|
|
437
|
|
|
|
217
|
|
Prepaid commercial insurance
|
|
|
68
|
|
|
|
94
|
|
Interest receivable
|
|
|
403
|
|
|
|
65
|
|
Other prepaid and current assets
|
|
|
475
|
|
|
|
373
|
|
|
|
|
|
|
|
|
|
|
$
|
10,003
|
|
|
$
|
12,420
|
|
|
|
|
|
|
|
|
7.
|
|
PLANT, MACHINERY AND EQUIPMENT, NET
|
|
|
Plant, machinery and equipment, net consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Construction in progress
|
|
$
|
23,458
|
|
|
$
|
23,680
|
|
Office building
|
|
|
19,245
|
|
|
|
19,236
|
|
Leasehold improvements
|
|
|
2,716
|
|
|
|
1,653
|
|
Motor vehicles
|
|
|
721
|
|
|
|
721
|
|
Plant and machinery
|
|
|
13,500
|
|
|
|
11,988
|
|
Furniture, fixtures and equipment
|
|
|
5,504
|
|
|
|
4,968
|
|
Software
|
|
|
7,587
|
|
|
|
7,555
|
|
|
|
|
|
|
|
|
|
|
|
72,731
|
|
|
|
69,801
|
|
Less: Accumulated depreciation
|
|
|
(24,353
|
)
|
|
|
(25,219
|
)
|
|
|
|
|
|
|
|
|
|
|
48,378
|
|
|
|
44,582
|
|
Less: Impairment of long-lived assets
|
|
|
(253
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Plant, machinery and equipment, net
|
|
$
|
48,125
|
|
|
$
|
44,582
|
|
|
|
|
|
|
|
|
|
|
The Group recorded depreciation expenses of $7,145, $6,103 and $4,213 for the years ended
December 31, 2007, 2008 and 2009, respectively.
|
F-28
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
8.
|
|
ACQUIRED INTANGIBLE ASSETS, NET
|
|
|
Acquired intangible assets, net consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
$
|
3,134
|
|
|
$
|
2,608
|
|
Accumulated amortization
|
|
|
(1,586
|
)
|
|
|
(1,963
|
)
|
|
|
|
|
|
|
|
|
|
|
1,548
|
|
|
|
645
|
|
Less: impairment of long-lived assets
|
|
|
(627
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Acquired intangible assets, net
|
|
$
|
921
|
|
|
$
|
645
|
|
|
|
|
|
|
|
|
|
|
The Group acquired software licenses from third parties, which are amortized over the
shorter of the useful economic life of the relevant technology platform or the license
period, which is 2 to 5 years. The Group acquired software licenses of $1,567, $689 and $69
for the years ended December 31, 2007, 2008 and 2009, respectively.
|
|
|
The fair value of the ICP license owned by Techfaith Interactive was $15 on May 24, 2009 and
is amortized over 4.7 years.
|
|
|
The Group had recorded amortization expenses of $276, $794 and $377 for the years ended
December 31, 2007, 2008 and 2009, respectively.
|
|
|
The Group recognized impairment loss of $nil, $627 and $nil for the years ended December 31,
2007, 2008 and 2009, respectively.
|
9.
|
|
IMPAIRMENT OF LONG LIVED ASSETS
|
|
|
In light of the deteriorating economic environment in 2008, the Group assessed long-lived
assets and intangible assets subject to amortization for impairment at the asset group
level. Assets are grouped with other assets and liabilities at the lowest level for which
identifiable cash flows are largely independent of the cash flows of other assets and
liabilities. For each asset group, the Group compared the sum of the expected undiscounted
future cash flows from the use of the assets in each of the asset groups with the carrying
amount of such assets. The expected future cash flows of each of the asset groups are based
on a financial projection management used for planning purpose. When estimating the fair
value of the asset, the Group considered value in use and value in exchange. Value in
use of the asset was derived through the application of income approach discounted cash flow
method, while value in exchange was derived by primarily using the cost approach as well as
the market approach. According to the high and best use concept in the authoritative
pronouncement, the Group used the higher of value in use or value in exchange to determine
the fair value of the asset. The Group recorded $253 impairment loss for fixed assets and
$627 impairment loss for intangible assets in 2008.
|
F-29
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
|
|
The Group has three equity method investments with accumulated carrying value of $nil as of
December 31, 2009.
|
|
|
On July 12, 2005, CK Techfaith Communication Technology Limited (CK Techfaith) was
established by Techfaith BVI and CK Telecom Inc. in the BVI. CK Techfaiths registered
capital is $2,735, of which Techfaith BVI and CK Telecom Inc. injected $1,243 and $1,492 in
March 2006, and owns 45% and 55% equity interest, respectively. CK Techfaith was
principally engaged in the provision of customized handset design solutions. CK Techfaith
was accounted for as an equity method investment.
|
F-30
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
10.
|
|
LONG-TERM INVESTMENT continued
|
|
|
CK Techfaith continually incurred operating losses since incorporated. The two shareholders
determined to cease operations and CK Techfaith was deleted from the Register of Companies
in the BVI on May 1, 2007. Therefore, as of May 1, 2007, CK Techfaith had no assets or
liabilities.
|
|
|
The Group presents below summarized financial information in relation to CK Techfaith:
|
|
|
Long-term investment in an affiliate CK Techfaith
|
|
|
|
|
|
Balance as of January 1, 2007
|
|
$
|
850
|
|
Exchange difference
|
|
|
1
|
|
Investment cost
|
|
|
|
|
Less: equity in loss of an affiliate
|
|
|
(851
|
)
|
|
|
|
|
Balance as of December 31, 2007
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CK Techfaith
|
|
|
|
For 4 months ended
|
|
|
|
May 1, 2007
|
|
|
|
(Note)
|
|
|
|
|
|
|
Net sales
|
|
$
|
|
|
R&D expense
|
|
|
1,340
|
|
Impairment of know-how
|
|
|
553
|
|
|
|
|
|
Total expenses
|
|
|
(1,893
|
)
|
|
|
|
|
Net loss
|
|
$
|
(1,893
|
)
|
|
|
|
|
Note:
|
|
CK Techfaith ceased operation as of May 1, 2007.
|
F-31
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
|
|
On March 15, 2007, BYTE Holding Ltd. (BYTE) was established by Techfaith BVI and BYD Co.,
Ltd. (BYD) in the BVI. BYTEs registered capital is $2,724, of which Techfaith BVI and
BYD injected $nil and $2,724, and owns 31% and 69% equity interest, respectively. BYTE is
principally engaged in providing one-stop EMS to global leading handset customers. BYTE was
accounted for as an equity method investment. As of December 31, 2009, Techfaith BVI had
not injected capital in BYTE. The Group could not obtain BYTEs financial statements for
2009. Since the Group has no obligation to fund BYTEs loss, the Group did not record its
share of BYTEs result. The investment in BYTE will be reported as a cost method investment
in the future as the Group does not have the ability to exercise significant influence over
BYTEs operating and financial policies.
|
|
|
On July 20, 2007, the Company and Arasor International Group (Arasor) jointly formed a
company named Joined Fame Technology Limited (Joined Fame) in the BVI to expand the
wireless handset opportunities in the worlds emerging markets. As of December 31, 2009,
both the Company and Arasor had not injected capital in Joined Fame and Joined Fame had not
started its business.
|
F-32
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
11.
|
|
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
|
Accrued expenses and other current liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Accrued professional fees
|
|
$
|
620
|
|
|
$
|
752
|
|
Accrued facility fee
|
|
|
299
|
|
|
|
481
|
|
Accrued wages
|
|
|
822
|
|
|
|
416
|
|
Warranty provision
|
|
|
1,733
|
|
|
|
377
|
|
Business tax, value added tax and other tax payables
|
|
|
1,584
|
|
|
|
1,840
|
|
Accrued testing fee
|
|
|
1,325
|
|
|
|
988
|
|
Government grants
|
|
|
246
|
|
|
|
59
|
|
Rental payable
|
|
|
80
|
|
|
|
149
|
|
Social insurance payables
|
|
|
162
|
|
|
|
931
|
|
Customer deposits for minimum purchase
|
|
|
315
|
|
|
|
218
|
|
Accrued royalty and license fee
|
|
|
992
|
|
|
|
1,116
|
|
Prepayment for suppliers
|
|
|
544
|
|
|
|
1,076
|
|
Others
|
|
|
352
|
|
|
|
824
|
|
|
|
|
|
|
|
|
|
|
$
|
9,074
|
|
|
$
|
9,227
|
|
|
|
|
|
|
|
|
During 2008, the Group approved and announced to employees a restructuring plan to
streamline its business processes. This plan included the termination of 841 employees.
This plan was completed in 2008 and resulted in restructuring charges, including $3,419
reflected in the general and administrative expenses for employee severance and benefits in
compliance with the New Labour Law of the PRC. The office building where the terminated
employees used to work is owned by the Group. The Group assessed the fair value of the
office building and determined that there was no impairment of the carrying amount of the office
building as of December 31, 2008 and 2009.
F-33
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
Cayman Islands
The Company and TechSoft Holding are tax exempted companies incorporated in the Cayman
Islands.
British Virgin Islands
Under the current BVI law, income from Techfaith BVI, Great Earnest, 798 Entertainment,
Finest Technology, Infoexcel Technology, Boost Time, Charm Faith, Fair Nice and Time Spring
are not subject to taxation.
Hong Kong
No provision for Hong Kong Profits Tax was made for the years ended December 31, 2007, 2008
and 2009 on the basis that Techfaith HK, Technology HK and Media Chance did not have any
assessable profits arising in or derived from Hong Kong for the years.
PRC
The Groups PRC entities were subject to PRC Enterprise Income Tax (EIT) on the taxable
income in accordance with the relevant PRC income tax laws (the Old EIT Law). In 2007, the
EIT rate for companies operating in the PRC was 33%.
Prior to January 1, 2008, subsidiaries which qualified as high and new technology
enterprises (HNTE) under the Old EIT Law were Techfaith China, One Net, STEP Technologies
and Techfaith Intelligent Handset Beijing. They were entitled to a preferential tax rate of
15% with three-year exemption followed by a reduced tax rate of 7.5% for the subsequent
three years, starting from the first profitable year. In 2007, Techfaith China, One Net,
STEP Technologies and Techfaith Intelligent Handset Beijing were taxed at 7.5%, 7.5%, 7.5%
and 0%, respectively.
Techfaith Shanghai was entitled to a preferential tax rate of 15% starting from 2005 as a
foreign invested manufacturing enterprise. In 2007, Techfaith Shanghai was taxed at 15%.
Techfaith Shenzhen is located in Shenzhen Special Economic Zone, and entitled to a
preferential tax rate of 15% with a two-year exemption followed by a reduced tax rate of
7.5% for the subsequent three years starting from the first profitable year. In 2007,
Techfaith Shenzhen was tax exempted.
Techfaith Hangzhou and TechSoft are foreign investment enterprises established in Coastal
Economic Open Zones, which were entitled to a preferential tax rate of 24% with a two-year
exemption followed by a reduced tax rate of 12% for the subsequent three years starting from
the first profitable year. In 2007, both Techfaith Hangzhou and TechSoft were tax exempted.
F-34
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
13.
|
|
INCOME TAXES continued
|
On March 16, 2007, the National Peoples Congress adopted the Enterprise Income Tax Law
(the New EIT Law) which became effective on January 1, 2008. The New EIT Law applies a
uniform 25% enterprise income tax rate to both foreign invested enterprises and domestic
enterprises.
Under the New EIT Law, an enterprise which qualifies as a high and new technology
enterprise (the new HNTE) is entitled to a tax rate of 15%. Techfaith China and
Techfaith Intelligent Handset Beijing obtained the new HNTE in December 2008.
Based on the transition rules of the New EIT Law, Techfaith Shanghai, Techfaith Shenzhen,
TechSoft and Techfaith Hangzhou continue to enjoy preferential tax rates from 2008 through
2011 due to the preferential tax qualification obtained prior to January 1, 2008.
The preferential tax rates, which are rates enjoyed by the PRC entities of the Group,
different from the statutory rates, are presented in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiaries
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Techfaith China (1)
|
|
|
7.5
|
%
|
|
|
7.5
|
%
|
|
|
15.0
|
%
|
|
|
15.0
|
%
|
|
|
15.0
|
%
|
One Net
|
|
|
7.5
|
%
|
|
|
25.0
|
%
|
|
|
25.0
|
%
|
|
|
25.0
|
%
|
|
|
25.0
|
%
|
STEP Technology
|
|
|
7.5
|
%
|
|
|
25.0
|
%
|
|
|
25.0
|
%
|
|
|
25.0
|
%
|
|
|
25.0
|
%
|
Techfaith Intelligent Handset Beijing (1)
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
10.0
|
%
|
|
|
11.0
|
%
|
|
|
12.0
|
%
|
Techfaith Shanghai
|
|
|
7.5
|
%
|
|
|
9.0
|
%
|
|
|
10.0
|
%
|
|
|
22.0
|
%
|
|
|
24.0
|
%
|
Techfaith Shenzhen
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
11.0
|
%
|
|
|
12.0
|
%
|
Techfaith Hangzhou
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
12.5
|
%
|
|
|
12.5
|
%
|
|
|
12.5
|
%
|
TechSoft
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
12.5
|
%
|
|
|
12.5
|
%
|
|
|
|
(1)
|
|
The new HNTE status obtained by Techfaith China and Techfaith Intelligent Handset
Beijing in 2008 under the New EIT Law is valid for three years and qualifying entities
can then apply to renew for an additional three years provided their business
operations continue to qualify for the new HNTE status. The Group believes it is highly
likely that its qualifying entities will continue to obtain the renewal in the future.
|
Accordingly, in calculating deferred tax assets and liabilities, the Group assumed
its qualifying entities will continue to renew the new HNTE status at the conclusion
of the initial three year period.
F-35
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
13.
|
|
INCOME TAXES continued
|
The EIT Law includes a provision specifying that legal entities organized outside China will
be considered residents for Chinese income tax purposes if their place of effective
management or control is within China. If legal entities organized outside China were
considered residents for Chinese income tax purpose, they would become subject to the EIT
Law on their worldwide income. This would cause any income legal entities organized outside
China earned to be subject to Chinas 25% EIT. The Implementation Rules to EIT Law provide
that non-resident legal entities will be considered China residents if substantial and
overall management and control over the manufacturing and business operations, personnel,
accounting, properties, etc. resides within China. Pursuant to the additional guidance
released by the Chinese government on April 22, 2009, management does not believe that the
legal entities organized outside China should be characterized as China tax residents for
EIT Law purposes.
Under the PRC tax laws effective prior to January 1, 2008, dividends paid to foreign
investors by foreign-invested enterprises, such as dividends paid to the overseas holding
companies by the PRC subsidiaries, were exempt from PRC withholding tax. Under the EIT Law
and its implementation rules which became effective on January 1, 2008, dividends generated
after January 1, 2008 and payable by a foreign-invested enterprise in China to its foreign
investors who are non-resident enterprises are subject to a 10% withholding tax, unless any
such foreign investors jurisdiction of incorporation has a tax treaty with China that
provides for a different withholding arrangement.
Aggregate undistributed earnings of the Companys subsidiaries located in the PRC that are
taxable upon distribution to the Company of approximately $88,673 and $95,110 at December
31, 2008 and 2009, respectively, are considered to be indefinitely reinvested under
authoritative pronouncement, because the Group does not have any present plan to pay any
cash dividends on its ordinary shares in the foreseeable future and intends to retain most
of its available funds and any future earnings for use in the operation and expansion of its
business. Accordingly, no deferred tax liability has been accrued for the Chinese dividend
withholding taxes that would be payable upon the distribution of those amounts to the
Company as of December 31, 2009.
The current and deferred components of the income tax expense appearing in the consolidated
statements of operation are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current tax
|
|
$
|
6
|
|
|
$
|
36
|
|
|
$
|
3,513
|
|
Deferred tax
|
|
|
|
|
|
|
(129
|
)
|
|
|
129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6
|
|
|
$
|
(93
|
)
|
|
$
|
3,642
|
|
|
|
|
|
|
|
|
|
|
|
All of the income taxes are related to the PRC entities of the Group.
F-36
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
13.
|
|
INCOME TAXES continued
|
The principal components of the Groups deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets current:
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
$
|
219
|
|
|
$
|
190
|
|
Product warranty provision
|
|
|
91
|
|
|
|
32
|
|
Bad debts provision
|
|
|
705
|
|
|
|
1,077
|
|
Inventory provision
|
|
|
120
|
|
|
|
337
|
|
Less: Valuation allowance
|
|
|
(1,052
|
)
|
|
|
(1,636
|
)
|
|
|
|
|
|
|
|
Net deferred tax assets current
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets non-current:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
827
|
|
|
$
|
691
|
|
Net operating loss carry forwards
|
|
|
7,077
|
|
|
|
8,894
|
|
Less: Valuation allowance
|
|
|
(7,855
|
)
|
|
|
(9,585
|
)
|
|
|
|
|
|
|
|
Net deferred tax assets non-current
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, operating loss carry forwards amounted to $44,820 which will begin
to expire in 2011. The Group determines whether or not a valuation allowance is required at
the level of each taxable entity. The greater part of deferred tax assets arise in
companies which are not expected to have any significant taxable income in the foreseeable
future and consequently a full provision has been made in respect of those.
In 2008, the Group expected that Techfaith Intelligent Handset Beijing and Techfaith
Hangzhou would generate the majority of the Groups taxable income in the future. Techfaith
Hangzhou did not have a significant amount of deferred tax assets. Techfaith Intelligent
Handset Beijing had deferred tax assets of $878. Because of the difficulty of forecasting
future taxable income in the present market conditions and having regard to the ways in
which the Groups business has changed, the Group believed a conservative forecast of future
taxable income was appropriate in respect of that entity based on the projected taxable
income for the next five years and accordingly made a valuation allowance of 85% in respect
of its deferred tax assets. The total valuation allowance recorded in 2008 was $8,907 for
various deferred tax assets including operating loss carry forwards.
In 2009, Techfaith Intelligent Handset Beijing experienced loss. The Group has made a full
valuation allowance in respect of its deferred tax assets accordingly. The total valuation
allowance recorded in 2009 was $11,221 for various deferred tax assets including operating
loss carry forwards.
F-37
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
13.
|
|
INCOME TAXES continued
|
Reconciliation between the provision for income tax computed by PRC enterprise income tax
rate of 25% or 33% to income before income taxes and actual provision for income taxes is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
Tax provision at PRC enterprise
income tax rate of 33%, 25% and 25% for
2007, 2008 and 2009, respectively
|
|
$
|
(1,477
|
)
|
|
$
|
1,846
|
|
|
$
|
2,154
|
|
Expenses not deductible for tax purposes
|
|
|
71
|
|
|
|
1,262
|
|
|
|
153
|
|
Tax exemption and preferential tax rates
granted to PRC entities
|
|
|
(3,339
|
)
|
|
|
(6,701
|
)
|
|
|
(3,505
|
)
|
Effect of
losses generated by PRC entities
enjoying preferential tax rates
|
|
|
11,616
|
|
|
|
1,253
|
|
|
|
680
|
|
Effect of the different income tax rates
in other jurisdiction
|
|
|
597
|
|
|
|
2,235
|
|
|
|
1,846
|
|
Changes in valuation allowances
|
|
|
(7,462
|
)
|
|
|
12
|
|
|
|
2,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6
|
|
|
$
|
(93
|
)
|
|
$
|
3,642
|
|
|
|
|
|
|
|
|
|
|
|
Without the tax exemption granted to PRC entities, income tax expense would have been
increased by approximately $3,339, $6,701 and $3,505 for the year ended December 31, 2007,
2008 and 2009, respectively, representing a decrease in the basic and diluted earnings per
share of $0.01, $0.01 and $0.01, for the year ended December 31, 2007, 2008 and 2009,
respectively.
In March 2006, the Group entered into Series A Preferred Shares Purchase and Sell Agreement
(the Agreement) with QUALCOMM to establish a 70%-owned subsidiary, TechSoft Holding, which
engaged in the business of developing software applications for wireless communication
devices. The Group and QUALCOMM subscribed 70% and 30% of the issued series A preferred shares of TechSoft Holding, respectively. QUALCOMM is granted the right to, upon the
occurrence of certain conditions, require the Group to purchase back any or all of its
Series A Preferred Shares (Put option); and the right to, upon the occurrence of certain
conditions, purchase any or all of the Series A Preferred Shares held by the Group at the
price and on the terms pre-defined (Call option). The exercise price payable for each of
the option shares shall be the higher of, the original per share purchase price paid by
QUALCOMM or the Group, increased at a continuous compounded growth rate of ten percent (10%)
per annum including the date of full payment of the option price, as well as any declared
and unpaid dividends accrued or accruing thereupon up until the date of redemption; and the
amount equivalent to the business valuation performed by an independent professional
valuation company that is mutually agreed upon by QUALCOMM and the Group, in proportion to
QUALCOMMs percentage of shareholding on a fully-diluted as converted basis.
F-38
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
14.
|
|
PUT OPTION LIABILITY continued
|
The exercise price of the put option is the higher of a) calculated value (the calculated
value), which is defined as the original per share purchase price paid by QUALCOMM
increased at a continuous compounded growth rate of ten percent (10%) per annum including
the date of full payment of the option price, as well as any declared and unpaid dividends
accrued or accruing thereupon up until the date of redemption; and b) fair value, which is
defined as the amount equivalent to the business valuation of TechSoft Holding performed by
an independent professional valuation company that is mutually agreed upon by QUALCOMM and
the Group, in proportion to QUALCOMMs percentage of shareholding on a fully-diluted as
converted basis.
As the valuation of the put option is based on the valuation of TechSoft Holding, a
non-public company, it requires significant management judgment due to the absence of quoted
market prices, and the lack of observable inputs. As a result, the Group has determined
that the fair value of the put option is classified as Level 3 valuation within the fair
value hierarchy under Authoritative pronouncement issued relating fair value measurement
(see Note 16).
The fair value of TechSoft Holdings ordinary share is determined using the income approach
valuation methodology that includes discounted cash flows of TechSoft Holding. The
discounted cash flows were based on discrete four-year forecast developed by management for
planning purposes, discounted at weighted average cost of capital of 23%. The fair value of
TechSoft Holdings ordinary shares as of December 31, 2009 is less than the calculated value
and therefore the value of the put option is based on the difference between the calculated
value and the fair value of the ordinary shares of TechSoft Holding, having regard to the
probability of Qualcomm exercising the option.
A reconciliation of the beginning and ending balances of the put option measured at fair
value, on a recurring basis, using Level 3 inputs follows:
|
|
|
|
|
Balance at the beginning of 2008
|
|
$
|
318
|
|
Change in fair value of the put option
|
|
|
855
|
|
|
|
|
|
Balance at the beginning of 2009
|
|
$
|
1,173
|
|
Change in fair value of the put option
|
|
|
84
|
|
|
|
|
|
Balance at the end of 2009
|
|
$
|
1,257
|
|
|
|
|
|
F-39
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
On June 9, 2009, 798 Entertainment, a subsidiary of the Group, issued $10,000 principal
amount of senior secured convertible promissory notes due June 8, 2012, (the Convertible
Notes) to a group of third-party investors (the Note Holders). The Convertible Notes were
issued at par and bear interest at a rate of 8% per annum, compounded annually. Interest is
due on the notes maturity date and payable in cash.
The key terms of the Convertible Notes are as follows:
Conversion
The Note Holders have the right, at any time on or before the tenth day before the maturity
date, to convert the outstanding principal amount, or a portion thereof, into that number of
|
(i)
|
|
798 Entertainments Class B Ordinary Shares, par value US$0.01 per share at the
conversion price of US$28.92 per share, or
|
|
|
(ii)
|
|
The Companys shares, par value US$0.00002 per share at the conversion price of
US$0.0793 per share. The total number of the Companys shares the Note holders convert
the notes into cannot be more than 129,941,915, subject to adjustment for forward and
reverse stock splits, recapitalization and the like.
|
The conversion prices will be adjusted if one of the following conditions occurs:
|
a.
|
|
if the Company or 798 Entertainment issues any additional equity security at a
price per share (the New Issuance per share) that is lower than the conversion price
per share then in effect, then the conversion price per share is adjusted to the New
Issuance price per share.
|
|
|
b.
|
|
Stock splits, combinations and dividends
|
However, the conversion price will not be adjusted upwards except in the case of stock
combinations.
The Notes will automatically convert into 798 Entertainments Class B Ordinary Shares at the
conversion price then in effect upon the closing of a Qualified Public Offering of 798
Entertainment. A Qualified Public Offering is defined as an initial public offering of 798
Entertainments ordinary shares on an internationally recognized stock exchange outside the
PRC, at a price per share in the public offering that values 798 Entertainment at more than
$200,000 immediately prior to such public offering.
Dividend premium
In the event the 798 Entertainment declares any dividend or other distribution on 798
Entertainment Class B Ordinary Shares or Ordinary Shares, the Note Holders are entitled to
an interest payment (a Dividend Premium), payable at the same time when any such dividend
or distribution is paid by the 798 Entertainment, in an amount equal to which the Note
holders would have received had the convertible notes been converted into the 798
Entertainments Class B Ordinary Shares or then into the 798 Entertainments Ordinary
Shares.
F-40
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
15.
|
|
CONVERTIBLE NOTES continued
|
Late charges for due amount of principal and interests
Nine percent (9%) per annum (accrued daily and compounded annually) from the date unpaid
amount was due until the same is paid in full.
Interest rate reset
The interest rate of the Convertible Notes will reset from 8% to 20%, exclusive of Dividend
Premiums and late charges paid or payable, at the earlier of (i) the occurrence of a default
event or (ii) December 9, 2011 if the Qualified Public Offering has not occurred by such
date. If either of these two conditions occurs, the Note holders may require 798
Entertainment to redeem all or any portion of the Convertible Notes for cash.
If 798 Entertainment fails to pay the redemption price to the Note holders, the Note holders
have the option but not the obligation, to convert all or part of the redemption price into
the Companys Ordinary Shares at a conversion price equal to the lesser of (i) the
conversion price to convert the Convertible Notes to the Companys ordinary share then in
effect, and (ii) the weighted average price of the Companys ordinary shares during the
period beginning on and including the date when the redemption price is due and ending on
and including the date when the Note Holders submit a notice to 798 Entertainment.
The conversion right to the Companys ordinary shares, the dividend premium feature, and the
interest reset feature, are embedded derivatives that are bifurcated for measurement
purposes, and are presented on a combined basis with the convertible notes.
The initial fair value of these derivatives was $12,759 on the issuance date. The change in
the fair value of derivatives during 2009 was $5,270, and was recorded in earnings in 2009.
The total of the fair value of the derivatives at the issuance date with the amount of
$12,759 and the issuance cost with the amount of $417 resulted in a debt discount totaling
$13,176. The debt discount was amortized into interest expense over the term of Convertible
Notes using the effective interest rate method. During 2009, the amortized discount of $588
was recorded as part of the interest expense.
F-41
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
Authoritative literature provides a fair value hierarchy, which prioritizes the inputs to
valuation techniques used to measure fair value into three broad levels. The level in the
hierarchy within which the fair value measurement in its entirety falls is based upon the
lowest level of input that is significant to the fair value measurement as follows:
|
|
|
Level 1 inputs are based upon unadjusted quoted prices for identical instruments
traded in active markets.
|
|
|
|
|
Level 2 inputs are based upon quoted prices for similar instruments in active
markets, quoted prices for identical or similar instruments in markets that are not
active, and model-based valuation techniques for which all significant assumptions are
observable in the market or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.
|
|
|
|
|
Level 3 inputs are generally unobservable and typically reflect managements
estimates of assumptions that market participants would use in pricing the asset or
liability. The fair values are therefore determined using model-based techniques that
include option pricing models, discounted cash flow models, and similar techniques.
|
The following section describes the valuation methodologies the Group uses to measure
financial assets and liabilities at fair value on a recurring basis.
(a) Assets and liabilities measured at fair value on a recurring basis
The Put Option the Group offered to QUALCOMM was recorded as a liability at fair value. The
Group measured the fair value for the Put Option with the assistance of an independent
valuation firm.
The Put Option was classified as a Level 3 liability because the Group used unobservable
inputs to value it, reflecting the Groups assessment of the assumptions market participants
would use in valuing these derivatives. The fair value of the Put Option as of December 31,
2008 and 2009 were $1,173 and $1,257, respectively (see Note14).
The Group issued $10,000 Convertible Notes to a group of third party investors in June 2009.
The conversion right to the Companys ordinary shares, the dividend premium feature, and the
interest reset feature, are identified as derivatives and required to be bifurcated from the
debt host. These derivatives are recorded at fair value initially and marked to market
subsequently. The Group measured the fair value for these derivatives with the assistance of
an independent valuation firm.
F-42
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
16.
|
|
FAIR VALUE continued
|
Value of the conversion right includes value of the conversion right to the Companys
ordinary shares and value of the conversion right to 798 Entertainments class B ordinary
shares, and is calculated as the difference between the value of the converted shares and
the value of pure debt component when conversion occurs. The value of the conversion right
to the Companys ordinary shares is the excess of conversion value over conversion right to
798 Entertainments class B ordinary shares. The fair value of the dividend premium feature
is $nil as the Company does not expect to declare dividends in the future. The interest
reset feature will obligate the Group to pay extra interest payments. The present value of
such payments, multiplied by the corresponding
probabilities, as estimated by the management, of no Qualified IPO within the 30-month
period after issuance or a default event, will be the expected value of the interest reset
feature. These derivatives were classified as Level 3 liabilities because the Group used
unobservable inputs to value them, reflecting the Groups assessment of the assumptions
market participants would use in valuing these derivatives.
As of December 31, 2009, the fair value of the derivatives associated with the Convertible
Notes, which amounted to $18,029, is recorded together with the principal of the
Convertible Notes. During the year of 2009, gains and losses on the change of the fair value
of these derivatives were recognized in the consolidated statement of operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
Quoted price
|
|
|
|
|
|
|
|
|
|
|
|
|
in active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
markets
|
|
|
other
|
|
|
Significant
|
|
|
|
|
|
|
for identical
|
|
|
observable
|
|
|
unobservable
|
|
|
|
|
|
|
investments
|
|
|
inputs
|
|
|
inputs
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Put Option
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,173
|
|
|
$
|
1,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
Quoted price
|
|
|
|
|
|
|
|
|
|
|
|
|
in active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
markets
|
|
|
other
|
|
|
Significant
|
|
|
|
|
|
|
for identical
|
|
|
observable
|
|
|
unobservable
|
|
|
|
|
|
|
investments
|
|
|
inputs
|
|
|
inputs
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Put Option
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,257
|
|
|
$
|
1,257
|
|
Derivatives related to the
Convertible Notes
|
|
$
|
|
|
|
$
|
|
|
|
$
|
18,029
|
|
|
$
|
18,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value
|
|
$
|
|
|
|
$
|
|
|
|
$
|
19,286
|
|
|
$
|
19,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-43
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
16.
|
|
FAIR VALUE continued
|
(b) Assets and liabilities measured at fair value on a nonrecurring basis
The Group obtained control of Techfaith Interactive on May 14, 2009.
On January 1, 2009, the Group adopted the guidance on fair value measurement for
nonfinancial assets and liabilities that are recognized or disclosed at fair value in the
financial statements on a non-recurring basis.
The Group measured the fair value for the asset acquired, with the assistance of an
independent valuation firm, using discounted cash flow techniques, and the asset was
classified as Level 3 asset because the Group used unobservable inputs to value it
reflecting the Groups assessment of the assumptions market participants would use in
valuing these purchased intangible asset.
The following table presents the Groups non-financial asset that was measured at fair value
on a nonrecurring basis, which represents fair value of asset owned by Techfaith
Interactive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
Quoted price
|
|
|
|
|
|
|
|
|
|
|
|
|
in active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
markets
|
|
|
other
|
|
|
Significant
|
|
|
|
|
|
|
for identical
|
|
|
observable
|
|
|
unobservable
|
|
|
|
|
|
|
investments
|
|
|
inputs
|
|
|
inputs
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets acquired:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
$
|
|
|
|
$
|
|
|
|
$
|
13
|
|
|
$
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
acquired at
fair value
|
|
$
|
|
|
|
$
|
|
|
|
$
|
13
|
|
|
$
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-44
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
During 2007, 2008, and 2009, the Group recognized compensation expense, net of forfeitures,
of $94, $147 and $20, respectively, for share-based payment awards for which the requisite
service was rendered during the year.
Share option
In March 2005, the Group adopted the 2005 Share Incentive Plan (the Plan) which allows the
Group to offer a variety of incentive awards to employees and directors of the Group. For
the year ended December 31, 2005, options to purchase 40,000,000 ordinary shares were
authorized under the Plan. Under the terms of the Plan, options are generally granted at
prices equal to the fair market value of the Groups shares listed on NASDAQ and expire 10
years from the date of grant. The options vest in accordance with the terms of the
agreement separately entered into by the Group and grantee at the time of the grant.
In August 2005, the Group granted 263,272 share options to purchase ordinary shares to two
independent directors which would vest entirely in November 2005. The estimated fair value
of the options granted was $0.62 on the date of grant using the Black-Scholes option pricing
model. A zero forfeiture rate was used. The Group recognized $162 as share based
compensation expense related to options in 2005.
In March 2006, the Group granted 131,636 share options to an independent director which
vested entirely on the grant date. The estimated fair value of the options granted was
$0.45 on the date of grant using the Black-Scholes option pricing model. A zero forfeiture
rate was used. Share based compensation expense of $59 was recognized upon the grant of the
option. In August 2006, the Group cancelled the above mentioned share options and issued
65,818 shares as a replacement, which fully vested immediately. Total fair value of share
options cancelled was $35 with each share option valued at $0.27 while total fair value of
replacement shares as of the grant date was $38 with each share valued at $0.58. An
additional compensation expense of $3 was recognized in 2006 upon cancellation of share
options and issuance of shares.
The following weighted-average assumptions were used for grants issued during the years
ended December 31, 2005 and 2006 (there were no grants in 2007, 2008 and 2009):
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Average risk-free rate of return
|
|
|
4.1
|
%
|
|
|
4.7
|
%
|
Expected dividend yield
|
|
Nil
|
|
|
Nil
|
|
Expected volatility
|
|
|
35
|
%
|
|
|
69.2
|
%
|
Expected life (years)
|
|
|
10
|
|
|
|
5
|
|
F-45
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
17.
|
|
SHARE-BASED PAYMENT continued
|
Share option
continued
The risk-free rate for periods within the contractual life of the option is based on the
yield of U.S. Treasury bond with the same maturity as the contractual life of the option in
effect at the time of grant. The expected life of options represents the period of time the
granted options are expected to be outstanding. For the 2005 grants, the Group used the
contractual term of the options because it did not believe it had a basis in history for
estimating an expected life less than the contractual life. For the 2006 grants, the Group
used the simplified method defined in Authoritative literature to estimate the expected life
as the simple average of the vesting term and the contractual term. As management expected
to grow the business with internally generated cash, management does not expect to pay
dividend in the foreseeable future and has not paid any dividends to date and therefore used
a zero dividend yield assumption. Expected volatilities are based on the historical
volatility of the Companys ADS and vesting period of the option to be issued.
Pursuant to the resignation of a former independent director during 2006, 131,636 share
options granted to him were forfeited as the share options were not exercised within the
time stipulated in the share option agreement and accordingly $81 share based compensation
expense was reversed.
As of December 31, 2009, there were 131,636 exercisable options. The fair value of option
as of the grant date and the weighted average exercise price was $0.62 and $1.083
respectively with a remaining contractual life of 5.7 years.
Nonvested shares
|
|
|
|
|
|
|
Number of
|
|
|
|
nonvested shares
|
|
|
|
|
|
|
Unvested at January 1, 2009
|
|
$
|
32,909
|
|
Granted during the year
|
|
|
105,000
|
|
Vested during the year
|
|
|
(121,455
|
)
|
Forfeited during the year
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2009
|
|
$
|
16,454
|
|
|
|
|
|
F-46
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
17.
|
|
SHARE-BASED PAYMENT continued
|
Nonvested shares
continued
In July 2006, the Group granted 315,000 nonvested shares to the Chief Financial Officer for
free with a vesting schedule of 3 years under 2005 Share Incentive Plan. The fair value of
nonvested shares as of the grant date was $0.98 per share, based on the closing price of the
Companys share on the grant date. For the nonvested shares with a graded vesting schedule,
the Group recognized compensation cost on a straight-line basis over the requisite service
period for each separately vesting portion of the award. On August 15, 2008, the Chief
Financial Officer resigned and 105,000 of the remaining unvested shares were forfeited. As
of the resignation date, 210,000 nonvested shares granted to the Chief Financial Officer had
vested. The Group recorded share based compensation expense of $36 and $140 related to
these nonvested shares for the years ended December 31, 2007 and 2008, respectively. On
July 28, 2009, the Company signed an amendment agreement with the ex-Chief Financial Officer
of the Group, and agreed to grant 105,000 shares to the ex-Chief Financial Officer which
vested immediately, accordingly $17 additional expense was recorded at the grant date.
In August 2006, 65,818 and 65,818 nonvested shares were granted to two independent directors
with half of the number of nonvested shares, 65,818 vested immediately and the other half,
65,818 vested on April 1, 2007. The fair value of nonvested shares as of the grant date was
$0.58 per share. Share based compensation expense of $38 for these nonvested shares were
recognized for the year ended December 31, 2007.
In November 2006, another 65,818 nonvested shares were granted to an independent director
with half of the number of nonvested shares, 32,909 vested immediately and the other half,
32,909 vested on November 1, 2007. The fair value of nonvested shares as of the grant date
was $0.50 per share. The Group recognized share based compensation expense of $16 for these
nonvested shares for the year ended December 31, 2007.
In August 2007, another 65,818 nonvested shares were granted to an independent director with
25% of the number of nonvested shares, 16,455 vested immediately and the remaining 75%,
49,363 to be vested on August 12, 2008, 2009 and 2010 averagely. The fair value of
nonvested shares as of the grant date was $0.28 per share. As of August 12, 2009, 49,363
nonvested shares had vested. The Group recognized share based compensation expenses of $4,
$7 and $3 for these nonvested shares for the years ended December 31, 2007, 2008 and 2009,
respectively.
The intrinsic value of nonvested shares vested for the years ended December 31, 2007, 2008
and 2009 is $99, $33 and $20, respectively. As of December 31, 2009, the intrinsic value of
16,454 unvested shares was $3.
F-47
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
18.
|
|
SHARE REPURCHASE AND CANCELLATION OF TREASURY STOCK
|
In 2006, the Group had obtained the approval from the required shareholders and was
authorized to repurchase up to $40 million of the Groups outstanding ADSs in the open
market, depending on market conditions, ADS price and other factors and subject to the
requirements of applicable law. The Group had purchased 577,000 ADSs, representing 8,655,000
ordinary shares from the NASDAQ stock market for treasury stock, through the share
repurchase program and reduced the outstanding shares as of December 31, 2006. The
respective 577,000 ADSs were cancelled by the Group in 2008. The carrying amount of the
repurchased treasury stock was reclassified to additional paid-in capital upon cancellation.
No ADS of the Group was purchased by or on behalf of the Group in 2007 and 2008.
On September 29, 2008, the Groups Board of Directors approved to repurchase additional ADSs
from the open market, as part of the 2006 share repurchase plan which was approved by
shareholders in 2006. In December 2009, the Group repurchased 61,200 ADSs representing
918,000 ordinary shares from the NASDAQ stock market for treasury stock. The respective
61,200 ADSs were subsequently cancelled by the Group on March 26, 2010.
19.
|
|
RELATED PARTY TRANSACTIONS
|
In 2007, the Group purchased raw materials from its related parties, Techfaith Technology
(Shenyang) Ltd. (Techfaith Technology) and De Ming Technology (Hangzhou) Ltd. (De Ming)
(formerly known as Kang Mu Ni Electronics (Hangzhou) Ltd.) for $34 and $523, respectively.
Techfaith Technology and De Ming are subsidiaries of Techfaith Electronics Limited, a
company established in September 2007, of which the Groups Founder and CEO holds 43% equity
interest.
In 2008, Techfaith Technology became one of the EMS providers of the Group. During the year
ended December 31, 2008, the Group sold raw materials to Techfaith Technology for $18,805
and purchased products from Techfaith Technology for $17,031. The Group purchased raw
materials from De Ming for $2,373 in 2008.
During the year ended December 31, 2009, the Group sold raw materials to Techfaith
Technology for $833 and purchased products from Techfaith Technology for $3,479. The Group
purchased raw materials from De Ming for $1,154 in 2009.
As of December 31, 2008 and 2009, amounts due from a related party are as follow:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Techfaith Technology
|
|
$
|
5,537
|
|
|
$
|
9,941
|
|
|
|
|
|
|
|
|
F-48
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
19.
|
|
RELATED PARTY TRANSACTIONS continued
|
|
|
|
As of December 31, 2008 and 2009, amounts due to related parties are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Techfaith Technology
|
|
$
|
|
|
|
$
|
7
|
|
De Ming
|
|
|
419
|
|
|
|
259
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
419
|
|
|
$
|
266
|
|
|
|
|
|
|
|
|
20.
|
|
OPERATING SEGMENT AND GEOGRAPHIC INFORMATION
|
The Groups chief operating decision maker has been identified as the Chief Executive
Officer, who reviews consolidated results when making decisions about allocating resources
and assessing performance of the Group.
At the beginning of 2009, the Group adjusted its segment reporting. The business activities
of TechSoft Holding, which were previously reported as wireless software and application,
are now presented in handset design. The business activities of 798 Entertainment, which
were previously reported in wireless software and application, are now presented separately
as mobile game design and other related services. Prior-year figures have been adjusted
accordingly.
The office building the Group headquarter previously resided in and office building in the
process of construction, which were previously reported in Product Sales segment, are now
included in Reconciling amounts together with other corporate items and eliminations of
intersegment transactions. Prior-year figures have been adjusted accordingly.
The Group uses gross profit as the measure of each operating segment.
The financial information for each operating segment reflects that information which is
specifically identifiable or which is allocated based on an internal allocation method.
Selected financial information by operating segment
1
is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
Assets
|
|
|
|
|
|
|
|
|
Handset design
|
|
$
|
20,052
|
|
|
$
|
971
|
|
Product sales
|
|
|
151,386
|
|
|
|
183,892
|
|
Mobile game design and other related services
|
|
|
|
|
|
|
21,574
|
|
Reconciling amounts
|
|
|
48,626
|
|
|
|
44,230
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
220,064
|
|
|
$
|
250,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciling amounts:
|
|
|
|
|
|
|
|
|
Corporate assets
|
|
$
|
48,626
|
|
|
$
|
44,230
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
The Groups chief operating decision maker only reviews revenue and cost for each operating segment.
Expenses are not allocated to each segment.
|
F-49
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
20.
|
|
OPERATING SEGMENT AND GEOGRAPHIC INFORMATION continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenditures for additions to long-lived assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Handset design
|
|
$
|
4,019
|
|
|
$
|
1,355
|
|
|
$
|
2
|
|
Product sales
|
|
|
9,800
|
|
|
|
839
|
|
|
|
731
|
|
Mobile game design and other related services
|
|
|
|
|
|
|
|
|
|
|
334
|
|
Corporate assets
|
|
|
|
|
|
|
12,559
|
|
|
|
288
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditure
|
|
$
|
13,819
|
|
|
$
|
14,753
|
|
|
$
|
1,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Handset design
|
|
$
|
41,721
|
|
|
$
|
19,123
|
|
|
$
|
4,482
|
|
Product sales
|
|
|
101,723
|
|
|
|
189,727
|
|
|
|
206,106
|
|
Mobile game design and other related services
|
|
|
|
|
|
|
|
|
|
|
488
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
143,444
|
|
|
|
208,850
|
|
|
|
211,076
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Handset design
|
|
|
25,239
|
|
|
|
10,308
|
|
|
|
4,425
|
|
Product sales
|
|
|
79,556
|
|
|
|
157,377
|
|
|
|
168,376
|
|
Mobile game design and other services
|
|
|
|
|
|
|
|
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
104,795
|
|
|
|
167,685
|
|
|
|
172,865
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
38,649
|
|
|
$
|
41,165
|
|
|
$
|
38,211
|
|
|
|
|
|
|
|
|
|
|
|
Revenues for the Groups products and services are shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
Net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Design fees
|
|
$
|
26,042
|
|
|
$
|
15,488
|
|
|
$
|
1,830
|
|
Royalty income
|
|
|
7,772
|
|
|
|
1,158
|
|
|
|
413
|
|
Component sales related to design
|
|
|
7,854
|
|
|
|
2,260
|
|
|
|
2,147
|
|
Service income
|
|
|
53
|
|
|
|
217
|
|
|
|
92
|
|
|
|
|
|
|
|
|
|
|
|
Revenues related to handset design
|
|
|
41,721
|
|
|
|
19,123
|
|
|
|
4,482
|
|
|
|
|
|
|
|
|
|
|
|
Smart phones
|
|
|
36,444
|
|
|
|
99,952
|
|
|
|
106,413
|
|
Feature phones
|
|
|
47,424
|
|
|
|
82,335
|
|
|
|
79,567
|
|
Wireless module
|
|
|
12,513
|
|
|
|
7,331
|
|
|
|
19,952
|
|
Other components
|
|
|
5,342
|
|
|
|
109
|
|
|
|
174
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
|
101,723
|
|
|
|
189,727
|
|
|
|
206,106
|
|
|
|
|
|
|
|
|
|
|
|
Mobile game design and other related services
|
|
|
|
|
|
|
|
|
|
|
488
|
|
Total net revenues
|
|
$
|
143,444
|
|
|
$
|
208,850
|
|
|
$
|
211,076
|
|
|
|
|
|
|
|
|
|
|
|
F-50
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
20.
|
|
OPERATING SEGMENT AND GEOGRAPHIC INFORMATION continued
|
Geographic information
Revenues, classified by the major geographic areas in which the Groups customers are
located (for design contract and game related revenue, based on the address of the customer
who contracted with the Group; for product sales, based on the address to which the Group
ships product), were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from countries other than the PRC: (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Brazil
|
|
|
1,673
|
|
|
|
650
|
|
|
|
1,302
|
|
Japan
|
|
|
11,641
|
|
|
|
6,783
|
|
|
|
3,543
|
|
United States
|
|
|
2,526
|
|
|
|
3,911
|
|
|
|
7,836
|
|
Other countries
|
|
|
29,126
|
|
|
|
40,095
|
|
|
|
5,751
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues from countries other than the PRC
|
|
|
44,966
|
|
|
|
51,439
|
|
|
|
18,432
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from the PRC (2)
|
|
|
98,478
|
|
|
|
157,411
|
|
|
|
192,644
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
143,444
|
|
|
$
|
208,850
|
|
|
$
|
211,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
For design contract and game related revenue, includes revenue generated from
contracts for which the contract party is incorporated outside the PRC. For product
sale revenue, includes shipments to customers outside the PRC.
|
|
(2)
|
|
For design contract and game related revenue, includes revenue generated from
contracts for which the contract party is incorporated in the PRC. For product sale
revenue, includes shipments to customers in the PRC.
|
The Group uses EMS providers to provide manufacturing services for its products.
During the normal course of business, in order to reduce manufacturing lead times and
ensure adequate component supply, the Group enters into contracts with certain
manufacturers that allow them to procure inventory based on criteria defined by the
Group. As of December 31, 2009, the Group had commitments under non-cancellable
contracts that future minimum purchases are $5,055 in 2010.
F-51
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
21.
|
|
COMMITMENTS continued
|
|
(b)
|
|
Operating lease as lessee
|
The Group has entered into operating lease agreements principally for its office
spaces in the PRC. These leases expire through 2011. Rental expenses under
operating leases for the years ended December 31, 2007, 2008 and 2009 were $684, $514
and $1,152, respectively.
Future minimum rental lease payments under non-cancellable operating leases
agreements were as follows:
|
|
|
|
|
2010
|
|
$
|
988
|
|
2011
|
|
|
235
|
|
|
|
|
|
|
|
$
|
1,223
|
|
|
|
|
|
As of December 31, 2009, capital commitments for construction of property and
purchase of plant, machinery and equipment are $461 which will be due in 2010.
The following tables summarize net revenues and accounts receivable from customers that
accounted for 10% or more of the Groups net revenues and accounts receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
|
Year ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A
|
|
|
11.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
B
|
|
|
N/A
|
|
|
|
12.3
|
%
|
|
|
N/A
|
|
C
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
14.1
|
%
|
D
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
10.1
|
%
|
E
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
10.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.0
|
%
|
|
|
12.3
|
%
|
|
|
34.2
|
%
|
|
|
|
|
|
|
|
|
|
|
A small number of customers have historically accounted for a substantial portion of our net
revenue. In 2007, 2008 and 2009, our top three customers collectively accounted for
approximately 25.0%, 28.8% and 34.2%, respectively, of our net revenues.
F-52
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
22.
|
|
MAJOR CUSTOMERS continued
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
|
As of December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
A
|
|
|
22.0
|
%
|
|
|
N/A
|
|
B
|
|
|
14.2
|
%
|
|
|
16.7
|
%
|
C
|
|
|
N/A
|
|
|
|
18.3
|
%
|
|
|
|
|
|
|
|
|
|
|
36.2
|
%
|
|
|
35.0
|
%
|
|
|
|
|
|
|
|
23.
|
|
NET (LOSS) INCOME PER SHARE
|
The following table sets forth the computation of basic and diluted net income (loss) per
share for the years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
Net income (loss) attributable to ChinaTechfaith
Wireless Communication Technology Limited
(numerator), basic
|
|
$
|
(3,272
|
)
|
|
$
|
8,001
|
|
|
$
|
6,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible notes interest
|
|
|
|
|
|
|
|
|
|
|
588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to ChinaTechfaith
Wireless Communication Technology Limited
(numerator), diluted
|
|
|
(3,272
|
)
|
|
|
8,001
|
|
|
|
6,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares (denominator):
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares outstanding
|
|
|
649,807,421
|
|
|
|
649,972,306
|
|
|
|
650,057,866
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares from assumed vest of
nonvested shares
|
|
|
|
|
|
|
90,006
|
|
|
|
6,054
|
|
Weighted average shares from convertible notes,
if converted
|
|
|
|
|
|
|
|
|
|
|
70,825,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computing
diluted net income per share
|
|
|
649,807,421
|
|
|
|
650,062,312
|
|
|
|
720,889,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to ChinaTechfaith
Wireless Communication Technology Limited
per share, basic
|
|
$
|
(0.01
|
)
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to ChinaTechfaith
Wireless Communication Technology Limited
per share, diluted
|
|
$
|
(0.01
|
)
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, the Group had 390,999 ordinary shares equivalents outstanding that
could have potentially diluted basic income (loss) per share in the future, but which were
excluded in the computation of diluted income (loss) per share in the year presented, as
their effect would have been anti-dilutive.
As of December 31, 2008 and 2009, the Group had 131,636 and 131,636 ordinary shares
equivalents outstanding that could have potentially diluted basic income (loss) per share in
the future, but which were excluded in the computation of diluted income (loss) per share in
the years presented, as their effect would have been anti-dilutive.
F-53
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
24.
|
|
MAINLAND CHINA CONTRIBUTION AND PROFIT APPROPRIATION
|
Full time employees of the Group in the PRC participate in a government-mandated
multi-employer defined contribution plan pursuant to which certain pension benefits, medical
care, unemployment insurance, employee housing fund and other welfare benefits are provided
to employees. Chinese labour regulations require the Group to accrue for these benefits
based on certain percentages of the employees salaries. The total provisions for such
employee benefits were $5,304, $4,511 and $2,244 for the years ended December 31, 2007, 2008
and 2009, respectively.
The Group is required to make contributions to the plan out of the amounts accrued for
medical and pension benefits to relevant local labour bureaus. The contributions for the
years ended December 31, 2007, 2008 and 2009 amounted to$3,863, $3,165 and 1,525
respectively. The local labour bureaus are responsible for the medical benefits and pension
liability to be paid to these employees. The Group has no further commitments beyond its
monthly contribution.
Pursuant to the laws applicable to the PRCs Foreign Investment Enterprises, the Companys
subsidiaries in the PRC registered as foreign-owned enterprise must make appropriations from
after-tax profit to non-distributable reserve funds as determined by the Board of Directors
of the relevant PRC subsidiaries. These reserves include a (1) general reserve, (2)
enterprise expansion fund and (3) staff bonus and welfare fund. Subject to certain
cumulative limits, the general reserve fund requires annual appropriations of not less than
10% of after-tax profit (as determined under accounting principles and financial regulations
applicable to PRC enterprises at each year-end); the other fund appropriations are at the
Groups discretion. These reserve funds can only be used for specific purposes and are not
distributable as cash dividends. The Group had made appropriation to these statutory
reserve funds of $1,729 and $2,451 for the year ended December 31, 2008 and 2009,
respectively.
As stipulated by the relevant law and regulations in the PRC, the Companys subsidiaries and
variable interest entities in the PRC are required to maintain non-distributable statutory
surplus reserve. Appropriations to the statutory surplus reserve are required to be made at
not less than 10% of profit after taxes as reported in these entities statutory financial
statements prepared under the accounting principles generally accepted in the PRC. Once
appropriated, these amounts are not available for future distribution to owners or
shareholders. Once the general reserve is accumulated to 50% of these entities registered
capital, these entities can choose not to provide more reserves. The statutory reserve may
be applied against prior year losses, if any, and may be used for general business expansion
and production and an increase in registered capital of these entities. Amounts contributed
to the statutory reserve were $8,542 and $10,993 as of December 31, 2008 and 2009,
respectively.
F-54
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
Acquisition of QIGI Technology
On February 10, 2010, the Group obtained control of QIGI&BODEE Technology (Beijing) Co., Ltd
(QIGI Technology), a domestic mobile phone manufacturing and distribution company by
acquiring 100% of equity interest of the primary beneficiary of QIGI Technology, Citylead
Limited. The consideration to acquire Citylead Limited includes $500 of cash and 65,934,066
ordinary shares of the Company at a fair value of $0.19 per ordinary share as of the
acquisition date.
There are contingent receivables according to the agreements based on QIGI Technologys
operating performance. If QIGI Technology does not meet the performance target for year 2010
or 2011 the original holders of Citylead Limited are obligated to return certain number of
ordinary shares of the Company back to the Group. Such contingent share receivable is
recorded as a contingent asset at fair value as of the acquisition
date and subsequently marked to market at each period end.
The transaction was considered an acquisition of a business and accordingly the purchase
method of accounting has been applied. The acquired net assets were recorded at their fair
market value at the date of acquisition.
|
|
|
|
|
Cash consideration
|
|
$
|
500
|
|
Fair value of ordinary shares
|
|
|
12,835
|
|
Fair value of contingent receivable
|
|
|
(196
|
)
|
|
|
|
|
Total consideration
|
|
$
|
13,139
|
|
|
|
|
|
The purchase price was preliminarily allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
|
period
|
|
|
|
|
|
|
|
Intangible assets:
|
|
|
|
|
|
|
Contract backlog
|
|
|
20
|
|
|
0.1 year
|
Customer base
|
|
|
680
|
|
|
5 years
|
Trade name & domain name
|
|
|
1,670
|
|
|
Indefinite life
|
Goodwill
|
|
|
1,242
|
|
|
|
Other net assets acquired
|
|
|
9,697
|
|
|
|
Deferred tax liability
|
|
|
(170
|
)
|
|
|
|
|
|
|
|
|
Total
|
|
|
13,139
|
|
|
|
|
|
|
|
|
|
Sale of 49% equity interest in Time Spring
In
May 2010, the Group sold 49% equity interest of a wholly-owned subsidiary, Time Spring to
Billion Team Asia Limited, an independent third party for $0.05. After this transaction, Time
Spring was 51% owned by the Group. Time Spring was a shell
company without any substantial operation prior to May 2010. Time Spring owns Media Chance, an entity in Hong
Kong, which owns 100% of Glomate Mobile (Beijing) Co., Ltd.
F-55
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
27.
|
|
NONCONTROLLING INTERESTS
|
On March 17, 2006, the Group and QUALCOMM established TechSoft Holding, which engaged in
the business of developing software applications for wireless communication devices. The
Group and QUALCOMM hold 70% and 30% of TechSoft Holdings share capital, respectively.
In July 2009, 798 Entertainment, a wholly owned subsidiary of the Group, issued 345,722
Class B Ordinary Shares to Infiniti Capital Limited (an independent third party), for
$10,000 cash at an issuance price of US$28.92 per share (Base Price), with par value of
US$0.01 per share. The Group incurred legal costs of $162 in relation to the issuance of these
Class B Ordinary Shares. Therefore the net proceeds were $9,838.
These Class B Ordinary Shares are convertible into the 798 Entertainments Ordinary Shares
at the option of Infiniti Capital Limited. The conversion price is initially set to be the
Base Price and subject to adjustment.
In
addition to the standard anti-dilution adjustment, the conversion price will also be
adjusted down if the audit net income of 798 Entertainment in the twelve calendar months
ending June 30, 2010, 2011 and 2012 is lower than $15,000, $30,000 and $45,000,
respectively.
The Class B Ordinary Share will be automatically converted (based on the then-effective
conversion price) into 798 Entertainments Ordinary Shares immediately prior to and
conditional upon the closing of a Qualified Public Offering of 798 Entertainment.
No dividend or distribution shall be declared, paid, set aside or made with respect to 798
Entertainments ordinary shares at any time unless a distribution is likewise declared, paid
set aside or made, respectively, at the same time with respect to each outstanding 798
Entertainments Class B Ordinary Share as if these Class B Ordinary Shares had been
converted into 798 Entertainments ordinary shares.
After this issuance, the Group retained its control of 798 Entertainment, but reduced its
share ownership in 798 Entertainment from 100% to 74.3%. This transaction was accounted for
as an equity transaction. Therefore, no gain or loss is recognized in consolidated net
income or comprehensive income. The initial carrying amount of the noncontrolling interest,
$2,356, is calculated as the net assets of the investee, 798 Entertainment, times the
noncontrollings percentage, 25.7%. The difference between the proceeds received, $9,838,
and the initial carrying value of the noncontrolling interest, $2,356, was recognized as an
increase in additional paid-in capital attributable to the Company.
The carrying amount of accumulated other comprehensive income of 798 Entertainment was
adjusted to reflect the change in the ownership interest of 798 Entertainment through a
corresponding credit to additional paid -in capital attributable to the Group.
F-56
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
28.
|
|
ADOPTION OF AUTHORITATIVE GUIDANCE REGARDING NONCONTROLLING INTEREST
|
Effective
January 1, 2009, the Group adopted authoritative guidance regarding
noncontrolling interests in consolidated financial statements, which clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity
and should be reported as equity on
the financial statements. The authoritative guidance requires consolidated net income to be
reported at amounts that include the amounts attributable to both the parent and the
noncontrolling interests. Furthermore, disclosure of the amounts of consolidated net income
attributable to the parent and to the noncontrolling interests is required on the face of
the financial statements.
For the Group, this authoritative guidance is effective as of the beginning of the year
ending December 31, 2009. However, the adoption of this authoritative guidance requires
retrospective application of the presentation and disclosure requirements of the standard
to all periods presented. Consequently, the Group adjusted its previously issued
financial statements for the two years ended December 31, 2008, contained in its annual
report on Form 20-F for the year ended December 31, 2008, for the adoption of this
authoritative guidance. The following adjustments have been made:
(a) the noncontrolling interests (previously described as minority interest) has now been
included as a component of total equity whereas previously it was shown outside of equity,
(b) the net income or loss attributable to the noncontrolling interests is now shown as an
allocation of net income for the year rather than being deducted in arriving at net income,
and
(c) consolidated comprehensive income or loss now includes the comprehensive income or loss
attributable to the noncontrolling interests.
F-57
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
ADDITIONAL INFORMATION SCHEDULE 1
CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
CONDENSED BALANCE SHEETS
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,633
|
|
|
$
|
649
|
|
Amounts due from subsidiaries
|
|
|
96,060
|
|
|
|
100,840
|
|
Prepaid expenses and other current assets
|
|
|
136
|
|
|
|
65
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
101,829
|
|
|
|
101,554
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
6
|
|
|
|
6
|
|
Investment in subsidiaries
|
|
|
89,821
|
|
|
|
103,901
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
191,656
|
|
|
$
|
205,461
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accrued expenses and other current liabilities
|
|
$
|
1,180
|
|
|
$
|
1,268
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,180
|
|
|
|
1,268
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
Ordinary shares of par value $0.00002:
|
|
|
|
|
|
|
|
|
50,000,000,000,000 shares authorized; shares issued and
outstanding, 650,034,590 in 2008 and 650,156,045 in 2009
|
|
|
13
|
|
|
|
13
|
|
Additional paid-in capital
|
|
|
105,846
|
|
|
|
113,657
|
|
Treasury stock, at cost (nil and 918,000 shares as of
December 31, 2008 and 2009, respectively)
|
|
|
|
|
|
|
(199
|
)
|
Accumulated other comprehensive income
|
|
|
24,095
|
|
|
|
23,863
|
|
Retained earnings
|
|
|
60,522
|
|
|
|
66,859
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
190,476
|
|
|
|
204,193
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND EQUITY
|
|
$
|
191,656
|
|
|
$
|
205,461
|
|
|
|
|
|
|
|
|
F-58
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
ADDITIONAL INFORMATION SCHEDULE 1
CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY (CONTINUED)
CONDENSED STATEMENTS OF OPERATIONS
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
(131
|
)
|
|
|
(250
|
)
|
|
|
(84
|
)
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
(131
|
)
|
|
|
(250
|
)
|
|
|
(84
|
)
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(131
|
)
|
|
|
(250
|
)
|
|
|
(84
|
)
|
Interest income
|
|
|
1,800
|
|
|
|
346
|
|
|
|
1
|
|
Equity in earnings (loss) of subsidiaries
|
|
|
(4,898
|
)
|
|
|
8,760
|
|
|
|
6,504
|
|
Change in fair value of put option
|
|
|
(43
|
)
|
|
|
(855
|
)
|
|
|
(84
|
)
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(3,272
|
)
|
|
|
8,001
|
|
|
|
6,337
|
|
Income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(3,272
|
)
|
|
$
|
8,001
|
|
|
$
|
6,337
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.01
|
)
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.01
|
)
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
649,807,421
|
|
|
|
649,972,306
|
|
|
|
650,057,866
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
649,807,421
|
|
|
|
650,062,312
|
|
|
|
720,889,120
|
|
|
|
|
|
|
|
|
|
|
|
F-59
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
ADDITIONAL INFORMATION SCHEDULE 1
CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY (CONTINUED)
STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME (LOSS)
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
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Accumulated
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Total
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Additional
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other
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share
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Com-
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Ordinary shares
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paid-in
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Treasury
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comprehensive
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Retained
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holders
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prehensive
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Number
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Amount
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capital
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stock
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income
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earnings
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equity
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Income (loss)
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Balance at January 1, 2007
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649,692,954
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$
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13
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$
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109,833
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$
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(4,628
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)
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$
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5,339
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$
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55,793
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$
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166,350
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Foreign currency translation adjustments
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8,290
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8,290
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$
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8,290
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Share-based compensation
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220,182
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94
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94
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Reduction in underwriters cost for the IPO
*
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400
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400
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Net loss
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(3,272
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)
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(3,272
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)
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(3,272
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)
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Balance at December 31, 2007
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649,913,136
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13
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110,327
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(4,628
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)
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13,629
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52,521
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171,862
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$
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5,018
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Cancellation of treasury stock
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(4,628
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)
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4,628
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Foreign currency translation adjustments
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10,466
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10,466
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$
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10,466
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Share-based compensation
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121,454
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147
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147
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Net income
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8,001
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8,001
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8,001
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Balance at December 31, 2008
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650,034,590
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$
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13
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$
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105,846
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$
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$
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24,095
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$
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60,522
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$
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190,476
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$
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18,467
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Repurchase of ordinary shares
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(199
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(199
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Foreign currency translation adjustments
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77
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77
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$
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77
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Share-based compensation
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121,455
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20
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20
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Capital contribution by
a noncontrolling shareholder
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7,791
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(309
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)
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7,482
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Net income
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6,337
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6,337
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6,337
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Balance at December 31, 2009
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650,156,045
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$
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13
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$
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113,657
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$
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(199
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$
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23,863
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$
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66,859
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$
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204,193
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$
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6,414
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F-60
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
ADDITIONAL INFORMATION SCHEDULE 1
CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
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Year ended December 31,
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2007
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2008
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2009
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Operating activities:
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Net income (loss)
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$
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(3,272
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)
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$
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8,001
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$
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6,337
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Adjustments to reconcile net income to net cash
used in operating activities:
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Amortization of share-based compensation
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94
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147
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20
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Change in fair value of put option
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43
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855
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(84
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)
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Gain or loss from long term investment
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4,788
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(8,768
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)
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(6,521
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)
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Change in operating assets and liabilities:
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Amounts due from subsidiaries
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(20,400
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)
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(17,646
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)
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(4,780
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)
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Prepaid expenses and other current assets
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10
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28
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71
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Accrued expenses and other current liabilities
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401
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6
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172
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Net cash used in operating activities
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(18,336
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)
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(17,377
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)
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(4,785
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)
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Financing activity
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Repurchase of ordinary shares from market
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(199
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)
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Net cash used in financing activity
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(199
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)
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Net decrease in cash and cash equivalents
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(18,336
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)
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(17,377
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)
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(4,984
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)
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Cash and cash equivalents at the beginning of the year
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41,346
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23,010
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5,633
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Cash and cash equivalents at the end of the year
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$
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23,010
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$
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5,633
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$
|
649
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F-61
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
ADDITIONAL INFORMATION SCHEDULE 1
Note:
The Condensed Financial Information of the Company only has been prepared using the same
accounting policies as set out in the Companys consolidated financial statements except
that the Company has used equity method to account for its investment in its subsidiaries
and variable interest entities.
2.
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INVESTMENTS IN SUBSIDIARIES AND VARIABLE INTEREST ENTITIES
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The Company and its subsidiaries and its variable interest entities are included in the
consolidated financial statements where the inter-company balances and transactions are
eliminated upon consolidation. For the purpose of the Companys stand-alone financial
statements, its investments in subsidiaries and variable interest entities are reported
using the equity method of accounting. The Companys share of income and losses from its
subsidiaries and variable interest entities is reported as earnings from subsidiaries and
variable interest entities in the accompanying condensed financial information of parent
company.
The Company is a tax exempted company incorporated in the Cayman Islands.
F-62
Exhibit 2.6
INVESTORS RIGHTS AGREEMENT
THIS INVESTORS RIGHTS AGREEMENT (this
Agreement
), dated June 9, 2009, is entered into by and
among:
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(i)
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Leo Technology Limited
, a limited liability company organized
and existing under the laws of the British Virgin Islands (the
Company
);
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|
(ii)
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China Techfaith Wireless Communication Technology Limited, a company organized
and existing under the laws of the Cayman Islands (the
Listco
);
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(iii)
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Techfaith Wireless Technology Group Limited, a company established under the
laws of British Virgin Islands which is a directly wholly owned subsidiary of Listco
(
TechFaith BVI
);
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(iv)
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Techfaith Interactive Technology (Beijing) Limited
(
), a company organized under the laws of the PRC, also
known as One Net Entertainment Limited (
) (the
WFOE
);
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(v)
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Beijing Techfaith Interactive Internet Technology Limited
(
), a company organized under the laws of the PRC (the
Operating Company
);
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(vi)
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the individuals as set forth in
Schedule I
attached hereto
(collectively, the
Founders
);
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(vii)
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the entities as set forth in
Schedule II
attached hereto
(collectively, the
Note Purchasers
); and
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(viii)
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Infiniti Capital Limited, a company incorporated under the laws of British Virgin
Islands (the
Share Purchaser
, together with the Note Purchasers, the
Investors
).
|
Each of the parties listed above referred to herein individually as a
Party
and collectively
as the
Parties
.
RECITALS
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(A)
|
|
The Convertible Note and Share Purchase Agreement dated as of May 15, 2009 (the
Purchase Agreement
) by and among the Company, the Note Purchasers, the Share
Purchaser, and certain other parties thereto provides that the execution and delivery
of this Agreement by the Parties hereto is a condition precedent to the consummation of
the Closing contemplated thereunder.
|
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(B)
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The Parties seek to enter into this Agreement to set out the terms governing
the rights and obligations of the Parties subsequent to the consummation of the Closing
contemplated under the Purchase Agreement.
|
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals, the mutual promises hereinafter
set forth, and other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the Parties hereby agree as follows:
SECTION 1 INTERPRETATION
1.1
Definitions
. The following terms shall have the meanings ascribed to them below:
Action
means any charge, claim, action, complaint, petition, investigation, suit or other
proceeding, whether administrative, civil or criminal, whether at Law or in equity, and whether or
not before any mediator, arbitrator or Governmental Authority.
Affiliate
means, with respect to a Person, any other Person that, directly or indirectly,
Controls, is Controlled by, or is under common Control with such Person. In the case of an
Investor, the term Affiliate also includes (v) any shareholder of the Investor, (w) any of such
shareholders or Investors general partners or limited partners, (x) the fund manager managing
such shareholder or Investor (and general partners, limited partners and officers thereof) and (y)
trusts controlled by or for the benefit of any such Person referred to in (v), (w) or (x). In the
case of a natural person, the term Affiliate also includes his/her Relatives, and any Affiliates
of his/her Relatives. For purposes of this Agreement, each Group Company and each Listco Group
Company shall be deemed an Affiliate of each other.
Approved Annual Budget
means the Annual Budget and Business Plan duly approved by the Class
B Majority Holders under Section 4.1 hereof.
Auditors
means a reputable accountancy firm duly appointed by the Board to audit the
Companys annual consolidated financial statements, which firm shall be reasonably satisfactory to
the Class B Majority Holders, or if the Class B Majority Holders and the Board could not reach an
agreement with the appointment, a Big Four Accounting Firm.
Benefit Plan
means any employment contract, deferred compensation agreement, bonus plan,
incentive plan, profit sharing plan, retirement agreement or other employment compensation
agreement or any other plan which provides or provided benefits for any employee, officer,
consultant, and/or director or with respect to which contributions are or have been made on account
of an employee, officer, consultant, and/or a director.
Big Four Accounting Firm
means one of the four largest international accountancy firms in
the world.
Board
means the board of directors of the Company.
Business Day
means any day that is not a Saturday, Sunday, legal holiday or other day on
which commercial banks are required or authorized by law to be closed in the PRC.
Charter Documents
means, with respect to a particular legal entity, the articles of
incorporation, certificate of incorporation, memorandum of association, articles of association,
bylaws, articles of organization, certificate of formation, limited liability company agreement,
operating agreement, or similar or other constitutive, governing, or charter documents, or
equivalent documents, of such entity.
Circular 75
means the Notice on Relevant Issues Concerning Foreign Exchange Administration
for Domestic Residents to Engage in Overseas Financing and Round Trip Investment via Overseas
Special Purpose Companies issued by SAFE on October 21, 2005.
Class B Majority Holders
means, as of any given time, holders holding no less than 75% of,
collectively, the then outstanding Ordinary Shares issued upon conversion of Class B Ordinary
Shares, the Ordinary Shares issuable upon conversion of the then outstanding Class B Ordinary
Shares, and the Ordinary Shares issuable upon conversion of Class B Ordinary Shares issuable upon
conversion of the then outstanding Notes, calculated on an as-converted basis.
2
Class B Ordinary Shares
means Class B Ordinary Shares of the Company, $0.01 per share, which
shares are convertible into Ordinary Shares in accordance with the terms of the
Memorandum of Association and Articles of Association of the Company (the
Memorandum and
Articles
).
Closing
has the meaning ascribed thereto in the Purchase Agreement.
Control
of a given Person means the power or authority, whether exercised or not, to direct
the business, management and policies of such Person, directly or indirectly, whether through the
ownership of voting securities, by Contract or otherwise; provided, that such power or authority
shall conclusively be presumed to exist upon possession of beneficial ownership or power to direct
the vote of more than fifty percent (5 0%) of the votes entitled to be cast at a meeting of the
members or shareholders of such Person or power to control the composition of a majority of the
board of directors of such Person. The terms Controlled and Controlling have meanings
correlative to the foregoing.
Controlling Documents
means, collectively, (i) an exclusive business cooperation agreement
between the WFOE and the Operating Company dated as of May 14, 2009, (ii) an equity pledge
agreement dated as of May 14, 2009 among the WFOE, the Operating Company, Ms. YUE Hongmei (
)
(PRC Identification Card No: 220281197807140023) and Mr. YUE Hongwei (
) (PRC Identification
Card No: 220281197304222617) (the
Pledge Agreement
), (iii) a loan agreement dated as of May 14,
2009 between the WFOE and each of Ms. YUE Hongmei
(
) and Mr. YUE
Hongwei
(
),
(iv) an
exclusive option agreement dated as of May 14, 2009 among the WFOE, the Operating Company, Ms. YUE
Hongmei (
) and
Mr. YUE Hongwei
(
), (v) an irrevocable proxy issued by Ms. YUE Hongmei
(
) and Mr. YUE Hongwei (
) in favor of the WFOE dated as of May 14, 2009, (vi) a
computer software copyright pledge framework agreement between the WFOE and the Operating Company
dated as of May 14, 2009, and (vii) a framework agreement among the WFOE, the Operating Company,
Ms. YUE Hongmei (
) and Mr. YUE Hongwei (
) dated as of May 14, 2009, each as amended
from time to time.
Equity Pledge Agreement
means a certain equity pledge agreement between the Company and the
Note Purchasers dated as of June 9, 2009.
Equity Securities
means, with respect to any Person that is a legal entity, any and all
shares of capital stock, membership interests, units, profits interests, ownership interests,
equity interests, registered capital, and other equity securities of such Person, and any right,
warrant, option, call, commitment, conversion privilege, preemptive right or other right to acquire
any of the foregoing, or security convertible into, exchangeable or exercisable for any of the
foregoing, or any Contract providing for the acquisition of any of the foregoing.
Guarantee
means certain guarantees delivered by Listco to the Investors at the Closing.
Governmental Authority
means any government of any nation or any federation, province or
state or any other political subdivision thereof; any entity, authority or body exercising
executive, legislative, judicial, regulatory or administrative functions of or pertaining to
government, including any government authority, agency, department, board, commission or
instrumentality of the PRC or any other country, or any political subdivision thereof, any court,
tribunal or arbitrator, and any self-regulatory organization.
3
Governmental Order
means any applicable order, ruling, decision, verdict, decree, writ,
subpoena, mandate, precept, command, directive, consent, approval, award, judgment, injunction or
other similar determination or finding by, before or under the supervision of any Governmental
Authority.
Group
means, collectively, the Company and its Subsidiaries, including without limitation,
the Company, the WFOE and the Operating Company.
Group Company
means a member of the Group.
Group Parties
means the Group Companies, Listco and Techfaith BVI.
Hong Kong
means the Hong Kong Special Administrative Region of the Peoples Republic of
China.
Indebtedness
of any Person means, without duplication, each of the following of such Person:
(i) all indebtedness for borrowed money, (ii) all obligations issued, undertaken or assumed as the
deferred purchase price of property or services (other than trade payables entered into in the
ordinary course of business), (iii) all reimbursement or payment obligations with respect to
letters of credit, surety bonds and other similar instruments, (iv) all obligations evidenced by
notes, bonds, debentures or similar instruments, including obligations so evidenced that are
incurred in connection with the acquisition of properties, assets or businesses, (v) all
indebtedness created or arising under any conditional sale or other title retention agreement, or
incurred as financing, in either case with respect to any property or assets acquired with the
proceeds of such indebtedness (even though the rights and remedies of the seller or bank under such
agreement in the event of default are limited to repossession or sale of such property), (vi) all
obligations that are capitalized in accordance with US GAAP or PRC GAAP, (vii) all obligations
under bankers acceptance, letter of credit or similar facilities, (viii) all obligations to
purchase, redeem, retire, defease or otherwise acquire for value any Equity Securities of such
Person, (ix) all obligations in respect of any interest rate swap, hedge or cap agreement, and (x)
all guarantees issued in respect of the Indebtedness referred to in clauses (i) through (ix) above
of any other Person, but only to the extent of the Indebtedness guaranteed.
Intellectual Property
means any and all (i) patents, all patent rights and all applications
therefor and all reissues, reexaminations, continuations, continuations-in-part, divisions, and
patent term extensions thereof, (ii) inventions (whether patentable or not), discoveries,
improvements, concepts, innovations and industrial models, (iii) registered and unregistered
copyrights, copyright registrations and applications, mask works and mask work registrations and
applications therefor, authors rights and works of authorship (including artwork of any kind and
software of all types in whatever medium, inclusive of computer programs, source code, object code
and executable code, firmware, development tools, files, records and data, and related
documentation), (iv) URLs, web sites, web pages and any part thereof, (v) technical information,
know-how, trade secrets, drawings, designs, design protocols, specifications, proprietary data,
customer lists, databases, proprietary processes, technology, formulae, and algorithms, (vi) trade
names, trade dress, trademarks, domain names, service marks, logos, business names, and
registrations and applications therefor, and (vii) the goodwill symbolized or represented by the
foregoing.
Laws
means any and all provisions of any constitution, treaty, statute, law, regulation,
ordinance, code, rule, or rule of common law, any governmental approval, concession, grant,
franchise, license, agreement, directive, requirement, or other governmental restriction or any
similar form of decision of, or determination by, or any interpretation or administration of any of
the foregoing by, any Governmental Authority, in each case as amended, and any and all Governmental
Order.
4
Liabilities
means, with respect to any Person, all liabilities, obligations and commitments
of such Person of any nature, whether accrued, absolute, contingent or otherwise, and whether due
or to become due.
Lien
means any claim, charge, easement, encumbrance, lease, covenant, security interest,
lien, option, pledge, rights of others, or restriction (whether on voting, sale, transfer,
disposition or otherwise), whether imposed by Contract, understanding, law, equity or otherwise.
Listco Group
means, collectively, Listco and its Subsidiaries.
Listco Group Company
means any member of the Listco Group.
Management Rights Letter
means a certain management rights letter delivered by the Company
to IDG-Accel China Growth Fund II L.P. at the Closing.
Material Contracts
shall have the meaning set forth in the Purchase Agreement.
New Securities
means any Equity Securities of the Company issued after the date hereof,
excluding (i) the Ordinary Shares issued upon conversion of the Class B Ordinary Shares issued
under the Purchase Agreement or upon the conversion of the Notes, (ii) the Class B Ordinary Shares
issued under the Purchase Agreement or upon the conversion of the Notes, (iii) Ordinary Shares and
options therefor issued pursuant to the ESOP, (iv) any Ordinary Shares issued pursuant to a
Qualified Public Offering, and (v) any Equity Securities issued as a result of any stock split,
stock dividend, reclassification, reorganization or similar event with respect to Ordinary Shares
as duly approved by the board of directors.
Noteholder Majority
means, as of any given time, the holders of at least a majority of the
Ordinary Shares issued or issuable upon conversion of the Class B Ordinary Shares issued or
issuable upon conversion of the Notes (excluding any that have been redeemed by the Company).
Notes
means the Senior Secured Convertible Promissory Note issued by the Company to the Note
Purchasers pursuant to the Purchase Agreement.
Notice 106
means the Implementing Rules for Circular 75 issued by SAFE on May 31, 2007.
Ordinary Shares
means the Companys Ordinary Shares, par value US$0.01 per share.
Ordinary Share Equivalents
means any security or obligation which is by its terms
convertible into or exchangeable or exercisable for Ordinary Shares or other share capital of the
Company, and any option, warrant or other subscription or purchase right with respect to Ordinary
Shares or such other share capital, including without limitation, the Notes and Class B Ordinary
Shares.
Permitted Liens
means (i) Liens for Taxes not yet due or payable or the validity of which
are being contested, and (ii) Liens incurred in the ordinary course of business consistent with
past practice, which (x) do not in the aggregate materially detract from the value or use of the
assets that are subject to such Liens and (y) were not incurred in connection with the borrowing of
money.
Person
means any natural person, corporation, limited liability company, joint stock
company, joint venture, partnership, enterprise, trust, unincorporated organization or any other
entity or organization.
5
PRC
means the Peoples Republic of China, solely for purposes of this Agreement, excluding
Hong Kong, the Macau Special Administrative Region and the islands of Taiwan.
PRC GAAP
means generally accepted accounting principles in the PRC, consistently applied.
Prohibited Person
means any Person that is (i) a national or resident of any U.S. embargoed
or restricted country, (ii) included on, or Affiliated with any Person on, any list maintained by
the United States government in respect of United States export control and sanctions laws,
including the Denied Persons List, Entity List and Unverified List maintained by the United States
Department of Commerce, the Debarred List maintained by the United States State Department,
any Designated/Blocked Nationals exclusion lists maintained by the United States Treasury
Department, and any similar list promulgated by the United States government; (iii) subject to the
sanctions administered or enforced by the United Nations Security Council, the European Union, or
Her Majestys Treasury, (iv) a member of any PRC military organization, or (v) otherwise identified
by a U.S. Governmental Authority as a Person with whom business transactions, including exports and
re-exports, are restricted.
Qualified Public Offering
means a firm commitment underwritten initial public offering of
Ordinary Shares on the New York Stock Exchange, the NASDAQ, NYSE Alternext (formerly known as the
American Stock Exchange), or any other internationally recognized stock exchange outside the PRC
reasonably acceptable to Class B Majority Holders, with publicly traded Ordinary Shares immediately
following such offering representing no less than 25% of the fully-diluted share capital of the
Company immediately following the offering, at a price per share in the public offering that values
the Company at more than US$200 million immediately prior to such public offering.
Related Party
means any officer, director, supervisory board member, or holder of any Equity
Security of any Listco Group Company, and any Affiliate of any of the foregoing, except that, with
respect to the Listco, the term Related Party shall not include any holder of Equity Securities
of Listco who is not required to file a statement of beneficial ownership with the SEC with respect
to an interest in Listco or has no such statement of beneficial ownership on file with the SEC.
Relatives
of a natural person means the spouse of such person, and any parent, grandparent,
child, grandchild, sibling, uncle, aunt, nephew, or niece of such person, and the spouse of the
foregoing persons.
Representatives
means, with respect to a Person, such Persons Affiliates, and its and their
respective counsels, financial advisors, auditors and other authorized representatives, including,
without limitation, their agents, employees, officers, and directors.
SAFE
means the State Administration of Foreign Exchange of the PRC.
SAFE Rules and Regulations
means collectively, the Circular 75, Notice 106, and any other
applicable SAFE rules and regulations.
Security Documents
means collectively, the Guarantees, and Equity Pledge Agreement.
Share Purchaser Majority
means, as of any given time, the holders, if any, of at least a
majority of the Class B Ordinary Shares issued by the Company pursuant to the Purchase Agreement.
Subsidiary
means, with respect to any given Person, any other Person that is not a natural
person and that is Controlled directly or indirectly by such given Person.
6
Tax
means (i) in the PRC: (a) any national, provincial, municipal, or local taxes, charges,
fees, levies, or other assessments, including, without limitation, all net income (including
enterprise income tax and individual income withholding tax), turnover (including value-added tax,
business tax, and consumption tax), resource (including urban and township land use tax), special
purpose (including land value-added tax, urban maintenance and construction tax, and additional
education fees), property (including urban real estate tax and land use fees), documentation
(including stamp duty and deed tax), filing, recording, social insurance (including pension,
medical, unemployment, housing, and other social insurance withholding), tariffs (including import
duty and import value-added tax), and estimated and provisional taxes, charges, fees, levies, or
other
assessments of any kind whatsoever, (b) all interest, penalties (administrative, civil or
criminal), or additional amounts imposed by any Governmental Authority in connection with any item
described in clause (a) above, and (c) any form of transferee liability imposed by any Government
Authority in connection with item described in clause (a) and (b) above and (ii) in any
jurisdiction other than the PRC: all similar liabilities as described in clause (i)(a) and (i)(b)
above.
Tax Return
means any return, report or statement showing Taxes, used to pay Taxes, or
required to be filed with respect to any Tax (including any elections, declarations, schedules or
attachments thereto, and any amendment thereof), including any information return, claim for
refund, amended return or declaration of estimated or provisional Tax.
Trade Sale
means any of the following events:
(1) any consolidation, amalgamation, scheme of arrangement or merger of any Group Company with
or into any other Person or reorganization or other transaction or series of related transactions,
in which the shareholders of such Group Company immediately prior to such consolidation,
amalgamation, merger, scheme of arrangement or reorganization, do not own more than fifty percent
(50%) of such Group Companys voting power in the aggregate immediately after such consolidation,
merger, amalgamation, scheme of arrangement, reorganization or other transactions, or any
transaction or series of related transactions to which any Group Company is a party in which in
excess of fifty percent (50%) of such Group Companys voting power is transferred;
(2) a sale, transfer, lease or other disposition of all or substantially all of the assets of
any Group Company (including without limitation its equity interest in its Subsidiaries), or any
series of related transactions resulting in such sale, transfer, lease or other disposition of all
or substantially all of the assets of any Group Company; or
(3) the sale, transfer or other disposition of all or substantially all of any Group Companys
outstanding capital stock (or any series of related transactions resulting in such sale, pledge,
transfer or other disposition of all or substantially all of any Group Companys outstanding
capital stock).
Transaction Documents
means this Agreement, the Notes, the Controlling Documents, the
Purchase Agreement, the Management Rights Letter, the Security Documents, and each director
indemnification agreement entered into between the Company and each Investor Director as of the
date hereof (such director indemnification agreements, collectively, the
Director Indemnification
Agreements
).
US GAAP
means generally accepted accounting principles in the United States, consistently
applied.
7
1.2
Other Defined Terms
. The following terms shall have the meanings defined for such terms in the
Sections set forth below:
|
|
|
Agreement
|
|
Preamble
|
Annual Budget and Business Plan
|
|
Section 3.1(c)
|
Arbitration Notice
|
|
Section 12.2(a)
|
CFC
|
|
Section 9.14(b)
|
Co-Sale Shares
|
|
Section 5.3(b)(1)
|
Code
|
|
Section 9.14(a)
|
Company
|
|
Preamble
|
Compulsory Sale
|
|
Section 7.1
|
Dispute
|
|
Section 12.2(a)
|
ESOP
|
|
Section 9.6
|
Force Majeure Event
|
|
Section 9.16(c)
|
Founders
|
|
Preamble
|
Gross-up Amount
|
|
Section 9.15(a)
|
HKIAC
|
|
Section 12.2(b)
|
HKIAC Rules
|
|
Section 12.2(b)
|
International Taxes
|
|
Section 9.15(a)
|
Investor Directors
|
|
Section 2.2(a)(2)
|
Investors
|
|
Preamble
|
Instrument of Accession
|
|
Section 5.1
|
Issuance Notice
|
|
Section 6.2
|
Listco
|
|
Preamble
|
Note Purchaser Director
|
|
Section 2.2(a)(1)
|
Note Purchasers
|
|
Preamble
|
Offered Shares
|
|
Section 5.3(a)(1)
|
Operating Company
|
|
Preamble
|
Ordinary Directors
|
|
2.2 (a) (3)
|
Participating Investor
|
|
Section 5.3(a)(2)(C)
|
Partnership Election
|
|
Section 9.14(c)
|
Party
|
|
Preamble
|
PFIC
|
|
Section 9.14(a)
|
Principal Tribunal
|
|
Section 12.2(i)( 1)
|
Prospective Purchaser
|
|
Section 7.1
|
Purchase Agreement
|
|
Recitals
|
Reallotment Notice
|
|
Section 5.3(a)(2)(B)
|
Reallotment Period
|
|
Section 5.3(a)(2)(C)
|
Reallotment Shares
|
|
Section 5.3(a)(2)(B)
|
Relevant Fiscal Year
|
|
Section 9.16(a)
|
Restricted Business
|
|
Section 10.1 (a)
|
Security Holder
|
|
Section 9.1
|
Selling Investor
|
|
Section 5.3(b)(1)
|
Share Purchaser
|
|
Preamble
|
Share Purchaser Director
|
|
Section 2.2(a)(2)
|
Techfaith BVI
|
|
Preamble
|
Transfer
|
|
Section 5.1
|
Transfer Notice
|
|
Section 5.3(a)(1)
|
Transferor
|
|
Section 5.3(a)(1)
|
WFOE
|
|
Preamble
|
WFOE Board
|
|
Section 2.2(b)
|
8
1.3
Interpretation
. For all purposes of this Agreement, except as otherwise expressly herein
provided, (i) the terms defined in this Section 1 shall have the meanings assigned to them in this
Section 1 and include the plural as well as the singular, (ii) all accounting terms not otherwise
defined herein have the meanings assigned under PRC GAAP, (iii) all references in this Agreement to
designated Sections and other subdivisions are to the designated Sections and other subdivisions
of the body of this Agreement, (iv) pronouns of either gender or neuter shall include, as
appropriate, the other pronoun forms, (v) the words herein, hereof and hereunder and other
words of similar import refer to this Agreement as a whole and not to any particular Section or
other subdivision, (vi) all references in this Agreement to designated Schedules, Exhibits and
Appendices are to the Schedules, Exhibits and Appendices attached to this Agreement, (vii)
references to this Agreement, any other Transaction Documents and any other document shall be
construed as references to such document as the same may be amended, supplemented or novated from
time to time, (viii) the term or is not exclusive, (ix) the term including will be deemed to be
followed by , but not limited to, (x) the terms shall, will, and agrees are mandatory, and
the term may is permissive, (xi) the phrase directly or indirectly means directly, or
indirectly through one or more intermediate Persons or through contractual or other arrangements,
and direct or indirect has the correlative meaning, (xii) the expressions Investor, Share
Purchaser and Note Purchaser shall, unless the
context prohibits, include their respective successors, transferees and assigns and any Persons
deriving title under them, and (xiii) the headings used in this Agreement are used for convenience
only and are not to be considered in construing or interpreting this Agreement.
SECTION 2 BOARD OF DIRECTORS; SHAREHOLDER MEETING
2.1
Board Size
. The size of the Board shall at all times be five (5) directors.
2.2
Board Composition
.
(a) The composition of the Board shall be determined as follows:
(1) the Noteholder Majority shall have the right to designate, from time to time, one
(1) individual (the
Note Purchaser Director
) to occupy a position on the Board, so long as
the then outstanding Notes, Ordinary Shares, and Class B Ordinary Shares held by the
Noteholder Majority represent (on an as-converted basis) at least 172,861 Ordinary Shares
(as appropriately adjusted for share splits and similar events);
(2) the Share Purchaser Majority shall the right to designate, from time to time, one
(1) individual (the
Share Purchaser Director
and with the Note Purchaser Director, the
Investor Directors
) to occupy a position on the Board;
(3) the shareholders of the Company representing a majority in voting power of the
Ordinary Shares shall have the right to designate, from time to time, all of the remaining
directors on the Board (the
Ordinary Directors
), numbering three or, if the Noteholder
Majority or the Share Purchaser Majority is no longer entitled to designate the Note
Purchaser Director or the Share Purchaser Director, four or five, as the case may be,
provided that at least one of the Ordinary Directors shall be an independent director in
that such director shall not be a Related Party or an employee of any Listco Group Company.
For the purposes of this Section 2.2(a)(3) only, the Ordinary Shares of the Company shall
exclude the Ordinary Shares issued or issuable upon the conversion of any Class B Ordinary
Shares.
(b) Each Group Company shall cause, and the Founders, Techfaith BVI and Listco shall cause
each Group Company to cause, (i) the WFOE to have a board of directors or similar governing body
(the
WFOE Board
), (ii) the size of the WFOE Board at all times be five (5) directors, and (iii)
the composition of the WFOE Board to at all times consist of the same persons as directors as those
then on the Board.
2.3
Election and Removal of Directors
.
(a) With respect to each election of directors of the Board, each holder of voting securities
of the Company shall vote at each meeting of shareholders of the Company, or in lieu of any such
meeting shall give such holders written consent with respect to, as the case may be, all of such
holders voting securities of the Company as may be necessary (i) to keep the size of the Board at
five (5) directors, (ii) to cause the election or re-election as members of the Board, and during
such period to continue in office, each of the individuals designated pursuant to Section 2.2, and
(iii) against any nominees not designated pursuant to such Section.
9
(b) Any Person or group of Persons entitled to designate any individual to be elected as a
director of the Board pursuant to this Section 2 shall have the right to remove any such director
occupying such position and to fill any vacancy caused by the death, disability, retirement,
resignation or removal of any director occupying such position. Each holder of voting securities of
the Company agrees to always vote such holders respective voting securities of the Company in
support of the principle that a director on the Board designated pursuant to Section 2.2 shall be
removed from the Board with or without cause only upon the vote or written consent of the Person or
Persons
entitled to designate such director pursuant to Section 2.2, and each such holder further
agrees not to seek, vote for or otherwise effect the removal with or without cause of any such
director without such vote or written consent. If a vacancy is created on the Board at any time by
the death, disability, retirement, resignation or removal of any director designated pursuant to
Section 2.2 the replacement director to fill such vacancy shall be designated in the same manner,
in accordance with Section 2.2, as the director whose seat was vacated. For the avoidance of doubt,
any director designated by a Person or a group of Persons to the Board or the WFOE Board pursuant
to Section 2.2 shall cease to be a director if such Person or group of Persons no longer has the
right to designate a director under Section 2.2, and in such event the Person or group of Persons
who designated such director shall cause such director to resign or be removed.
(c) The Company agrees to take such action, and each other Party hereto agrees to take such
action, as is necessary to cause the election or appointment to the WFOE Board of each director
designated to serve on the Board pursuant to this Section 2. Upon a request by any Person or group
of Persons entitled to designate a director to the Board to remove such director from the Board in
accordance with Section 2.3, each Party agrees to vote all voting securities of the Company held or
owned thereby to effect removal of such director from the Board, and the Company agrees to take
such action, and each other Party hereto agrees to take such action, as is necessary to cause the
removal of such director from the WFOE Board.
2.4
Quorum
. The Board and the WFOE Board shall hold no less than one (1) board meeting during each
fiscal quarter. A meeting of the Board and the WFOE Board shall only proceed where there are
present (whether in person or by means of a conference telephone or any other equipment which
allows all participants in the meeting to speak to and hear each other simultaneously) a majority
of all directors of such Group Company then in office, provided that such majority include both
Investor Directors, and the Parties shall cause the foregoing to be the quorum requirements for the
Board and the WFOE Board. Notwithstanding the foregoing, if notice of the board meeting has been
duly delivered to all directors of the Board or the WFOE Board seven days prior to the scheduled
meeting in accordance with the notice procedures under the Charter Documents of the applicable
Group Company, and the number of directors required to be present under this Section 2.4 for such
meeting to proceed is not present within one half hour from the time appointed for the meeting
solely because of the absence of the Investor Directors, each holder of voting securities of the
Company, or the applicable Group Company, as the case may be, shall procure that the directors
present at the meeting shall adjourn the meeting to the third following Business Day at the same
time and place (or to such other time or such other place as the directors may determine) with
notice delivered to all directors one day prior to the adjourned meeting in accordance with the
notice procedures under the Charter Documents of the applicable Group Company and, if at the
adjourned meeting, the number of directors required to be present under this Section 2.4 for such
meeting to proceed is not present within one half hour from the time appointed for the meeting
solely because of the absence of such Investor Director, then the presence of such Investor
Director shall not be required at such adjourned meeting.
2.5
Management
. All day-to-day operations and major transactions of the Company shall be directed
by the Board.
10
2.6
Expenses
. The Company will promptly pay or reimburse each non-employee Board member and each
non-employee WFOE Board member for all reasonable out-of-pocket expenses incurred in connection
with attending board or committee meetings and otherwise performing their duties as directors and
committee members.
2.7
Shareholder Meeting
. The Noteholder Majority shall have right to send one representative of
each holder of a Note in their capacity as a noteholder, if such holder is not also a shareholder,
to attend each general or special meeting of the shareholders of the Company in a nonvoting
observer capacity, and the Company shall send to each such holder copies of all notices,
minutes, consents and any other documents or information that the Company provides to its
shareholders at the same time when it provides to its shareholders.
SECTION 3 INFORMATION RIGHTS
3.1
Information Rights
. Subject to compliance with applicable Laws, the Group Parties shall deliver
or cause to be delivered to each of the Investors:
(a) as soon as practicable, but in any event within forty five (45) days after the end of each
fiscal year of the Company, consolidated and consolidating income statements and statements of cash
flows for the Group for such fiscal year and consolidated and consolidating balance sheets and
accounts receivable aging reports for the Group as of the end of such fiscal year, all prepared in
accordance with PRC GAAP and audited and certified by the Auditors;
(b) as soon as practicable, but in any event within thirty (30) days after the end of each
month of the Company, unaudited income statements and statements of cash flows for the Group
Companies for such month (and, in the case of a month that is a fiscal quarter end, for such fiscal
quarter) and unaudited balance sheets for the Group Companies as of the end of such month, all
prepared in accordance with PRC GAAP; and
(c) as soon as practicable, but in any event at least thirty (30) days prior to the end of
each fiscal year, an annual budget and business plan in English for the succeeding fiscal year for
the Group (the
Annual Budget and Business Plan
), setting forth: the projected balance sheets,
income statements and statements of cash flows for each month during such period of each Group
Company; the projected budget for operation of business; any dividend or distribution to be
declared or paid; the projected incurrence, assumption or refinancing of indebtedness; projected
revenue and profit for each month during such period; all payments projected to be made not in the
ordinary course of business consistent with past practice by any of the Group Companies; and all
other material matters relating to the operation, development and business of the Group Companies.
3.2
Inspection Rights
. Subject to compliance with applicable Laws, the Group Parties shall permit
each of the Investors, and/or their authorized representatives or advisors, to visit and inspect
all of the properties and examine all books of account and records of each Group Company (including
any technology reports and contracts) and discuss the affairs, finances and accounts of any Group
Company with the directors, officers, employees, accountants, legal counsel and investment bankers
thereof, all at such reasonable times with reasonable advance notification by such Investor and at
such Investors expense. The Group Companies shall provide reasonable assistance to the Investors
in connection therewith.
11
SECTION 4 PROTECTIVE PROVISIONS
4.1
Acts of the Group Companies Requiring Class B Majority Holder Approval
. Regardless of anything
else contained herein or in the Charter Documents of any Group Company, no Group Company shall
take, permit to occur, approve, authorize, or agree or commit to do any of the following, and no
Group Party shall permit any Group Company to and the Founders shall not permit the Company to
take, permit to occur, approve, authorize, or agree or commit to do any of the following, whether
in a single transaction or a series of related transactions, whether directly or indirectly, and
whether or not by amendment, merger, consolidation, scheme of arrangement, amalgamation, or
otherwise, unless approved in writing by the Class B Majority Holders in advance:
(a)
Charter Documents
. Any amendment or modification to or waiver under any of the
Charter Documents of any Group Company, other than amendments pursuant to and in compliance with
Section 12.7 hereof.
(b)
Major Transaction
. Any Trade Sale, or any other merger, consolidation,
amalgamation, scheme of arrangement or other business combination with or into any other Person, or
any other transaction involving a Group Company in which the shareholders of such Group Company
immediately prior to such transaction do not retain a majority of the voting power of and Control
over the surviving entity, or any sale, transfer, assignment, lease, conveyance or otherwise
disposal of all or substantially all of its assets in any one transaction or series of
transactions, or any reorganization, or any reclassification of share capital.
(c)
Dividends; Repurchases
. Any declaration, set aside or payment of a dividend or
other distribution by any Group Company except for (i) any distribution or dividend with respect to
which the sole recipient of any proceeds therefrom is the Company and (ii) any distribution or
dividend as specified under Section 3.8 of the Disclosure Schedule under the Purchase Agreement, or
the adoption of, or any change to, the dividend policy of any Group Company, or any redemption or
repurchase of Equity Securities of a Group Company, except for (x) repurchases of the Notes as
provided in the Notes and (y) repurchases from departing employees, directors or officers in
accordance with the ESOP.
(d)
Security Issuance
. Any issuance, sale, or offer to sell by any Group Company of
its Equity Securities, except for (i) the issuance of Class B Ordinary Shares upon conversion of
the Notes, (ii) the issuance of Ordinary Shares issued upon conversion of the Class B Ordinary
Shares issued under the Purchase Agreement or upon conversion of the Notes, (iii) the issuance of
Ordinary Shares or options therefor in accordance with the ESOP, and (iv) the issuance of any
Ordinary Shares pursuant to a Qualified Public Offering.
(e)
ESOP
. The adoption, amendment or termination of any employee equity incentive plan
or any related agreement or document.
(f)
Equity Capital
. The alteration or re-organization of the equity capital, including
without limitation, any increase, reduction or cancellation of authorized equity capital, or any
consolidation, reclassification, subdivision or conversion of, or any alteration of the rights in
respect of, any equity capital, other than (i) any alteration to permit the conversion of the Notes
or the Class B Ordinary Shares in accordance with the terms under the Notes or the Memorandum and
Articles, or (ii) any alteration in preparation for or as a result of a Qualified Public Offering,
provided that such alteration under clause (ii) shall not be effective until the consummation of
such Qualified Public Offering.
(g)
Related Party Transaction
. Except as specifically provided for under the
Transaction Documents, the entry into any transaction or series of transactions (or the
termination, extension, continuation after expiry, renewal, amendment, variation or waiver of any
term under agreement with respect to any transaction or series of transactions) with any Related
Party.
(h)
Bankruptcy and Liquidation
. Except pursuant to the Transaction Documents or for
the benefit of the holders of the Notes, the commencement of or consent to any proceeding seeking
(i) to adjudicate it as bankrupt or insolvent, (ii) liquidation, winding up, dissolution,
reorganization, or arrangement of any of the Group Companies under any Law relating to bankruptcy,
insolvency or reorganization or relief of debtors, or (iii) the entry of an order for relief or the
appointment of a receiver, trustee, or other similar official for it or for any substantial part of
its property.
12
(i)
Tax and Accounting Policies
. Any adoption of or change to, a significant tax or
accounting practice or policy or any internal financial controls and authorization policies, or the
making of any significant tax or accounting election.
(j)
Board
. Any change of the size or composition of the board of directors of any
Group Company.
(k)
Business Scope
. Any material change to the business scope, or nature of business
of any Group Company, or cessation of any business line of any Group Company.
(l)
Re-domestication
. The re-domestication, continuance or removal of any Group
Company to any other jurisdiction except for the migration of the Company from the British Virgin
Islands to the Cayman Islands through registration by way of continuation.
4.2
Acts of the Group Companies Requiring Investor Director Approval
. Regardless of anything else
contained herein or in the Charter Documents of any Group Company, no Group Company shall take,
permit to occur, approve, authorize, or agree or commit to do any of the following, and no Group
Party shall permit any Group Company to and the Founders shall not permit the Company to take,
permit to occur, approve, authorize, or agree or commit to do any of the following, whether in a
single transaction or a series of related transactions, whether directly or indirectly, and whether
or not by amendment, merger, consolidation, scheme of arrangement, amalgamation, or otherwise,
unless approved by both Investor Directors:
(a)
Annual Budget and Business Plan
. The adoption of the Annual Budget and Business
Plan or any deviation from or amendment to the Annual Approved Budget then in effect (including
without limitation, any capital expenditures or commitments therefor, or any research and
development expenditures or commitments therefor in excess of the amounts provided for in the
Approved Annual Budget then in effect) unless such deviation is in an amount no more than
US$150,000 in excess of the amounts provided for in the Approved Annual Budget then in effect,
individually or in the aggregate with other deviations;
(b)
Senior Management
. The appointment or removal of the chief executive officer,
chief financial officer, the president, a vice president, the chief operating officer, the chief
technical officer, the chief sales and marketing officer, or any other employee with
responsibilities similar to any of the foregoing or any change in the compensation package of any
such person.
(c)
Indebtedness; Liens
. Any incurrence of any Indebtedness in excess of US$200,000,
or any guarantee in one transaction or a series of related transactions for an aggregate amount in
excess of US$200,000, or the grant of any security interest, pledge, mortgage, lien or other
encumbrance in excess of US$200,000 on any assets of any Group Company except for (i) Permitted
Liens or (ii) pursuant to the Security Documents.
(d)
Purchases; Disposals
. (i) Any purchase or acquisition of any business and/or
assets with the aggregate purchase price in excess of US$200,000 except as specifically
pre-approved in the Approved Annual Budget, or (ii) the sale, transfer, lease, license, assignment,
conveyance, or disposal, whether directly or indirectly, of any material property (tangible or
intangible such as Intellectual Property rights), assets or business with a fair market value or
book value in excess of US$200,000, other than (i) inventory in the ordinary course of business or
(ii) as specifically pre-approved in the Approved Annual Budget or (iii) pursuant to the Security
Documents or the Notes.
(e)
Investments, Partnerships and Joint Ventures
. (i) The subscription, purchase or
acquisition of any interest in, or any contribution to, any Person, (ii) the establishment of any
new Group Company or any new Subsidiary, or (iii) the entry into any partnership, joint venture or
consortium.
13
(f)
Auditors and Fiscal Year
. The appointment and removal of the Auditors or the
auditors for any other Group Company, or change of the term of the fiscal year for any Group
Company.
(g)
Litigation
. The commencement or settlement of any Action (other than any Action
involving one or more of the Investors) involving any Group Company where the amount in
dispute is more than US$200,000 or which may impose restrictions on any Group Company or the
conduct of its businesses.
(h)
Material Contracts
. Entry into, termination, or material modification or waiver
of, or material amendment to, any Material Contracts (except for each Note if approved by the
holder of such Note) or Controlling Documents.
SECTION 5 RESTRICTIONS ON TRANSFER OF SHARES
5.1
Transfer of Shares by Techfaith BYI or Listco
. Each of Techfaith BVI and Listco agrees that it
will not, directly or indirectly, sell, assign, transfer, pledge, hypothecate or otherwise
encumber, convey, or otherwise dispose of, or suffer to exist any Lien on (whether by operation of
law or otherwise) (each, a
Transfer
) any interest it now or hereafter holds (directly or
indirectly) in the Equity Securities of the Company or Techfaith BVI, respectively, including,
without limitation, any interest in any of the economic benefits arising from or in connection with
any such interest owned, unless each of the following are satisfied: (a) the Class B Majority
Holders give an informed written consent to such Transfer in advance, (b) the Transfer is in
compliance with all applicable Laws, (c) where the Person acquiring such Equity Securities is not
already a party to this Agreement, such Person shall have executed and delivered to each of the
other Parties hereto an original copy of the Instrument of Accession agreeing to be bound by this
Agreement, in substantially the form attached hereto as Exhibit A (the
Instrument of Accession
),
and (d) in connection with such Transfer, the transferor shall have complied with all of the
provisions set forth in Section 5.3.
5.2
No Recognition
. Any purported Transfer that does not comply with the provisions of this
Agreement shall be null and void, and neither the Company nor Techfaith BVI nor any other Party
shall register or recognize any such purported Transfer. Within five Business Days after
registering any Transfer on the books of the Company or Techfaith BVI, the Company or Techfaith
BVI, as the case may be, shall send a notice to the Investors stating that such Transfer has taken
place and setting forth the name of the transferor, the name of the transferee and the number and
the class of the Equity Securities involved.
5.3
Right of First Refusal and Co-Sale Rights of Investors
.
(a)
Right of First Refusal
.
(1)
Transfer Notice
. In the event Techfaith BVI proposes to Transfer Equity
Securities of the Company, or Listco proposes to Transfer Equity Securities of Techfaith
BVI, to any Person, then Techfaith BVI, or Listco, as the case may be (the
Transferor
),
shall give each Investor a written notice of its intent to make the Transfer (the
Transfer
Notice
), which Transfer Notice shall include (i) a description of the Equity Securities to
be transferred (the
Offered Shares
), including, without limitation, the number and class
of Equity Securities to be sold or transferred, (ii) the identity (including name and
address) of any prospective transferee, and (iii) the consideration and the material terms
and conditions upon which the proposed Transfer is to be made. The Transfer Notice shall
certify that the Transferor has received a firm offer from each prospective transferee and
in good faith believes a binding agreement for the Transfer is obtainable on the terms set
forth in the Transfer Notice. The Transfer Notice shall also include a copy of any written
proposal, term sheet or letter of intent or other agreement relating to the proposed
Transfer.
14
(2)
Investors Option
.
(A) Each Investor shall have an option for a period of thirty (30) days from
its receipt of the Transfer Notice to elect to purchase its respective pro rata
share of the Offered Shares at the same price and subject to the same material terms
and conditions as described in the Transfer Notice. Each Investor may exercise such
purchase option and, thereby, purchase all or any portion of its pro rata share
of the Offered Shares, by notifying the Transferor in writing, before expiration of
the thirty-day period as to the number of such Offered Shares which it wishes to
purchase. For purposes of this clause (A), each Investors pro rata share of the
Offered Shares shall be a fraction of the Offered Shares, of which the number of
Ordinary Shares (assuming the exercise, conversion and exchange of all Ordinary
Share Equivalents) owned by such Investor on the date of the Transfer Notice shall
be the numerator and the total number of Ordinary Shares (assuming the exercise,
conversion and exchange of all Ordinary Share Equivalents) held by all Investors on
the date of the Transfer Notice shall be the denominator.
(B) If any Investor fails to exercise in full its option to purchase its pro
rata share of the Offered Shares, the Transferor shall give written notice (a
Reallotment Notice
) to each Investor who has fully exercised its option to
purchase a pro rata portion of the Offered Shares. The Reallotment Notice shall
include all of the information and certifications required in a Transfer Notice and
briefly describe such Investors rights of reallotment. The Reallotment Notice shall
further identify the portion of the Offered Shares in respect of which any Investor
has failed to exercise its right of first refusal (the
Reallotment Shares
).
(C) Each Investor entitled to receive a Reallotment Notice (a
Participating
Investor
) shall have an option to purchase, at the same price and subject to the
same material terms and conditions as described in any Reallotment Notice, the
Reallotment Shares described in such Reallotment Notice; provided if such Investors
collectively desire to purchase more than the Reallotment Shares, the Reallotment
Shares shall be allocated among them according to their pro rata share (or such
other allocation as they may agree to, provided that such Investors shall notify the
Transferor of such agreement). Such option shall be exercisable by each
Participating Investor by notifying the Transferor in writing, within thirty (30)
days after delivery to the Participating Investor of the Reallotment Notice (a
Reallotment Period
). For purposes of this clause (C), each Participating
Investors pro rata share of the Reallotment Shares shall be a fraction of the
Reallotment Shares, of which the number of Ordinary Shares (assuming the exercise,
conversion and exchange of any Ordinary Share Equivalents) owned by such
Participating Investor on the date of the Transfer Notice shall be the numerator and
the total number of Ordinary Shares (assuming the exercise, conversion and exchange
of any Ordinary Share Equivalents) held on the date of the Transfer Notice by all
Participating Investors electing to purchase Reallotment Shares shall be the
denominator.
(D) Each Investor shall be entitled to apportion Offered Shares to be purchased
among its Affiliates, provided that such Investor notifies the Transferor of such
allocation.
15
(E) If any Investor exercises its option under this Section 5.3(a)(2) to
purchase any Offered Shares, then payment for such Offered Shares shall be made by
wire transfer, against delivery of the Offered Shares to be purchased at a place
agreed by the parties and at the time of the scheduled closing therefor, which shall
be no later than thirty (30) days after the expiration of any period for exercise by
such Investor of its right of first refusal with respect to the Offered Shares and
all periods for exercise by the Investors of any right of reallotment.
(b)
Right of Co-Sale
.
(1) Within fifteen (15) days after expiration of the time for exercise by the Investors
of any rights of first refusal hereunder (and any right of reallotment) in respect
of the Offered Shares, the Transferor shall give written notice to each Investor which
has not exercised a right of first refusal in respect of the Offered Shares, which notice
shall indicate the number of the Offered Shares as to which the Investors did not exercise
their rights of first refusal (the
Co-Sale Shares
) and advise such Investor of its co-sale
rights with respect to such Co-Sale Shares. Each such Investor (a
Selling Investor
) that
notifies the Transferor in writing within fifteen (15) days after receipt of the co-sale
notice shall have a right to participate in any sale by the Transferor of the Co-Sale Shares
on the same terms and conditions as specified in the Transfer Notice. Such Selling
Investors notice to the Transferor shall indicate the number of Equity Securities the
Selling Investor wishes to sell under its right to participate.
(2) To the extent one or more of the Selling Investors exercise such right of
participation in accordance with the terms and conditions set forth below, the number of
Equity Securities that the Transferor may sell in the Transfer shall be correspondingly
reduced.
(3) Each Selling Investor may elect to sell up to such number of the Equity Securities
in the Company held thereby equal to the product of (i) the aggregate number of Ordinary
Shares covered by the co-sale notice delivered by the Transferor (assuming the exercise,
conversion and exchange of any Ordinary Share Equivalents) and (ii) a fraction, the
numerator of which is the number of Ordinary Shares (assuming the exercise, conversion and
exchange of any Ordinary Share Equivalents) owned by the Selling Investor on the date of the
Transfer Notice, and the denominator of which is the total number of Ordinary Shares
(assuming the exercise, conversion and exchange of any Ordinary Share Equivalents) owned
(directly or indirectly through wholly-owned subsidiaries) by the Transferor and all of the
Selling Investors on the date of the Transfer Notice. For the purpose of this Section
5.3(b)(3), with respect to a Transfer by Listco of any Equity Securities in Techfaith BVI,
the aggregate number of Ordinary Shares covered by the Transfer Notice shall be deemed to be
the product of (i) the total Ordinary Shares held by Techfaith BVI, and (ii) a ratio by
which such number of Equity Securities in Techfaith BVI purported to be Transferred by
Listco bear to all Equity Securities in Techfaith BVI held by Listco.
(4) Each Selling Investor shall effect its participation in the sale by promptly
delivering to the Transferor for transfer to the prospective purchaser one or more
certificates, properly endorsed for transfer, which represent the type and number of Equity
Securities which such Selling Investor elects to sell; provided, however, that if the
prospective purchaser objects to the delivery of Ordinary Share Equivalents in lieu of
Ordinary Shares, such Selling Investor shall convert such Ordinary Share Equivalents into
Ordinary Shares and deliver certificates corresponding to such Ordinary Shares. The Company
agrees to make any such conversion concurrent with the actual transfer of such Ordinary
Shares to the purchaser and contingent on the closing of such transfer.
(5) The share certificate or certificates that a Selling Investor delivers to the
Transferor pursuant to Section 5.3(b)(4) shall be transferred to the prospective purchaser
in consummation of the sale of the Equity Securities pursuant to the terms and conditions
specified in the Transfer Notice, and the Transferor shall concurrently therewith remit to
such Selling Investor that portion of the sale proceeds to which such Selling Investor is
entitled by reason of its participation in such sale.
16
(6) To the extent that any prospective purchaser prohibits the participation of a
Selling Investor exercising its co-sale rights hereunder in a proposed Transfer or otherwise
refuses to purchase Equity Securities from a Selling Investor exercising its co-sale rights
hereunder, the Transferor shall not sell to such prospective purchaser any Equity Securities
unless and until, simultaneously with such sale, the Transferor shall purchase from such
Selling Investor all Equity Securities such Selling Investor elects to sell
for the same consideration and on the same terms and conditions as the proposed
transfer described in the Transfer Notice.
(c)
Non-Exercise of Rights
.
(1) To the extent that the Investors have not exercised their rights to purchase the
Offered Shares within the time periods specified in Section 5.3(a), and the Investors have
not exercised their rights to participate in the sale of the Offered Shares within the time
periods specified in Section 5.3(b), the Transferor shall have a period of sixty (60) days
from the expiration of such rights in which to sell the Co-Sale Shares to any third-party
transferee identified in the Transfer Notice so long as (i) the terms and conditions
(including the purchase price) of such sale are no more favorable than those specified in
the Transfer Notice and (ii) such sale complies with the requirements of Section 5.1. Within
fifteen (15) days of entering into any agreement to sell Offered Shares to a third-party
transferee under this Section 5.3(c), the Transferor shall furnish each Investor with a copy
of all agreements relating to such sale.
(2) In the event the Transferor does not consummate the sale or disposition of the
Co-Sale Shares within sixty (60) days from the expiration of the Investors first refusal
rights and co-sale rights, such rights of the Investors shall revive and shall be applicable
to any subsequent Transfer of the Co-Sale Shares by the Transferor until such rights lapse
in accordance with the terms of this Agreement.
(3) The exercise or non-exercise of the rights of the Investors under this Section 5.3
to purchase or participate in the sale of Equity Securities by the Transferor shall not
adversely affect their rights to make subsequent purchases of Equity Securities from the
Transferor or subsequently participate in sales of Equity Securities by the Transferor.
(d)
Valuation of Property
.
(1) Should the purchase price specified in the Transfer Notice be payable in property
other than cash or evidences of indebtedness, each Investor shall have the right to pay the
purchase price in the form of cash equal in amount to the value of such property if it
exercises its right of first refusal.
(2) If the Transferor and the Investor(s) cannot agree on the value of such property
within thirty (30) days after the Investor(s) receipt of the Transfer Notice, the valuation
shall be made by an appraiser of recognized standing selected by the Transferor and the
Investors or, if they cannot agree on an appraiser within forty (40) days after the
Investor(s) receipt of the Transfer Notice, each shall select an appraiser of recognized
standing and the two (2) appraisers shall designate a third appraiser of recognized standing
within fifty (50) days after the Investor(s) receipt of the Transfer Notice, whose
appraisal shall be determinative of such value. The appraisal shall be completed within ten
(10) days upon the appointment of the appraiser pursuant to this clause.
17
(3) The cost of such appraisal shall be shared equally between the Transferor on one
side and the Investors electing to exercise their right of first refusal hereunder on the
other side (in accordance with their relative pro rata share).
SECTION 6 PRE-EMPTIVE RIGHTS
6.1
General
. Each Investor shall have a pre-emptive right to purchase up to a pro rata share of any
New Securities which the Company may, from time to time, propose to issue. An Investors pro rata
share, for purposes of this pre-emptive right, shall be determined according to the number of
Ordinary Shares (assuming the exercise, conversion or exchange of any Ordinary Share
Equivalents) owned by such Investor immediately prior to the issuance of the New Securities in
relation to the total number of Ordinary Shares (assuming the exercise, conversion or exchange of
any Ordinary Share Equivalents) outstanding immediately prior to the issuance of the New
Securities. If any Investor fails to exercise its right hereunder to purchase its full pro rata
share of any New Securities, each of the other Investors who has exercised its right to purchase
its full pro rata of any New Securities shall have a right of over-allotment to purchase any
remaining New Securities on a pro rata basis, determined according to the number of Ordinary Shares
(assuming the exercise, conversion or exchange of any Ordinary Share Equivalents) held by such
Investor with the over-allotment right immediately prior to the issuance of the New Securities, in
relation to the number of Ordinary Shares (assuming the exercise, conversion or exchange of any
Ordinary Share Equivalents) held immediately prior to the issuance of the New Securities by all
Investors having such over-allotment right.
6.2
Exercise of Right
. In the event the Company proposes to undertake an issuance of New
Securities, it shall give each Investor a written notice (an
Issuance Notice
) of such intention,
describing the type of New Securities, their price and the general terms upon which the Company
proposes to issue the same, and the prospective purchaser of New Securities. Each Investor shall
have thirty (30) days after any such Issuance Notice is delivered to exercise its pre-emptive right
under this Section 6 to purchase up to its pro rata share of such New Securities, for the price and
upon the terms specified in the Issuance Notice, by giving written notice to the Company and
stating therein the quantity of New Securities to be purchased in the exercise of such right. Upon
expiration of such thirty-day period, the Company shall give each Investor which has exercised its
pre-emptive right to purchase its full pro rata share of such New Securities further written
notice, describing any New Securities with respect to which any other Investor has not exercised
its pre-emptive right. Each Investor entitled to receive such notice shall have thirty (30) days
after such further notice is delivered to exercise its right of over-allotment to purchase any
further New Securities on a pro rata basis under this Section 6, for the price and upon the terms
specified in the Issuance Notice, by giving written notice to the Company and stating therein the
quantity of further New Securities to be purchased in the exercise of such right of over-allotment,
provided that the quantity of such further New Securities shall not exceed its pro rata share under
its right of over-allotment.
6.3
Sales by the Company
. In connection with any proposed issuance of New Securities, for sixty
(60) days after the expiration of any period for exercise by the Investors hereto of their
pre-emptive right and any right of over-allotment under this Section 6 in respect of such proposed
issuance, the Company may sell any New Securities with respect to which the Investors have not
exercised such rights, at a price and upon terms no more favorable than specified in the Issuance
Notice so long as each purchaser of such New Securities who is not already a party to this
Agreement shall have executed and delivered to each of the other parties hereto an instrument of
accession joining this Agreement as a party in form and substance reasonably satisfactory to the
Investors. In the event the Company has not sold such New Securities within such 60-day period, the
Company shall not thereafter issue or sell any New Securities, without first again offering such
securities to the Investors in the manner provided in Section 6.2 above.
18
SECTION 7 DRAG ALONG RIGHTS
7.1
Right to Require Compulsory Sale
. At any time after the third anniversary of the date hereof,
the Class B Majority Holders shall have the right to cause the other shareholders of the Company to
enter into a Trade Sale of any Group Company with a third party (
Prospective Purchaser
) in a
bona-fide, arms length transaction in which the implied valuation of such Group Company in such
Trade Sale is no less than US$300,000,000 (a
Compulsory Sale
) on substantially the same terms and
conditions as agreed by the Class B Majority Holders. Without limiting the generality of the
foregoing, in furtherance of a Compulsory Sale, the Class B Majority Holders (i) may require the
migration of the Company to another jurisdiction, (ii) may require the merger, amalgamation or
consolidation of any Group Company with or into another Person, (iii) may require all shareholders
of the Company to sell all the Equity Securities in the Company held thereby, and (iv)
may require any Group Company and/or the Parties hereto to take all such other actions as the Class
B Majority Holders may deem appropriate to effect a Compulsory Sale.
7.2
Consummation of Compulsory Sale
. Each Party hereto shall do and perform, or cause to be done
and performed, all such further acts and things and shall execute and deliver all such other
agreements, certificates, instruments and documents as the Class B Majority Holders may request in
furtherance of any proposed Compulsory Sale, including, without limitation:
(a) Being present (in person or by proxy) at all relevant meetings of the shareholders of the
Company (or adjournments thereof) with respect to the Compulsory Sale, or approving, executing and
giving all relevant written consents in lieu of a meeting with respect thereto;
(b) Voting all the Equity Securities of the Company held by such Party to approve any
resolutions which may be required to consummate such Compulsory Sale;
(c) Voting against any other consolidation, recapitalization, amalgamation, merger, sale of
Equity Securities, sale of assets, business combination, or transaction that would interfere with,
delay, restrict, or otherwise adversely affect such Compulsory Sale;
(d) Not exercising any dissenters or appraisal rights or similar rights under applicable Law
with respect to such Compulsory Sale; and
(e) Delivering to any representative appointed by the Class B Majority Holders all
certificates evidencing any Equity Securities of the Company held by such Party; provided that if
any Party shall fail to deliver such certificates to the representative of the Class B Majority
Holders as required under this clause, the disposition of any capital shares held by such Party may
be effected without such Partys consent or surrender of its certificate.
7.3
Right of First Refusal
. Notwithstanding the foregoing, if and only if the Class B Majority
Holders exercise their rights under Section 7.1 and Section 7.2 hereunder, the Founders shall have
a right of first refusal to consummate the Compulsory Sale as the purchaser (either directly or
indirectly through an acquisition vehicle) at the same price, terms and conditions as applicable to
the Compulsory Sale (provided that if any portion of the price is payable by the Prospective
Purchaser in a form other than cash, the Founders shall be permitted to pay cash in lieu thereof
based on the fair market value thereof) as set forth in the Compulsory Sale Notice. To exercise
such right of first refusal, the Founders must deliver, within 10 Business Days of its receipt of a
notice from the Class B Majority Holders requiring the Founders to sell their Equity Securities on
substantially the same terms and conditions of the Compulsory Sale as agreed by the Class B
Majority Holders (the
Compulsory Sale Notice
), an irrevocable, binding offer that is capable of
acceptance by the Class B Majority Holders, which offer shall be on terms and conditions,
individually and in the aggregate, at least as favorable to the Class B Majority Holders as in the
Compulsory Sale described in the Compulsory Sale Notice, and that includes evidence reasonably
satisfactory to the Class B Majority Holders (i) of financing sufficient to consummate such
transaction by the Founders, and (ii) that all conditions (including approvals) necessary to
consummate such transaction by the Founders can be obtained without material cost or delay that is
any worse than that in the Compulsory Sale. If the Founders satisfy the foregoing requirements,
they shall consummate such transaction in accordance with therewith; otherwise, the Founders
rights under this Section 7.3 shall be deemed void with respect to such Compulsory Sale.
19
SECTION 8 REGISTRATION RIGHTS
8.1
Registration Rights
. The Parties hereby acknowledge and agree to the terms set forth in
Appendix A-1 Listco Registration Rights and Appendix A-2 Company Registration Rights attached
hereto, making provision for certain registration rights, and such terms in Appendix A-1 and
Appendix A-2 form an integral part of this Agreement and are binding on the Parties as if such
terms were set forth in the body of this Agreement.
SECTION 9 ADDITIONAL UNDERTAKINGS
9.1
SAFE Registration
. Each of the Founders shall file within thirty (30) calendar days after the
Closing with the Beijing branch of SAFE an amendment to his existing offshore investment foreign
exchange registration in relation to the transactions contemplated under the Transaction Documents
in accordance with the SAFE Rules and Regulations, and procure the completion of such registration
as soon as practicable. If any holder or beneficial owner of any Equity Security of the Company
(each, a
Security Holder
) is a Domestic Resident as defined in Circular 75 and Notice 106 and
is subject to the SAFE registration or reporting requirements under Circular 75, the Group Parties
and the Founders shall use their best efforts to promptly obtain a Power of Attorney in the form
attached hereto as Exhibit B from such Security Holder, and the Group Parties and the Founders
shall use their best efforts to cause the designated representative under such Power of Attorney to
promptly take such actions and execute such instruments on behalf of such Security Holder to comply
with the applicable SAFE registration or reporting requirements under SAFE Rules and Regulations,
and in the event such Security Holder fails to comply with the applicable SAFE registration or
reporting requirements under SAFE Rules and Regulations, the Group Parties and the Founders shall
use their best efforts to promptly cause such Security Holder to cease to be a holder or beneficial
owner of any Equity Security of the Company. The Group Parties and the Founders shall, and shall
cause all the other Group Companies to, fully comply with all applicable PRC Laws relating to the
filing, registration and reporting to SAFE or any of its local branches with respect to any foreign
exchange transactions, investments, changes or occurrence of significant events.
9.2
Controlling Documents
. The Group Parties shall ensure that each party to the relevant
Controlling Documents fully perform its/his/her respective obligations under the Controlling
Documents and carry out the terms and the intent of the Controlling Documents. If any the
Controlling Documents become illegal, void or unenforceable under PRC Laws after the date hereof,
the Parties shall devise a feasible alternative legal structure reasonably satisfactory to the
Class B Majority Holders which gives effect to the intentions of the parties in each Controlling
Document and the economic arrangement thereunder as closely as possible.
9.3
Internet Publishing License
. As soon as practicable following the Closing, the Operating
Company shall, and the Group Parties shall cause the Operating Company to obtain the Internet
publishing license in relation to the business of online games from the relevant PRC Governmental
Authority in accordance with the applicable Laws.
9.4
Qualified Public Offering
. The Group Parties shall use best efforts to accomplish a Qualified
Public Offering within three (3) years following the date of this Agreement.
9.5
Control of Subsidiaries
. The Company shall institute and keep in place such arrangements as are
reasonably satisfactory to the Investors such that the Company (i) will at all times control the
operations of each other Group Company, and (ii) will at all times be permitted to properly
consolidate the financial results for each Group Company in the consolidated financial statements
for the Company prepared under PRC GAAP.
20
9.6
ESOP
. As soon as practicable following the Closing, the Company shall duly establish an equity
incentive plan in the form and substance reasonably satisfactory to the Class B Majority Holders
(the
ESOP
), providing for the issuance of such number of Ordinary Shares representing no more
than 5% of the then total outstanding share capital of the Company immediately following the
Closing on a fully diluted basis, to employees, officers, consultants or directors of the Group
Companies from time to time and providing that (a) with respect to a particular award under the
ESOP, no more than 25% will vest upon the first anniversary of the grant of such award and
thereafter will not vest any faster than monthly over the next three (3) years following the first
anniversary of such grant, (b) such award in any event will not be exercisable or transferable
prior to the Qualified Public Offering, and (c) unvested options will terminate, and unvested
shares will be subject to a repurchase right at cost, in any case on termination of the employment
or other service, with or without cause.
9.7
Intellectual Property Protection
. The Group Parties shall, and shall cause each of the other
Group Companies to, take all reasonable steps to protect their respective Intellectual Property
rights, including without limitation (a) registering their respective trademarks, brand names,
domain names and copyrights, and (b) requiring each employee and consultant of each Group Company
to enter into a confidential information and intellectual property assignment agreement and a
non-competition and non-solicitation agreement requiring such persons to protect and keep
confidential such Group Companys confidential information, intellectual property and trade
secrets, prohibiting such persons from competing with such Group Company for a reasonable time
after their tenure with any Group Company, and requiring such persons to assign all ownership
rights in their work product to such Group Company, in each case in form and substance reasonably
acceptable to the Class B Majority Holders.
9.8
Insurance
. If requested by any Investor, the Group Parties shall promptly purchase and maintain
in effect, workers injury compensation insurance, key man insurance, and other insurance, in any
case with respect to the Groups properties, employees, products, operations, and/or business, each
in the amounts not less than that are customarily obtained by companies of similar size, in a
similar line of business, and with operations in the PRC.
9.9
Internal Control System
. The Group Parties shall cause each Group Company to maintain the books
and records in accordance with sound business practices and implement and maintain an adequate
system of procedures and controls with respect to finance, management, and accounting that meets
international standards of good practice and is reasonably satisfactory to Class B Majority
Holders.
9.10
Director Indemnification
. To the maximum extent permitted by the law of the jurisdiction in
which the Company is organized, the Company shall indemnify and hold harmless each of its directors
and comply with the terms of the Director Indemnification Agreements, and at the request of any
director who is not a party to a Director Indemnification Agreement, shall enter into an
indemnification agreement with such director in similar form as the Director Indemnification
Agreements. At the request of any director, the Company shall obtain and maintain customary
insurance coverage for the directors on commercially reasonable terms.
9.11
Legal Compliance and Ethical Business Practices
. The Group Parties shall, and shall cause each
other Group Company to, conduct its business in all material respects in compliance with all
applicable Laws, and in particular, shall and shall cause each other Group Company, and its
Representatives acting on behalf of such company to, comply with all applicable Laws relating to
anti-bribery, anti-corruption, anti-money laundering, record keeping and internal control, and not
to, conduct or agree to conduct any business, or enter into or agree to enter into any transaction
with, a Prohibited Person.
21
9.12
Future Significant Holders of Ordinary Shares
. Unless waived by the Class B Majority Holders,
the Company covenants that it will cause all future holders of more than one percent 1% of the
Companys Ordinary Shares and all future holders of Ordinary Share Equivalents convertible,
exchangeable or exercisable for 1% of the of the Companys Ordinary Shares to join this Agreement
as a party. The Parties hereby agree that such future holders may become parties to this Agreement
by executing an instrument of accession to this Agreement in a standard and customary form
reasonably satisfactory to the Class B Majority Holders, without any amendment of this Agreement,
pursuant to this Section 9.12.
9.13
Tax Returns
. The Company shall engage a reputable accounting firm reasonably acceptable to the
Class B Majority Holders, to prepare all Tax Returns for Taxes payable by all Group Companies.
9.14
United States Tax Matters
.
(a)
PFIC Compliance
. The Parties (other than the Investors) shall, and shall cause
each other Group Company to, take such commercially reasonable steps as in compliance with
applicable Laws, to avoid classification as a passive foreign investment company (a
PFIC
) as
defined by the Internal Revenue Code of 1986, as amended (the
Code
), for the current and any
future taxable year; provided however, that satisfaction of this provision shall not require the
Company or any of the Group Companies to spend cash it currently holds or will acquire in the
future other than in the ordinary course of business. Within ninety (90) days from the end of each
taxable year of the Company, the Parties (other than the Investors) shall in consultation with a
reputable accounting firm determine whether any Group Company was a PFIC in such taxable year
(including whether any exception to PFIC status may apply). The Parties (other than the Investors)
shall, and shall cause each other Group Company to, make available to the Investors upon reasonable
request all information necessary to determine whether any Group Company was a PFIC in any taxable
year. If it is determined that a Group Company was a PFIC in such taxable year (or if a Government
Authority or an Investor informs the Company that it has so determined), the Company shall, within
ninety (90) days from the end of such taxable year of the Company, inform each Investor of such
determination and shall provide or cause to be provided such information as an Investor may
reasonably request to enable such Investor to comply with any reporting requirements as a result of
such determination, including information needed to elect to treat the applicable Group Company as
a qualified electing fund (within the meaning of Section 1295 of the Code), and a complete and
accurate PFIC Annual Information Statement for the Company and for any such other Group Company
as described in section 1.1295-1(g)( 1) of the U.S. Treasury Regulations.
(b)
CFC Compliance
. To the Knowledge of the Company, other than the Investors and
their assignees or transferees, if any, no shareholder that holds (directly or indirectly) 10% or
more of the voting power of the share capital of the Company is a United States person as defined
in Section 7701(a)(30) of the Code. Each Party (other than the Company and the Investors) shall
provide prompt written notice to the Company, and the Company shall in turn provide prompt written
notice to the Investors, if any such Party becomes a United States shareholder as defined in
Section 951(b) of the Code with respect to the Company. Within ninety (90) days from the end of
each taxable year, the Company shall in consultation with a reputable accounting firm determine
whether it is a controlled foreign corporation (
CFC
), as defined in Section 957 of the Code. Each
Group Company shall provide to the Investors upon reasonable request (i) any information in its
possession concerning its shareholders and, to the Group Companys actual knowledge, the direct and
indirect interest holders in each shareholders, sufficient for the Investors to determine whether
or not such Group Company is a CFC; and (ii) in the event any Group Company is determined to be a
CFC, any information reasonably requested by the Investors in connection with complying with
reporting requirements for U.S. tax purposes. The Parties (other than the Investors) shall, and
shall cause any relevant Group Company to, use commercially best efforts to avoid generating for
any taxable year in which any Group Company is a CFC, income that would be includible in the income
of such Investor pursuant to Section 951 of the Code.
22
(c)
Entity Classification Election
. The Parties (other than the Investors), will not,
and will cause the other Group Companies not to, take any action inconsistent with their treatment
as corporations for U.S. federal income tax purposes without the prior written consent of Investor
Directors and will not elect to be treated as other than corporations for U.S. federal income tax
purposes. Upon notification by Investor Directors that any Group Company should elect to be
classified as partnerships or disregarded entities for United States federal income tax purposes
(the
Partnership Election
), the Parties (other than the Investors), if applicable, shall make, or
shall cause to be made, the Partnership Election by filing, or by causing to be filed, Internal
Revenue
Service Form 8832 (or any successor form), and the Parties (other than the Investors), shall
not permit the Partnership Election to be terminated or revoked without the written consent of
Investor Directors.
(d)
Reporting Compliance
. The Parties (other than the Investors) shall, and shall
procure each other Group Company to:
(1) pay all material Taxes, including withholding Taxes, and meet all other material
Tax compliance obligations, in all material respects, including with respect to transfer
pricing and evidentiary requirements for transfer pricing), as required under the laws of
the jurisdictions where the Group Company operates;
(2) at all times deal at arms length with any other Group Company;
(3) retain a reputable accounting firms as may be agreed by Class B Majority Holders to
handle all of its Tax compliance matters in all jurisdictions where the Group Company
operates, including with respect to the obligations of each Group Company under Section
9.14(a) with respect to the PFIC regime and Section 9.14(b) with respect to the CFC regime;
(4) except with respect to other Group Companies, Listco and their affiliates, refrain
from entering into tax sharing agreements or otherwise guarantee another persons liability
with respect to Taxes, and refrain from extending any applicable statute of limitations
period in respect of Taxes without the consent of Class B Majority Holders;
(5) provide to the Investors any other information that has not otherwise been
described in this Section 9.14 reasonably necessary for the preparation of income Tax
returns of any kind whatsoever and reasonably requested by the Investors; and
(6) refrain from entering into any transactions primarily motivated for the purpose of
reducing or evading Taxes, without the written consent of Class B Majority Holders.
9.15
Other Tax Matters
.
(a) Any and all payments by the Company with respect to any Class B Ordinary Shares and
Ordinary Shares currently or hereafter held by the Investors, including any dividend or other
distribution with respect thereto, shall be made free and clear of and without deduction for any
and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all
liabilities with respect thereto, imposed under applicable Law (including without limitation any
law, rule, code or regulation of the Peoples Republic of China or any other non-U.S. Governmental
Authority) excluding net income taxes and franchise taxes (imposed in lieu of net income taxes)
imposed on any Investor as a result of a present or former connection between such Investor and the
jurisdiction of the governmental authority imposing such tax or any political subdivision or taxing
authority
23
thereof
or therein (other than any such connection arising solely from such Investors having executed, delivered or performed its obligations or received a payment under, or enforced,
this Agreement) (any such non-excluded taxes, levies, imposts, deductions, charges, withholdings or
liabilities collectively referred to as
International Taxes
). If the Company shall be required to
deduct any International Taxes from or in respect of any such payment, (i) the sum payable shall be
increased by the amount by which the sum payable would otherwise have to be increased (the
Gross-up Amount
) to ensure that after making all required deductions (including deductions
applicable to the Gross-up Amount) the payee would receive an amount equal to the sum it would have
received had no such deductions been made, (ii) the Company shall make such deductions and (iii)
the Company shall pay the full amount withheld or deducted to the applicable Governmental Authority
within the time period required under applicable Law; provided, however, that the Company shall not
be required to pay any Gross-up Amount with respect to any International Taxes (A) that are
attributable to an Investors failure to
comply with the requirements of paragraph (d) of this Section or (B) that are imposed on
amounts payable to the Investor at the time of the Closing.
(b) The Company and Listco will use their best efforts to ensure that they will not be deemed
as a resident enterprise for PRC Tax purposes or otherwise subject to income Tax in the PRC.
(c) The Parties (other than the Investors) agree to jointly and severally indemnify each
Investor from and against (i) any Taxes imposed on such Investor by any PRC Government Authority in
connection with its investment in the Company, and (ii) any loss, claim, liability, expense, or
other damage (including diminution in the value of the Company business or such Investors
investment in the Company) attributable to (x) any failure to comply with any of the covenants of
any Group Company under the Transaction Documents, and (y) any misrepresentation or breach of
warranty made in this Agreement. For the avoidance of doubt, investment shall include the Notes.
(d) An Investor that is entitled to an exemption from or reduction in the rate of any
withholding tax under the law of the jurisdiction in which the Company is located, or any treaty to
which such jurisdiction is a party, with respect to payments in connection with the Ordinary Shares
or Class B Ordinary Shares shall deliver to the Company, at the time or times prescribed by
applicable law or reasonably requested by the Company, such properly completed and executed
documentation prescribed by applicable law as will permit such payments to be made without
withholding or at a reduced rate of withholding, provided that such Investor is legally entitled to
complete, execute and deliver such documentation and in such Investors reasonable judgment such
completion, execution or submission would not materially prejudice the legal position of such
Investor.
9.16
Ratchet
.
(a) In the event that an Investor, on the one hand, and the Company, on the other hand,
disagree as to the amount or calculation of Audited Net Income (as defined in the Memorandum and
Articles) for Fiscal Year 2009, Fiscal Year 2010, or Fiscal Year 2011 (each as defined in the
Memorandum and Articles, each a
Relevant Fiscal Year
), such dispute shall be resolved by the
Class B Majority Holders, on the one hand, and the Company, on the other hand, pursuant to Section
12.2, and the resolution pursuant to Section 12.2 shall be final and binding upon all of the
Parties.
(b) If any Force Majeure Event in respect of the Company occurs during any Relevant Fiscal
Year, and there is sufficient evidence proving that such Force Majeure Event causes the Audited Net
Income for such Relevant Fiscal Year to be lower than the applicable Target (as defined in the
Memorandum and Articles) for such Relevant Fiscal Year, the Company, on the one hand, and the Class
B Majority Holders, on the other hand, shall re-negotiate in good faith an adjustment to the Target
for such Relevant Fiscal Year to reflect the effects of such Force Majeure Event, which adjustment
as agreed to by the Company, on the one hand, and the Class B Majority Holders, on the other hand,
shall be the new Target for such Relevant Fiscal Year.
(c) For purposes of this Section 9.16,
Force Majeure Event
means an unavoidable catastrophe
of general applicability beyond the reasonable control of the Company that interrupts the expected
course of events and which materially and adversely affects the Company and the performance by the
Company of its obligations under the Transaction Documents, such as natural disasters, wars,
insurrections, and government restrictions (including the denial or cancellation of an export or
other license necessary for the business operation of the Company Group) promulgated or implemented
after the date hereof pursuant to a change of applicable Laws.
24
SECTION 10 UNDERTAKINGS
10.1
Covenants
. In further consideration of the Investors equity investment in or loans to the
Company, and as a material inducement thereto, each of Listco, Techfaith BVI and each Founder
hereby undertakes that it shall not, and shall cause all Persons it/he/she Controls (in each case,
except for the Group Companies) not to, either solely or jointly with or on behalf of any Person,
directly or indirectly, do or permit any of the following without the prior written consent of the
Class B Majority Holders:
(a) carry on or be engaged in any Restricted Business, or invest, acquire, or hold more than a
1% interest in, or render any services to, any Person engaged in any Restricted Business, where
Restricted Business means the business of designing, developing, programming, selling, marketing,
distributing, testing, hosting, managing, operating or maintaining online games (including without
limitation games on PC platform and/or mobile handset platform);
(b) solicit any person who is or has been at any time a customer of the Group for the purpose
of offering to such customer goods or services similar to or competing with those offered by any
Group Company, or canvass or solicit any Person who is or has been at any time a supplier or
licensor of any Group Company for the purpose of inducing any such Person to terminate its business
relationship with such Group Company;
(c) solicit or entice away or endeavour to solicit or entice away any director, officer,
consultant or employee of any Group Company;
(d) divulge to any Person whatsoever (save to the extent required by Law) or use, take away,
conceal, destroy or retain for its/his/her own or anothers advantage or to the detriment of any
Group Company any of the trade secrets, accounts, financial or trading information or other
confidential information which it/he/she may receive or obtain in relation to the businesses,
finances, dealings or affairs of any Group Company including any information regarding the
products, processes or the customers, licensors, suppliers or agents of any Group Company and
including any papers or records howsoever recorded (whether in writing or print or by photographic,
electrical, magnetic, symbolic or other means).
10.2
Acknowledgements
. Each of Listco, Techfaith BVI and the Founders expressly agree that the
limitations set forth in this Section 10 are reasonably tailored and reasonably necessary in light
of the circumstances. Furthermore, if any provision of this Section 10 is more restrictive than
permitted by the Laws of any jurisdiction in which an Investor or a Group Company seeks enforcement
thereof, then this Section 10 will be enforced to the greatest extent permitted by Law. Each of the
undertakings contained in this Section 10 shall be enforceable by each Group Company and each
Investor separately and independently of the right of the other Group Companies and the other
Investors.
10.3
Termination
. This Section 10 shall terminate on earliest of (1) the completion of a Qualified
Public Offering, (2) the second anniversary of the date when neither Listco nor Techfaith BVI or
any Founder or any Affiliate of any of the foregoing, directly or indirectly, has any interest in
the Equity Securities of any Group Company, (3) the termination of this Agreement by mutual consent
of all Parties, and (4) the sixth anniversary of this Agreement.
25
SECTION 11 TERMINATION; NO THIRD PARTY BENEFICIARIES; ASSIGNMENTS AND TRANSFERS
11.1
Termination
. This Agreement shall terminate upon mutual consent of the Parties hereto. The
provisions of Sections 2, 3, 4, 5, 6, 7, and 9 shall terminate on the consummation of the Qualified
Public Offering.
11.2
Effect of Termination
. If this Agreement terminates, the Parties shall be released from their
obligations under this Agreement, except in respect of any obligation stated, explicitly or
otherwise, to continue to exist after the termination of this Agreement (including without
limitation those under Sections 8, 11, and 12 and Appendix A-1, and Appendix A-2). If any Party
breaches this
Agreement before the termination of this Agreement, it shall not be released from its obligations
arising from such breach on termination.
11.3
No Third Party Beneficiaries
. This Agreement and the rights and obligations of the Parties
hereunder shall inure to the benefit of, and be binding upon, their respective successors, assigns
and legal representatives. Nothing in this Agreement is intended to confer upon any Person other
than the Parties hereto and their respective successors and permitted assigns any rights, benefits,
or obligations hereunder.
11.4
Assignment
. No Group Party may assign any of such Partys rights, benefits or obligations
under this Agreement without the prior written consent of the Class B Majority Holders. Each
Investor may freely transfer its rights and obligations hereunder to a third party in connection
with the transfer (subject to applicable Laws) of Equity Securities of the Company held by such
Investor but only to the extent of such transfer, and any such transferee who is not already a
party to this Agreement, shall execute and deliver to each of the other Parties hereto an original
copy of an instrument of accession becoming a party hereto as a Share Purchaser or Note
Purchaser subject to the terms and conditions hereof. For the avoidance of doubt, each Investor
may enter into any swap or other derivatives transaction that transfers to any Person, in whole or
in part, any of the economic benefits or risks of ownership of the Equity Securities of the Company
held thereby, whether any such transaction is to be settled by delivery of the Equity Securities,
in cash or otherwise.
SECTION 12 MISCELLANEOUS
12.1
Governing Law
. This Agreement shall be governed by, and construed in accordance with, the Laws
of the British Virgin Islands, without regard to conflicts of laws principles thereunder.
12.2
Dispute Resolution
.
(a) Any dispute, controversy or claim (each, a
Dispute
) arising out of or relating to this
Agreement, or the interpretation, breach, termination, validity or invalidity thereof, shall be
referred to arbitration upon the demand of either party to the dispute with notice (the
Arbitration Notice
) to the other.
(b) The Dispute shall be settled by arbitration in Hong Kong by the Hong Kong International
Arbitration Centre (the
HKIAC
) in accordance with the Hong Kong International Arbitration Centre
Administered Arbitration Rules (the
HKIAC Rules
) in force when the Arbitration Notice is
submitted in accordance with the HKIAC Rules. There shall be one arbitrator. The HKIAC Council
shall select the arbitrator, who shall be qualified to practice law in New York. The arbitrator may
retain an expert who shall be qualified to practice law in the British Virgin Islands in order to
advise the arbitrator on the Laws of the British Virgin Islands.
(c) The arbitral proceedings shall be conducted in English. To the extent that the HKIAC Rules
are in conflict with the provisions of this
Section 12.2
, including the provisions
concerning the appointment of the arbitrators, the provisions of this
Section 12.2
shall
prevail.
26
(d) Each party to the arbitration shall cooperate with each other party to the arbitration in
making full disclosure of and providing complete access to all information and documents requested
by such other party in connection with such arbitral proceedings, subject only to any
confidentiality obligations binding on such party.
(e) The award of the arbitral tribunal shall be final and binding upon the parties thereto,
and the prevailing party may apply to a court of competent jurisdiction for enforcement of such
award.
(f) The arbitral tribunal shall decide any Dispute submitted by the parties to the arbitration
strictly in accordance with the substantive Law of the British Virgin Islands and shall not apply
any other substantive Law.
(g) Any party to the Dispute shall be entitled to seek preliminary injunctive relief, if
possible, from any court of competent jurisdiction pending the constitution of the arbitral
tribunal.
(h) During the course of the arbitral tribunals adjudication of the Dispute, this Agreement
shall continue to be performed except with respect to the part in dispute and under adjudication.
(i) The Parties to this Agreement agree to the consolidation of arbitrations under the
Transaction Documents in accordance with the following:
(1) In the event of two or more arbitrations having been commenced under any of the
Transaction Documents, the tribunal in the arbitration first filed (the
Principal
Tribunal
) may in its sole discretion, upon the application of any party to the
arbitrations, order that the proceedings be consolidated before the Principal Tribunal if
(A) there are issues of fact and/or law common to the arbitrations, (B) the interests of
justice and efficiency would be served by such a consolidation, and (C) no prejudice would
be caused to any party in any material respect as a result of such consolidation, whether
through undue delay or otherwise. Such application shall be made as soon as practicable and
the party making such application shall give notice to the other parties to the
arbitrations.
(2) The Principal Tribunal shall be empowered to (but shall not be obliged to) order at
its discretion, after inviting written (and where desired oral) representations from the
parties that all or any of such arbitrations shall be consolidated or heard together and/or
that the arbitrations be heard immediately after another and shall establish a procedure
accordingly. All Parties shall take such steps as are necessary to give effect and force to
any orders of the Principal Tribunal.
(3) If the Principal Tribunal makes an order for consolidation, it: (A)shall
thereafter, to the exclusion of other arbitral tribunals, have jurisdiction to resolve all
disputes forming part of the consolidation order; (B)shall order that notice of the
consolidation order and its effect be given immediately to any arbitrators already appointed
in relation to the disputes that were consolidated under the consolidation order; and (C)
may also give such directions as it considers appropriate (a) to give effect to the
consolidation and make provision for any costs which may result from it (including costs in
any arbitration rendered functus officio under this
Section 12.2
); and (b) to ensure
the proper organization of the arbitration proceedings and that all the issues between the
parties are properly formulated and resolved.
(4) Upon the making of the consolidation order, any appointment of arbitrators relating
to arbitrations that have been consolidated by the Principal Tribunal (except for the
appointment of the arbitrators of the Principal Tribunal itself) shall for all purposes
cease to have effect and such arbitrators are deemed to be functi officio, on and from the
date of the consolidation order. Such cessation is without prejudice to (A) the validity of
any acts done or orders made by such arbitrators before termination, (B) such arbitrators
entitlement to be paid their proper fees and disbursements and (C) the date when any claim
or defence was raised for the purpose of applying any limitation period or any like rule or
provision.
27
(5) The Parties hereby waive any objections they may have as to the validity and/or
enforcement of any arbitral awards made by the Principal Tribunal following
the consolidation of disputes or arbitral proceedings in accordance with this
Section 12.2
where such objections are based solely on the fact that consolidation
of the same has occurred.
12.3
Language
. This Agreement has been executed in English language only. Any translation of this
Agreement into another language shall have no interpretive effect. All documents or notices to be
delivered pursuant to or in connection with this Agreement shall be in the English language or, if
any such document or notice is not in the English language, accompanied by an English translation
thereof, and the English language version of any such document or notice shall control for purposes
thereof.
12.4
Amendments
. Except as otherwise permitted herein, this Agreement and its provisions may be
amended, changed, waived, discharged or terminated only by a writing signed by each of (i) the
Company, (ii) the Class B Majority Holders, and (iii) shareholders representing more than 75% in
voting power of the Companys issued and outstanding Ordinary Shares held by Parties hereto;
provided that any amendment that disproportionately adversely affects any particular Investor as
compared to other Investors shall require the consent of such disproportionately adversely affected
Investor.
12.5
Notices
. Any notice required or permitted pursuant to this Agreement shall be given in writing
and shall be given either personally or by sending it by next-day or second-day courier service of
international standing, fax, electronic mail or similar means to the address as shown below the
signature of such Party on the signature page of this Agreement (or at such other address as such
Party may designate by fifteen (15) days advance written notice to the other Parties to this
Agreement given in accordance with this Section 12.5). Where a notice is sent by next-day or
second-day courier service, service of the notice shall be deemed to be effected by properly
addressing, pre-paying and sending by next-day or second-day service through an
internationally-recognized courier a letter containing the notice, with a confirmation of delivery,
and to have been effected at the earlier of (i) receipt (or when delivery is refused) and (ii)
expiration of two (2) Business Days after the letter containing the same is sent as aforesaid.
Where a notice is sent by fax or electronic mail, service of the notice shall be deemed to be
effected by properly addressing, and sending such notice through a transmitting organization, with
a written confirmation of delivery, and to have been effected on the day the same is sent as
aforesaid. Notwithstanding the foregoing, to the extent a with a copy to address is designated,
notice must also be given to such address in the manner above for such notice, request, consent or
other communication hereunder to be effective.
12.6
Further Assurances
. Each Party hereto shall do and perform, or cause to be done and performed,
all such further acts and things and shall execute and deliver all such other agreements,
certificates, written assurances, instruments and documents as any other Party may reasonably
request to give effect to the terms and intent of this Agreement. No Party will, by any voluntary
action, avoid or seek to avoid the observance or performance of any of the terms to be performed
hereunder by it, and each Party will at all times in good faith assist and take action as
appropriate in the carrying out of all of the provisions of this Agreement.
28
12.7
Charter Documents
. In the event of any conflict or inconsistency between any of the terms of
this Agreement and any of the terms of any of the Charter Documents for any of the Group Companies,
or in the event of any dispute related to any such Charter Document, the terms of this Agreement
shall prevail in all respects, the Parties shall give full effect to and act in accordance with the
provisions of this Agreement over the provisions of the Charter Documents, and the Parties hereto
shall exercise all voting and other rights and powers (including to procure any required alteration
to such Charter Documents to resolve such conflict or inconsistency) to make the provisions of this
Agreement effective. Without limiting the generality of the foregoing, at the request of any holder
of a Class B Ordinary Share issued upon conversion of a Note, the Parties shall exercise all voting
and other rights and powers to (i) procure amendments to the Charter Documents of the Company to
incorporate the provisions of this Agreement reasonably requested by such holder (including but not
limited to those relating to board composition, director designation, director removal, Board
quorum
requirements in Section 2, protective provisions in Section 4, and drag along rights in Section 7)
into the Charter Documents and (ii) make such amendments effective as promptly as possible after
such request. Notwithstanding the fact that such corresponding provisions in this Agreement are not
in any of the Charter Documents for any of the Group Companies on the date hereof, it is the
intention of the parties to give such provisions in this Agreement full effect, and each agrees to
take such actions as are necessary to make such provisions effective and agrees not to take any
actions that impair any such provisions in this Agreement. Furthermore, in the event any consent or
other action is required by or permitted to be taken by the Class B Majority Holders or the holders
of Class B Ordinary Shares under the Charter Documents of the Company, the Parties agree that the
holders of the Notes shall be treated as if they are holders of the Class B Ordinary Shares
issuable upon conversion of such Notes for all such purposes.
12.8
Entire Agreement
. This Agreement constitutes the entire agreement between the Parties with
respect to the subject matter hereof and supersedes all prior written or oral understandings or
agreements with respect to the subject matter hereof.
12.9
Voting Trust
. Each Party hereto agrees that it shall not enter into any other agreements or
arrangements of any kind with respect to the voting of any Equity Securities of the Company or
deposit any Equity Securities in other voting trust or similar arrangement.
12.10
Severability
. If any provision of this Agreement is prohibited by applicable Law or otherwise
determined to be invalid or unenforceable by a court of competent jurisdiction, the provision that
would otherwise be prohibited, invalid or unenforceable shall be deemed amended to apply to the
broadest extent that it would be valid and enforceable, and the invalidity or unenforceability of
such provision shall not affect the validity of the remaining provisions of this Agreement so long
as this Agreement as so modified continues to express, without material change, the original
intentions of the parties as to the subject matter hereof and the prohibited nature, invalidity or
unenforceability of the provision(s) in question does not substantially impair the respective
expectations or reciprocal obligations of the parties or the practical realization of the benefits
that would otherwise be conferred upon the parties. The Parties will endeavor in good faith
negotiations to replace the prohibited, invalid or unenforceable provision(s) with a valid
provision(s), the effect of which comes as close as possible to that of the prohibited, invalid or
unenforceable provision(s).
12.11
Remedies Cumulative
. Each and all of the various rights, powers and remedies of a Party
hereto will be considered to be cumulative with and in addition to any other rights, powers and
remedies which such Party may have at law or in equity in the event of the breach of any of the
terms of this Agreement. The exercise or partial exercise of any right, power or remedy will
neither constitute the exclusive election thereof nor the waiver of any other right, power or
remedy available to such Party.
12.12
No Presumption
. The Parties agree that this Agreement was jointly drafted by them, that each
has been represented by counsel in connection with this Agreement, and that any applicable Law that
would require interpretation of any claimed ambiguities in this Agreement against the Party that
drafted it has no application and is expressly waived. If any claim is made by a Party relating to
any conflict, omission or ambiguity in the provisions of this Agreement, no presumption or burden
of proof or persuasion will be implied because this Agreement was prepared by or at the request of
any Party or its counsel, and no Party will claim or assert otherwise.
29
12.13
Aggregation of Shares
. All Equity Securities of the Company held or acquired by Affiliates of
an Investor shall be aggregated for purpose of determining the availability of any rights under
this Agreement.
12.14
No Waiver
. Failure to insist upon strict compliance with any of the terms, covenants, or
conditions hereof will not be deemed a waiver of such term, covenant, or condition, nor will any
waiver or relinquishment of, or failure to insist upon strict compliance with, any right, power or
remedy power hereunder at any one or more times be deemed a waiver or relinquishment of such right,
power or remedy at any other time or times.
12.15
Counterparts
. This Agreement may be executed in one or more counterparts, each of which shall
be deemed an original but all of which together shall constitute one and the same instrument.
12.16
Headings
. The headings used in this Agreement are used for convenience only and are not to be
considered in construing or interpreting this Agreement.
12.17
Amendment
. The Parties hereby agree that
(a) Recital G of the Purchase Agreement shall be deleted and replaced in full by the
following:
Listco acknowledges that the investment from the Share Purchaser and each Note Purchaser to
the Company will bring substantial benefits to the Company and Listco, and at the Closing, Listco
will execute and deliver two guarantees in favor of the Investors in the form attached as Exhibit C
hereto (collectively, the
Guarantees
) to induce the investment from the Share Purchaser and the
Note Purchasers.
(b) The definition of Security Documents in Section 1.1 of the Purchase Agreement shall be
deleted and replaced in full by the following:
Security Documents means collectively, the Guarantees and Equity Pledge Agreement.
(c) Except as expressly amended by this Section 12.17, the terms and conditions of the
Purchase Agreement shall remain in full force and effect.
[The remainder of this page has been left intentionally blank.]
30
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.
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COMPANY:
LEO TECHNOLOGY LIMITED
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By:
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/s/ Dong Defu
Name: Dong Defu
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Capacity: Director
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Address:
P.O. Box 957, Offshore Incorporations
Centre, Road Town, Tortola, British Virgin
Islands
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[Signature Page to Investors Rights Agreement]
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.
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LISTCO:
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CHINA
TECHFAITH WIRELESS
COMMUNICATION
TECHNOLOGY LIMITED
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By:
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/s/ Dong Defu
Name: Dong Defu
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Capacity: Director
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Address:
P.O. Box 309GT, Ugland House, South
Church
Street, George Town, Grand
Cayman, Cayman
Islands
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TECHFAITH BVI:
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TECHFAITH WIRELESS TECHNOLOGY GROUP LIMITED
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By:
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/s/ Dong Defu
Name: Dong Defu
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Capacity: Director
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Address:
No. 10A, Tower D2, IT Park, Electronics
Town, Jiu Xian Qiao North Road, Chao
Yang District, Beijing, China 100015
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[Signature Page to Investors Rights Agreement]
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.
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WFOE:
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TECHFAITH INTERACTIVE
TECHNOLOGY (BEIJING) LIMITED
(
)
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By:
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/s/ Dong Defu
Name: Dong Defu
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Capacity: Chief Executive Director
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Address:
No. 10A, Tower D2, IT Park, Electronics
Town, Jiu Xian Qiao North Road, Chao
Yang District, Beijing, China
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[Signature Page to Investors Rights Agreement]
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.
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OPERATING COMPANY:
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BEIJING TECHFAITH
INTERACTIVE
INTERNET TECHNOLOGY LIMITED
(
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By:
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/s/ Yue Hongmei
Name: Yue Hongmei
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Capacity: Director
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Address:
No. 10A, Tower D2, IT Park, Electronics
Town, Jiu Xian Qiao North Road, Chao
Yang District, Beijing, China
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[Signature Page to Investors Rights Agreement]
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.
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FOUNDERS:
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/s/ He Changke
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He Changke
(
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PRC Identification Card No:
120112196201091312
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Address:
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No. 10A, Tower D2, IT Park, Electronics
Town, Jiu Xian Qiao North Road, Chao
Yang
District, Beijing, China 100015
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By:
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/s/ Huo Baozhuang
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Huo Baozhuang
(
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PRC Identification Card No:
650300710513401
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Address:
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No. 10A, Tower D2, IT Park, Electronics
Town, Jiu Xian Qiao North Road, Chao
Yang District, Beijing, China 100015
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[Signature Page to Investors Rights Agreement]
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.
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FOUNDERS:
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/s/ Liu Cangsong
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Liu Changsong
(
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PRC Identification Card No:
110108197104278917
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Address:
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No. 10A, Tower D2, IT Park, Electronics
Town, Jiu Xian Qiao North Road, Chao
Yang
District, Beijing, China 100015
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By:
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/s/ Dong Defu
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Dong Defu
(
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PRC Identification Card No:
220224197107242611
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Address:
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No. 10A, Tower D2, IT Park, Electronics
Town, Jiu Xian Qiao North Road, Chao
Yang District, Beijing, China 100015
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[Signature Page to Investors Rights Agreement]
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.
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FOUNDERS:
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/s/ Liu Cangsong
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LIU Cangsong
(
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PRC Identification Card No:
110108197104278917
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Address:
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No. 10A, Tower D2, IT Park, Electronics
Town, Jiu Xian Qiao North Road, Chao
Yang
District, Beijing, China 100015
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By:
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/s/ Dong Defu
Dong Defu
(
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PRC Identification Card No:
220224197107242611
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Address:
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No. 10A, Tower D2, IT Park, Electronics
Town, Jiu Xian Qiao North Road, Chao
Yang District, Beijing, China 100015
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[Signature Page to Investors Rights Agreement]
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.
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INVESTORS:
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IDG-ACCEL CHINA GROWTH FUND II L.P.
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By: IDG-Accel China Growth Fund II
Associates L.P., its General Partner;
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By: IDG-Accel China Growth Fund GP II
Associates Ltd., its General Partner;
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By:
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/s/ Chi Sing Ho
Name: Chi Sing Ho
Capacity: Authorized Signatory
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Address:
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c/o IDG VC Management Ltd.
Unit 1509, The Center
99 Queens Road
Central, Hong Kong
Attn: Chi Sing HO
Fax: 852-2529 1619
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with a copy to:
Room 616, Tower A, COFCO Plaza,
8 Jianguomennei Dajie
Beijing, 100005, P.R. China
Attn: Mr. Xiaobing Yin
Fax: 8610-8512 0225
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[Signature Page to Investors Rights Agreement]
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.
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IDG-ACCEL CHINA INVESTORS II L.P.
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By: IDG-Accel China Growth Fund GP II
Associates L.P., its General Partner
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By:
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/s/ Chi Sing Ho
Name: Chi Sing Ho
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Capacity: Authorized Signatory
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Address:
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c/o IDG VC Management Ltd.
Unit 1509, The Center
99 Queens Road
Central, Hong Kong
Attn: Chi Sing Ho
Fax: 852-2529 1619
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with a copy to:
Room 616, Tower A, COFCO Plaza,
8 Jianguomennei Dajie
Beijing, 100005, P.R. China
Attn: Mr. Xiaobing Yin
Fax: 8610-8512 0225
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[Signature
Page to Investors Rights Agreement]
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.
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INVESTORS:
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INFINITI CAPITAL LIMITED
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By:
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/s/ Deby Loo
Name: Deby Loo
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Capacity: Director
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By:
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/s/ Jason Ho
Name: Jason Ho
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Capacity: Director
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Address:
1605, Hutchison House, 10 Harcourt Road,
Central Hong Kong
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[Signature Page to Investors Rights Agreement]
Schedule I Founders
LIU
Cangsong (
), PRC Identification Card: 110108197104278917
DONG
Defu (
), PRC Identification Card: 220224197107242611
HE
Changke (
), PRC Identification Card: 120112196201091312
HUO
Baozhuang (
), PRC Identification Card: 650300710513401
Schedule I-1
Schedule II Note Purchasers
IDG-Accel China Growth Fund II L.P.
IDG-Accel China Investors II L.P.
Schedule II-1
Appendix A-1 Listco Registration Rights
SECTION 1 INTERPRETATION
1.1
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Definitions
. All the capitalized terms used but not defined in this Appendix but
that are defined in the Agreement shall have the meanings as set forth in the Agreement.
When used in this Appendix, the following terms shall have the meanings ascribed to them
below:
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ADS
means American Depositary Shares, with each ADS as of the date of the Agreement
representing fifteen (15) Listco Ordinary Shares.
Applicable Securities Law
means (i) with respect to any offering of securities in the United
States of America, or any other act or omission within that jurisdiction, the securities laws of
the United States, including the Exchange Act and the Securities Act, and any applicable law of any
state of the United States of America, and (ii) with respect to any offering of securities in any
jurisdiction other than the United States of America, or any related act or omission in that
jurisdiction, the applicable laws of that jurisdiction.
Commission
means (i) with respect to any offering of securities in the United States of
America, the Securities and Exchange Commission of the United States of America or any other
federal agency at the time administering the Securities Act, and (ii) with respect to any offering
of securities in a jurisdiction other than the United States of America, the regulatory body of the
jurisdiction with authority to supervise and regulate the sale of securities in that jurisdiction.
Depositary
means the depositary in respect of the ADSs of Listco, currently The Bank of New
York.
Exchange Act
means the United States Securities Exchange Act of 1934, as amended.
Form F-3
means Form F-3 promulgated by the Commission under the Securities Act or any
substantially similar form then in effect.
Holders
means the Note Purchasers or any transferee of the Registrable Securities held by
any such Note Purchaser and the rights under this Agreement pursuant to Section 6.4 hereof.
Initiating Holders
means, with respect to a request duly made under Section 2.1 to Register
any Registrable Securities, the Holders initiating such request.
Listco Ordinary Shares
means the ordinary shares of Listco, par value US$0.00002 per share.
Listco Ordinary Share Equivalents
means any security or obligation which is by its terms
convertible into or exchangeable or exercisable for Listco Ordinary Shares or other share capital
of Listco, and any option, warrant or other subscription or purchase right with respect to Listco
Ordinary Shares or such other share capital.
Majority Holders
means Holders holding a majority of the Registrable Securities held by all
Holders.
Majority Initiating Holders
means Initiating Holders holding a majority of the Registrable
Securities held by all Initiating Holders.
Appendix A-1 - 1
Registration
means a registration effected by preparing and filing a Registration Statement
and the declaration or ordering of the effectiveness of that Registration Statement, and the terms
Register and Registered have meanings correlative with the foregoing.
Registrable Securities
means (i) the Listco Ordinary Shares issuable or issued upon
conversion of the Notes, and (ii) any Listco Ordinary Shares issued or issuable as (or issuable
upon the conversion, exchange or exercise of any Listco Ordinary Share Equivalent) a dividend or
other distribution with respect to, or in exchange for, or in replacement of, the Securities
referenced in (i), excluding in all cases, however, any Registrable Securities sold by a Person in
a transaction other than an assignment in compliance with Section 6.4 hereof.
Registration Statement
means a registration statement prepared on Forms S-1, S-3, F-1, or
F-3 under the Securities Act, or on any comparable form in connection with registration in a
jurisdiction other than the United States.
Securities Act
means the United States Securities Act of 1933, as amended.
Selling Expenses
means any brokers commission, underwriters discount, concession or
commission in connection with the sale of the Registrable Securities.
Violation
has the meaning ascribed thereto in Section 5.1(a) hereof.
1.2
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Interpretation
. In addition to the provisions of Section 1.3 of the Agreement, which
shall apply to this Appendix, all references in this Appendix to designated Sections and
other subdivisions are to the designated Sections and other subdivisions of the body of this
Appendix, and the words herein, hereof and hereunder and other words of similar import
refer to this Appendix as a whole and not to any particular Section or other subdivision.
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1.3
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Intent
. Section 2 through Section 6 of this Appendix are drafted primarily in
contemplation of an offering of Listco Ordinary Shares in the United States of America. The
parties recognize, however, the possibility that securities may be qualified or Registered
in a jurisdiction other than the United States of America for offering to the public.
Accordingly, it is their intention that, whenever this Appendix refers to a law or
institution of the United States of America but the parties wish to effectuate qualification
or Registration in a different jurisdiction, reference in this Appendix to the laws or
institutions of the United States shall be read as referring, mutatis mutandis, to the
comparable laws or institutions of the jurisdiction in question.
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SECTION 2 DEMAND REGISTRATION
2.1
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Registration
. Subject to the terms of this Appendix, at any time after the date of
this Agreement, any Holder holding at least 30% or more of the then outstanding Registrable
Securities may request Listco in writing to file a Registration Statement providing for the
resale of the Registrable Securities that they hold for which the reasonably anticipated
aggregate price to the public, net of Selling Expenses, would exceed US$1,000,000. Such
Registration Statement shall be on Form F-3 (except if Listco is not then eligible to register
the Registrable Securities on Form F-3, such registration shall be on Form F-1 or such other
appropriate form in accordance herewith and the Securities Act and the rules promulgated
thereunder). Upon receipt of such a request, Listco shall (i) promptly (and in any event
within 10 days) give written notice of the proposed Registration to all other Holders and (ii)
as soon as practicable, and in any event within twenty (20) days of the receipt of such
request, file such Registration Statement covering all Registrable Securities specified in the
request, together with any Registrable Securities of any Holder who requests in writing to
join such Registration within ten (10) days after Listco s delivery of written notice. Listco
shall use its best efforts to cause such Registration Statement to be declared effective under
the Securities Act as promptly as practicable after the filing thereof, but in any event no
later than twenty
(20) after the date of the initial filing of such Registration Statement (if the Commission
has not provided comments as part of any review by it related to such Registration
Statement) or twenty (20) after all such comments are cleared (if the Commission does
provide such comments in which case the Company will respond promptly thereto to clear such
comments). Listco shall be obligated to effect no more than one Registrations pursuant to
this Section 2.1 within any twelve-month period; provided if the sale of all of the
Registrable Securities requested to be included pursuant to this Section 2.1 is not
consummated for any reason other than due to the action or inaction of the Holders including
Registrable Securities in such Registration, such Registration shall not be deemed to
constitute one Registration effected by Listco pursuant to this Section 2.1.
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Appendix A-1 - 2
2.2
Limitations
.
(a) Listco shall not be obligated to Register or qualify Registrable Securities
pursuant to Section 2.1 if, within ten (10) days of the receipt of any request of Initiating
Holders to Register any Registrable Securities under Section 2.1, Listco gives notice to
such Initiating Holders of its bona fide intention to effect the filing for its own account
of a Registration Statement with the Commission within sixty (60) days of receipt of that
request (other than an Exempt Registration as defined below), provided that Listco is
actively employing in good faith all reasonable efforts to cause that Registration Statement
to become effective.
(b) Listco shall not be obligated to Register or qualify Registrable Securities
pursuant to Section 2.1 if, after receiving a request from Initiating Holders pursuant to
Section 2.1 hereof, the board of directors of Listco (excluding any interested directors)
concludes in good faith that the filing of a registration statement under Section 2.1 would
be materially detrimental to Listco and its shareholders in the near future because such
action would (i) materially interfere with a significant acquisition, corporate
reorganization, or other similar transaction involving Listco; (ii) require premature
disclosure of material information that Listco has a bona fide business purpose for
preserving as confidential; or (iii) render Listco unable to comply with requirements under
the Securities Act or Exchange Act, and that, as a result, it is in the best interests of
Listco and its shareholders to defer the filing of such registration statement at such time,
and if Listco furnishes to the Initiating Holders a certificate signed by the Chief
Executive Officer of Listco to that effect, then Listco shall have the right to defer such
filing for a period of not to exceed ninety (90) days from the receipt of any request duly
submitted by Initiating Holders under Section 2.1 to Register Registrable Securities;
provided, however, that Listco shall not utilize this right more than once in any one-year
period; and provided further that Listco shall not register any Securities for the account
of itself or any other stockholder during such period (other than an Exempt Registration).
2.3
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Underwritten Offerings
. If, in connection with a request to Register Registrable
Securities under Section 2.1, the Initiating Holders seek to distribute such Registrable
Securities in an underwriting, they shall so advise Listco as a part of the request, and
Listco shall include such information in the written notice to the other Holders described
in Section 2.1. In such event, the right of any Holder to include its Registrable Securities
in such Registration shall be conditioned upon such Holders participation in such
underwriting and the inclusion of such Holders Registrable Securities in the underwriting
(unless otherwise mutually agreed by the Majority Initiating Holders) to the extent provided
herein. All Holders proposing to distribute their Securities through such underwriting shall
enter into an underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting by Listco (which underwriter or underwriters shall be
reasonably acceptable to the Majority Initiating Holders). Notwithstanding any other
provision of this Appendix, if the managing underwriter advises Listco that market factors
(including the aggregate number of securities requested to be Registered, the general
condition of the market, and the status of the Persons proposing to
sell Securities pursuant to the Registration) require a limitation of the number of
Registrable Securities to be underwritten, the underwriters may exclude such number of
Registrable Securities from the underwriting as required, but only after excluding all other
Securities from the underwriting (including, without limitation, any Securities which Listco
may seek to include in the underwriting for its own account). If a limitation of the number
of Registrable Securities is required pursuant to this Section 2.3, the number of
Registrable Securities that may be included in the underwriting by selling Holders shall be
allocated among such Holders, in proportion, as nearly as practicable, to the respective
amounts of Registrable Securities which the Holders request to include in the Registration.
Any Registrable Securities excluded or withdrawn from such underwriting shall be withdrawn
from the Registration.
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Appendix A-1 - 3
SECTION 3 PIGGYBACK REGISTRATIONS
3.1
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Registration of Listco s Securities
. Subject to Section 3.3, if Listco proposes to
Register for its own account or the account of any other stockholders any of its Securities
in connection with the public offering of such Securities, Listco shall promptly give each
Holder written notice of such Registration and, upon the written request of any Holder given
within ten (10) days after delivery of such notice, Listco shall include in such
Registration any Registrable Securities thereby requested by such Holder. If a Holder
decides not to include all or any of its Registrable Securities in such Registration by
Listco, such Holder shall nevertheless continue to have the right to include any Registrable
Securities in any subsequent Registration Statement or Registration Statements as may be
filed by Listco with respect to offerings of its Securities, all upon the terms and
conditions set forth herein.
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3.2
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Right to Terminate Registration
. Listco shall have the right to terminate or
withdraw any Registration initiated by it under Section 3.1 prior to the effectiveness of
such Registration, whether or not any Holder has elected to participate therein. The
expenses of such withdrawn Registration shall be borne by Listco in accordance with Section
4.3.
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3.3
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Underwriting Requirements.
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(a) In connection with any offering involving an underwriting of Listcos Securities,
Listco shall not be required to Register the Registrable Securities of a Holder under this
Section 3 unless such Holder shall include such Registrable Securities in the underwriting
and such Holder enters into an underwriting agreement in customary form with the
underwriters selected by Listco and setting forth such terms for the underwriting as have
been agreed upon between Listco and the underwriters. In the event the underwriters advise
Holders seeking Registration of Registrable Securities pursuant to this Section 3 in writing
that market factors (including the aggregate number of Registrable Securities requested to
be Registered, the general condition of the market, and the status of the Persons proposing
to sell Securities pursuant to the Registration) require a limitation of the number of
Registrable Securities to be underwritten, the underwriters may exclude some or all
Registrable Securities from the Registration and underwriting, but only after excluding all
other Securities from the underwriting (other than any Securities which Listco may seek to
include in the underwriting for its own account) (provided that, notwithstanding anything to
the contrary in this Section, in no event shall, after such exclusion, the Registrable
Securities included in the underwriting would constitute less than 25% of the total
Securities proposed to be sold in the offering), and the number of Securities and
Registrable Securities that may be included in the Registration and the underwriting shall
be allocated (i) first, to Listco, (ii) thereafter, among the Holders requesting inclusion
of their Registrable Securities in such Registration Statement in proportion, as nearly as
practicable, to the respective amounts of Registrable Securities which the Holders would
otherwise be entitled to include in the Registration, and (iii) finally to any other
stockholders entitled to include Securities in such Registration Statement.
Appendix A-1 - 4
3.4
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Exempt Transactions
. Listco shall have no obligation to Register any Registrable
Securities under this Section 3 in connection with a Registration by Listco (i) relating
solely to the sale of securities to participants in accordance with an employee benefit
plan, or (ii) relating to a corporate reorganization or other transaction under Rule 145 of
the Securities Act (collectively,
Exempt Registrations
).
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SECTION 4 PROCEDURES
4.1
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Registration Procedures and Obligations
. Whenever required under this Appendix to
effect the Registration of any Registrable Securities held by the Holders, Listco shall, as
expeditiously as reasonably possible:
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(a) Prepare and file with the Commission a Registration Statement with respect to those
Registrable Securities and cause that Registration Statement to become effective and not be
withdrawn until the date on which all such Registrable Securities have been sold pursuant to
such Registration Statement;
(b) Prepare and file with the Commission amendments and supplements to that
Registration Statement and the prospectus used in connection with the Registration Statement
as may be necessary to comply with the provisions of Applicable Securities Law with respect
to the disposition of all Registrable Securities covered by the Registration Statement;
(c) Furnish to the Holders the number of copies of a prospectus, including a
preliminary prospectus, required by Applicable Securities Law, and any other documents as
they may reasonably request in order to facilitate the disposition of Registrable Securities
owned by them;
(d) In the event of any underwritten public offering, enter into and perform its
obligations under an underwriting agreement, in usual and customary form, with the managing
underwriter of the offering;
(e) Notify each Holder of Registrable Securities covered by the Registration Statement
at any time when a prospectus relating thereto is required to be delivered under Applicable
Securities Law or of the happening of any event as a result of which any prospectus included
in the Registration Statement, as then in effect, includes an untrue statement of a material
fact or omits to state a material fact required to be stated therein or necessary to make
the statements therein not misleading in the light of the circumstances then existing;
(f) Provide a transfer agent and registrar for all Registrable Securities Registered
pursuant to the Registration Statement and, where applicable, a CUSIP number for all those
Registrable Securities, in each case not later than the effective date of the Registration;
(g) Use its commercially best efforts to furnish, at the request of any Holder
requesting Registration of Registrable Securities pursuant to this Appendix, on the date
that such Registrable Securities are delivered for sale in connection with a Registration
pursuant to this Appendix, (i) an opinion, dated the date of the sale, of the counsel
representing Listco for the purposes of the Registration, in form and substance as is
customarily given to underwriters in an underwritten public offering; and (ii) a comfort
letter dated the date of the sale, from the independent certified public accountants of
Listco, in form and substance as is customarily given by independent certified public
accountants to underwriters in an underwritten public offering, addressed to the
underwriters;
(h) Take all reasonable action necessary to list the Registrable Securities on the
primary exchange upon which the Listco Ordinary Shares are traded; and
Appendix A-1 - 5
(i) Take all reasonable action necessary to: (a) cause the Depositary to accept the
deposit of the Registrable Securities into the deposit facility to issue ADSs (or receipts)
representing such Registrable Securities; and (b) cause the Depositary to register with the
SEC (to the extent necessary) such ADSs and to maintain the effectiveness of a registration
statement on Form F-6 relating to the ADSs and an adequate number of ADSs available for
issuance thereunder.
4.2
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Information From Holder
. It shall be a condition precedent to the obligations of the
Listco to take any action pursuant to Section 2 or 3 of this Appendix with respect to the
Registrable Securities of any selling Holder that such Holder shall furnish to the Listco
such information regarding itself, the Registrable Securities held by it, and the intended
method of disposition of such Registrable Securities as shall be required to effect the
Registration of such Holders Registrable Securities.
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4.3
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Expenses of Registration
. All reasonable expenses, other than Selling Expenses,
incurred in connection with Registrations, filings or qualifications pursuant to this
Appendix shall be borne by Listco. Listco shall not, however, be required to pay for any
expenses of any Registration proceeding begun pursuant to Section 2.1 of this Appendix if
the Registration request is subsequently withdrawn at the request of the Majority Initiating
Holders (in which case all participating Holders shall bear such expenses pro rata based
upon the number of Registrable Securities that were to be thereby Registered in the
withdrawn Registration); provided, however, that if at the time of such withdrawal, the
Holders have learned of a material adverse change in the condition, business or prospects of
Listco from that known to the Holders at the time of their request and have withdrawn the
request with reasonable promptness following disclosure by Listco of such material adverse
change, then the Holders shall not be required to pay any of such expenses. All Selling
Expenses shall be borne by the holders of the Securities Registered pro rata on the basis of
the number of shares Registered.
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SECTION
5 INDEMNIFICATION
(a) To the extent permitted by applicable law, Listco will indemnify and hold harmless
each Holder, such Holders officers, directors, legal counsel, each member of the
underwriting syndicate and each Person, if any, who controls (as defined in the Securities
Act) such Holder or underwriter against any losses, claims, damages or liabilities (joint or
several) to which they may become subject under Applicable Securities Laws, or any rule or
regulation promulgated under Applicable Securities Laws, insofar as such losses, claims,
damages, or liabilities (or actions in respect thereof) arise out of or are based upon any
of the following statements, omissions or violations (each a Violation): (i) any untrue
statement or alleged untrue statement of a material fact contained in the applicable
Registration Statement, including any preliminary prospectus or final prospectus contained
therein or any amendments or supplements thereto, (ii) the omission or alleged omission to
state in the Registration Statement, including any preliminary prospectus or final
prospectus contained therein or any amendments or supplements thereto, a material fact
required to be stated therein or necessary to make the statements therein not misleading, or
(iii) any violation or alleged violation by Listco of Applicable Securities Laws, or any
rule or regulation promulgated under Applicable Securities Laws. Listco will reimburse each
such Holder, underwriter or controlling Person for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such loss, claim, damage,
liability or action.
(b) The indemnity agreement contained in this Section 5.1 shall not apply to amounts
paid in settlement of any such loss, claim, damage, liability or action if such settlement
is effected without the consent of Listco (which consent shall not be unreasonably withheld
or delayed), nor shall Listco be liable in any such case for any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon a
Violation that occurs in sole reliance upon and in full conformity with written information
furnished expressly for use in the Registration Statement by any such Holder, underwriter or
controlling Person.
Appendix A-1 - 6
(c) With respect to any preliminary prospectus, the foregoing indemnity shall not inure
to the benefit of any Holder or underwriter, or any Person controlling (within the meaning
of the Securities Act) such Holder or underwriter, from whom a Person asserting any losses,
claims, damages or liabilities purchased shares in the offering, if a copy of the prospectus
(as then amended or supplemented if Listco shall have furnished any amendments or
supplements thereto) was not sent or given by or on behalf of such Holder or underwriter to
such Person, if required by applicable law so to have been delivered, at or prior to the
written confirmation of the sale of the shares to such Person, and if the prospectus (as so
amended or supplemented) would have cured the defect giving rise to such loss, claim, damage
or liability.
(a) To the extent permitted by applicable law, each selling Holder that has included
Registrable Securities in a Registration will, severally and not jointly, indemnify and hold
harmless Listco, its directors, officers, legal counsel and accountants, any underwriter,
any other Holder selling Registrable Securities in connection with such Registration and
each Person, if any, who controls (within the meaning of the Securities Act) Listco, such
underwriter or other Holder, against any losses, claims, damages or liabilities (joint or
several) to which any of the foregoing Persons may become subject, under Applicable
Securities Laws, or any rule or regulation promulgated under Applicable Securities Laws,
insofar as such losses, claims, damages or liabilities (or actions in respect thereto)
solely arise out of or are solely based upon any Violation, in each case to the extent (and
only to the extent) that such Violation occurs in reliance upon and in conformity with
written information furnished by such Holder expressly for use in connection with such
Registration.
(b) The indemnity contained in this Section 5.2 shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if such settlement is
effected without the consent of the Holder (which consent shall not be unreasonably
withheld).
(c) In no event shall any indemnity under this Section 5.2 exceed the net proceeds from
the offering received by such Holder.
5.3
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Notice of Indemnification Claim
. Promptly after receipt by an indemnified
party under Section 5.1 or Section 5.2 of notice of the commencement of any action
(including any governmental action), such indemnified party will, if a claim in respect
thereof is to be made against any indemnifying party under Section 5.1 or Section 5.2,
deliver to the indemnifying party a written notice of the commencement thereof, and the
indemnifying party shall have the right to participate in, and, to the extent the
indemnifying party so desires, jointly with any other indemnifying party similarly noticed,
to assume the defense thereof with counsel mutually satisfactory to the indemnifying
parties. Notwithstanding the foregoing, the indemnifying party(ies) may not agree to any
compromise or settlement to which the indemnified party has not consented in writing, such
consent not to be unreasonably withheld. An indemnified party (together with all other
indemnified parties that may be represented without conflict by one counsel) shall have the
right to retain one separate counsel, with reasonable fees and expenses to be paid by the
indemnifying party, if representation of such indemnified party by the counsel retained by
the indemnifying party would be inappropriate due to actual or potential differing interests
between such indemnified party and any other party represented by such counsel in such
proceeding. The failure to deliver written notice to the indemnifying party within a
reasonable time of the commencement of any such action, if materially prejudicial to its
ability to defend such action, shall relieve such indemnifying party, to the extent so prejudiced, of any liability to the indemnified party under this Section 5,
but the omission to deliver written notice to the indemnifying party will not relieve it of
any liability that it may have to any indemnified party otherwise than under this Section 5.
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Appendix A-1 - 7
5.4
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Contribution
. If any indemnification provided for in Section 5.1 or Section 5.2 is
held by a court of competent jurisdiction to be unavailable to an indemnified party with
respect to any loss, liability, claim, damage or expense referred to herein, the
indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall
contribute to the amount paid or payable by such indemnified party as a result of such loss,
liability, claim, damage or expense in such proportion as is appropriate to reflect the
relative fault of the indemnifying party, on the one hand, and of the indemnified party, on
the other, in connection with the statements or omissions that resulted in such loss,
liability, claim, damage or expense, as well as any other relevant equitable considerations.
The relative fault of the indemnifying party and of the indemnified party shall be
determined by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission to state a material fact relates to information
supplied by the indemnifying party or by the indemnified party and the parties relative
intent, knowledge, access to information, and opportunity to correct or prevent such
statement or omission. However, in no event shall any contribution by a Holder under this
Section 5.4, together with indemnity by such Holder under Section 5.2, exceed the net
proceeds from the offering received by such Holder.
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5.5
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Underwriting Agreement
. To the extent that the provisions on indemnification and
contribution contained in the underwriting agreement entered into in connection with the
underwritten public offering are in conflict with the foregoing provisions, the provisions
in the underwriting agreement shall control.
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5.6
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Survival
. The obligations of Listco and Holders under this Section 5 shall survive
the completion of any offering of Registrable Securities in a Registration Statement under
this Appendix, and otherwise.
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SECTION 6 ADDITIONAL UNDERTAKINGS
6.1
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Reports Under the Exchange Act
. With a view to making available to the Holders the
benefits of Rule 144 promulgated under the Securities Act and any comparable provision of
any Applicable Securities Law that may at any time permit a Holder to sell Securities of
Listco to the public without Registration or pursuant to a Registration on Form S-3, Listco
agrees to:
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(a) make and keep public information available, as those terms are understood and
defined in Commission Rule 144, at all times;
(b) file with the Commission in a timely manner all reports and other documents
required of Listco under all Applicable Securities Laws; and
(c) promptly furnish to any Holder holding Registrable Securities, upon request (i) a
written statement by Listco that it has complied with the reporting requirements of all
Applicable Securities Laws at any time after it has become subject to such reporting
requirements or, at any time after so qualified, that it qualifies as a registrant whose
Securities may be resold pursuant to Form F-3 (or any successor form thereto), (ii) a copy
of the most recent annual or quarterly report (if applicable) of Listco and such other
reports and documents as may be filed by Listco with the Commission, and (iii) such other
information as may be reasonably requested in availing any Holder of any rule or regulation
of the Commission, that permits the selling of any such Securities without Registration or
pursuant to Form F-3 (or any successor form thereto).
Appendix A-1 - 8
6.2
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Limitations on Subsequent Registration Rights
. From and after the date of this
Agreement, Listco shall not, without the prior written consent of the Majority Initiating
Holders, enter into any agreement with any holder or prospective holder of any Securities of
Listco that would allow such holder or prospective holder (i) to include such Securities in
any Registration filed under Section 2 or 3, unless under the terms of such agreement such
holder or prospective holder may include such Securities in any such Registration only to
the extent that the inclusion of such Securities will not reduce the amount of the
Registrable Securities of the Holders that are included, (ii) to demand Registration of
their Securities, or (iii) cause Listco to include such Securities in any Registration filed
pursuant to the terms hereof on a basis pari passu with or more favorable to such holder or
prospective holder than is provided to the Holders.
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6.3
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Termination of Registration Rights
. No Holder shall be entitled to exercise any
right provided for in this Appendix at such time in which all Registrable Securities held by
such Holder (together with any affiliate of the Holder that is also a holder of the
Registrable Securities with whom such Holder must aggregate its sales under Rule 144) can be
sold in a single transaction without restriction in compliance with Rule 144.
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6.4
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Assignment of Registration Rights
. The right to cause Listco to Register Registrable
Securities pursuant to this Appendix may be assigned by any Holder to a transferee or
assignee of such Registrable Securities, provided that: (a) Listco is, within a reasonable
time after such transfer, furnished with written notice of the name and address of such
transferee or assignee and the Registrable Securities with respect to which such
registration rights are being assigned; (b) such transferee or assignee agrees in writing to
be bound by and subject to the terms and conditions of this Appendix; and (c) such transfer
or assignment shall be effective only if immediately following such transfer or assignment
the further disposition of such Registrable Securities by the transferee or assignee is
restricted under Applicable Securities Law. In the event of a transfer or assignment of
Registrable Securities which does not satisfy the conditions set forth above, such
Registrable Securities shall no longer be deemed to constitute Registrable Securities for
purposes of this Appendix.
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6.5
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Conversion of Ordinary Share Equivalents
. Notwithstanding anything to the contrary
provided in this Appendix, Listco shall have no obligation to Register Registrable
Securities which, if constituting Listco Ordinary Share Equivalents, have not been
exercised, converted or exchanged, as applicable, for Listco Ordinary Shares prior to
Registration, but Listco shall cooperate and facilitate any such exercise, conversion or
exchange as requested by the applicable Holder.
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[The remainder of this page has been left intentionally blank.]
Appendix A-1 - 9
Appendix A-2 Company Registration Rights
SECTION 1 INTERPRETATION
1.1
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Definitions
. All the capitalized terms used but not defined in this Appendix but
that are defined in the Agreement shall have the meanings as set forth in the Agreement.
When used in this Appendix, the following terms shall have the meanings ascribed to them
below:
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Applicable Securities Law
means (i) with respect to any offering of securities in the United
States of America, or any other act or omission within that jurisdiction, the securities laws of
the United States, including the Exchange Act and the Securities Act, and any applicable law of any
state of the United States of America, and (ii) with respect to any offering of securities in any
jurisdiction other than the United States of America, or any related act or omission in that
jurisdiction, the applicable laws of that jurisdiction.
Commission
means (i) with respect to any offering of securities in the United States of
America, the Securities and Exchange Commission of the United States of American or any other
federal agency at the time administering the Securities Act, and (ii) with respect to any offering
of securities in a jurisdiction other than the United States of America, the regulatory body of the
jurisdiction with authority to supervise and regulate the sale of securities in that jurisdiction.
Exchange Ac
t means the United States Securities Exchange Act of 1934, as amended.
Form F-3
means Form F-3 promulgated by the Commission under the Securities Act or any
substantially similar form then in effect.
Form S-3
means Form S-3 promulgated by the Commission under the Securities Act or any
substantially similar form then in effect.
Holders
means the Investors or any transferee of the Registrable Securities held by any such
Investor and the rights under this Agreement pursuant to Section 6.4 hereof.
Initiating Holders
means, with respect to a request duly made under Section 2.1 or Section
2.2 to Register any Registrable Securities, the Holders initiating such request.
IPO
means initial public offering of the Companys Ordinary Shares on the New York Stock
Exchange, the NASDAQ, NYSE Alternext (formerly known as the American Stock Exchange) or any other
exchange of recognized international reputation and standing duly approved by the Companys board
of directors (including the Investor Directors).
Majority Holders
means Holders holding a majority of the Registrable Securities held by all
Holders.
Majority Initiating Holders
means Initiating Holders holding a majority of the Registrable
Securities held by all Initiating Holders.
Registration
means a registration effected by preparing and filing a Registration Statement
and the declaration or ordering of the effectiveness of that Registration Statement, and the terms
Register and Registered have meanings correlative with the foregoing.
Registrable Securities
means (i) the Ordinary Shares issuable or issued upon conversion of
the Class B Ordinary Shares (including the Class B Ordinary Shares issuable or issued upon
conversion of the Notes), and (ii) any Ordinary Shares issued or issuable as (or issuable upon the
conversion, exchange or exercise of any Ordinary Share Equivalent) a dividend or other distribution
with respect to, or in exchange for, or in replacement of, the Securities referenced in (i),
excluding in all cases, however, any Registrable Securities sold by a Person in a transaction other
than an assignment in compliance with Section 6.4 hereof.
Appendix A-2 - 1
Registration Statement
means a registration statement prepared on Forms S-1, S-3, F-1, or
F-3 under the Securities Act, or on any comparable form in connection with registration in a
jurisdiction other than the United States.
Securities Act
means the United States Securities Act of 1933, as amended.
Selling Expenses
means any brokers commission, underwriters discount, concession or
commission in connection with the sale of the Registrable Securities.
Violation
has the meaning ascribed thereto in Section 5.1(a) hereof.
1.2
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Interpretation
. In addition to the provisions of Section 1.3 of the Agreement, which
shall apply to this Appendix, all references in this Appendix to designated Sections and
other subdivisions are to the designated Sections and other subdivisions of the body of this
Appendix, and the words herein, hereof and hereunder and other words of similar import
refer to this Appendix as a whole and not to any particular Section or other subdivision.
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1.3
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Intent
. Section 2 through Section 6 of this Appendix are drafted primarily in
contemplation of an offering of Ordinary Shares in the United States of America. The parties
recognize, however, the possibility that securities may be qualified or Registered in a
jurisdiction other than the United States of America for offering to the public or that the
Company might effect an offering in the United States of America in the form of American
Depositary Receipts or American Depositary Shares. Accordingly,
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(a) It is their intention that, whenever this Appendix refers to a law or institution
of the United States of America but the parties wish to effectuate qualification or
Registration in a different jurisdiction, reference in this Appendix to the laws or
institutions of the United States shall be read as referring, mutatis mutandis, to the
comparable laws or institutions of the jurisdiction in question; and
(b) It is agreed that the Company will not undertake any listing of American Depositary
Receipts, American Depositary Shares or any other security derivative of the Ordinary Shares
unless arrangements have been made satisfactory to the Majority Holders to ensure that the
spirit and intent of this Appendix will be realized and that the Company is committed to
take such actions as are necessary such that the Holders will enjoy rights corresponding to
the rights hereunder to sell their Registrable Securities in a public offering in the United
States of America as if the Company had listed Ordinary Shares in lieu of such derivative
securities.
SECTION 2 DEMAND REGISTRATION
2.1
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Registration Other Than on Form F-3 or Form S-3
. Subject to the terms of this
Appendix, at any time after an IPO, Holders holding at least 20% or more of the then
outstanding Registrable Securities may request the Company in writing to effect the
Registration of Registrable Securities that they hold for which the reasonably anticipated
aggregate price to the public, net of Selling Expenses, would exceed US$2,000,000. Upon
receipt of such a request, the Company shall (a) promptly (and in any event within 10 days)
give written notice of the proposed Registration to all other Holders and (b) as soon as
practicable, cause the Registrable Securities specified in the request, together with any
Registrable Securities of any Holder who requests in writing to join such Registration
within ten (10) days after the Companys delivery of written notice, to be Registered and/or
qualified for sale and distribution to the public in such jurisdictions as the Initiating Holders may reasonably
request. The Company shall be obligated to effect no more than one Registration pursuant to
this Section 2.1 within any twelve-month period; provided if the sale of all of the
Registrable Securities requested to be included pursuant to this Section 2.1 is not
consummated for any reason other than due to the action or inaction of the Holders including
Registrable Securities in such Registration, such Registration shall not be deemed to
constitute one Registration effected by Company pursuant to this Section 2.1.
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Appendix A-2 - 2
2.2
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Registration on Form F-3 or Form S-3
. Subject to the terms of this Appendix, at any
time after an IPO when the Company is entitled to use Form F-3, Form S-3 or a comparable
form to Register the requested Registrable Securities, Holders holding at least 20% or more
of the then outstanding Registrable Securities may request the Company in writing to file a
Registration Statement on Form F-3 or Form S-3 (or any successor form to Form F-3 or Form
S-3, or any comparable form for Registration in a jurisdiction other than the United States)
for a public offering of Registrable Securities for which the reasonably anticipated
aggregate price to the public, net of Selling Expenses, would exceed US$1,000,000. Upon
receipt of such a request the Company shall (a) promptly (and in any event within 10 days)
give written notice of the proposed Registration to all other Holders and (b) as soon as
practicable, cause the Registrable Securities specified in the request, together with any
Registrable Securities of any Holder who requests in writing to join such Registration
within ten (10) days after the Companys delivery of written notice, to be Registered and
qualified for sale and distribution in such jurisdictions as the Initiating Holder may
reasonably request. The Holders may at any time, and from time to time, require the Company
to effect the Registration of Registrable Securities under this Section 2.2.
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(a) The Company shall not be obligated to Register or qualify Registrable Securities
pursuant to this Section 2:
(1) if, within ten (10) days of the receipt of any request of Initiating Holders to
Register any Registrable Securities under Section 2.1 or Section 2.2, the Company gives
notice to such Initiating Holders of its bona fide intention to effect the filing for its
own account of a Registration Statement with the Commission within sixty (60) days of
receipt of that request (other than an Exempt Registration as defined below), provided that
the Company is actively employing in good faith all reasonable efforts to cause that
Registration Statement to become effective; or
(2) in any particular jurisdiction in which the Company would be required to qualify to
do business or to execute a general consent to service of process in effecting such
registration, qualification or compliance.
(b) If, after receiving a request from Initiating Holders pursuant to Section 2.1 or
Section 2.2 hereof, the board of directors of the Company (excluding any interested
directors) concludes in good faith, and upon the advise of legal counsel that the filing of
a registration statement under Section 2.1 or Section 2.2 would be materially detrimental to
the Company and its shareholders in the near future because such action would (i) materially
interfere with a significant acquisition, corporate reorganization, or other similar
transaction involving the Company; (ii) require premature disclosure of material information
that the Company has a bona fide business purpose for preserving as confidential; or (iii)
render the Company unable to comply with requirements under the Securities Act or Exchange
Act, and that, as a result, it is in the best interests of the Company and its shareholders
to defer the filing of such registration statement at such time, and if the Company
furnishes to the Initiating Holders a certificate signed by the Chief Executive Officer of
the Company to that effect, then the Company shall have the right to defer such filing for a
period of not to exceed ninety (90) days from the receipt of any request duly submitted by Initiating Holders under Section
2.1 or Section 2.2 to Register Registrable Securities; provided, however, that the Company
shall not utilize this right more than once in any one-year period; and provided further
that the Company shall not register any Securities for the account of itself or any other
stockholder during such period (other than an Exempt Registration).
Appendix A-2 - 3
2.4
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Underwritten Offerings
. If, in connection with a
request to Register Registrable Securities under
Section 2.1 or Section 2.2, the Initiating
Holders seek to distribute such Registrable
Securities in an underwriting, they shall so
advise the Company as a part of the request, and
the Company shall include such information in
the written notice to the other Holders
described in Section 2.1 and Section 2.2. In
such event, the right of any Holder to include
its Registrable Securities in such Registration
shall be conditioned upon such Holders
participation in such underwriting and the
inclusion of such Holders Registrable
Securities in the underwriting (unless otherwise
mutually agreed by the Majority Initiating
Holders) to the extent provided herein. All
Holders proposing to distribute their Securities
through such underwriting shall enter into an
underwriting agreement in customary form with
the underwriter or underwriters selected for
such underwriting by the Company (which
underwriter or underwriters shall be reasonably
acceptable to the Majority Initiating Holders).
Notwithstanding any other provision of this
Appendix, if the managing underwriter advises
the Company that market factors (including the
aggregate number of securities requested to be
Registered, the general condition of the market,
and the status of the Persons proposing to sell
Securities pursuant to the Registration) require
a limitation of the number of Registrable
Securities to be underwritten, the underwriters
may exclude such number of Registrable
Securities from the underwriting as required,
but only after excluding all other Securities
from the underwriting (including, without
limitation, any Securities which the Company may
seek to include in the underwriting for its own
account). If a limitation of the number of
Registrable Securities is required pursuant to
this Section 2.4, the number of Registrable
Securities that may be included in the
underwriting by selling Holders shall be
allocated among such Holders, in proportion, as
nearly as practicable, to the respective amounts
of Registrable Securities which the Holders
request to include in the Registration. Any
Registrable Securities excluded or withdrawn
from such underwriting shall be withdrawn from
the Registration.
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SECTION 3 PIGGYBACK REGISTRATIONS
3.1
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Registration of the Companys Securities
. Subject to Section 3.3, if the Company
proposes to Register for its own account or the account of any other stockholders any of its
Securities in connection with the public offering of such Securities, the Company shall
promptly give each Holder written notice of such Registration and, upon the written request
of any Holder given within ten (10) days after delivery of such notice, the Company shall
use include in such Registration any Registrable Securities thereby requested by such
Holder. If a Holder decides not to include all or any of its Registrable Securities in such
Registration by the Company, such Holder shall nevertheless continue to have the right to
include any Registrable Securities in any subsequent Registration Statement or Registration
Statements as may be filed by the Company with respect to offerings of its Securities, all
upon the terms and conditions set forth herein.
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3.2
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Right to Terminate Registration
. The Company shall have the right to terminate or
withdraw any Registration initiated by it under Section 3.1 prior to the effectiveness of
such Registration, whether or not any Holder has elected to participate therein. The
expenses of such withdrawn Registration shall be borne by the Company in accordance with
Section 4.3.
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Appendix A-2 - 4
3.3
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Underwriting Requirements.
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(a) In connection with any offering involving an underwriting of the Companys
Securities, the Company shall not be required to Register the Registrable Securities of a
Holder under this Section 3 unless such Holder shall include such Registrable Securities in
the underwriting and such Holder enters into an underwriting agreement in customary form
with the underwriters selected by the Company and setting forth such terms for the
underwriting as have been agreed upon between the Company and the underwriters. In the event
the underwriters advise Holders seeking Registration of Registrable Securities pursuant to
this Section 3 in writing that market factors (including the aggregate number of Registrable
Securities requested to be Registered, the general condition of the market, and the status
of the Persons proposing to sell Securities pursuant to the Registration) require a
limitation of the number of Registrable Securities to be underwritten, the underwriters may
exclude some or all Registrable Securities from the Registration and underwriting, but only
after excluding all other Securities from the underwriting (other than any Securities which
the Company may seek to include in the underwriting for its own account) (provided that,
notwithstanding anything to the contrary in this Section, in no event shall, after such
exclusion, the Registrable Securities included in the underwriting would constitute less
than 25% of the total Securities proposed to be sold in the offering unless such
underwriting is for the IPO), and the number of Securities and Registrable Securities that
may be included in the Registration and the underwriting shall be allocated (i) first, to
the Company, (ii) thereafter, among the Holders requesting inclusion of their Registrable
Securities in such Registration Statement in proportion, as nearly as practicable, to the
respective amounts of Registrable Securities which the Holders would otherwise be entitled
to include in the Registration, and (iii) finally to any other stockholders entitled to
include Securities in such Registration Statement.
3.4
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Exempt Transactions
. The Company shall have no obligation to Register any
Registrable Securities under this Section 3 in connection with a Registration by the Company
(i) relating solely to the sale of securities to participants in accordance with an employee
benefit plan, or (ii) relating to a corporate reorganization or other transaction under Rule
145 of the Securities Act (or comparable provision under the laws of another jurisdiction,
as applicable) duly approved by the board of directors of the Company in accordance with
Section 4 of the Agreement (collectively,
Exempt Registrations
).
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SECTION 4 PROCEDURES
4.1
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Registration Procedures and Obligations
. Whenever required under this Appendix to
effect the Registration of any Registrable Securities held by the Holders, the Company
shall, as expeditiously as reasonably possible:
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(a) Prepare and file with the Commission a Registration Statement with respect to those
Registrable Securities and cause that Registration Statement to become effective and not be
withdrawn until the date on which all such Registrable Securities have been sold pursuant to
the Registration Statement;
(b) Prepare and file with the Commission amendments and supplements to that
Registration Statement and the prospectus used in connection with the Registration Statement
as may be necessary to comply with the provisions of Applicable Securities Law with respect
to the disposition of all Registrable Securities covered by the Registration Statement;
(c) Furnish to the Holders the number of copies of a prospectus, including a
preliminary prospectus, required by Applicable Securities Law, and any other documents as
they may reasonably request in order to facilitate the disposition of Registrable Securities
owned by them;
(d) Use its reasonable best efforts to Register and qualify the Registrable Securities
covered by the Registration Statement under the securities laws of any jurisdiction,
as reasonably requested by the Holders, provided that the Company shall not be required
to qualify to do business or file a general consent to service of process in any such
jurisdiction;
Appendix A-2 - 5
(e) In the event of any underwritten public offering, enter into and perform its
obligations under an underwriting agreement, in usual and customary form, with the managing
underwriter of the offering;
(f) Notify each Holder of Registrable Securities covered by the Registration Statement
at any time when a prospectus relating thereto is required to be delivered under Applicable
Securities Law or of the happening of any event as a result of which any prospectus included
in the Registration Statement, as then in effect, includes an untrue statement of a material
fact or omits to state a material fact required to be stated therein or necessary to make
the statements therein not misleading in the light of the circumstances then existing;
(g) Provide a transfer agent and registrar for all Registrable Securities Registered
pursuant to the Registration Statement and, where applicable, a CUSIP number for all those
Registrable Securities, in each case not later than the effective date of the Registration;
(h) Use its commercially best efforts to furnish, at the request of any Holder
requesting Registration of Registrable Securities pursuant to this Appendix, on the date
that such Registrable Securities are delivered for sale in connection with a Registration
pursuant to this Appendix, (i) an opinion, dated the date of the sale, of the counsel
representing the Company for the purposes of the Registration, in form and substance as is
customarily given to underwriters in an underwritten public offering; and (ii) a comfort
letter dated the date of the sale, from the independent certified public accountants of the
Company, in form and substance as is customarily given by independent certified public
accountants to underwriters in an underwritten public offering, addressed to the
underwriters; and
(i) Take all reasonable action necessary to list the Registrable Securities on the
primary exchange upon which the Ordinary Shares are traded or, in connection with an IPO,
the primary exchange upon which the Ordinary Shares will be traded.
4.2
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Information From Holder
. It shall be a condition precedent to the obligations of the
Company to take any action pursuant to Section 2 or 3 of this Appendix with respect to the
Registrable Securities of any selling Holder that such Holder shall furnish to the Company
such information regarding itself, the Registrable Securities held by it, and the intended
method of disposition of such Registrable Securities as shall be required to effect the
Registration of such Holders Registrable Securities.
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4.3
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Expenses of Registration
. All reasonable expenses, other than Selling Expenses,
incurred in connection with Registrations, filings or qualifications pursuant to this
Appendix, shall be borne by the Company. The Company shall not, however, be required to pay
for any expenses of any Registration proceeding begun pursuant to Section 2.1 or Section 2.2
of this Appendix if the Registration request is subsequently withdrawn at the request of the
Majority Initiating Holders (in which case all participating Holders shall bear such
expenses pro rata based upon the number of Registrable Securities that were to be thereby
Registered in the withdrawn Registration); provided, however, that if at the time of such
withdrawal, the Holders have learned of a material adverse change in the condition, business
or prospects of the Company from that known to the Holders at the time of their request and
have withdrawn the request with reasonable promptness following disclosure by the Company of
such material adverse change, then the Holders shall not be required to pay any of such
expenses. All Selling Expenses shall be borne by the holders of the Securities Registered
pro rata on the basis of the number of shares Registered.
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Appendix A-2 - 6
SECTION
5 INDEMNIFICATION
(a) To the extent permitted by applicable law, the Company will indemnify and hold
harmless each Holder, such Holders officers, directors, shareholders, legal counsel and
accountants, any underwriter (as defined in the Securities Act) for such Holder and each
Person, if any, who controls (as defined in the Securities Act) such Holder or underwriter
against any losses, claims, damages or liabilities (joint or several) to which they may
become subject under Applicable Securities Laws, or any rule or regulation promulgated under
Applicable Securities Laws, insofar as such losses, claims, damages, or liabilities (or
actions in respect thereof) arise out of or are based upon any of the following statements,
omissions or violations (each a Violation): (i) any untrue statement or alleged untrue
statement of a material fact contained in the applicable Registration Statement, including
any preliminary prospectus or final prospectus contained therein or any amendments or
supplements thereto, (ii) the omission or alleged omission to state in the Registration
Statement, including any preliminary prospectus or final prospectus contained therein or any
amendments or supplements thereto, a material fact required to be stated therein or
necessary to make the statements therein not misleading, or (iii) any violation or alleged
violation by the Company of Applicable Securities Laws, or any rule or regulation
promulgated under Applicable Securities Laws. The Company will reimburse each such Holder,
underwriter or controlling Person for any legal or other expenses reasonably incurred by
them in connection with investigating or defending any such loss, claim, damage, liability
or action.
(b) The indemnity agreement contained in this Section 5.1 shall not apply to amounts
paid in settlement of any such loss, claim, damage, liability or action if such settlement
is effected without the consent of the Company (which consent shall not be unreasonably
withheld or delayed), nor shall the Company be liable in any such case for any such loss,
claim, damage, liability or action to the extent that it arises out of or is based upon a
Violation that occurs in sole reliance upon and in full conformity with written information
furnished expressly for use in the Registration Statement by any such Holder, underwriter or
controlling Person.
(c) With respect to any preliminary prospectus, the foregoing indemnity shall not inure
to the benefit of any Holder or underwriter, or any Person controlling (within the meaning
of the Securities Act) such Holder or underwriter, from whom a Person asserting any losses,
claims, damages or liabilities purchased shares in the offering, if a copy of the prospectus
(as then amended or supplemented if the Company shall have furnished any amendments or
supplements thereto) was not sent or given by or on behalf of such Holder or underwriter to
such Person, if required by applicable law so to have been delivered, at or prior to the
written confirmation of the sale of the shares to such Person, and if the prospectus (as so
amended or supplemented) would have cured the defect giving rise to such loss, claim, damage
or liability.
(a) To the extent permitted by applicable law, each selling Holder that has included
Registrable Securities in a Registration will, severally and not jointly, indemnify and hold
harmless the Company, its directors, officers, legal counsel and accountants, any
underwriter, any other Holder selling Registrable Securities in connection with such
Registration and each Person, if any, who controls (within the meaning of the Securities
Act) the Company, such underwriter or other Holder, against any losses, claims, damages or
liabilities (joint or several) to which any of the foregoing Persons may become subject,
under Applicable Securities Laws, or any rule or regulation promulgated under Applicable
Securities Laws, insofar as such losses, claims, damages or liabilities (or actions in
respect thereto) solely arise out of or are solely based upon any Violation, in each case to
the extent (and only to the extent) that such Violation occurs in reliance upon and in
conformity with written information furnished by such Holder expressly for use in connection
with such Registration.
Appendix A-2 - 7
(b) The indemnity contained in this Section 5.2 shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if such settlement is
effected without the consent of the Holder (which consent shall not be unreasonably
withheld).
(c) In no event shall any indemnity under this Section 5.2 exceed the net proceeds from
the offering received by such Holder.
5.3
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Notice of Indemnification Claim
. Promptly after receipt by an indemnified party
under Section 5.1 or Section 5.2 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof is to be
made against any indemnifying party under Section 5.1 or Section 5.2, deliver to the
indemnifying party a written notice of the commencement thereof, and the indemnifying party
shall have the right to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly noticed, to assume the defense
thereof with counsel mutually satisfactory to the parties. Notwithstanding the foregoing,
the indemnifying party(ies) may not agree to any compromise or settlement to which the
indemnified party has not consented in writing, such consent not to be unreasonably
withheld. An indemnified party (together with all other indemnified parties that may be
represented without conflict by one counsel) shall have the right to retain one separate
counsel, with the fees and expenses to be paid by the indemnifying party, if representation
of such indemnified party by the counsel retained by the indemnifying party would be
inappropriate due to actual or potential differing interests between such indemnified party
and any other party represented by such counsel in such proceeding. The failure to deliver
written notice to the indemnifying party within a reasonable time of the commencement of any
such action, if materially prejudicial to its ability to defend such action, shall relieve
such indemnifying party, to the extent so prejudiced, of any liability to the indemnified
party under this Section 5, but the omission to deliver written notice to the indemnifying
party will not relieve it of any liability that it may have to any indemnified party
otherwise than under this Section 5.
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5.4
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Contribution
. If any indemnification provided for in Section 5.1 or Section 5.2 is
held by a court of competent jurisdiction to be unavailable to an indemnified party with
respect to any loss, liability, claim, damage or expense referred to herein, the
indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall
contribute to the amount paid or payable by such indemnified party as a result of such loss,
liability, claim, damage or expense in such proportion as is appropriate to reflect the
relative fault of the indemnifying party, on the one hand, and of the indemnified party, on
the other, in connection with the statements or omissions that resulted in such loss,
liability, claim, damage or expense, as well as any other relevant equitable considerations.
The relative fault of the indemnifying party and of the indemnified party shall be
determined by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission to state a material fact relates to information
supplied by the indemnifying party or by the indemnified party and the parties relative
intent, knowledge, access to information, and opportunity to correct or prevent such
statement or omission. However, in no event shall any contribution by a Holder under this
Section 5.4, together with indemnity by such Holder under Section 5.2, exceed the net
proceeds from the offering received by such Holder.
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5.5
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Underwriting Agreement
. To the extent that the provisions on indemnification and
contribution contained in the underwriting agreement entered into in connection with the
underwritten public offering are in conflict with the foregoing provisions, the provisions
in the underwriting agreement shall control.
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Appendix A-2 - 8
5.6
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Survival
. The obligations of the Company and Holders under this Section 5 shall
survive the completion of any offering of Registrable Securities in a Registration Statement
under this Appendix, and otherwise.
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SECTION 6 ADDITIONAL UNDERTAKINGS
6.1
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Reports Under the Exchange Act
. With a view to making available to the Holders the
benefits of Rule 144 promulgated under the Securities Act and any comparable provision of
any Applicable Securities Law that may at any time permit a Holder to sell Securities of the
Company to the public without Registration or pursuant to a Registration on Form F-3 or Form
S-3 (or any comparable form in a jurisdiction other than the United States), the Company
agrees to:
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(a) make and keep public information available, as those terms are understood and
defined in Commission Rule 144 (or comparable provision under Applicable Securities Laws in
any jurisdiction where the Companys Securities are listed), at all times following ninety
(90) days after the effective date its first Registration Statement;
(b) file with the Commission in a timely manner all reports and other documents
required of the Company under all Applicable Securities Laws; and
(c) at any time following ninety (90) days after the effective date first Registration
Statement, promptly furnish to any Holder holding Registrable Securities, upon request (i) a
written statement by the Company that it has complied with the reporting requirements of all
Applicable Securities Laws at any time after it has become subject to such reporting
requirements or, at any time after so qualified, that it qualifies as a registrant whose
Securities may be resold pursuant to Form F-3 or Form S-3 (or any form comparable thereto
under Applicable Securities Laws of any jurisdiction where the Companys Securities are
listed), (ii) a copy of the most recent annual or quarterly report of the Company and such
other reports and documents as may be filed by the Company with the Commission, and (iii)
such other information as may be reasonably requested in availing any Holder of any rule or
regulation of the Commission, that permits the selling of any such Securities without
Registration or pursuant to Form F-3 or Form S-3 (or any form comparable thereto under
Applicable Securities Laws of any jurisdiction where the Companys Securities are listed).
6.2
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Limitations on Subsequent Registration Rights
. From and after the date of this
Agreement, the Company shall not, without the prior written consent of the Majority
Initiating Holders, enter into any agreement with any holder or prospective holder of any
Securities of the Company that would allow such holder or prospective holder (i) to include
such Securities in any Registration filed under Section 2 or 3, unless under the terms of
such agreement such holder or prospective holder may include such Securities in any such
Registration only to the extent that the inclusion of such Securities will not reduce the
amount of the Registrable Securities of the Holders that are included, (ii) to demand
Registration of their Securities, or (iii) cause the Company to include such Securities in
any Registration filed pursuant to the terms hereof on a basis pari passu with or more
favorable to such holder or prospective holder than is provided to the Holders.
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6.3
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Termination of Registration Rights
. No Holder shall be entitled to exercise any
right provided for in this Appendix (i) after five years following the consummation of the
Qualified Public Offering, or (ii) as to any Holder, when all Registrable Securities held by
such Hold (together with any Affiliate of the Holder with whom such Holder must aggregate
its sales under Rule 144) can be sold in a single transaction without restriction in
compliance with Rule 144.
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Appendix A-2 - 9
6.4
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Assignment of Registration Rights
. The right to cause the Company to Register
Registrable Securities pursuant to this Appendix may be assigned by any Holder to a
transferee or assignee of such Registrable Securities, provided that: (a) the Company is, within a
reasonable time after such transfer, furnished with written notice of the name and address
of such transferee or assignee and the Registrable Securities with respect to which such
registration rights are being assigned; (b) such transferee or assignee agrees in writing to
be bound by and subject to the terms and conditions of this Appendix; and (c) such transfer
or assignment shall be effective only if immediately following such transfer or assignment
the further disposition of such Registrable Securities by the transferee or assignee is
restricted under Applicable Securities Law. In the event of a transfer or assignment of
Registrable Securities which does not satisfy the conditions set forth above, such
Registrable Securities shall no longer be deemed to constitute Registrable Securities for
purposes of this Appendix.
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6.5
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Conversion of Ordinary Share Equivalents
. Notwithstanding anything to the contrary
provided in this Appendix, the Company shall have no obligation to Register Registrable
Securities which, if constituting Ordinary Share Equivalents, have not been exercised,
converted or exchanged, as applicable, for Ordinary Shares prior to Registration, but the
Company shall cooperate and facilitate any such exercise, conversion or exchange as
requested by the applicable Holder.
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6.6
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Market Stand-Off
. Each Holder hereby agrees that, without the prior written consent
of the managing underwriter, during the period of duration (not to exceed 180 days)
specified by the Company and an underwriter of Ordinary Shares beginning on the date of the
IPO, it shall not, to the extent requested by the Company and such underwriter, directly or
indirectly sell, offer to sell, contract to sell (including, without limitation, any short
sale), grant any option to purchase or otherwise transfer or dispose of (other than to
donees who agree to be similarly bound) any Securities of the Company held by it immediately
prior to the effectiveness of the registration statement for such offering except common
stock included, or acquired after, such registration, if and only if all officers, directors
and stockholders holding at least 1% of the outstanding Ordinary Shares enter into similar
agreements. Any discretionary waiver or termination of the restrictions in this Section 6.6
shall apply to all Holders on a pro rata basis. For purposes of clarity, the obligations
described in this Section 6.6 shall not apply to an Exempt Registration.
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[The remainder of this page has been left intentionally blank.]
Appendix A-2 - 10
Exhibit A Form of Instrument of Accession
THIS INSTRUMENT OF ACCESSION (this
Instrument
) is made as of [
Insert Date
] by [
Insert the
Name of the Transferee
] (the
Transferee
). Reference is made to that certain Investors Rights
Agreement, dated as of June 9, 2009 by and among Leo Technology
Limited
, a limited
liability company organized and existing under the laws of the British Virgin Islands (the
Company
), China Techfaith Wireless Communication Technology Limited, a company organized and
existing under the laws of the Cayman Islands (the
Listco
), Techfaith Wireless Technology Group
Limited, a company established under the laws of British Virgin Islands which is a directly wholly
owned subsidiary of Listco (
TechFaith BYI
), Techfaith Interactive Technology (Beijing) Limited
(
), a company organized under the laws of the PRC (the
WFOE
), Beijing
Techfaith Interactive Internet Technology Limited (
), a company
organized under the laws of the PRC (the
Operating Company
), the individuals as set forth in
Schedule I attached thereto (collectively, the
Founders
), the entities as set forth in Schedule
II attached thereto (collectively, the
Note Purchasers
), and Infiniti Capital Limited, a company
incorporated under the laws of the British Virgin Islands (the
Share Purchaser
, together with the
Note Purchasers, the Investors), as amended from time to time, that certain convertible note and
share purchase agreement, dated as of May 15, 2009 by and among the Company, the Investors, Listco
and the other parties thereto, as amended from time to time (the
Purchase Agreement
), and all the
other Transaction Documents (as defined in the Purchase Agreement) currently in effect to which the
transferor (the
Transfero
r) is a party (collectively, the
Transaction Agreements
). The
Transferee, as a condition precedent to becoming the owner or holder of record of [
Insert Number of
Shares
] of [Ordinary Shares] [NAME OF OTHER EQUITY SECURITIES] (the
Transferred Securities
) of
the Company, hereby agrees to join each of the Transaction Agreements as a party thereto and to be
bound by and hold the Transferred Securities subject to all the obligations of the Transferor under
each of the Transaction Agreements as if the Transferee were an original party thereto. This
Instrument shall be governed by the internal laws of the State of New York, United States of
America.
This Instrument shall take effect and shall become an integral part of each of the Transaction
Agreements immediately upon the consummation of the transfer of the Transferred Securities. By
signing below, the Company acknowledges receipt of written notice of the assignment to the
Transferee of the Transferred Securities.
IN WITNESS WHEREOF, this Instrument has been duly executed by the Transferee as of the date
set forth below.
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[NAME OF TRANSFEREE]
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By:
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Name:
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Title:
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Date:
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ACCEPTED:
Leo Technology Limited
Exhibit A-1
Exhibit B Form of Power of Attorney
Power of Attorney
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Principal :
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Name:
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ID:
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Address:
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Post code:
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Telephone:
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Agent :
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Name:
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ID:
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Address:
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Post code:
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Telephone:
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The Principal intends to exercise the share subscription rights/options granted to it under a
certain share subscription certificate/option agreement dated
_____, 200[__], made by the Principal and
Leo Technology Limited, a company incorporated under the laws of British Virgin Islands (BVICo).
Upon satisfaction of the relevant conditions provided under the share subscription
certificate/option agreement, the Principal will obtain
_____
common shares of the BVICo, or [__]% of
the total issued share capital of the BVICo. The Agent is hereby appointed to conduct any and all
foreign currency registration procedures in connection with the exercise of share subscription
rights/options provided in the immediately preceding sentence.
The powers granted to the Agent hereunder are limited to making applications, conducting all
procedures relating to any declaration, acknowledgement, amendment or waiver, receiving all
notices, certificates and other documents, and dealing with all other matters, each in connection
with such foreign currency registration.
Principal:
(Signature)
Dated
Exhibit B-1
Exhibit C Guarantees
GUARANTEE
THIS GUARANTEE is entered into on [
] (this
Guarantee
), by China Techfaith Wireless Communication
Technology Limited, a company organized and existing under the laws of the Cayman Islands
(
Guarantor
), in favor of and for the benefit of each entity listed on Schedule I attached hereto
(each, a
Note Purchaser
, and collectively, the
Note Purchasers
), and Infiniti Capital Limited,
a company incorporated under the laws of British Virgin Islands (the
Share Purchaser
, together
with the Note Purchasers, the
Guaranteed Parties
).
RECITALS
SECTION 1 Leo Technology Limited
, a limited liability company organized and
existing under the laws of the British Virgin Islands (the
Guarantor Sub
), is an indirectly
wholly owned subsidiary of the Guarantor;
A. The Guarantor Sub seeks to secure an investment from each Guaranteed Party pursuant to a
Convertible Note and Share Purchase Agreement dated as of May 15, 2009 with each Guaranteed Party
and certain other parties (the
Purchase Agreement
), pursuant to which each Note Purchaser will
purchase from the Guarantor Sub, and the Guarantor Sub will sell to each Note Purchaser, upon the
terms and conditions stated therein, a senior secured convertible promissory note (each a
Note
,
and collectively the
Notes
) in the principal amount set forth opposite such Note Purchasers name
on Schedule I attached hereto, and the Share Purchaser will purchase from the Guarantor Sub, and
the Guarantor Sub will sell to the Share Purchaser, upon the terms and conditions stated therein,
345,722 Class B Ordinary Shares of the Guarantor Sub, par value US$0.01 per share (the
Shares
),
for an aggregate consideration of US$10,000,000.
B. Guarantor acknowledges that such investments from the Guaranteed Parties will bring
substantial benefits to the Guarantor Sub and Guarantor, and Guarantor agrees to guarantee the
Guaranteed Obligations (as defined below) as provided herein for the benefit of the Guaranteed
Parties to induce the Guaranteed Parties to enter into and close the transactions contemplated by
the Purchase Agreement and to induce the Guaranteed Parties to invest in the Guarantor Sub in
accordance with the terms set forth in the Purchase Agreement.
C. Concurrently with and as a condition to the closing contemplated by the Purchase Agreement
by the parties thereto, Guarantor hereby executes and delivers this Guarantee in favor of and for
the benefit of the Guaranteed Parties.
NOW, THEREFORE, in consideration of the foregoing recitals and to induce the Guaranteed Parties to
enter into the Purchase Agreement and to induce the Guaranteed Parties to invest in the Guarantor
Sub in accordance with the terms set forth in the Purchase Agreement, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Guarantor
hereby agrees, for the benefit of each Guaranteed Party, as follows:
1. Defined Terms:
The following terms shall have the meaning ascribed to them below:
(a)
Guaranteed Obligations
means all liabilities and obligations of the Guarantor Sub under
or pursuant to the Investors Rights Agreement entered among the Guarantor, the Guarantor Sub, the
Investors and the other parties dated as of the date hereof (the
Investors Rights Agreement
) and
under or pursuant to the Equity Pledge Agreement entered between the
Guarantor Sub and the Investors dated as of the date hereof (the
Equity Pledge Agreement
),
in any case whether now existing or hereafter arising, contracted or incurred, absolute or
contingent, liquidated or unliquidated.
Exhibit B-2
(b)
Bankruptcy Proceeding
means with respect to a given Person, any case, proceeding or
other action commenced by or against such given Person under any existing or future Law relating to
bankruptcy, insolvency, reorganization or relief of debtors from creditors, seeking to have an
order for relief entered with respect to any such given Person, or seeking to adjudicate any such
given Person bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up,
liquidation, dissolution, composition or other relief with respect to any such given Person or its
debts, or seeking appointment of a receiver, trustee, custodian, conservator or other similar
official for any such given Person or for all or any substantial part of its asset; or seeking
issuance of a warrant of attachment, execution, restraint or similar process against all or any
substantial part of the assets of such given Person.
(c)
Governmental Authority
means any government of any nation or any federation, province or
state or any other political subdivision thereof; any entity, authority or body exercising
executive, legislative, judicial, regulatory or administrative functions of or pertaining to
government, including any government authority, agency, department, board, commission or
instrumentality of the PRC or any other country, or any political subdivision thereof, any court,
tribunal or arbitrator, and any self-regulatory organization.
(d)
Governmental Order
means any applicable order, ruling, decision, verdict, decree, writ,
subpoena, mandate, precept, command, directive, consent, approval, award, judgment, injunction or
other similar determination or finding by, before or under the supervision of any Governmental
Authority.
(e)
Laws
means any and all provisions of any constitution, treaty, statute, law, regulation,
ordinance, code, rule, or rule of common law, any governmental approval, concession, grant,
franchise, license, agreement, directive, requirement, or other governmental restriction or any
similar form of decision of, or determination by, or any interpretation or administration of any of
the foregoing by, any Governmental Authority, in each case as amended, and any and all Governmental
Order.
(f)
Person
means any individual, corporation, partnership, limited partnership,
proprietorship, association, limited liability company, firm, trust, estate or other enterprise or
entity.
(g)
Transaction Documents
has the meaning set forth in the Purchase Agreement.
2. Guarantee.
(a) In order to induce the Guaranteed Parties to enter into the Purchase Agreement and invest
in the Guarantor Sub in accordance with the terms thereunder, Guarantor irrevocably and
unconditionally guarantees, as primary obligor and not merely as surety, the full, complete, due
and punctual performance and payment in full of all Guaranteed Obligations when the same shall
become due, whether at stated maturity, by acceleration, demand or otherwise (including payment of
amounts that would become due but for the effect of any Bankruptcy Proceeding), whether under the
Transaction Documents, by operation of applicable Law or otherwise. The Guarantee is a guaranty of
performance and payment when due and not merely of
collection. The Guarantee shall be unconditional regardless of any lack of enforceability of
any of the Transaction Documents or any Bankruptcy Proceeding with respect to the Guarantor Sub.
The Guarantee shall be in addition to and shall not in any way be prejudiced by any collateral or
other security now or hereafter held by any Guaranteed Party or by any lien to which any Guaranteed
Party may be entitled, including without limitation, the security interest held by the Trustee (as
defined in the Equity Pledge Agreement) on behalf of the Note Purchasers under the Equity Pledge
Agreement.
Exhibit B-3
(b) The obligations of Guarantor hereunder shall continue and remain in full force and effect
or be reinstated, as the case may be, in the event that all or any part of the performance (by
payment or otherwise) of the Guaranteed Obligations by the Guarantor Sub is rescinded or recovered
directly or indirectly from any Guaranteed Party as a preference, fraudulent transfer or otherwise,
and any such Guaranteed Obligations the performance (by payment or otherwise) of which is so
rescinded or recovered shall constitute Guaranteed Obligations.
(c) Upon the failure of the Guarantor Sub to perform or pay any of the Guaranteed Obligations
when and as the same shall become due, Guarantor will upon demand by any Guaranteed Party perform
or cause to be performed such Guaranteed Obligations as are to be performed, and pay in cash or
cause to be paid in cash such Guaranteed Obligations as are to be paid, in each case as the
applicable Transaction Documents shall provide.
(d) The obligations owed by the Guarantor Sub under the Notes to the holders of the Notes that
are guaranteed by the Guarantor in favor of the holders of the Notes in accordance with a separate
Guarantee delivered by and among the Parties on the date hereof (the
Senior Guaranteed
Obligations
) shall be deemed senior to all Guaranteed Obligations owed by the Guarantor Sub (the
Junior Guaranteed Obligations
), and the Junior Guaranteed Obligations shall be subordinated to
the Senior Guaranteed Obligations. For the avoidance of doubt, no holder of any Junior Guaranteed
Obligation shall make any claim under this Guarantee against Guarantor with respect to any Junior
Guaranteed Obligation, and Guarantor shall not perform or pay any Junior Guaranteed Obligations, in
any case unless (i) each Note has ceased to be outstanding by conversion or redemption in full in
accordance with the terms of such Note, or (ii) the holders of the Notes have given written consent
in respect of such claim.
3. Guarantee Absolute; Continuing Guarantee.
The obligations of Guarantor hereunder are
irrevocable, absolute, independent and unconditional and shall not be affected by any circumstance
which constitutes a legal or equitable discharge of a guaranty or surety other than indefeasible
payment in full of the Guaranteed Obligations. Each Guaranteed Party may enforce this Guarantee
upon the occurrence of any failure of the Guarantor Sub to pay or perform any Guaranteed
Obligations notwithstanding the existence of any dispute between the Guarantor Sub and such
Guaranteed Party with respect to the existence of such event. The obligations of Guarantor
hereunder are independent of the obligations of the Guarantor Sub and any other guarantor, and a
separate action may be brought and prosecuted against Guarantor whether or not any action is
brought against the Guarantor Sub or any other guarantor. This Guarantee is a continuing guaranty
and shall be binding upon Guarantor and its permitted successors and assigns.
Exhibit B-4
4. Actions by Guaranteed Parties.
Any Guaranteed Party may from time to time, without notice
or demand and without affecting the validity or enforceability of this Guarantee or giving rise to
any limitation, impairment or discharge of Guarantors Liability hereunder, (a) renew, extend,
accelerate or otherwise change the time, place, manner or terms of performance (by payment or
otherwise) of the Guaranteed Obligations owed to such Guaranteed
Party, (b) settle, compromise, release or discharge, or accept or refuse any offer of
performance with respect to, or substitutions for, the Guaranteed Obligations owed to such
Guaranteed Party or any agreement relating thereto and/or subordinate the performance (by payment
or otherwise) of the same to the performance (by payment or otherwise) of any other obligations,
(c) request and accept other guaranties of the Guaranteed Obligations owed to such Guaranteed Party
and take and hold security for the payment of this Guarantee or such Guaranteed Obligations,
(d) release, exchange, compromise, subordinate or modify, with or without consideration, or
exercise any right or remedy with respect to, any security for payment of the Guaranteed
Obligations owed to such Guaranteed Party, any other guaranties of such Guaranteed Obligations, or
any other obligation of any Person with respect to such Guaranteed Obligations, (e) enforce and
apply any security now or hereafter held by or for the benefit of such Guaranteed Party (with
respect to the Note Purchasers, including without limitation, the security under the Equity Pledge
Agreement) in respect of this Guarantee or the Guaranteed Obligations owed to such Guaranteed Party
and direct the order or manner of sale thereof, or exercise any other right or remedy that such
Guaranteed Party may have against any such security, as such Guaranteed Party in its discretion may
determine consistent with any applicable security agreement, including foreclosure on any such
security pursuant to one or more judicial or nonjudicial sales, whether or not every aspect of any
such sale is commercially reasonable, and (f) exercise any other rights available to such
Guaranteed Party under the Transaction Documents, at Law or in equity.
5. No Discharge.
This Guarantee and the obligations of Guarantor hereunder shall be valid and
enforceable and shall not be subject to any limitation, impairment or discharge for any reason
(other than performance of such Guaranteed Obligations as are to be performed and by indefeasible
payment in full of such Guaranteed Obligations as are to be paid), including the occurrence of any
of the following, whether or not Guarantor shall have had notice or knowledge of any of them:
(a) any failure to assert or enforce or agreement not to assert or enforce, or the stay or
enjoining, by order of court, by operation of law or otherwise, of the exercise or enforcement of,
any claim or demand or any right, power or remedy with respect to the Guaranteed Obligations or any
agreement relating thereto, or with respect to any other guaranty of or security for the payment of
the Guaranteed Obligations, (b) any waiver or modification of, or any consent to departure from,
any of the terms or provisions of the Notes or the other Transaction Documents or any agreement or
instrument executed pursuant thereto, or of any other guaranty or security for the Guaranteed
Obligations, (c) the Guaranteed Obligations, or any agreement relating thereto, at any time being
found to be illegal, invalid or unenforceable in any respect, (d) the application of performance or
payments received from any source to the performance or payment of liabilities other than the
Guaranteed Obligations, even though any Guaranteed Party might have elected to apply such
performance or payment to any part or all of the Guaranteed Obligations, (e) any failure to perfect
or continue perfection of a security interest in any collateral which secures any of the Guaranteed
Obligations, (f) any defenses, set-offs or counterclaims that the Guarantor Sub may assert against
any Guaranteed Party in respect of the Guaranteed Obligations, including but not limited to failure
of consideration, breach of warranty, payment, statute of frauds, statute of limitations, accord
and satisfaction and usury, and (g) any other act or thing or omission, or delay to do any other
act or thing, which may or might in any manner or to any extent operate to prejudice, affect or
discharge this Guarantee.
Exhibit B-5
6. Waivers.
Guarantor
WAIVES
, for the benefit of each Guaranteed Party: (a) any right to
require Guaranteed Parties, as a condition of payment or performance by Guarantor, to first have
recourse to any other security or rights or taking any other steps or proceedings against the
Guarantor Sub or any other person; (b) any defense arising by reason of the incapacity, lack of
authority or any disability or other defense of the Guarantor Sub including any defense based on or
arising out of the lack of validity or the unenforceability of the Guaranteed Obligations or any
agreement or instrument relating thereto or by reason of the cessation of the liability of the
Guarantor Sub from any cause other than indefeasible payment in full of the Guaranteed Obligations;
(c) any defense based upon any Law which provides that the obligation of a surety must be neither
larger in amount nor in other respects more burdensome than that of the principal; (d) any defense
based upon any Guaranteed Partys errors or omissions in the administration of the Guaranteed
Obligations, except behavior that amounts to bad faith; (e) any principles or provisions of Law,
statutory or otherwise, that are or might be in conflict with the terms of this Guarantee and any
legal or equitable discharge of Guarantors obligations hereunder, (f) the benefit of any statute
of limitations affecting Guarantors liability hereunder or the enforcement hereof, (g) any rights
to set-offs, recoupments and counterclaims, and (h) promptness, diligence and any requirement that
any Guaranteed Party protect, secure, perfect or insure any Lien or any property subject thereto;
(i) notices, demands, presentments, protests under or in connection with any Transaction Document
or this Guarantee and notices of any of the matters referred to in Sections 4 and 5 and any right
to consent to any thereof; and (j) to the fullest extent permitted by Law, any defenses or benefits
that may be derived from or afforded by Law which limit the Liability of or exonerate guarantors or
sureties, or which may conflict with the terms of this Guarantee.
7. No Rights of Subrogation, Contribution, Subordination.
Until the Guaranteed Obligations
shall have been paid in full, Guarantor shall withhold exercise of (a) any claim, right or remedy,
direct or indirect, that Guarantor now has or may hereafter have against the Guarantor Sub or any
of its assets in connection with this Guarantee or the performance by Guarantor of its obligations
hereunder, in each case whether such claim, right or remedy arises in equity, under contract, by
statute, under common law or otherwise and including (i) any right of subrogation, reimbursement or
indemnification that Guarantor now has or may hereafter have against the Guarantor Sub, (ii) any
right to enforce, or to participate in, any claim, right or remedy that any Guaranteed Party now
has or may hereafter have against the Guarantor Sub, and (iii) any benefit of, and any right to
participate in, any collateral or security now or hereafter held by any Guaranteed Party, and (b)
any right of contribution Guarantor now has or may hereafter have against any other guarantor of
any of the Guaranteed Obligations. Any Indebtedness of the Guarantor Sub now or hereafter held by
Guarantor is subordinated in right of payment to the Guaranteed Obligations, and any such
Indebtedness of the Guarantor Sub to Guarantor collected or received by Guarantor after an Event of
Default (as defined in the Notes) has occurred and is continuing shall be held in trust for the
Note Purchasers and shall forthwith be paid over to the Note Purchasers ratably in proportion to
the principal amount of the Notes held by such Note Purchasers to be credited and applied against
the Guaranteed Obligations. Without limiting the generality of the foregoing, the Guarantor shall
not be entitled nor shall claim to rank as creditor against the estate in the Bankruptcy Proceeding
with respect to Guarantor Sub in competition with any Guaranteed Party.
8. Expenses.
Guarantor agrees to pay, or cause to be paid, on demand, and to save Guaranteed
Parties harmless against liability for, any and all reasonable costs and expenses (including fees,
costs of settlement and disbursements of counsel and allocated costs of internal counsel) incurred
or expended by any Guaranteed Party in connection with the enforcement of or preservation of any
rights under this Guarantee.
Exhibit B-6
9. Payments.
(a) All payments to be made by Guarantor hereunder shall be made in immediately available
funds, in U.S. Dollars and at the place or places in and at which the corresponding sums are
payable by the Guarantor Sub under the Transaction Documents. All
payments to a Guaranteed Party under this Guarantee shall be made by the Guarantor
irrespective of and without deduction for, any counterclaim, defense, recoupment, or set-off and
shall be final.
(b) The obligations of Guarantor to make payment in U.S. Dollars as set forth in Section 9(a)
shall not be discharged or satisfied by any tender, or any recovery pursuant to any judgment, which
is expressed in or converted into any currency other than U.S. Dollars, except to the extent such
tender or recovery shall result in the actual receipt by the appropriate party of the full amount
of U.S. Dollars due under this Guarantee. The obligations of
Guarantor to make payments in U.S.
Dollars as aforesaid shall be enforceable as an alternative or additional cause of action for the
purpose of recovery in U.S. Dollars of the amount, if any, by which such actual receipt shall fall
short of the full amount of U.S. Dollars due under this Guarantee, and shall not be affected by the
judgment being obtained for any other sums due under this Guarantee.
10. Tax Matters.
Any payment made pursuant to this Guarantee shall be made free and clear of
and without deduction for any and all Taxes. If Guarantor shall be required by applicable Law to
deduct or withhold any Taxes imposed by any taxing authority or other Governmental Authority from
or in respect of any sum payable under this Guarantee to any Guaranteed Party, the sum payable
shall be increased as may be necessary so that after making all required deductions or withholdings
(including deductions or withholdings applicable to additional sums payable under this section),
such Guaranteed Party receives an amount equal to the sum it would have received had no such
deductions or withholdings been required. Guarantor shall pay the full amount deducted or withheld
to the relevant taxation authority or other Governmental Authority in accordance with applicable
Law.
11. Covenants.
Guarantor covenants and agrees that if Guarantor or any of its successors or
assigns (i) shall consolidate with, amalgamate with or merge into any other Person and shall not be
the continuing or surviving Person of such consolidation, amalgamation or merger or (ii) shall
transfer all or substantially all of its properties and assets to any other Person, then, and in
each such case, proper provisions shall be made so that the successors and assigns of Guarantor
shall assume all of its obligations set forth in this Guarantee. Guarantor undertakes that its
obligations hereunder will constitute direct, unconditional, unsecured, unsubordinated and general
obligations of, and will rank at least pari passu with, all other present and future outstanding
unsecured indebtedness issued, created, assumed or guaranteed by Guarantor.
12. Amendments and Waivers.
No amendment, modification, termination or waiver of any
provision of this Guarantee, and no consent to any departure by Guarantor therefrom, shall in any
event be effective without the written concurrence of Guaranteed Parties. Any such waiver or
consent shall be effective only in the specific instance and for the specific purpose for which it
was given.
13. Further Assurances
. Each party agrees to cooperate fully with the other parties and to
execute such further instruments, documents and agreements and to give such further written
assurances, as may be reasonably requested by any other party to evidence and reflect the
transactions described herein and contemplated hereby, and to carry into effect the intents and
purposes of this Guaranty.
Exhibit B-7
14. Miscellaneous.
(a)
Rights Cumulative; Effect of Certain Waivers
. The rights, powers and remedies
given to Guaranteed Parties by this Guarantee are cumulative and shall be in addition to and
independent of all rights, powers and remedies given to Guaranteed Parties by virtue of Law or
equity or in any of the Transaction Documents or any other agreement between Guarantor and one
or more Guaranteed Parties. Any forbearance or failure to exercise, and any delay by any
Guaranteed Party in exercising, any right, power or remedy hereunder shall not impair any such
right, power or remedy or be construed to be a waiver thereof, nor shall it preclude the further
exercise of any such right, power or remedy.
(b)
Headings and Subtitles; Interpretation
For all purposes of this Guarantee, except
as otherwise expressly herein provided, (i) the terms defined in Section 1 shall have the meanings
assigned to them in Section 1 and include the plural as well as the singular, (ii) all references
in this Guarantee to designated Sections and other subdivisions are to the designated Sections
and other subdivisions of the body of this Guarantee, (iii) pronouns of either gender or neuter
shall include, as appropriate, the other pronoun forms, (iv) the words herein, hereof and
hereunder and other words of similar import refer to this Guarantee as a whole and not to any
particular Section or other subdivision, (v) all references in this Guarantee to designated
Schedules, Exhibits and Annexes are to the Schedules, Exhibits and Annexes attached to this
Guarantee, (vi) references to this Guarantee, the Purchase Agreement, any other Transaction
Documents and any other document shall be construed as references to such document as the same may
be amended, supplemented or novated from time to time, (vii) the term or is not exclusive, (viii)
the term including will be deemed to be followed by , but not limited to, (ix) the terms
shall, will, and agrees are mandatory, and the term may is permissive, (x) the phrase
directly or indirectly means directly, or indirectly through one or more intermediate Persons or
through contractual or other arrangements, and direct or indirect has the correlative meaning,
(xi) the expressions Note Purchaser, Share Purchaser and Guaranteed Parties shall include
their respective successors, transferees and assigns and any persons deriving title under them, and
(xii) the headings used in this Guarantee are used for convenience only and are not to be
considered in construing or interpreting this Guarantee.
(c)
Severability
. If any provision of this Guarantee is prohibited by applicable Law
or otherwise determined to be invalid or unenforceable by a court of competent jurisdiction, the
provision that would otherwise be prohibited, invalid or unenforceable shall be deemed amended to
apply to the broadest extent that it would be valid and enforceable, and the invalidity or
unenforceability of such provision shall not affect the validity of the remaining provisions of
this Guarantee or obligations, or of such provision or obligation in any other jurisdiction.
Guarantor will endeavor in good faith negotiations to replace the prohibited, invalid or
unenforceable provision(s) with a valid provision(s), the effect of which comes as close as
possible to that of the prohibited, invalid or unenforceable provision(s).
(d)
Specific Performance
. Guarantor agrees that irreparable damage would occur to each
Guaranteed Party in the event any of the provisions of this Guarantee were not performed in
accordance with the terms hereof and that each Guaranteed Party is entitled to specific performance
(without the posting of any bond) of the terms of this Guarantee in addition to any other remedies
at Law or in equity.
(e)
Assignment
. Guarantor may not assign its rights or delegate its obligations under
this Guarantee, in whole or in part without the prior written consent of each Guaranteed Party.
Any purported assignment or delegation in violation of the terms of this Guarantee is void. This
Guarantee shall inure to the benefit of Guaranteed Parties and their respective successors and
assigns.
Exhibit B-8
(f)
Notices
. Whenever notice is required to be given under this Guarantee, unless
otherwise provided herein, such notice shall be given in accordance with Section 8.7 of the
Purchase Agreement.
(g)
Counterparts
. This Guarantee may be executed in any number of counterparts and by
the different parties hereto in separate counterparts, each of which when so executed and delivered
shall be deemed to be an original for all purposes; but all such counterparts together shall
constitute but one and the same instrument.
(h)
Governing Law
.
THIS GUARANTEE SHALL BE DEEMED TO BE MADE IN AND IN ALL RESPECTS
SHALL BE INTERPRETED, CONSTRUED AND GOVERNED BY AND IN ACCORDANCE WITH THE INTERNAL LAWS OF THE
CAYMAN ISLANDS, WITHOUT REGARD TO THE CONFLICT OF LAW PRINCIPLES THEREOF.
(i)
No Presumption
. Each party agrees that it has been represented by counsel in
connection with this Guarantee, and that any applicable Law that would require interpretation of
any claimed ambiguities in this Guarantee against the party that drafted it has no application and
is expressly waived. If any claim is made by a party relating to any conflict, omission or
ambiguity in the provisions of this Guarantee, no presumption or burden of proof or persuasion will
be implied because this Note was prepared by or at the request of any party or its counsel, and no
party will claim or assert otherwise.
(j)
Representations and Warranties
. Guarantor hereby represents and warrants to the
Guaranteed Parties that (i) it has the power and authority to execute, deliver and perform this
Guarantee and has obtained all consents, approvals, permits or authorizations in connection with
the execution, delivery and performance by it of this Guarantee as required by all applicable Laws,
its constitutional documents, and any material contract by which it is bound; (ii) the execution,
delivery and performance by it of this Guarantee do not result in a violation of any applicable
Laws, its constitutional documents or any material contract by which it is bound; and (iv) this
Guarantee is duly authorized, executed and delivered by the Guarantor, and constitutes a valid and
binding obligation of the Guarantor, enforceable against it in accordance with its terms, except
(x) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other
applicable Laws of general application affecting enforcement of creditors rights generally, and
(y) as limited by applicable Laws relating to the availability of specific performance, injunctive
relief, or other equitable remedies.
15. Dispute Resolution.
(a) Any dispute, controversy or claim (each, a
Dispute
) arising out of or relating to this
Guarantee, or the interpretation, breach, termination, validity or invalidity thereof, shall be
referred to arbitration upon the demand of either party to the dispute with notice (the
Arbitration Notice
) to the other.
(b) The Dispute shall be settled by arbitration in Hong Kong by the Hong Kong International
Arbitration Centre (the
HKIAC
) in accordance with the Hong Kong International Arbitration Centre
Administered Arbitration Rules (the
HKIAC Rules
) in force when the Arbitration Notice is
submitted in accordance with the HKIAC Rules. There shall be one (1) arbitrator. The HKIAC
Council shall select the arbitrator, who shall be qualified to practice law in New York. The
arbitrator may retain an expert who shall be qualified to practice law in the
Cayman Islands and British Virgin Islands in order to advise the arbitrator on the Laws of the
Cayman Islands and British Virgin Islands.
Exhibit B-9
(c) The arbitral proceedings shall be conducted in English. To the extent that the HKIAC
Rules are in conflict with the provisions of this
Section 15
, including the provisions
concerning the appointment of the arbitrators, the provisions of this
Section 15
shall
prevail.
(d) Each party to the arbitration shall cooperate with each other party to the arbitration in
making full disclosure of and providing complete access to all information and documents requested
by such other party in connection with such arbitral proceedings, subject only to any
confidentiality obligations binding on such party.
(e) The award of the arbitral tribunal shall be final and binding upon the parties thereto,
and the prevailing party may apply to a court of competent jurisdiction for enforcement of such
award.
(f) The arbitral tribunal shall decide any Dispute submitted by the parties to the arbitration
strictly in accordance with the substantive Law of Cayman Islands and shall not apply any other
substantive Law.
(g) Any party to the Dispute shall be entitled to seek preliminary injunctive relief, if
possible, from any court of competent jurisdiction pending the constitution of the arbitral
tribunal.
(h) During the course of the arbitral tribunals adjudication of the Dispute, this Guarantee
shall continue to be performed except with respect to the part in dispute and under adjudication.
(i) Guarantor and the Guaranteed Parties agree to the consolidation of arbitrations under this
Guarantee and the Transaction Documents in accordance with the following:
1. In the event of two or more arbitrations having been commenced under any of the Transaction
Documents or this Guarantee, the tribunal in the arbitration first filed (the
Principal Tribunal
)
may in its sole discretion, upon the application of any party to the arbitrations, order that the
proceedings be consolidated before the Principal Tribunal if (A) there are issues of fact and/or
law common to the arbitrations, (B) the interests of justice and efficiency would be served by such
a consolidation, and (C) no prejudice would be caused to any party in any material respect as a
result of such consolidation, whether through undue delay or otherwise. Such application shall be
made as soon as practicable and the party making such application shall give notice to the other
parties to the arbitrations.
2. The Principal Tribunal shall be empowered to (but shall not be obliged to) order at its
discretion, after inviting written (and where desired oral) representations from the parties that
all or any of such arbitrations shall be consolidated or heard together and/or that the
arbitrations be heard immediately after another and shall establish a procedure accordingly.
Guarantor and the Guaranteed Parties shall take such steps as are necessary to give effect and
force to any orders of the Principal Tribunal.
3. If the Principal Tribunal makes an order for consolidation, it: (A) shall thereafter, to
the exclusion of other arbitral tribunals, have jurisdiction to resolve all disputes forming part
of the consolidation order; (B) shall order that notice of the consolidation order and its effect
be given immediately to any arbitrators already appointed in relation to the disputes that were
consolidated under the consolidation order; and (C) may also give such directions as it considers
appropriate (a) to give effect to the consolidation and make provision for any costs which may
result from it (including costs in any arbitration
rendered functus officio under this
Section 15
); and (b) to ensure the proper
organization of the arbitration proceedings and that all the issues between the parties are
properly formulated and resolved.
Exhibit B-10
4. Upon the making of the consolidation order, any appointment of arbitrators relating to
arbitrations that have been consolidated by the Principal Tribunal (except for the appointment of
the arbitrators of the Principal Tribunal itself) shall for all purposes cease to have effect and
such arbitrators are deemed to be functus officio, on and from the date of the consolidation order.
Such cessation is without prejudice to (A) the validity of any acts done or orders made by such
arbitrators before termination, (B) such arbitrators entitlement to be paid their proper fees and
disbursements and (C) the date when any claim or defence was raised for the purpose of applying any
limitation period or any like rule or provision.
5. Guarantor and the Guaranteed Parties hereby waive any objections they may have as to the
validity and/or enforcement of any arbitral awards made by the Principal Tribunal following the
consolidation of disputes or arbitral proceedings in accordance with this
Section 15
where
such objections are based solely on the fact that consolidation of the same has occurred.
16.
Execution as a deed. It is intended that this Guarantee takes effect as a deed. Each
party has duly executed this Guarantee as a deed.
[The remainder of this page is intentionally left in blank.]
Exhibit B-11
IN WITNESS WHEREOF
, each party has duly executed this Guarantee as a deed as of the date first
written above.
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CHINA TECHFAITH WIRELESS COMMUNICATION TECHNOLOGY LIMITED
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By:
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Name:
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Capacity:
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In the presence of:
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Name:
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Accepted and Agreed by:
IDG-ACCEL CHINA GROWTH FUND II L.P.
By: IDG-Accel China Growth Fund II Associates L.P., its General Partner;
By: IDG-Accel China Growth Fund GP II Associates Ltd., its General Partner;
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By:
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Name:
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Capacity: Authorized Signatory
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In the presence of:
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Name:
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IDG-ACCEL CHINA INVESTORS II L.P.
By: IDG-Accel China Growth Fund GP II Associates Ltd., its General Partner;
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By:
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Name:
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Capacity: Authorized Signatory
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In the presence of:
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Name:
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Accepted and Agreed by:
INFINITI CAPITAL LIMITED
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By:
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Name:
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Capacity:
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In the presence of:
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Name:
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Exhibit B-12
SCHEDULE I
NOTE PURCHASERS
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Note Purchaser
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Principal Amount
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IDG-Accel China Growth Fund II L.P.
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$
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9,244,000
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IDG-Accel China Investors II L.P.
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$
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756,000
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