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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(Mark One)
     
o   REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR (G) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
     
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2010.
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                      .
OR
     
o   SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report
Commission file number: 000-51242
CHINA TECHFAITH WIRELESS COMMUNICATION TECHNOLOGY LIMITED
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrant’s name into English)
Cayman Islands
(Jurisdiction of incorporation or organization)
No. 13, YongChang North Road
Beijing Economic-Technological Development Area (Yi Zhuang)
Beijing 100176
People’s Republic of China
(Address of principal executive offices)
Jay Ji
Director of Investor Relations
China Techfaith Wireless Communication Technology Limited
No. 13, YongChang North Road
Beijing Economic-Technological Development Area (Yi Zhuang)
Beijing 100176
People’s 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.
     
Title of each class   Name of each exchange on which registered
     
Ordinary shares, par value US$0.00002 per share*   The NASDAQ Stock Market LLC
    (The NASDAQ Global Market)
     
*   Not for trading, but only in connection with the listing on The NASDAQ Global Market of American depositary shares, each representing 15 ordinary shares.
Securities registered or to be registered pursuant to Section 12(g) of the Act.
NONE
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
NONE
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 794,003,193 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 o No þ
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
         
Large accelerated filer o   Accelerated filer þ   Non-accelerated filer o
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
         
US GAAP þ   International Financial Reporting Standards as issued by   Other o
    the International Accounting Standards Board o    
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 o Item 18 o
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes o No o
 
 

 

 


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  Exhibit 4.14
  Exhibit 4.15
  Exhibit 4.16
  Exhibit 4.17
  Exhibit 8.1
  Exhibit 12.1
  Exhibit 12.2
  Exhibit 13.1
  Exhibit 13.2
  Exhibit 15.1
  Exhibit 15.2

 

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INTRODUCTION
In this annual report, unless otherwise indicated,
“China” or “PRC” refers to the People’s 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 67.8% 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;
“Tecface Technology” refers to Tecface Communication Technology (Beijing) Limited (formerly known as STEP Technologies (Beijing)Co., Ltd), our wholly owned subsidiary in China;
“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 Intelligent Handset 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.”

 

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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, 2008, 2009 and 2010 and the selected consolidated balance sheet data as of December 31, 2009 and 2010 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, 2006 and 2007 and the selected consolidated balance sheet data as of December 31, 2006, 2007 and 2008 have been derived from our audited consolidated financial statements, which are not included in this annual report.
Our consolidated financial statements as of and for the year then ended December 31, 2009 have been restated. For details, see Note 3, “Restatement,” to our consolidated financial statements included in this annual report on Form 20-F and Item 5.A. “Operating and Financial Review and Prospects — Operating Results — Restatement of Previously-Issued Financial Statements.” In addition, we adopted authoritative guidance on accounting for uncertainty in income taxes on January 1, 2007, prospectively. We also adopted authoritative guidance on noncontrolling interests in consolidated financial statements on January 1, 2009, retrospectively.
                                         
    For the Year Ended December 31,  
                            2009        
    2006     2007     2008     (As restated)     2010  
    (In thousands, except share, per share and per ADS data)  
Consolidated Statement of Operations Data
                                       
Net revenues
  $ 80,804     $ 143,444     $ 208,850     $ 211,076     $ 271,877  
Gross profit
    25,699       38,649       41,165       38,211       67,092  
Operating expenses
    (40,728 )     (47,440 )     (40,125 )     (24,881 )     (32,323 )
Government subsidy income
    180       1,734       3,081       481       159  
Other operating income
                2,443             1,109  
Income (loss) from operations
    (14,849 )     (7,057 )     6,564       13,811       36,037  
Equity in loss of an affiliate
    (393 )     (851 )                  
Net income (loss)
    (10,208 )     (3,621 )     7,349       2,386       28,658  
 
                                       
Less: Net loss (income) attributable to noncontrolling interest
    1,808       1,200       652       2,028       (818 )
 
                                       
Net income (loss) attributable to Techfaith
  $ (8,793 )   $ (3,272 )   $ 8,001     $ 4,414     $ 27,840  
Earnings per share:
                                       
Net income (loss) per share attributable to Techfaith
                                       
— Basic
  $ (0.01 )   $ (0.01 )   $ 0.01     $ 0.01     $ 0.04  
— Diluted
  $ (0.01 )   $ (0.01 )   $ 0.01     $ 0.01     $ 0.03  
Shares used in per share computation
                                       
— Basic
    656,255,882       649,807,421       649,972,306       650,057,866       732,784,822  
— Diluted
    656,255,882       649,807,421       650,062,312       720,889,120       795,843,605  

 

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    As of December 31,  
                            2009        
    2006     2007     2008     (As restated)     2010  
    (In thousands)  
Consolidated Balance Sheet Data
                                       
Cash and cash equivalents
  $ 113,172     $ 84,754     $ 78,926     $ 130,544     $ 198,536  
Accounts receivable
    37,229       40,014       37,804       28,992       19,241  
Inventories
    8,546       50,763       37,763       22,937       17,745  
Total assets
    207,714       234,861       220,064       250,667       303,953  
Total current liabilities
    37,123       60,739       28,248       28,700       33,976  
Total non-current liabilities
                      18,029       430  
Total liabilities and equity
  $ 207,714     $ 234,861     $ 220,064     $ 250,667     $ 303,953  
Number of treasury stock
    8,655,000       8,655,000             918,000        
Number of ordinary shares issued
    649,692,954       649,913,136       650,034,590       650,156,045       794,003,193  
B. Capitalization and Indebtedness
Not Applicable.
C. Reasons for the Offer and Use of Proceeds
Not Applicable.
D. Risk Factors
Risks Related to Our Business
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 81.9% of our total net revenues in 2010. We started to develop our online and mobile game business in 2008, which constituted less than 1.0% and 4.0% of our total revenues in 2009 and 2010, respectively; we expect it to become an increasingly significant contributor to our total net revenues in the future. 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:
    achieve and maintain our profitability and margins;
 
    acquire and retain customers;
 
    attract, train and retain qualified personnel;
 
    maintain adequate control over our costs and expenses;
 
    keep up with evolving industry standards and market developments; or
 
    respond to competitive and changing market conditions.
If we are unsuccessful in addressing any of the above risks, our business may be materially and adversely affected.
Also, we recently restated our financial statements as of and for the year ended December 31, 2009. The restatement is described in detail in Note 3, “Restatement,” to our consolidated financial statements included in this annual report on Form 20-F and Item 5.A. “Operating and Financial Review and Prospects — Operating Results - Restatement of Previously-Issued Financial Statements.” Despite our best efforts to carefully consider and analyze accounting implications of non-routine events, we cannot be sure that there will not be any restatement of our financial statements in the future, which may further complicate attempts to evaluate our business and prospects.

 

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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 be unable 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.
The global financial markets have experienced significant disruptions since 2008, and most of the world’s major economies entered into recession, with recovery being show and uncertain. China’s economy recovered after a significant slowdown that began in the second half of 2008, but it is uncertain whether such recovery will continue into 2011 and beyond. Entering into 2011, inflation remains the main risk for China’s economy. The main causes of China’s inflationary pressure include the massive liquidity stimulus introduced after the global financial crisis in 2009 and rising commodity prices. To cope with the global economic downturn and inflation, we undertook a human resource restructuring in 2008 and 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 and 2010, we had 518 and 471 employees, respectively. 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 China’s 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 the 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 any 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 2010, we launched motion gaming mobile devices and TV phones. During 2010, we 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.
QUALCOMM Incorporated, or QUALCOMM, has also lowered the entry barrier for many smaller handset companies through the introduction of MSM6240 and MSM 6270 chipsets, greatly increasing our competition in this area.

 

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The introduction of Google Android represents both opportunities and threats for us. We would need to shift our focus from windows mobile to Google Android platform and we may face difficulties adapting our technology to work with the new operating system. More co-operation with third parties providers are also required and this in turn increases our cost in this area.
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 original developed products, or ODP, business and brand name phone sales. Accordingly, our success depends on our customers’ success in their business. Our largest customer in 2008, 2009 and 2010 contributed approximately 12.3%, 14.1% and 11.4% of our net revenues, respectively, and our largest three customers in 2008, 2009 and 2010 contributed approximately 28.8%, 34.2% and 30.4% of our net revenues, respectively. We are not certain whether our customers will be able to achieve success in their business or how long they will remain competitive in their business even if initially successful. If any of our 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.
Due to the global economic recession, many local and regional telecom operators in China have reduced their subsidies on their mobile phones and modems, which in turn drive up the prices charged to end users. This may reduce the demand from the end users and eventually affect our business.
We are exposed to inventory risks and the credit risk in relation to 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 in relation to our customers may arise from events or circumstances beyond our control. For instance, an economic downturn may cause our customers to default under their ODP product 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 the assembling and manufacturing of 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.
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 Sim Technology Group Limited, BYD Electronico Limited 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.

 

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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 new 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 operating results with respect to mobile and online games will continue to depend on numerous factors beyond our control, including:
    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;
 
    whether the mobile and online games business, particularly in China, continues to grow and the rate of any such growth;
 
    general economic conditions, particularly economic conditions adversely affecting discretionary consumer spending;
 
    the availability and popularity of other forms of entertainment;
 
    changes in consumer demographics and public tastes and preferences;
 
    the popularity and price of new mobile and online games and in-game items that our competitors launch and distribute; and
 
    market acceptance of our newly designed games.
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.
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 continue making 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:
    high acquisition and financing costs;
 
    potential ongoing financial obligations and unforeseen or hidden liabilities;
 
    failure to achieve our intended objectives, benefits or revenue-enhancing opportunities;
 
    cost of, and difficulties in, integrating acquired businesses and managing a larger business;
 
    potential claims or litigation regarding our board’s 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
 
    diversion of our resources and management attention.
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 counter-parties, 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 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.

 

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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.”
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 management’s 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.
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. The recent 9.0 magnitude earth quake in Japan, for example, has disrupted the supply of various components, affecting our production schedule for several products and may eventually reduce our gross margin. The unstable situation in the Middle East and the ongoing conflict in Libya has also affect our business in several ways, such as the reduction of orders from customers and the increase of shipment costs to and from these regions.

 

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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 company’s 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, 2010. See “Item 15. Controls and Procedures.” However, we cannot assure you that we will be able to maintain effective internal control in the future, and if we fail to maintain effective internal control 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 2010, 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.
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 refunds and liquidated damages if we cannot complete a mobile handset design by a specified deadline, 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 mobile handsets have gone into mass production. 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.

 

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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 Company—A. History and Development of the Company” and Note 1 to our consolidated financial statements included in this annual report on Form 20-F.
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 find 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 Company—B. Business Overview—Regulation.” 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 in 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 user’s 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 network service delay 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 Company—B. Business Overview—Regulations—Virtual Assets.”

 

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Our business benefits from certain tax incentives, and changes to these tax incentives could adversely affect our operating results.
Our income 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, Techfaith Intelligent Handset Beijing and Techfaith Shanghai 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 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 Company—B. Business Overview—Regulations—Tax.”
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 investor’s 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 the subsidiary’s ability to pay dividends or make other payments to us.
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. However, 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, 2009 and 2010, 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.

 

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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 China’s political and economic conditions and China’s 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.
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 China’s 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.

 

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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 subsidiary’s 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 31.94% of our outstanding shares. They and the other shareholders with registration rights 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.
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 IDG-Accel China Growth Fund II L.P. and IDG-Accel China Investors II L.P., or the IDG Funds, which are entities affiliated with IDGVC Partners, a leading venture capital firm. The notes were convertible into our ordinary shares or Leo Technology Limited’s ordinary shares at the option of the note holders. According to the relevant investor rights agreement, each of the IDG Funds chose to convert 62.5% of its share of the principal amount of the 8% senior secured convertible promissory notes into TechFaith’s ordinary shares, and the remaining 37.5% was converted into shares of 798 Entertainment Limited on September 8, 2010, and as a result of the conversion, TechFaith issued 78,814,628 of TechFaith’s ordinary shares to IDG Funds. As of the date of this annual report, IDG Funds have met the terms and conditions for resale under Rule 144 of the Securities Act in relation to these shares, represented by 5,254,309 ADSs, and may offer and sell such ADSs from time to time on the open market.
Sales of the above-mentioned registered shares in the public market could cause the price of our ADSs to decline.
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:
    actual or anticipated fluctuations in our quarterly operating results;
 
    changes in financial estimates by securities research analysts;

 

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    conditions in the mobile handset and mobile and online games markets;
 
    changes in the economic performance or market valuations of other mobile handset design houses, original design product providers or manufacturers;
 
    performance of other China-based companies that are listed on NASDAQ;
 
    announcements by us or our competitors of new products, acquisitions, strategic partnerships, joint ventures or capital commitments;
 
    addition or departure of key personnel; and
 
    fluctuations of exchange rates between the RMB and U.S. dollar.
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.
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.

 

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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 253,589,908 ordinary shares of our company, of which Mr. Defu Dong, our Chairman and Chief Executive Officer, beneficially owns 253,195,000 ordinary shares (constituting approximately 31.9% of our current total issued and outstanding shares), and have the 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.
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 it is likely that we were classified as a “passive foreign investment company,” or PFIC, for United States federal income tax purposes for our taxable year ended December 31, 2010, and we will very likely be a PFIC for our current taxable year ending December 31, 2011 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.”

 

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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, People’s 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.
We began to develop our game business in 2008, with mobile and online games that are developed by our subsidiary or licensed from third parties. To raise funds for the game business, our subsidiary, Leo Technology Limited, now renamed 798 Entertainment Limited, issued US$10 million aggregate principal amount of 8% senior secured convertible promissory notes to the IDG Funds in June 2009. Pursuant to conversion options granted to them under the relevant investor rights agreement, the IDG Funds exercised their conversion rights in relation to the notes in September 2010, converting 62.5% of the principal amount of the notes into our ordinary shares and the remaining principal amount into ordinary shares of LeoTechnology Limited, now 798 Entertainment Limited. As a result of the conversion, the IDG Funds now hold 78,814,628 of our ordinary shares, represented by 5,254,309 ADSs which the IDG Funds may offer and sell from time to time. In August 2010, we introduced a new product line-motion game, which generated an aggregate of US$5.1 million revenue in the fourth quarter of 2010.
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 Interactive’s equity owners, we have the ability to effectively control Techfaith Interactive’s 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 Note 1 to our consolidated financial statements included in this annual report on Form 20-F.
On February 10, 2010, we acquired Citylead Limited, or Citylead, together with its subsidiaries and obtained control over Citylead’s variable interest entity, QIGI Technology, a domestic brand mobile phone company. The consideration consisted of $500,000 in cash and 65,934,066 of our ordinary shares at a fair value of $0.19 per ordinary share paid as of the date of acquisition as well as certain receivables contingent upon QIGI Technology’s operating performance for 2010 and 2011. Through this acquisition, we expanded our branding business to target enterprise users and operator-tailored customers.
In May 2010, we sold 49% equity interest in our wholly-owned subsidiary, Time Spring Limited, or Time Spring, to Billion Team Asia Limited, or Billion Team, an affiliate of D Magic Mobile (Shanghai) Incorporation, an independent third party, or D Magic Mobile, for $49.00. Time Spring was a shell company without any substantial operations prior to May 2010, and after this transaction, we owned 51% of Time Spring. Time Spring in turn owns Media Chance Limited, an entity in Hong Kong which owns 100% of Glomate. After the restructuring, Billion Team granted Glomate the right to produce mobile phones with certain well-know brands. Glomate will focus on licensing well-known, international brands for high-end, brand-name mobile phones and add to our effort to maintain our existing strong presence in the market for ODP in China.
Our capital expenditures mainly relate to our purchase of plant, machinery and equipment related to our business operations. Our capital expenditures amounted to US$14.8 million, US$1.4 million and US$4.3 million in 2008, 2009 and 2010, respectively. Our capital expenditures for 2010 were mainly financed from our operating cash flow.
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 2010, our business comprised the following three areas: (1) ODP business; (2) brand name phone sales ; and (3) game business. In 2010, ODP contributed 81.9% of our revenues, brand name phone sales contributed 14.1% of our revenues and our game business contributed 4.0% of our 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.

 

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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 ODP products as a percentage of our total net revenues increased from over 46% in 2006 to 70% in 2007 to over 90% in 2008 and 2009, and decreased to 81.9% in 2010 due to increased revenue in our game business and the offering of QIGI brand products.
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 market position through cooperation agreements with Beijing Huaqi Information Digital Technology Co., Ltd., or Beijing Huaqi, which owns “aigo”, a leading brand in China’s consumer digital products for the operator-tailored market, 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.
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: dual mode GSM phones, modem card phones and EVDO phones. Of the five dual-mode GSM phones, three are WCDMA plus GSM phones designed for new China Unicom subscribers and two 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.
We put emphasis on the branding of our mobile handset products because branded products—especially products bearing well-known brands and images—offer 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 became 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 operated largely independent of our existing operations; we have been, and intend to continue, focusing on promoting QIGI as an important Techfaith brand, with emphasis on QIGI brand smart phones.
In May 2010, we sold 49% of the equity interest in our then-wholly owned subsidiary Time Spring to Billion Team, an affiliate of D Magic Mobile, a cooperative licensee of a number of renowned international brands in the mobile telecommunications industry. After this transaction, we owned 51% of Time Spring, which in turn owns Media Chance Limited, which owns 100% of Glomate. 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. In 2009, we began to provide mobile game services and began to earn revenues in the fourth quarter of that year. We launched two MMORPG games in 2010.
In 2010, we introduced the motion game device as a new product line in our game business. Through this new platform, we not only sell motion game controllers, accessories, but also design and manufacture mobile phones with motion game controller functions. From the fourth quarter of 2010, our motion game business generated US$5.1 million in income, and we expect our motion game business to continue to grow in the future and to develop into a core part of our game business.
Products and Services
Our products and services comprise: (1) ODP; (2) brand name phone sales (3) game business.
ODP Products
When we started our operations in 2002, we focused primarily on providing mobile handset design services. However, as a result of increasing customer requests for finished products from us, we have been involved in the mass production phase of the product cycle since 2006. The products we provide 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.
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 customer’s 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.
As a result of acquiring Citylead on February 10, 2010, we adjusted our segment reporting since the first quarter of 2010. We combined the previously reported handset design segment and product sales segment into one segment, the ODP segment.
Brand name phone sales
In February 2010, we acquired Citylead together with its subsidiaries and obtained control over Citylead’s variable interest entity, QIGI Technology, a domestic brand mobile phone company. Through this acquisition, we obtained the QIGI brand and commenced to sell brand name phones in the brand name phone sales segment under the QIGI brand. We now operate a new business segment for the sales of brand name phones. We emphasize the brand of our mobile handset products because branded products—especially products bearing well-known brands and images—offer a higher profit margin compared with other mobile handsets we sell. As a result of the new business line, we changed our segment reporting in the first quarter of 2010, and the business activities of QIGI Technology now represent a new segment, the brand name phone sales segment.
Game
We began to develop mobile games and PC online games in 2008 and have since then 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 two MMORPG games in 2010 which generated revenues amounting to US$103,000.
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 approximately 51.8% of our game revenues in 2010.

 

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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’s specification for a fixed price in a period, usually less than one year. Revenues from this type of contract is recognized under the proportional performance method using an output measure determined by achievement of milestones which include planning documentation and testing reports.
We began providing motion game services in 2010. Gamers can use motion game controllers or mobiles to play motion games, which can be downloaded from www.17vee.com . The controller or mobile is able to support hundreds of motion games such as racing, shooting, tennis, track and field. The motion game controller can be accessed through Bluetooth connection with the end user’s computer or laptop. Revenue from sales of motion game controllers and mobiles are recognized on goods delivery and ownership transferred to customers. Usually we receive advance payment from customers and deliver goods within one week of receiving payment. This part of our income contributed over 46.9% of our game revenue in 2010.
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 customer 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 2008, 2009 and 2010, our largest three customers collectively accounted for approximately 28.8%, 34.2% and 30.4%, 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.
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.
Our customers with respect to our motion game business are either distributors or individual end users. We typically charge payments based on the per-unit price multiplied by total number of motion game controllers. A portion of the total purchase price is usually payable upon the execution of the relevant sales contracts as prepayment and full payment are required before we deliver our products to our customers.
Sales and Marketing
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 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, the CTIA Wireless exhibition in Las Vegas, Communic Asia in Singapore and GITEX Technology Week Exposition in Dubai. 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.

 

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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 2.75G GSM/EDGE 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.
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 2.75G GSM/EDGE, 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 launched wireless portable people meters device for our US customer to collect marketing data which can monitor the media station which the people watching or listening.
We are also focusing our efforts to develop mobile games and online games, making progress in implementing new technologies such as motion games for online game. During January 2010, we launched our first MMORPG PC online game, developed entirely by our own studios . In 2011, we are putting in more effort to launch number of motion games.
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.

 

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As of December 31, 2010, our research and development staff and supportive function consisted of 318 engineers, representing approximately 67.5% 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, 2008, 2009 and 2010, we had research and development expenses of US$18.2 million, US$12.0 million and US$11.6 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 which 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 Sim Technology Group Limited, BYD Electronics Limited., and Longcheer Holdings Limited, which 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.
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.

 

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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 has qualified as a manufacturing foreign investment enterprise (the “FIE”) located in Shanghai Pudong according to the old EIT law and obtained HNTE in December 2008. It was entitled to a preferential tax rate of 15% prior to year 2008, with two-years exemption followed by a 50% reduction in tax rate for the subsequent three years under the old EIT law starting from 2005. According to the transition rule from the old tax laws to the new EIT Law, in 2008 and 2009, Techfaith Shanghai is entitled a tax rate of 18% and 20%, respectively. Starting from 2010, the tax rate for Techfaith Shanghai is 15%. 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 2009, 2010 and 2011. Based on the transition rules of the EIT Law, those companies each 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 China’s 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.
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 investor’s 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$117.5 million at December 31, 2010 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, 2010.
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, 2008, 2009 and 2010 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.

 

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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.
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 user’s 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.

 

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Pursuant to the Administration of the Settlement, Sale and Payment of Foreign Exchange Provisions, promulgated by the People’s 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 People’s 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 People’s 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.

 

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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:
(FLOW CHART)
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. We also have contractual arrangements with Techfaith Interactive under which Techfaith Interactive operates our online and mobile game business
 
(2)   Billion Team Asia Limited is an affiliate entity of D Magic Mobile (Shanghai) Incorporation.

 

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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 and provides motion game devices;
 
  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, IDG-Accel China Growth Fund II L.P. and IDG-Accel China Investor II L.P owns 23.4%, 8.1% and 0.7% of One Net respectively. Glomate is a subsidiary that is 51%-owned by us and 49%-owned by Billion Team Asia Limited, an affiliate of D Magic Mobile.
D.  Plant, Machinery and Equipment
As of December 31, 2010, 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 buildings in Hangzhou. During the year ended December 31, 2010, the construction has completed and transferred to property, machinery and equipment in the amount of US$24.5 million. In November 2010, the buildings have been leased to a third party for three years. As of December 31, 2010, we had paid US$2.6 million for leasehold improvement. The leasehold improvement is for new rented office working place in Beijing headquarter for the next three years starting from December 31, 2010. We believe that we will be able to obtain adequate facilities to accommodate our future expansion plans.
Item 4A. Unresolved Staff Comments
We received a letter from the staff of the SEC (the “Staff”), dated May 20, 2011, which contained a comment relating to our assessment on the effectiveness of our internal control over financial reporting as of December 31, 2010. We concluded that there was a material weakness in our internal control over financial reporting, and as a result, our internal control over financial reporting was not effective as of December 31, 2010, as set out in “Item 15. Controls and Procedures” on this Form 20-F. On May 23, 2011, we submitted our response letter to the Staff containing our conclusion and the related disclosure, and are awaiting confirmation from the Staff that the unsolved comment is cleared.

 

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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 Prospects—G. 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.
A.  Operating Results
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 2010, we re-organized our business operations into three segments: (1) ODP products, (2) brand name phone sales, and (3) game business.
Restatement of Previously-Issued Financial Statements
We issued our consolidated financial statements as of December 31, 2008 and 2009 and for the years ended December 31, 2007, 2008 and 2009 on May 19, 2010. As described in Note 3 to the financial statements “Restatement”, the financial statements as of and for the year ended December 31, 2009 were restated subsequently.
In 2009, our subsidiary, Leo Technology Limited, now renamed 798 Entertainment Limited, issued to the IDG Funds certain senior secured convertible promissory notes with a principal value of US$10 million that were issued at par less issuance costs of US$0.4 million. We recorded the notes as a liability at the amount of the net proceeds of US$9.6 million. These notes included a number of embedded derivatives, principally a right to convert into shares of Leo Technology or the shares of our company at the holder’s discretion. We determined that the fair value of these embedded derivatives at the date of issuance was US$12.8 million and pursuant to the authoritative literature were required to be bifurcated from the debt host and subsequently marked to market through earnings. In 2009 the loss charged to the income statement arising from the increase in the fair value of the derivatives was US$5.3 million. In our previously reported 2009 financial statements, we first allocated the proceeds to the embedded derivatives equal to the fair value of these embedded derivatives, and then allocated the remaining carrying amount to the debt host. Since the fair value of embedded derivatives exceeded the net proceeds of the notes and hence, result in a debit amount of US$3.2 million for the debt host at the date of the issuance. We accreted the residual amount (the residual amount of the debt host after deducting the embedded derivatives) to the amount due on the redemption of the notes over the life of the debt instrument assuming no conversion on redemption. In 2009, the charge to the income statement in respect of the accretion of interest was US$0.6 million. The notes were subsequently converted into our equity pursuant to the original conversion terms in September 2010, during which each investor chose to convert 62.5% of its share of the principal amount of the notes into our ordinary shares, and the remaining 37.5% was converted into shares of Leo Technology Limited, now renamed 798 Entertainment Limited.
While we believed that the accounting treatment applied to the notes above was in compliance with the relevant authoritative literature, we have subsequently determined that the more correct accounting treatment to be applied upon the issuance of the debt was to recognize the embedded derivatives at their fair value of US$12.8 million but to recognize the difference between that amount and the amount of the net proceeds as a loss upon the issuance of the convertible notes. Our earnings for the year ended December 31, 2009 was restated so as to result in the following changes:
         
Impact on current earnings for year ended December 31, 2009:   (in thousands)  
 
       
Decrease in net income in 2009
  $ (2,588 )
 
       
Increase in net loss attributable to noncontrolling interest
  $ 665  
 
     
 
       
Decrease in retained earning as of December 31, 2009
  $ (1,923 )
 
     
For details, see Note 3, “Restatement,” to our consolidated financial statements included in this annual report on Form 20-F.
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.

 

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Our revenues from ODP business as a percentage of our total net revenues increased from over 90% in both 2008 and 2009, and decreased to over 80% in 2010. However, a new business segment, brand name phone sales, contributed revenues ofUS$38.5 million in 2010. and game business has generated revenues in 2010 at amount of US$10.9 million and we expect it to generate more revenues in both QIGI branded and game business in 2010. Therefore, the revenues from ODP as a percentage of our total net revenues in 2010 fall in comparison. We recognize revenues from ODP products after all the risks and rights have passed to our customers—as we outsource the production and assembly of our products to outside manufacturers, we record revenue based on the gross amounts billed to our customers. We use this revenue-recording method because our customers generally entrust everything involving production to us and pay us fully and promptly upon being billed, for the following reasons: (1) we are the primary obligor in these transactions, (2) we have latitude in establishing prices, (3) we are involved in the determination of the service specifications, (4) we bear the credit risk, (5) we bear the inventory risk and (6) we have the right to select the suppliers and the manufacturers. Normally, full payment is required before products are shipped. We recognize revenues for products shipped on credit only after collection is reasonably assured.
We also provide mobile handset design services to mobile handset brand owners. Our revenues from mobile handset design services as a percentage of our total net revenues decreased from 9% in 2008 and 2% in 2009 to less than 1% in 2010, and the amount of revenue decreased from US$ 19.1 million in 2008 and US$ 4.5 million in 2009 to US$3.5 million in 2010. The decrease in revenues from handset design services is due to change in demands from customers as well as change in our product strategy, as an increasing number of 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 product sales are net of value-added taxes which is 17% of the gross sales proceeds received by our PRC subsidiaries.
Our revenues from PC online game and mobile game related 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 relate 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.
Cost of Revenues. Cost of revenues from our ODP 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 ODP products 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 brand name phone sales include raw materials and components cost from supplier, warranty and delivery cost. Cost of revenues for providing mobile game services to our customers primarily consists of compensation and benefits for our game developers. Cost of PC online game include maintenance expense, depreciation and amortization in web server and employee cost in connection with our online game services. Cost of revenues from motion game include product cost to EMS providers, warranty cost and delivery cost.
Operating Expenses. Our operating expenses consist of general and administrative, research and development and selling and marketing expenses and expenses related to impairment of long-lived 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.

 

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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.
Revenue Recognition
Our revenues are derived from sales of products of the ODP segment, sale of products of brand name phone sales segment and game-related revenue.
Revenue related to ODP segment
(1) 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. The four criteria are generally met upon delivery of the product.
(2) Design fee
Design fee is a fixed amount paid in installments according to pre-agreed milestones. In general, three milestones are identified in our design contracts with customers: GSM-based handsets industry-based standard referred to as full type approval, or FTA; the regulatory approval for its use in the intended country which, in the case of China, is a China-type approval, or CTA; and the beginning of mass production referred to as shipping acceptance, or SA. We recognize revenues in accordance with authoritative guidance with regard to software revenue recognition based on the proportional performance method using an output measure determined by the achievement of each milestone.
(3) Component sales related to design
After we have delivered design products to our 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 are 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 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. The four criteria are generally met upon delivery of the product.

 

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Revenue related to brand name phone sales segment
Revenue from sales of brand name phones represent mobile phone under the QIGI brand, which is owned by us. The QIGI brand phones are designed by us and manufactured by EMS providers. Revenue 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. The four criteria are generally met upon delivery of the product.
Revenue related to game segment
(1) Wireless gaming service
We provide mobile phone game-related services to brand mobile phone manufacturers. Under these arrangements, we maintain 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 relevant contract period. In return, mobile phone manufactures pay us a fixed fee for the contract period, usually one year. Revenue is recognized ratably over the contract period.
(2) Motion game device
Motion game device is a PC game control device that is used in motion games. Motion game device is designed by us and manufactured by EMS providers. Revenue 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. The four criteria are generally met upon delivery of the product.
(3) PC on-line game related service
We generate revenue from the provision of online game services. The online games can be accessed and played by end users free of charge but the end users may choose to purchase in-game merchandise or premium features to enhance their game-playing experience using virtual currency. The end users can purchase virtual currency by making direct online payments to us or purchasing prepaid cards (“PP-Cards”). The amounts received from direct online payments are recorded initially as deferred revenues. We sell PP-Cards through distributors at a discount to the face value of the PP-Cards. We record the amounts received from distributors after deduction of sales discounts as deferred revenues.
End users are required to use access codes and passwords, either obtained from the PP-card or through direct online payment, in exchange for the face value of these cards or the amount of direct online payment to virtual currency and deposit into their personal accounts. End users consume the virtual currency by purchasing in-game merchandise or premium features online. We recognize the revenues as the in-game merchandise or premium features are consumed in the game by the end users. We calculate the amount of revenues recognized for each unit of virtual currency consumed using a weighted average method on a monthly basis by dividing the total cumulative unrecognized deferred revenues by the amount of total unconsumed virtual currency.
Any deferred revenue remaining at the time the relevant PP-Card expires, which is normally one year from the purchase of each PP-Ccard, is recognized as revenues at that time. The amount associated with the unused virtual currency, which are without any contractual expiration terms, are carried as deferred revenues indefinitely as, due to our short operating history, we are not able to reasonably estimate the amount of virtual currency which will be ultimately given up by the end users.
(4) Mobile phone game design service
We also provide mobile phone game design services to brand mobile phone manufacturers. Under this type of arrangements, we are required to design mobile phone games according to customer’s 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.
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.

 

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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 and various assumptions such as projected future cash flows. Impairment 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 unit’s 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 $0.6 million as of December 31, 2009; this amount is allocated to the ODP segment. As of December 31, 2010, the total carrying amount is $1.8 million, of which $0.6 million is allocate to the ODP segment and $1.2 million is allocated to the brand name phone sales segment. For the year 2010, we performed the impairment assessment for goodwill allocated to the ODP and brand name phone sales segments. The fair values of the reporting units are substantially higher than their carrying values. Therefore, we have not recognized any impairment loss of goodwill in 2010.
To determine the fair values of the ODP segment and the brand name phone sales segment, we rely primarily on tje income approach by applying the discounted cash flow analysis. The following are critical assumptions in determining the fair values of the reporting units:
    The revenue growth is projected at a compound annual growth rate, or CAGR, of approximately 5% for the ODP segment for the period from 2011-2015; and the CAGR is projected to be approximately 8% or brand name phone sales segment from 2011-2015.
 
    In the projection period, the cost of revenues as a percentage of revenues is expected to remain stable for the ODP segment; and cost of revenues as percentage of revenue is expected to increase gradually.
 
    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 for the ODP segment, is expected to remain stable at 11.3%; and expected EBIT margins for the brand name phone sales segment are 30.9% for 2011, 29.3% for 2012, 26.3% for 2013 and 23.1% for 2014 and 2015, respectively.
 
    To maintain normal operations, capital expenditures are estimated to be around 0.4% of revenues for the ODP segment and 0.1% of revenues for the brand name phone sales segment.
 
    The working capital requirement is estimated based on main accounts turnover days.
 
    A perpetual growth rate after 2015 is assumed to be at 3% per year for the ODP segment and 2% per year for the brand name phone sales segment.
 
    The weighted average cost of capital, or WACC, used in the analysis is 23% for ODP segment and 39.5% for brand name brand name phone sales segment.
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.
To assess the reasonableness of our fair value analysis, when appropriate, we may also use market-based valuation approaches to corroborate the results of the income approach, such as performing market capitalization reconciliation and analyzing comparable companies’ trading multiples. Our overall market capitalization should reconcile, within a reasonable range, to the sum of the fair values of the reporting units. While the sum of the reporting units’ values may not equal market capitalization, the test may still indicate the reasonableness of the individual valuations of the reporting units if the difference can be adequately explained. Comparable companies’ trading multiples are compared to implied valuation multiples, and any differences should be adequately explained.
At the time of the annual impairment test date, the sum of the fair values of the reporting units was higher than our overall market capitalization. We analyzed the reasonableness of the difference by assessing several factors including recent acquisition premium in the industry, composition of our net assets and pricing trend of our shares. Based on our assessment, the difference between sum of the fair values of the reporting units and our overall market capitalization could be reasonably explained. As of the annual impairment test date, implied valuation multiples were also within the range of comparable company public trading multiples.

 

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Impairment of long-lived assets and certain indefinite-lived intangible asset
We evaluate our long-lived assets (asset group) for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset (asset group) may not be recoverable. When these events occur, we measure impairment by comparing the carrying amount of the assets (asset group) to future undiscounted net cash flows expected to result from the use of the assets (asset group) and their eventual disposition. If the sum of the expected undiscounted cash flow is less than the carrying amount of the assets (asset group), we recognize an impairment loss equal to the amount by which the carrying value of the asset (asset group) exceeds its fair value. The determination of fair value of the long lived assets acquired involves certain judgments and estimates. These judgments can include, but are not limited to, the cash flows that an asset is expected to generate in the future. This analysis also relies on a number of factors, including changes in strategic direction, business plans, regulatory developments, economic and budget projections, technological improvements, and operating results.
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 US$0.9 million impairment loss of long-lived assets in 2008.
During the years ended December 31, 2009 and 2010, there were no further impairment of long-lived assets.
In 2010, through the acquisition of Citylead, we recognized a trade name and domain name as an intangible asset with indefinite life. We review and test intangible assets with indefinite lives for impairment at least annually, or more frequently if events or changes in circumstances indicate that the carrying amount of such assets may be impaired. Intangible assets with an indefinite life are tested for impairment by comparing the fair value with its carrying value. If the fair value is less than the carrying value of the intangible asset with indefinite life, we recognize an impairment loss equal to the difference. Fair value is generally determined using income approach. Significant estimates used in the valuation methodologies include assumptions and estimates of future cash flows, future short-term and long-term growth rates, future profitability, weighted average cost of capital and industry economic factors. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for intangible assets with an indefinite life. During the year ended December 31, 2010, there was no impairment of indefinite life intangible assets.
In 2010, Through the business acquisition of Citylead, the intangible assets with indefinite life represent trade name and domain name acquired. Intangible assets with indefinite life are not amortized but tested for impairment annually. We performed the impairment test on the indefinite life intangible for the year ended December 31, 2010, and found no impairment of indefinite life intangible assets for that year.
Senior convertible promissory notes
In 2009, our subsidiary, Leo Technology Limited, now renamed 798 Entertainment Limited, issued to the IDG Funds senior secured convertible promissory notes with a principle value of US$10 million that were issued at par less issuance costs of US$0.4 million. We recorded the convertible notes as a liability at the amount of the net proceeds of US$9.6 million. The notes included a number of embedded derivatives, principally a right to convert into shares of Leo Technology Limited or the shares of our company at the holder’s discretion. We determined that the fair value of these embedded derivatives was at the date of issuance was US$12.8 million and pursuant to the authoritative literature were required to be bifurcated from the debt and subsequently marked to market through earnings. We limited the initial allocation of the proceeds to the embedded derivatives to the amount of proceeds received with the excess of the fair value of the embedded derivatives over the proceeds received charged to expense. Hence, the debt discount has exceeded the principle amount of these notes by US$3.2 million and was recognized as a loss in our consolidated statement of operations in 2009. We accreted the residual amount (the residual amount of the debt host after deducting the embedded derivatives) to the amount due on the redemption of the debt over the life of the debt instrument assuming no conversion on redemption. In 2009 and 2010, the interest expense recognized in the income statement in respect of the amortization of the remaining debt discount were immaterial. In addition, the change in the fair value of bifurcated embedded derivatives during 2009 and 2010 (till September 2010, which was the conversion date as described below) was a loss of US$5.3 million and a gain of US$1.3 million, respectively.
The notes were subsequently converted into equity of our company pursuant to the original conversion terms in September 2010, where each investor chose to convert 62.5% of its shares of the principal amount of the notes into our ordinary shares, and the remaining 37.5% was converted into shares of 798 Entertainment Limited. We considered the authoritative literature for the conversion of convertible instrument and believed that convertible debt instrument which does not include a beneficial conversion feature, the carrying amount of the debt, including any unamortized premium or discount, shall be credited to the capital accounts upon conversion to reflect the stock issued and no gain or loss is recognized. In addition, we also considered the authoritative literature that no gain or loss would arise from the conversion of the debt instrument which does not include a beneficial conversion feature if it took place pursuant to the original conversion terms.

 

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Accordingly, we credited the carrying amount of such notes to include any unrecognized premium or discount, unamortized issuance costs and any part of the carrying value attributable to an embedded derivative bifurcated or otherwise, to the capital accounts upon conversion to reflect the shares issued for the conversion pursuant to the original terms with no inducement and no gain or loss recognized.
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 management’s 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 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.
Our consolidated financial statements as of December 31, 2009 and for the year then ended have been restated, due to the correction of the accounting treatment of the senior convertible promissory notes described above. For details, see Note 3, “Restatement,” to our consolidated financial statements included in this annual report on Form 20-F and Item 5.A. “Operating and Financial Review and Prospects — Operating Results — Restatement of Previously-Issued Financial Statements.”
                         
    For the Year Ended December 31,  
            2009        
    2008     (As restated)     2010  
    (In thousands)  
Consolidated Statement of Operations Data
                       
Net revenues:
                       
ODP
  $ 208,850     $ 210,588     $ 222,549  
Brand name phone sales
                38,462  
Game
          488       10,866  
 
                 
 
                       
Total net revenues
    208,850       211,076       271,877  
 
                 
 
                       
Cost of revenues:
                       
ODP
    (167,685 )     (172,801 )     (180,517 )
Brand name phone sales
                (22,066 )
Game
          (64 )     (2,202 )
 
                 
 
                       
Total cost of revenues
    (167,685 )     (172,865 )     (204,785 )
 
                 
 
                       
Gross profit
    41,165       38,211       67,092  
 
                 
 
                       
Operating expenses:
                       
General and administrative
    (15,553 )     (9,600 )     (14,626 )
Research and development
    (18,195 )     (12,040 )     (11,613 )
Selling and marketing
    (5,497 )     (3,241 )     (6,084 )
Impairment of long-lived assets
    (880 )            
Total operating expenses
    (40,125 )     (24,881 )     (32,323 )
Government subsidy income
    3,081       481       159  
Other operating income
    2,443             1,109  
Income from operations
    6,564       13,811       36,037  
Interest expense
    (47 )     (35 )     (1 )

 

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    For the Year Ended December 31,  
            2009        
    2008     (As restated)     2010  
    (In thousands)  
Interest income
    1,616       667       882  
Investment income
                142  
Other income (expenses), net
    (22 )     115       (101 )
Loss on issuance of convertible notes
          (3,176 )      
Change in fair value of put option
    (855 )     (84 )     (123 )
Change in fair value of derivatives embedded in convertible notes
          (5,270 )     1,280  
Income tax benefit (expenses)
    93       (3,642 )     (9,458 )
 
                 
 
                       
Net income
    7,349       2,386       28,658  
Less: net loss (income) attributable to the noncontrolling interest
    652       2,028       (818 )
Net income attributable to Techfaith
  $ 8,001     $ 4,414     $ 27,840  
 
                 
Comparison of the Year Ended December 31, 2009 and the Year Ended December 31, 2010
Net Revenues
Our net revenue increased by 28.8% from US$211.1 million in 2009 to US$271.9 million in 2010. The increase was attributed to the increased sales of smart phones and feature phones in ODP business and, brand name phone sales and increased revenues from our game business.
ODP business. Our net revenues from ODP increased by 5.7% from US$210.6 million in 2009 to US$222.5 million in 2010, due to the increase in sales orders of smart phones and feature phones.
ODP products revenues from our feature phones as a result of contracts for which the contract party was incorporated inside the PRC increased by 38.6% from US$66.1 million in 2009 to US$91.6 million in 2010. 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$13.5 million in 2009 to US$10.8 million in 2010, due to our business strategy to expand the domestic markets for feature phones.
ODP product revenue from our smart phones as a result of contracts for which the contract party was incorporated inside the PRC increased by 5.4% from US$104.3 million in 2009 to US$109.9 million in 2010 due to expand domestic markets for middle- and high-end smart phones. ODP revenue from our smart phones as a result of contracts for which the contract party was incorporated outside the PRC decreased by 19.0% from US$2.1 million in 2009 to US$1.7 million in 2010, due to our business strategy to continuously expand the domestic marktes for middle and high-end smart phones.
Brand name phone sales. Revenues from Brand name phone sales increased from nil in 2009 to US$38.5 million in 2010. The increase was primarily due to our having newly acquired.
Game. Revenues from game increased from US$0.5 million in 2009 to US$10.9 million in 2010. The increase was primarily due to revenue increase in mobile game services and motion game devices during 2010. We began generating income from PC online games by launching two MMORPG games during 2010 and we intend to continue our efforts to develop and launch more mobile and online games in the future. In addition, we began to generate revenues from a new product line, motion game, by selling motion game devices and mobiles. We expect game revenues to increase in the coming years.
Cost of Revenues
Cost of revenues increased by 18.4% from US$172.9 million in 2009 to US$204.8 million in 2010. The increase was attributable to the increase in cost of revenues for product sales.
ODP. Cost of revenues for ODP increased by 4.5% from US$172.8 million in 2009 to US$180.5 million in 2010, due to the increase in the volume of our sales contracts. The increase is consistent with the increase in our ODP revenues as an ODP provider..
Brand name phone sales. Cost of revenues from brand name phone sales increased from nil in 2009 to US$22.1 million in 2010. The increase was primarily due to acquisition of control over QIGI Technology in 2010.
Game. Cost of revenues from game increased from US$0.1 million in 2009 to US$2.2 million in 2010. The increase was primarily due to the fact that we began to generate revenue in the game business with two PC online games and motion game controller in 2010 and the increase revenues from mobile phone game services. During 2010, we provided some more mobile game services to certain manufacturers of branded mobile phones and continued efforts to develop and expand the online games and motion games portions of our business.

 

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Gross Profit
Our gross profit was US$ 67.1 million in 2010, compared to US$ 38.2 million in 2009, representing gross margins of 24.7% and 18.1%, respectively. The gross margin for ODP increased from 17.9% in 2009 to 18.9% in 2010. The increase was primarily due to the fact that changes in our product mix also caused changes in gross margins for feature phone and smart phones in 2010. Gross margin for brand name phone sales was 42.6% in 2010. This high growth margin was primarily due to the fact that we started to sell middle and high-end QIGI-branded smart phones with over 40% gross margin. Revenues from ODP decreased from 99.8% of the total net revenue in 2009 to 81.9% in 2010. On the contrary, the revenues from brand name phone sales contributed 14.1% of the total net revenues in 2010. Revenue from game business increased from less than 1.0% of the total net revenue in 2009 to 4.0% in 2010. As a result of the foregoing, our gross margins increased from 18.1% in 2009 to 24.7% in 2010.
Operating Expenses
Operating expenses increased by 29.7% from US$24.9 million in 2009 to US$32.3 million in 2010. The increase was primarily due to the introduction of the brand-name phone sales business which resulted in an increase in sales and marketing expanse as well as general and administrative expenses.
General and Administrative. General and administrative expenses increased from US$9.6 million in 2009 to US$14.6 million in 2010. The increase was due primarily to a US$8.2 million bad debts provision according to our general bad debts provision policy, which was US$2.1 million in 2009.
Research and Development. Research and development expenses decreased from US$12.0 million in 2009 to US$11.6 million in 2010. The decrease was due primarily to the cost savings resulting from a decrease in material and testing fees, as the gaming business has increased significantly during the year, research and development spending has shifted from our ODP business to our game business, and less material and testing fees are required for the game business due to the nature of the business.
Selling and Marketing. Selling and marketing expenses increased by 90.6% from US$3.2 million in 2009 to US$6.1 million in 2010. The increase was due primarily to the fact that we performed large-scale sales and promotional campaigns for QIGI brand smart phones in 2010.
Government Subsidy Income
We recorded government subsidy income of US$0.5 million and US$0.2 million for the years ended December 31, 2009 and 2010, 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$0.3 million and US$0.2 million for the years ended December 31, 2009 and 2010, 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$0.2 million and nil million for the years ended December 31, 2009 and 2010, respectively for this type of government grants.
Other operating Income
We record other operating income of nil and US$1.1 million for the years ended December 31, 2009 and 2010, respectively. In 2010, primarily represented rental income received.
Interest income
Interest income increased by 28.6% from US$0.7 million in 2009 to US$0.9 million in 2010. The increase was primarily due to the fact that cash and cash equivalents increased by 52.0% from 2009 to 2010.
Other (expenses) income
Other income of US$0.1 million in 2009 primarily represented penalty income received. In 2010, we recorded a expense of US$0.1 million for the change in fair value of the contingent acquisition consideration in relation to the acquisition of Citylead in February 2010. According to share purchase agreement, if the acquired business cannot meet certain performance targets for 2010 and 2011, the selling shareholders are obliged to return certain number shares issued as consideration to Techfaith. Therefore, the selling shareholders are obligated to return previously transferred consideration, and we record the change in fair value of the contingent consideration receivable as a other income or expenses.
Loss on issuance of convertible notes
Loss on issuance of convertible notes in 2009 represented the loss recognized for the portion of the senior convertible promissory notes discounted in excess of the face value of the notes. There is no such loss recognized in 2010.

 

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Change in fair value of put option
Change in fair value of put option were losses of US$84,000 and US$123,000 in 2009 and 2010, respectively, as a result of the increase in the fair value of certain underlying put option relating to the Techsoft business, as the actual performance of the Techsoft business did not meet the original budget and therefore, the fair value of the underlying put option was affected.
Change in fair value of derivatives embedded in convertible notes
As a result of issuance of convertible notes with embedded derivatives in 2009, we recognized a loss of US$5.3 million and a gain of US$1.3 million for the years ended December 31, 2009 and 2010, respectively, due to the change in fair value of the derivatives embedded in convertible notes of such fair value was changed in line with the fluctuation of share price of the Company throughout the period. In September 2010, the two investors have exercised their rights and converted into our ordinary shares and 798 Entertainment’s class B ordinary shares by 62.5% and 37.5% of the face value of the convertible notes, respectively. There was no such income or loss incurred since the fourth quarter of 2010.
Income tax benefit (expenses)
Income tax expense increased from US$3.6 million in 2009 to US$9.5 million in 2010 was mainly due to significant increases in our net revenues and gross profit.
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$27.8 million in 2010, as compared to a net income attributable to Techfaith of US$4.4 million in 2009.
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.
ODP Business. ODP revenues include two main components-handset design and ODP products. 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.
Revenues from ODP products 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.
ODP product revenues 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. ODP product revenues 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.
ODP product revenues 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. ODP product revenues 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 ODP product revenues.
ODP Business. 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.

 

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Cost of revenue from ODP products 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. Gross margin for ODP products decreased from 19.7% in 2008 to 17.9% in 2009. The decrease was mainly due to the changes in the product mix, which also caused changes in gross margins for handset design and ODP products revenues. ODP revenue from ODP products decreased from 100% of the total net revenue in 2008 to 99.8% in 2009. The slight decrease was primary due to the introduction of the new segment for game business. 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.
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.

 

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Other operating income
Other operating income for year ended December 31, 2008 primarily represented a gain of US$2.4 million recognised in connection with the reversal of the excess amount of accrued contribution recorded in previous years pursuant to the government-mandated defined contribution employee benefit plan upon the verification by the local government agency.
Interest income
Interest income decreased by 56.3% from US$1.6 million in 2008 to US$0.7 million in 2009. The decrease was primarily due to term deposits with an aggregate amount of RMB 50 million were matured in 2009 and thereafter, we allocated more money in savings account for operation purpose.
Other (expenses) income
Other expense of US$22,000 in 2008 represented a donation. Other income of US$115,000 in 2009 primarily represented penalty income received.
Loss on issuance of convertible notes
Loss on issuance of convertible notes in 2009 represented the loss recognized for the portion of the senior convertible promissory notes discount in excess of the face value of the notes. These is no such loss recognized in 2008.
Change in fair value of put option
Change in fair value of put option was US$855,000 in 2008 as a result of the expectation exceeding performance of the Techfaith Software (China) Limited (“Techsoft”) business underlying the put option. The fair value of the put option changed slighted by US$84,000 in 2009 because Techsoft business in 2009 was not significantly different from the expectation as of the beginning of that year.
Change in fair value of derivatives embedded in convertible notes
As a result of issuance of convertible notes with embedded derivatives in 2009, we recognized a loss of US$5.3 million for the year ended December 31, 2009 due to increase in fair value of the derivatives embedded in convertible notes of such fair value was changed in line with the fluctuation of share price of the Company throughout the period.
Income tax benefit (expenses)
Income tax benefit of US$93,000 in 2008 was resulted due to our PRC entities were still entitled to the tax exemption and preferential tax rates during the year ended December 31, 2008. Income tax expense increased to US$ 3.6 million in 2009 due to these preferential tax treatments granted to our PRC entities were expired in 2009.
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$4.4 million in 2009, as compared to a net income attributable to Techfaith of US$8.0 million in 2008.
Accounting Pronouncements Not Yet Adopted
In October 2009, the Financial Accounting Standards Board (FASB) issued amended revenue recognition guidance for arrangements with multiple deliverables. The new guidance eliminates the residual method of revenue recognition and allows the use of management’s best estimate of selling price for individual elements of an arrangement when vendor specific objective evidence (VSOE), vendor objective evidence (VOE) or third-party evidence (TPE) is unavailable. Prospective application of this new guidance for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with earlier application permitted. Alternatively, an entity can elect to adopt this guidance on a retrospective basis. We are in the process of evaluating what effect the adoption of this pronouncement will have on our consolidated financial condition and results of operations.
In October 2009, the FASB issued authoritative guidance which amends the scope of existing software revenue recognition accounting. Tangible products containing software components and non-software components that function together to deliver the product’s essential functionality would be scoped out of the accounting guidance on software and accounted for based on other appropriate revenue recognition guidance. Prospective application of this new guidance for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with earlier application permitted. Alternatively, an entity can elect to adopt this new guidance on a retrospective basis. We are in the process of evaluating what effect the adoption of this pronouncement will have on our consolidated financial condition and results of operations.

 

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In April 2010, the FASB issued an authoritative pronouncement regarding the 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 pronouncement 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 what effect the adoption of this pronouncement will have on our consolidated financial condition and results of operations.
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) entity’s functional currency, (2) functional currency of the foreign operation for which the employee providesservices, 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 entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition, and therefore should be considered an equity award assuming all other criteria for equity classification are met. The pronouncement is 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 what effect the adoption of this pronouncement will have on our consolidated financial condition and results of operations.
In December 2010, the FASB issued an authoritative pronouncement on when to perform Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts. The amendments in this update modify Step 1 so that for those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with existing guidance, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce that fair value of a reporting unit 101 below its carrying amount. For public entities, the guidance is effective for impairment tests performed during entities’ fiscal years (and interim periods within those years) that begin after December 15, 2010. Early adoption will not be permitted. We do not expect the adoption of this pronouncement will have a significant effect on our consolidated financial position or results of operations.
In December 2010, the FASB issued an authoritative pronouncement on disclosure of supplementary pro forma information for business combinations. The objective of this guidance is to address diversity in practice regarding the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations. The amendments in this update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, non-recurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments affect any public entity as defined by Topic 805 that enters into business combinations that are material on an individual or aggregate basis. The amendments will be effective for business combinations consummated in periods beginning after December 15, 2010, and should be applied prospectively as of the date of adoption. Early adoption is permitted. We do not expect the adoption of this pronouncement will have a significant effect on our consolidated financial position or results of operations.
B. Liquidity and Capital Resources
The following table sets forth a summary of our cash flows for the periods indicated:
                         
    Year Ended December 31,  
            2009        
    2008     (As restated)     2010  
    (In thousands)  
Net cash provided by operating activities
  $ 1,496     $ 33,241     $ 53,729  
Net cash (used in) provided by investing activities
    (11,409 )     (1,146 )     9,291  
Net cash provided by financing activities
          19,389       290  
Effect of exchange rate changes
    4,085       134       4,682  
Net increase (decrease) in cash and cash equivalents
    (5,828 )     51,618       67,992  
Cash and cash equivalents at beginning of period
    84,754       78,926       130,544  
Cash and cash equivalents at end of period
  $ 78,926     $ 130,544     $ 198,536  

 

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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, 2010 and December 31, 2009, we had US$198.5 million and US$130.5 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.
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 Technology’s common equity under a definitive agreement entered in 2009. In September, 2010, according to relevant investor rights agreement, each of the IDG Funds chose to convert 62.5% of its share of the principal amount of the convertible note into TechFaith’s ordinary shares, and the remaining 37.5% was converted into shares of 798 Entertainment Limited. As a result of the conversion, TechFaith issued 78,814,628 of TechFaith’s ordinary shares to IDG Funds, representing approximately 9.9% of TechFaith’s total outstanding share capital immediately on September 8, 2010. As of the date of this annual report, IDG Funds have met the terms and conditions for resale under Rule 144 of the Securities Act in relation to these shares, represented by 5,254,309 ADSs, and may offer and sell such ADSs from time to time on the open market.
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.”
Operating Activities. Net cash provided by operating activities was US$53.7 million in 2010 as compared to US$33.2 million in 2009. The increase was mainly due to the operating profit from our ODP business and branded business. Net cash provided by operating activities increased substantially; in 2008, net cash provided by operating activities was US$1.5 million; in 2009, net cash provided by operating activities was US$33.2 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 increased from US$4.7 million in 2009 to US$7.5 million in 2010. The increase was due primarily to higher amount of prepayments paid by customers with the increase of sales of products from 2009 to 2010. Advance from customers decreased from US$5.3 million in 2008 to US$4.7 million in 2009. The decrease was primarily due to the lower amount of prepayments paid by customers despite the increase of sales of products from 2008 to 2009. 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$2.3 million in 2009 to US$1.8 million in 2010, deferred revenue decreased slightly from US$0.8 million in 2009 to US$0.3 million in 2010. The decrease was due primarily to the significant decrease of revenues from design fees and design contracts from 2008 to 2009. Deferred revenue increased from US$1.7 million in 2008 to US$0.8 million in 2009.
Our accounts receivable amounted to US$37.8 million, US$29.0 million and US$19.2 million as of December 31, 2008, 2009 and 2010, respectively. Our inventories amounted to US$37.8 million, US$22.9 million and US$17.7 million as of December 31, 2008, 2009 and 2010, respectively.
Investing Activities . Net cash used in investing activities was US$1.1 million in 2009. In 2010, the cash provided by investing activities US$9.3 million. The increase in our investing activities in 2010 was due primarily to acquire branded business and partially offset by an increase in purchase of plant, machinery and equipment. 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 the reduced capital investment in 2009.

 

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Financing Activities. Net cash provided by financing activities were US$19.4 million in 2009 and US$0.3 million in 2010. Net cash used by financing activities were at $nil in 2008. 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 the common equity of Leo Technology Limited under a definitive agreement entered into in 2009.
Our capital expenditures amounted to US$14.8 million, US$1.4 million and US$4.3 million in 2008, 2009 and 2010, 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$4.3 million in 2010, which primarily consisted of plant and machinery, furniture, fixtures and equipment.
Our capital expenditure plan for 2011 is US$3.1 million, which primarily consists of the purchase of license and equipment and construction of buildings in Hangzhou and Beijing.
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, 2010 that are reasonably likely to have a material adverse effect on our net revenues, income, profitability, liquidity or capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.
E. Off-Balance Sheet Arrangements
We do not have any outstanding 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, 2010:
                                         
    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)
    279       279                    
 
                                       
Capital obligations (2)
    3,106       3,106                    
 
                                       
Purchase obligations (3)
    1,865       1,865                    
 
                             
 
                                       
Total
    5,250       5,250                    
 
                             
     
(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.

 

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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.
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 Information—D. 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
    40     Chairman and Chief Executive Officer
Deyou Dong
    36     Director and Chief Operating Officer
Jy-Ber Gilbert Lee
    55     Director
Hung Hsin (Robert) Chen
    65     Independent Director
Ken Lu
    48     Independent Director
Ling Sui
    55     Independent Director
Hui (Tom) Zhang
    38     Independent Director
Yuping Ouyang
    36     Chief Financial Officer
Changke He
    49     Chief Technology Officer
Yibo Fang
    42     Senior Vice President
Shugang Li
    43     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 company’s 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 bachelor’s 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 bachelor’s degree in mechanical engineering from National Taiwan University in 1977, his master’s degree in energy engineering and his Ph.D. degree in mechanical engineering from the University of Illinois in 1980 and 1984, respectively.
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 bachelor’s degree from Taiwan National Cheng Kung University in 1969.

 

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Dr. Ken Lu has been our independent director since August 2006. Dr. Lu is a founder and managing director of Seres Asset Management Limited, an investment management company focusing on the Asian equity markets. Prior to that, Dr. Lu was a managing director of APAC Capital Advisors Limited. Dr. Lu has also worked as a research analyst at a number of leading investment banks, including JP Morgan and Credit Suisse, serving as the Head of China Research at Credit Suisse from October 2001 to May 2004. Dr. Lu also serves on the boards and audit committees of AsiaInfo-Linkage, Inc., a company listed on the NASDAQ, and China Cord Blood Corporation, a company listed on the New York Stock Exchange, and Enerchina Holdings Ltd, a company listed in Hong Kong. He received his Bachelor of Science degree from Peking University in 1985, his Master of Science degree from Brigham Young University in 1988, and his Ph. D. degree in finance from the University of California, Los Angeles in 1998.
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 bachelor’s 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 bachelor’s 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 bachelor’s 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.
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 bachelor’s degree in automatic control and computer engineering from China Central Polytechnic College in 1982 and his master’s 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 bachelor’s 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 bachelor’s 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, Tower C, No. 5, Rongchang East Street, Beijing Economic-Technological Development Area (Yi Zhuang), Beijing 100176, People’s Republic of China.

 

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B.  Compensation of Directors and Executive Officers
In 2010, the aggregate cash compensation and benefits that we paid to our executive officers, including all the directors, was approximately US$0.15 million. No executive officer is entitled to any severance benefits upon termination of his or her employment with our company. We provided $0.02 million for executive pension and retirement benefits in 2010 as required by PRC law.
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 1,931,636 options and 644,090 non-vested shares were issued as of May 23, 2011. Our future grants of share incentives will be made pursuant to the 2005 plan.
The following table summarizes, as of December 31, 2010, the basic terms of the outstanding options granted under the 2005 plan to our directors and senior executive officers.
                                 
            Exercise              
    Ordinary Shares Underlying     Price     Date of     Date of  
    Options Granted     (US$/Share)     Grant   Expiration
Jy-Ber Gilbert Lee
    131,636       1.083     August 13, 2005   August 13, 2015
Total
    131,636                          
On April 21, 2011, we granted 1,500,000 options to directors named below. The following table summarizes the basic terms of these grants:
                                 
    Number of Ordinary Shares                      
    Underlying the Options Granted, as     Price             Vesting  
    of the Date of Grant     (US$/Share)     Date of Grant     Schedule  
Hung Hsin (Robert) Chen
    300,000       0.272     April 21,2011     (1 )
Jy-Ber Gilbert Lee
    300,000       0.272     April 21,2011     (1 )
Hui (Tom) Zhang
    300,000       0.272     April 21,2011     (1 )
Ken Lu
    300,000       0.272     April 21,2011     (1 )
Sui Ling
    300,000       0.272     April 21,2011     (1 )
 
                             
Total
    1,500,000                          
 
                             
As of May 23, 2011, under the 2005 plan, a total of 1,931,636 options had been granted to our directors and senior executive officers.
     
(1)   50% of the shares subject to the option vested immediately on the grant date and remaining 50% will be vested on April 21, 2012. As of May 23,2011, the any vested options have not been exercised yet.

 

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The following table summarizes, as of May 23, 2011, 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     Price     Date of     Vesting  
    Granted, as of the Date of Grant     (US$/Share)     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 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:
    our ordinary shares;
 
    options to purchase our ordinary shares;
 
    nonvested shares, which are non-transferable ordinary shares, subject to forfeiture upon termination of a grantee’s 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 grantee’s 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.
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 grantee’s service without cause within 12 months of the change-of-control transaction, the outstanding awards will automatically become fully vested and exercisable.

 

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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 2010, 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.
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 management’s 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 2010, 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.

 

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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.
D. Employees
As of December 31, 2010, we had 471 employees, including 318 in research and development and supportive function, 84 in selling and marketing and 69 in management and administration.
E. Share Ownership
As of December 31, 2010 and May 23, 2011, 794,003,193 ordinary shares and 794,003,193 ordinary shares, respectively, of our company were outstanding, excluding shares issuable upon exercise of outstanding options. 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 23, 2011, approximately 50.3% of the issued and outstanding shares were held by three record shareholders in the United States, including 26,645,026 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 23, 2011, to the extent such ownership exists.
                 
    Ordinary Shares Beneficially Owned (1)  
    Number     % (2)  
Directors and Executive Officers:
               
Defu Dong (3)
    253,195,000       31.89 %
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)
    65,818       *  
 
               
All directors and executive officers as a group (9
    253,589,908       31.94 %
     
*   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) 794,003,193 being the number of ordinary shares outstanding as of May 23, 2011 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 23, 2011, or the number of nonvested shares held by such person or group, if any, that will fully vest within 60 days after May 23, 2011, 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 23, 2011 by option or other agreement.
 
(3)   Includes 165,750,000 ordinary shares held by Oasis Land Limited, which is ultimately owned by Dong’s Family Trust, and 83,500,000 ordinary shares held by Helio Glaze Limited, which is ultimately owned by Huo’s 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. In December 2010 and March 2011, Mr. Defu Dong repurchased 263,000 ADSs representing 3,945,000 ordinary shares through Oasis Land Limited. The business address for Mr. Defu Dong is Building 1, No. 13, YongChang North Road, Beijing Economic-Technological Development Area (Yi Zhuang), Beijing 100176, People’s Republic of China.
 
(4)   Includes 131,636 ordinary shares that were issuable upon exercise of options exercisable within 60 days after May 23, 2011 held by Mr. Lee.
 
(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;

 

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(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 65,818 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 May 23, 2011, by our other principal shareholder.
                 
    Ordinary Shares Beneficially Owned (1)  
    Number     % (2)  
Other Principal Shareholders:
               
 
               
IDGVC Partners (3)
    78,814,628       9.93 %
Active Century Holdings Limited (4)
    65,934,066       8.3 %
     
(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) 794,003,193 being the number of ordinary shares outstanding as of May 23, 2011 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 23, 2011 or the number of nonvested shares held by such person or group, if any, that will fully vest within 60 days after May 23, 2011 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 23, 2011 by option or through any other agreement.
 
(3)   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 IDG Funds, affiliates of IDGVC Partners, a leading venture capital firm. The notes are convertible into our ordinary shares or Leo Technology Limited’s ordinary shares at the option of the note holders. According to the relevant investor rights agreement, each of the IDG Funds chose to convert 62.5% of its share of the principal amount of the notes into TechFaith’s ordinary shares, and the remaining 37.5% was converted into shares of 798 Entertainment Limited. As a result of the conversion, TechFaith issued 78,814,628 of TechFaith’s ordinary shares to IDG Funds on September 8, 2010. Following this conversion, the IDG Funds exercised their registration rights under the notes. represented by 5,254,309 ADSs outstanding on a fully diluted basis.
 
(4)   In January 2010, we entered into an agreement to obtain control of QIGI Technology in a stock-plus-cash transaction valued at approximately US$13.1 million; the consideration for this transaction is 65,934,066 of our ordinary shares, which share number is subject to an earnings adjustment pending the audited net profit of QIGI Technology for the years 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 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.

 

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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.
In 2010, we sold raw materials to Techfaith Technology for US$0.8 million and purchased products from Techfaith Technology for US$10.7 million. In 2010, we also purchased raw materials from De Ming for US$0.1 million.
As of December 31, 2010, amounts due from related parties are as follows:
                 
    Year ended December 31,  
    2009     2010  
    (In thousands of US$)  
Techfaith Technology
  $ 9,941     $ 8,061  
 
           
As of December 31, 2010, amounts due to related parties are as follows:
                 
    Year ended December 31,  
    2009     2010  
    (In thousands of US$)  
Techfaith Technology
  $ 7     $ 14  
 
               
De Ming
  $ 259     $ 32  
 
           
 
               
Total
  $ 266     $ 46  
 
           
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.

 

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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 2010, the trading price of our ADSs on the NASDAQ ranged from $1.91 to $4.34 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.
                 
    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  
2010
    4.34       1.91  
 
               
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  
Second Quarter 2010
    2.98       1.91  
Third Quarter 2010
    3.70       2.49  
Fourth Quarter 2010
    4.34       3.46  
 
               
Monthly Highs and Lows
               
November 2010
    4.34       3.80  
December 2010
    4.30       3.66  
January 2011
    4.69       3.99  
February 2011
    4.47       3.85  
March 2011
    4.78       3.95  
April 2011
    4.73       3.75  
May 2011 (through May 23, 2011)
    6.96       4.72  
B. Plan of Distribution
Not applicable.
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.

 

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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
1. Share Purchase Agreement dated January 1, and January 4, 2010, among Active Century Holdings Limited (“Active Century”), Citylead Limited (“Citylead”) Techfaith, QIGI&BODEE Technology Limited, QIGI Technology and certain persons listed therein.
On January 1, 2010, Techfaith and Citylead signed a share purchase agreement. According to the purchase agreement Techfaith purchased four Class B ordinary shares of Citylead at the price of US$125,000 per share for an aggregate purchase price of US$500,000. Techfaith then holds 4% of the outstanding shares of Citylead.
On January 4, 2010, Techfaith and Active Century entered into a share purchase agreement. Subject to the terms and conditions of this agreement, Active Century sold 96 ordinary shares of Citylead, representing 96% of the equity interests in Active Century, to Techfaith. As consideration, Techfaith would issue 65,934,066 of its own ordinary shares, each with par value US$0.00002, to Active Century. Active Century undertook to return a certain number of Techfaith’s ordinary shares if the QIGI Technology’s 2010 and 2011 performance cannot meet certain performance target.
2. Shareholders Agreement among Techfaith Hangzhou, Techfaith Intelligent Handset Beijing and Beijing E-town International Investment and Development Co Ltd (“BEIID”)
In April 2011, Techfaith Hangzhou, Techfaith Intelligent Handset Beijing and BEIID entered into an agreement to establish a subsidiary to develop a 10 million-unit capacity smartphone and feature phone production line in the Beijing Economic and Technological Development Area.
(1)   The registered capital of the newly established subsidiary is RMB500 million. Techfaith Hangzhou will invest RMB 245 million and hold 49% share interest; Techfaith Intelligent Handset Beijing will invest by contributing land use right valued at approximately RMB 55 million and hold 11% share interest; BEIID will invest RMB 200 million and hold 40% share interest. All the capital injection shall be paid in four installments and be completed on or before April 30, 2013.
(2)   The board of the subsidiary consists of five members, of which two are nominated by Techfaith Hangzhou, one is nominated by Techfaith Intelligent Handset Beijing, and the other two are nominated by BEIID. Each board decision will be passed by approval from a simple majority (more than 50% of the board members). Any decision to invest more than RMB 4 million or any guaranttee, loan and assets disposal (through transfer or donation) to one beneficiary in a fiscal year would require approval from two-thirds of the board. There are two supervisors, to be nominated by each of Techfaith Intelligent Handset Beijing and BEIID and to be approved by shareholders.
(3)   Profit distribution shall be approved by shareholders for each financial year according to such shareholders’ share percentage in the newly established subsidiary.

 

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3. Agreement between Techfaith Wireless Technology Group Limited (“Techfaith BVI”) and the Administration Committee of Shenyang PuHe New Town (“PuHe”)
In May 2011, Techfaith BVI and PuHe entered into an agreement to establish a subsidiary which would focus on mobile phone research and production.
The registered capital of the newly established subsidiary was set at RMB 240 million. Techfaith BVI will invest RMB 200 million and hold 83.3% share interest in the subsidiary. PuHe will invest RMB 40 million and hold 16.7% share interest. The registered capital would be made in two installments over the course of two years.
In addition, PuHe also agreed to provide a government subsidy of RMB 10 million for the acquisition of fixed assets, with certain conditions attached.
D. Exchange Controls
See “Item 4.B. Information on the Company—Business Overview—Regulation—Foreign 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 that are applicable to any payments made to or by our Company. There are no exchange control regulations or currency restrictions in the Cayman Islands.
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 upon United States federal income tax law, which is subject to differing interpretations or change, possibly with retroactive effect.
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;
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.

 

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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.
Passive Foreign Investment Company
Due to the price of our ADSs and ordinary shares during 2010 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, 2010, it is likely that we were classified as 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 2010 and our retention of a significant amount of cash, more than 50% of the value of our assets during 2010 may be viewed as passive for purposes of the asset test and, as a result we may have been a PFIC during 2010.
We must make a separate determination each year as to whether we are a PFIC (after the close of each taxable year) and we expect that we will very likely be a PFIC for our current taxable year ending December 31, 2011 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.

 

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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. 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.
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.
Taxation of Dividends and Other Distributions on the ADSs or Ordinary Shares
Subject to the passive foreign investment company rules discussed above, 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). Because we do not intend to determine our earnings and profits on the basis of United States federal income tax principles, a U.S. Holder should assume distributions will be reported as a dividend. 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, 2013, 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 above) 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. There can be no assurance that our ADSs will be considered readily tradable on an established securities market in the United States in later years. 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 generally be treated as income from foreign sources for United States foreign tax credit purposes. A U.S. Holder may be eligible, subject to a number of complex limitations, to claim a foreign tax credit in respect of any foreign withholding taxes imposed on dividends received on ADSs or ordinary shares. A U.S. Holder who does not elect to claim a foreign tax credit for foreign tax withheld may instead claim a deduction for United States federal income tax purposes, in respect of such withholdings, but only for a year in which such holder elects to do so for all creditable foreign income taxes. If PRC withholding taxes apply to dividends paid to you with respect to the ADSs or ordinary shares, such PRC withholding taxes may be treated as foreign taxes eligible for credit against your United States federal income tax liability.

 

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Taxation of Disposition of Shares
Subject to the passive foreign investment company rules discussed above, you will recognize capital 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. Any capital gain or loss will be long-term if the ADSs or ordinary shares have been held for more than one year and will generally be United States source gain or loss for United States foreign tax credit purposes. The deductibility of a capital loss may be subject to limitations. In the event that gain from the disposition of the ADSs or ordinary shares is subject to tax in the PRC, a U.S. Holder that is eligible for the benefits of the U.S.-PRC treaty may elect to treat the gain as PRC source income. U.S. Holders are advised to consult their tax advisors regarding the tax consequences if a foreign withholding tax is imposed on a disposition of our ADSs or ordinary shares, including the availability of the foreign tax credit under their particular circumstances.
Information Reporting and Backup Withholding
The United States tax compliance rules impose reporting requirements on certain United States investors in connection with holding interests of a non-United States company, including our ADSs or ordinary shares, either directly or through a “foreign financial institution”. These rules also impose penalties if an individual U.S. Holder is required to submit such information to the United States Internal Revenue Service and fails to do so. In addition, U.S. Holders may be subject to information reporting to the United States 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 United States backup withholding (provided that certain certification requirements are satisfied). U.S. Holders are advised to consult their tax advisors regarding the application of the United States information reporting and backup rules to their particular circumstances.
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 Mellon, 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.
I. Subsidiary Information
For a listing of our subsidiaries, see “Item 4. Information on the Company — C. Organizational Structure.”

 

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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 used any derivative financial instruments to manage our interest risk exposure. 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. However, our future interest income may be lower than expected due to changes in market interest rates. A hypothetical 0.5 percentage point decrease in interest rates would have resulted in a decrease of approximately US$0.9 million in our interest income for the year ended December 31, 2010.
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.
The value of your investment in our ADSs may be affected by the foreign exchange rate between U.S. dollars and RMB, even though we use the U.S. dollar as our functional and reporting currency, because most of our expenses are denominated in RMB and the functional currency of our PRC subsidiaries is the RMB while the ADSs will be traded in U.S. dollars.
The conversion of RMB into foreign currencies, including U.S. dollars, is based on rates set by the People’s Bank of China. The PRC government allowed the Renminbi to appreciate by more than 20% against the U.S. dollar between July 2005 and July 2008. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow band. Since June 2010, the PRC government has allowed the Renminbi to appreciate slowly against the U.S. dollar again. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the future.
To the extent that we need to convert U.S. dollars into RMB for our operations, acquisitions, or other uses within the PRC, appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount we receive from the conversion. To the extent that we seek to convert RMB into U.S. dollars, depreciation of the RMB against the U.S. dollar would have an adverse effect on the U.S. dollar amount we receive from the conversion. As of December 31, 2010, we had RMB-denominated cash balances of RMB1,188.2 million and U.S. dollar-denominated cash balances of $18.4 million. Assuming we had converted the RMB-denominated cash balance of RMB1,188.2 million into U.S. dollars at the exchange rate of $1.00 for RMB6.6000 as of December 31, 2010, this cash balance would have been $180.0 million. Assuming a 1.0% depreciation of the RMB against the U.S. dollar, this cash balance would have decreased to $178.2 million.
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 5.9%, -0.7% and 3.3% in 2008, 2009 and 2010, 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.
B. Warrants and Rights
Not applicable.
C. Other Securities
Not applicable.
D. American Depositary Shares

 

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Fees and Charges Our ADS holders May Have to Pay
The Bank of New York Mellon, 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.
     
Persons depositing or withdrawing shares must pay:   For:
 
   
US$5.00 or less per 100 ADSs (or portion of 100 ADSs)
  Issuance of ADSs, including issuances resulting from a distribution of shares or rights or other property
 
   
 
  Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates
 
   
US$0.02 or less per ADS
  Any cash distribution to registered ADS holders
 
   
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
  Distribution of securities distributed to holders of deposited securities which are distributed by the depositary to registered ADS holders
 
   
US$0.02 per ADSs per calendar year (if the depositary has not collected any cash distribution fee during that year)
  Depositary services
 
   
Expenses of the depositary
  Cable, telex and facsimile transmissions (as expressly provided in the deposit agreement)
 
   
 
  Converting foreign currency to U.S. dollars
 
   
Registration or transfer fees
  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
 
   
Taxes, stamp duty and other governmental charges the depositary or the custodian have to pay on any ADS or share underlying an ADS
  As necessary
 
   
Any charges incurred by the depositary or its agents
for servicing the deposited securities
  As necessary
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, 2010, we were entitled to receive US$57,019.72 (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.

 

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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 chief executive officer and chief financial officer have 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. Our management has concluded that our disclosure controls and procedures as of the end of the period ended December 31, 2010 were ineffective because of the material weakness in our internal control over financial reporting described below.
Management’s 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 company’s 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 company’s receipts and expenditures are being made only in accordance with authorizations of a company’s management and directors, and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of a company’s assets that could have a material effect on the consolidated financial statements.
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, 2010 using criteria established in the Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management concluded that our internal control over financial reporting was ineffective as of December 31, 2010 due to the material weakness identified related to the accounting personnel within our financial accounting and reporting departments not having sufficient U.S. GAAP knowledge and experience to handle the accounting of complex and non-recurring transactions.
We have reported the material weaknesses to our audit committee and proposed an action plan for the audit committee’s approval in order to remediate the weakness. The steps we have planned to take include:
  (1)   the CFO to apply to become a member of Certified Public Accountant association in the U.S.;
  (2)   to provide ongoing training on U.S. GAAP and SEC regulations for our senior accounting and financial personnel to improve the capability of handling complex and non-recurring transaction; and
  (3)   to recruit additional financial personnel who have sufficient relevant education and experience in U.S. GAAP, including those who are Certified Public Accountants in the U.S., and to consult external qualified consultant when there are complex non-recurring and complex transactions.
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 China Techfaith Wireless Communication Technology Limited (the “Company”), its subsidiaries, variable interest entities and variable interest entity’s subsidiary’s (collectively the “Group”) internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Group’s 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 Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Group’s internal control over financial reporting based on our audit.

 

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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 that 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 company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s 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 company’s 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 company’s assets that could have a material effect on the financial statements.

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.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness has been identified and included in management’s assessment was related to the accounting personnel within the financial accounting and reporting departments of the Group not having sufficient U.S. GAAP knowledge and experience in handling the accounting of complex and non-recurring transactions. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2010, of the Group and this report does not affect our report on such financial statements and financial statement schedule.

In our opinion, because of the effect of the material weakness identified above on the achievement of the objectives of the control criteria, the Group has not maintained effective internal control over financial reporting as of December 31, 2010, based on the criteria established in Internal Control — Integrated 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, 2010, of the Group and our report dated May 24, 2011 expressed an unqualified opinion on those financial statements and financial statement schedule.

/s/ Deloitte Touche Tohmatsu CPA Ltd.
Beijing, the People’s Republic of China
May 24, 2011
Changes in internal control over financial reporting
There were no changes in our internal controls over financial reporting that occurred during the period covered by this annual report on Form 20-F that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16A. Audit Committee Financial Expert
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 person’s written request.

 

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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.
                 
    For the Year Ended December 31,  
    2009     2010  
    (In thousands of US$)  
Audit fees (1)
    942       1,000  
Audit-related fees
          200  
Tax fees (2)
    18       5  
All other fees
           
     
(1)   “Audit fees” means the aggregate fees billed in each of the fiscal years listed for professional services rendered by our principal auditors for the audit of our annual financial statements.
 
(2)   “Audit-related fees” means the aggregate fees billed in each of the fiscal years listed for professional services rendered by our principal auditors for the purpose of the filing of the Form F-3 and related audit of our subsidiaries.
 
(3)   “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.
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.
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 SEC’s 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, 2009 and 2010
                                 
                            Maximum  
                            Number (or  
                            Approximate  
                    Total     Dollar  
                    Number of     Value) of  
                    ADSs     ADSs that  
                    Purchased as     May  
    (a) Total     Average     Part of     Yet be  
    Number of     Price Paid     Publicly     Purchased  
    ADSs     Per     Announced     Under  
Period   Purchased     ADS     Program(1)     the Program  
December 2009
    61,200       3.2191       61,200     $ 9,802,991  
 
                       

 

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ITEM 16F. Change in Registrant’s Certifying Accountant
Not applicable.
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 issuer’s 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
         
Exhibit    
Number   Document
 
     
  1.1    
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).
       
 
  2.1    
Registrant’s 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).
       
 
  2.2    
Registrant’s 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).
       
 
  2.3    
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).
       
 
  2.4    
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).
       
 
  2.5    
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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Exhibit    
Number   Document
       
 
  2.6    
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 (incorporated by reference to Exhibit 2.6 from our Annual Report on Form 20-F (file no. 000-51242) filed with the Securities and Exchange Commission on May  19, 2010).
       
 
  4.1    
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).
       
 
  4.2    
Form of Indemnification Agreement with the Registrant’s 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).
       
 
  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 Annual Report 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.

 

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Exhibit    
Number   Document
       
 
  4.14 *  
Share Purchase Agreement dated January 1, 2010 between Active Century Holdings Limited, Citylead Limited, the Registrant, QIGI&BODEE Technology Limited, QIGI& BODEE Technology (Beijing) Co., Ltd. and certain persons listed therein.
       
 
  4.15 *  
Share Purchase Agreement dated January 4, 2010 between Active Century Holdings Limited, Citylead Limited, the Registrant, QIGI&BODEE Technology Limited, QIGI& BODEE Technology (Beijing) Co., Ltd. and certain persons listed therein.
       
 
  4.16 *  
Shareholders’ Agreement dated April 22, 2011 between Techfaith Wireless Communication Technology (Hangzhou) Limited, Techfaith Intelligent Handset Technology (Beijing) Limited and Beijing E-town International Investment and Development Co, Ltd. (English translation of the Chinese language document).
       
 
  4.17 *  
Agreement dated May 10, 2011 between Techfaith BVI and the Administration Committee of Shenyang Puhe New Town (“PuHe”) (English translation of the Chinese language document).
       
 
  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 Guan Teng Law Firm.
     
*   Filed with this annual report on Form 20-F.

 

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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 24, 2011

 

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CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
Report of Independent Registered
Public Accounting Firm and
Consolidated Financial Statements
For the years ended December 31, 2008, 2009 and 2010

 

 


Table of Contents

CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
         
CONTENTS   PAGE  
 
       
    F - 1  
 
       
    F - 2  
 
       
    F - 4  
 
       
    F - 5  
 
       
    F - 6  
 
       
    F - 8  
 
       
    F - 59  

 

 


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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, variable interest entities and variable interest entity’s subsidiary (collectively the “Group”) as of December 31, 2009 and 2010, 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, 2010, and related financial statement schedule included in Schedule 1. These financial statements and financial statement schedule are the responsibility of the Group’s 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, 2009 and 2010, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Note 3 to the consolidated financial statements, the accompanying 2009 financial statements have been restated in relation to the accounting for the issuance of convertible notes in 2009.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Group’s internal control over financial reporting as of December 31, 2010, 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 24, 2011 expressed an adverse opinion on the Group’s internal control over financial reporting.
/s/ Deloitte Touche Tohmatsu CPA Ltd.
Beijing, the People’s Republic of China
May 24, 2011

 

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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,  
    2009     2010  
    (As restated)        
ASSETS
               
 
               
Current assets:
               
Cash and cash equivalents
  $ 130,544     $ 198,536  
Accounts receivable, net of allowances of $9,151 and $13,133 as of December 31, 2009 and 2010, respectively
    28,992       19,241  
Amount due from a related party
    9,941       8,061  
Inventories
    22,937       17,745  
Prepaid expenses and other current assets
    12,420       7,997  
Deferred tax assets-current
          163  
 
           
Total current assets
    204,834       251,743  
 
           
Plant, machinery and equipment, net
    44,582       44,408  
Acquired intangible assets, net
    645       2,799  
Other asset
          3,155  
Goodwill
    606       1,848  
 
           
TOTAL ASSETS
  $ 250,667     $ 303,953  
 
           
 
               
LIABILITIES AND EQUITY
               
 
               
Current liabilities:
               
Accounts payable (including accounts payable of the consolidated variable interest entities without recourse to China TechfaithWireless Communication Technology Limited, $30 and $nil as of December 31, 2009 and 2010, respectively)
  $ 10,514     $ 7,819  
Amounts due to related parties
    266       46  
Accrued expenses and other current liabilities (including accrued expenses and other current liabilities of the consolidated variable interest entities without recourse to China Techfaith Wireless Communication Technology Limited, $223 and $1,272 as of December 31, 2009 and 2010, respectively)
    10,026       13,815  
Advance from customers (including advance from customers of the consolidated variable interest entities without recourse to China Techfaith Wireless Communication Technology Limited, $178 and $339 as of December 31, 2009 and 2010, respectively)
    4,720       7,450  
Deferred revenue
    755       291  
Income tax payable (including income tax payable of consolidated variable interest entities without recourse to China Techfaith Wireless Communication Technology Limited, $25 and $1,282 as of December 31, 2009 and 2010, respectively)
    1,162       3,175  
Put option liability
    1,257       1,380  
 
           
Total current liabilities
    28,700       33,976  
 
           

 

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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,  
    2009     2010  
    (As restated)        
 
               
Deferred tax liability-non-current
          140  
Long-term loan
          290  
Convertible notes and embedded derivatives
    18,029        
 
           
Total liabilities
    46,729       34,406  
 
           
 
               
Commitments (Note 24)
               
 
               
Equity:
               
Ordinary shares of par value $0.00002:
               
(50,000,000,000,000 shares authorized; shares issued and outstanding, 650,156,045 and 794,003,193, including 918,000 and nil held as treasury stock, as of December 31, 2009 and 2010, respectively)
    13       16  
Additional paid-in capital
    113,657       139,495  
Treasury stock, at cost (918,000 and nil shares as of December 31, 2009 and 2010, respectively)
    (199 )      
Accumulated other comprehensive income
    23,863       31,098  
Statutory reserve
    10,993       16,679  
Retained earnings
    53,943       76,097  
 
           
 
               
Total China Techfaith Wireless Communication Technology Limited shareholders’ equity
    202,270       263,385  
 
           
Noncontrolling interests
    1,668       6,162  
 
           
Total equity
    203,938       269,547  
 
           
TOTAL LIABILITIES AND EQUITY
  $ 250,667     $ 303,953  
 
           
The accompanying notes are an integral part of these consolidated financial statements.

 

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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,  
    2008     2009     2010  
          (As restated)        
Revenues:
                       
ODP
  $ 208,850     $ 210,588     $ 222,549  
Brand name phone sales
                38,462  
Game
          488       10,866  
 
                 
Total net revenues
    208,850       211,076       271,877  
 
                 
 
Cost of revenues:
                       
ODP
    (167,685 )     (172,801 )     (180,517 )
Brand name phone sales
                (22,066 )
Game
          (64 )     (2,202 )
 
                 
Total cost of revenues
    (167,685 )     (172,865 )     (204,785 )
 
                 
Gross profit
    41,165       38,211       67,092  
 
                 
 
Operating expenses:
                       
General and administrative
    (15,553 )     (9,600 )     (14,626 )
Research and development
    (18,195 )     (12,040 )     (11,613 )
Selling and marketing
    (5,497 )     (3,241 )     (6,084 )
Impairment of long-lived assets
    (880 )            
 
                 
Total operating expenses
    (40,125 )     (24,881 )     (32,323 )
 
                 
Government subsidy income
    3,081       481       159  
Other operating income
    2,443             1,109  
 
                 
Income from operations
    6,564       13,811       36,037  
 
                 
Interest expenses
    (47 )     (35 )     (1 )
Interest income
    1,616       667       882  
Investment income
                142  
Loss on issuance of convertible notes
          (3,176 )      
Other income (expenses), net
    (22 )     115       (101 )
Change in fair value of derivatives embedded in convertible notes
          (5,270 )     1,280  
Change in fair value of put option
    (855 )     (84 )     (123 )
 
                 
Income before income taxes
    7,256       6,028       38,116  
Income tax benefit (expenses)
    93       (3,642 )     (9,458 )
 
                 
Net income
    7,349       2,386       28,658  
Less: Net (income) loss attributable to noncontrolling interests
    652       2,028       (818 )
 
                 
 
Net income attributable to China Techfaith Wireless Communication Technology Limited
  $ 8,001     $ 4,414     $ 27,840  
 
                 
Net income per share attributable to China Techfaith Wireless Communication Technology Limited:
                       
Basic
  $ 0.01     $ 0.01     $ 0.04  
 
                 
Diluted
  $ 0.01     $ 0.01     $ 0.03  
 
                 
Weighted average shares used in computation:
                       
Basic
    649,972,306       650,057,866       732,784,822  
 
                 
Diluted
    650,062,312       720,889,120       795,843,605  
 
                 
The accompanying notes are an integral part of these consolidated financial statements.

 

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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)
                                                                                         
                                                            Equity attributable to                        
                                    Accumulated                     China Techfaith Wireless                        
                    Additional             other                     Communication                     Com-  
    Ordinary shares     paid-in     Treasury     comprehensive     Statutory     Retained     Technology Limited     Noncontrolling     Total     prehensive  
    Number     Amount     capital     stock     income     reserve     earnings     Shareholders     Interests     equity     income  
 
Balance at January 1, 2008
    649,913,136     $ 13     $ 110,327     $ (4,628 )   $ 13,629     $ 6,813     $ 45,708     $ 171,862     $ 1,807     $ 173,669          
Cancellation of treasury stock
                (4,628 )     4,628                                              
Foreign currency translation adjustments
                            10,466                   10,466       185       10,651     $ 10,651  
Share-based compensation
    121,454             147                               147             147          
Net income
                                        8,001       8,001       (652 )     7,349       7,349  
Provision for statutory reserve
                                  1,729       (1,729 )                          
 
                                                                 
Balance at December 31, 2008
    650,034,590       13       105,846             24,095       8,542       51,980       190,476       1,340       191,816     $ 18,000  
 
                                                                                     
 
                                                                                       
Repurchase of ordinary shares
                      (199 )                       (199 )           (199 )        
Foreign currency translation adjustments
                            77                   77             77     $ 77  
Share-based compensation
    121,455             20                               20             20          
Net income (as restated)
                                        4,414       4,414       (2,028 )     2,386       2,386  
Provision for statutory reserve
                                  2,451       (2,451 )                          
Capital contribution by a noncontrolling shareholder
                7,791             (309 )                 7,482       2,356       9,838          
 
                                                                 
Balance at December 31, 2009 (as restated)
    650,156,045       13       113,657       (199 )     23,863       10,993       53,943       202,270       1,668       203,938     $ 2,463  
 
                                                                                     
 
                                                                                       
Issue of ordinary shares for acquisition of Citylead
    65,934,066       1       12,834                               12,835             12,835          
Cancellation of treasury stock
    (918,000 )           (199 )     199                                              
Conversion of convertible notes
    78,814,628       2       13,202                               13,204       3,546       16,750          
Foreign currency translation adjustments
                            7,235                   7,235       130       7,365     $ 7,365  
Share-based compensation
    16,454             1                               1             1          
Net income
                                        27,840       27,840       818       28,658       28,658  
Provision for statutory reserve
                                  5,686       (5,686 )                          
 
                                                                 
Balance at December 31, 2010
    794,003,193     $ 16     $ 139,495     $     $ 31,098     $ 16,679     $ 76,097     $ 263,385     $ 6,162     $ 269,547     $ 36,023  
 
                                                                 
The accompanying notes are an integral part of these consolidated financial statements.

 

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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,  
    2008     2009     2010  
    (As restated)  
Operating activities:
                       
Net income
  $ 7,349     $ 2,386     $ 28,658  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Loss (gain) on disposal of plant, machinery and equipment
    73       125       (479 )
Impairment of long-lived assets
    880              
Amortization of acquired intangible assets
    794       377       616  
Inventory provision
    648       409       2,186  
Warranty provision
    1,067       365       341  
Bad debts expense
    2,996       2,081       8,204  
Depreciation of plant, machinery and equipment
    6,103       4,213       2,769  
Change in fair value of put option
    855       84       123  
Share-based compensation
    147       20       1  
Change in fair value of derivatives associated with convertible notes
          5,270       (1,280 )
Amortization of convertible notes interest
                1  
Loss on issuance of convertible notes
          3,176        
Changes in operating assets and liabilities:
                       
Accounts receivable
    (1,536 )     2,385       (3,356 )
Notes receivable
    4,212       85        
Inventories
    15,877       14,417       5,104  
Prepaid expenses and other current assets
    (4,836 )     (2,498 )     8,927  
Deferred tax assets
    129       132       (163 )
Deferred tax liability
                (30 )
Accounts payable
    (27,747 )     1,140       (2,915 )
Accrued expenses and other current liabilities
    (3,198 )     (406 )     743  
Advance from customers
    (2,423 )     (540 )     2,730  
Deferred revenue
    106       (993 )     (464 )
Income tax payable
          1,013       2,013  
 
                 
Net cash provided by operating activities
    1,496       33,241       53,729  
 
                 
 
                       
Investing activities:
                       
Purchase of plant, machinery and equipment
    (13,389 )     (865 )     (3,888 )
Proceeds from sale of plant, machinery and equipment
    116       47       57  
Purchase of intangible assets
    (1,364 )     (490 )     (334 )
Cash acquired from business acquisition of Citylead, net of cash consideration paid of $500
                10,683  
Deposit received for disposal of other asset
                2,773  
Decrease in restricted cash
    3,228       162        
 
                 
Net cash (used in) provided by investing activities
    (11,409 )     (1,146 )     9,291  
 
                 

 

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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,  
    2008     2009     2010  
    (As restated)  
Financing activities:
                       
Capital contribution by a noncontrolling shareholder
          9,838        
Proceeds from issuance of convertible notes, net of issuance cost paid of $250
          9,750        
Proceeds from long-term borrowing
                290  
Repurchase of ordinary shares
          (199 )      
 
                 
Net cash provided by financing activities
          19,389       290  
 
                 
 
Effect of exchange rate changes on cash and cash equivalents
    4,085       134       4,682  
Net increase (decrease) in cash and cash equivalents
    (5,828 )     51,618       67,992  
Cash and cash equivalents at the beginning of the year
    84,754       78,926       130,544  
 
                 
Cash and cash equivalents at the end of the year
  $ 78,926     $ 130,544     $ 198,536  
 
                 
 
                       
Supplemental cash flow information:
                       
Cash paid during the year for:
                       
Interest expenses
  $ 26     $ 25     $ 26  
 
                 
Income taxes
  $ 36     $ 2,499     $ 7,860  
 
                 
 
                       
Non-cash investing and financing activities:
                       
Share consideration issued in connection with the acquisition of Citylead (Note 4)
  $     $     $ 12,835  
 
                 
Conversion of the convertible notes (Note 17)
  $     $     $ 16,750  
 
                 
The accompanying notes are an integral part of these consolidated financial statements.

 

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CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE 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, variable interest entities (the “VIEs”) and VIE’s subsidiary include the following as of December 31, 2010:
                 
    Date of   Place of   Percentage of  
Subsidiaries   incorporation/acquisition   incorporation   legal ownership  
 
Techfaith Wireless Communication Technology
  July 26, 2002   People’s Republic of China     100 %
(Beijing) Limited (“Techfaith China”)
      (the “PRC”)        
 
               
Techfaith Wireless Technology Group Limited
  July 8, 2003   British Virgin Islands     100 %
(“Techfaith BVI”) (formerly known as Techfaith
      (the “BVI”)        
Wireless Communication Technology Limited)
               
 
               
Great Earnest Technology Limited (“Great Earnest”)
  August 8, 2003   BVI     100 %
 
               
One Net Entertainment Limited (“One Net”)
  September 5, 2003   PRC     67.8 %
(formerly known as Techfaith Interactive Technology (Beijing) Limited)
               
 
               
798 Entertainment Limited (“798 Entertainment”)
  October 15, 2003   BVI     67.8 %
(formerly known as Leo Technology Limited)
               
 
               
Tecface Communication Technology (Beijing) Limited (“Tecface Technology”) (formerly known as STEP Technologies (Beijing) Co., Ltd.)
  November 20, 2003   PRC     100 %
 
               
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 Intelligent Handset 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 (Shenyang) Limited (“Techfaith Shenyang”)
  March 27, 2007   PRC     100 %

 

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CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE 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  
 
Techfaith Wireless Technology (HK) Limited
  December 10, 2008   Hong Kong     100 %
(“Technology HK”)
               
 
               
Media Chance Limited (“Media Chance”)
  August 13, 2009   Hong Kong     51 %
 
               
Time Spring Limited (“Time Spring”)
  October 28, 2009   BVI     51 %
 
               
UU Internet Technology (Shenyang) Limited
  November 26, 2009   PRC     67.8 %
(“UU Shenyang”)
               
 
               
Glomate Mobile (Beijing) Co., Ltd. (“Glomate”)
  January 5, 2010   PRC     51 %
 
               
Citylead Limited (“Citylead”)
  February 10, 2010   BVI     100 %
 
               
QIGI&BODEE Technology Limited (“QIGI HK”)
  February 10, 2010   Hong Kong     100 %
 
               
QIGI&BODEE International Technology (Beijing) Limited (“QIGI International”)
  February 10, 2010   PRC     100 %
 
               
VIEs and VIE’s 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
  May 14, 2009   PRC   nil  
Limited (“Techfaith Interactive”)
               
 
               
QIGI&BODEE Technology (Beijing) Co., Ltd. (“QIGI Technology”)
  February 10, 2010   PRC   nil  
The Company and all of its subsidiaries, VIEs and VIE’s subsidiary are collectively referred to as the “Group”.
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. In 2010, the Group acquired Citylead with its subsidiaries and VIE (the “Citylead Group”) and started to sell mobile phones under “QIGI” brand, and in the same year, the group launched its PC on-line games for revenue operation.

 

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CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE 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
 
   
Variable interest entities
 
   
TechSoft Holding
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 the 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.
Techfaith Interactive
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 a 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 Interactive’s 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.

 

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CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE 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
Variable interest entities — continued
QIGI Technology
On February 10, 2010 the Group acquired Citylead, a Chinese brand mobile phone company, as set out in Note 4. Citylead, through QIGI International, entered into a series of agreements with QIGI Technology and its equity owners on February 5, 2010. QIGI International entered into exclusive business cooperation agreements with QIGI Technology, where QIGI International provides complete business support services and consulting services to QIGI Technology in exchange for a fee that constitutes substantially all of QIGI Technology’s net income. QIGI International also entered into equity pledge arrangements and equity interest transfer agreements, which assigned all of the equity owners’ rights and obligations to QIGI International, including the right to declare dividends, resulting in the equity owners lacking the ability to make decisions that have a significant effect on QIGI Technology’s operations and QIGI International ‘s ability to extract the profits from the operation of QIGI Technology, and assume QIGI Technology’s residual benefits. Therefore, QIGI International is the primary beneficiary of QIGI Technology.
Risks in relation to the VIE structure
The Group believes that the contractual arrangements with the VIEs are in compliance with PRC law and are legally enforceable. The shareholders of the VIEs are also shareholders of the Group and therefore have no current interest in seeking to act contrary to the contractual arrangements. However, uncertainties in the PRC legal system could limit the Group’s ability to enforce these contractual arrangements and if the shareholders of the VIEs were to reduce their interest in the Group, their interests may diverge from that of the Group and that may potentially increase the risk that they would seek to act contrary to the contractual terms, for example by influencing the VIEs not to pay the service fees when required to do so.
The Group’s ability to control the VIEs also depends on the power of attorney have to vote on all matters requiring shareholder approval in the VIEs. As noted above, the Group believes this power of attorney is legally enforceable but may not be as effective as direct equity ownership.
In addition, if the legal structure and contractual arrangements were found to be in violation of any existing PRC laws and regulations, the Group may be subject to fines or other actions. The Group does not believe such actions would result in the liquidation or dissolution of the Group or the VIEs.
There are no consolidated VIEs’ assets that are collateral for the VIEs’ obligations and can only be used to settle the VIEs’ obligations.

 

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CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE 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
Variable interest entities — continued
The following financial statement amounts and balances of the Group’s VIEs were included in the accompanying consolidated financial statements as of and for the years ended:
                 
    December 31,  
    2009     2010  
 
               
Total assets
  $ 7,090     $ 30,958  
Total liabilities
  $ 456     $ 2,730  
 
           
                         
    Years ended December 31,  
    2008     2009     2010  
 
                       
Net revenues
  $ 155     $ 740     $ 44,120  
Net income (loss)
  $ (2,172 )   $ (127 )   $ 11,708  
 
                 
                         
    Years ended December 31,  
    2008     2009     2010  
Net cash provided by (used in) operating activities
  $ (5,926 )   $ 188     $ 35,004  
Net cash used in investing activities
  $ (5 )   $ (80 )   $ (473 )
Net cash provided by financing activities
  $     $     $  
 
                 
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, VIEs and VIE’s subsidiary. All inter-company transactions and balances are eliminated upon consolidation.

 

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CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE 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 Group’s financial statements include revenue recognition, valuation allowance for deferred tax assets, impairment for goodwill, useful lives and impairment for plant, machinery and equipment and intangible assets and provision for warranty.
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.
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.
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 management’s 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.

 

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CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE 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 raw materials, finished goods and work in progress. 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.
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
  47 or 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
Acquired intangible assets, net
Acquired intangible assets with definite lives are amortized on a straight-line basis over their expected useful economic lives. Intangible assets with indefinite life represent trade name and domain name acquired through business acquisition of Citylead. Intangible assets with indefinite life are not amortized but tested for impairment annually. Amortization is calculated on a straight-line basis over the following estimated useful lives:
         
Software license
  2-5 years
Certification of internet content provider
  5 years
Customer base
  5 years
Contract backlog
  2 months

 

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Table of Contents

CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE 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
 
   
Impairment of long-lived assets and intangible assets with definite life
The Group reviews its long-lived assets and intangible assets with definite life for impairment whenever events or change in circumstances indicate that the carrying amount 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 these assets.
Impairment of intangible assets with indefinite life
The Group evaluates the remaining useful life of an intangible asset that is not being amortized in each reporting period to determine whether events and circumstances continue to support an indefinite useful life. If the intangible asset that is not being amortized is subsequently determined to have a definite useful life, the asset is then tested for impairment in the same way as intangible assets with definite life.
An intangible asset that is not subject to amortization is tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test of intangible assets with indefinite life consist of a comparison of the fair value of an intangible asset with its carrying amount.
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 unit’s 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, 2008, 2009 and 2010, no goodwill impairment loss was recorded.
The total carrying amount of goodwill is $1,848, among which $606 is allocated to ODP segment and $1,242 is allocated to brand name phone sales segment.

 

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Table of Contents

CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE 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 company’s 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 company’s accounts are not reflected within the Group’s consolidated balance sheets and statements of operations; however, the Group’s share of the earnings or losses of the affiliated company will be reflected in the consolidated statements of operations.
When the Group’s carrying value in an equity method affiliated company is reduced to zero, no further losses are recorded in the Group’s 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 investee’s 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 investee’s earnings.
Deferred revenue
Deferred revenue relates to both design fee revenue and PC-online game revenue. 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. PC-online game advances received from customers for purchase of prepaid game point cards, the amount are not recognized as PC-online game revenue until the in-game merchandise or premium features are consumed by the game player.

 

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CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE 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
 
   
Revenue related to ODP segment
  (1)  
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. The four criteria are generally met upon delivery of the product.
 
  (2)  
Design fee
 
     
Design fee is a fixed amount paid in installments according to pre-agreed milestones. In general, three milestones are identified in the Group’s 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.
 
  (3)  
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 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. The four criteria are generally met upon delivery of the product.
Revenue related to brand name phone sales segment
Revenue from sales of brand name phones, represent mobile phone under QIGI brand. The brand is owned by the Group. The QIGI brand phones are designed by the Group and manufactured by EMS providers. Revenue 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. The four criteria are generally met upon delivery of the product.

 

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Table of Contents

CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE 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
 
   
Revenue related to game segment
  (1)  
Wireless gaming 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 ratably over the contract period.
 
  (2)  
Motion game device
 
     
Motion game device is a PC game control device that is used in motion games. Motion game device is designed by the Group and manufactured by EMS providers. Revenue 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. The four criteria are generally met upon delivery of the product.
 
  (3)  
PC on-line game related service
 
     
The Group generates revenue from the provision of online game services. The online games can be accessed and played by end users free of charge but the end users may choose to purchase in-game merchandise or premium features to enhance their game playing experience using the virtual currency. The end users can purchase the virtual currency by making direct online payments to the Group or purchasing prepaid cards (“PP-Cards”). The amounts received from direct online payments were recorded initially as deferred revenues. The Group sells PP-Cards through distributors at a discount to the face value of the PP-Card. The Group records the amounts received from distributors after deduction of sales discounts as deferred revenues.
 
     
The end users are required to use the access codes and passwords, either obtained from the PP-card or through direct online payment, to exchange the face value of these cards or the amount of direct online payment to virtual currency and deposit into their personal accounts. End users consume the virtual currency by purchasing in-game merchandise or premium features online. The Group recognizes the revenues as the in-game merchandise or premium features are consumed in the game by the end users. The Group calculates the amount of revenues recognized for each unit of virtual currency consumed using weighted average method on monthly basis by dividing the total cumulative unrecognized deferred revenues by total unconsumed virtual currency.
 
     
Any deferred revenue remaining at the time of the inactive PP-cards is expired, which is normally one year from the purchase, is recognized as revenues at that time. The amount associated with the unused virtual currency, which are without contractual expiration term, are carried as deferred revenues indefinitely as the Group was not able to reasonably estimate the amount of virtual currency which will be ultimately given up by the users due to the short operating history of the Group.

 

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Table of Contents

CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE 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
Revenue related to game segment — continued
  (4)  
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 customer’s 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.
Business taxes
The Group’s PRC subsidiaries, VIEs and VIE’s subsidiary 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 2008, 2009, and 2010 totaled $302, $41 and $319, respectively.
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. The Group reports revenue net of VAT.
For products sold to overseas customers by PRC entities, the Group is entitled to a refund of VAT paid at rate of 13% for some component sales and 17% for other products sales. The Group records VAT refund on accrual basis. VAT refund is recorded as other current assets on the consolidated balance sheets. The Group reports revenue net of VAT.
Product warranty
The Group’s product warranty relates to the provision of bug fixing services to the Group’s designed mobile handset for a period of one to three years commencing upon the mass production of the mobile handset, and warranties to the Group’s customers on the sales of products. Accordingly, the Group’s product warranty accrual reflects management’s 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,  
    2008     2009     2010  
 
                       
Balance at beginning of the year
  $ 1,672     $ 1,733     $ 377  
Current period provision
    1,067       365       341  
Utilized during the year
    (1,061 )     (1,720 )     (447 )
Exchange difference
    55       (1 )     6  
 
                 
Balance at end of the year
  $ 1,733     $ 377     $ 277  
 
                 

 

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Table of Contents

CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE 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 $2,318, $282 and $159 for the years ended December 31, 2008, 2009 and 2010, 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 $763, $199 and $nil for the years ended December 31, 2008, 2009 and 2010, respectively for this type of government grants. The amount of $59 and $394 were recorded as a liability on the balance sheet as of December 31, 2009 and 2010, respectively.
The Group recorded total government subsidy income of $3,081, $481 and $159 for the years ended December 31, 2008, 2009 and 2010, 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 Group’s 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 $750, $908 and $2,983 in 2008, 2009 and 2010, respectively, and have been included as part of selling and marketing expenses.

 

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Table of Contents

CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE 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
 
   
Foreign currency translation
The functional and reporting currency of the Company is the United States dollar (“U.S. dollar”). The financial records of the Group’s subsidiaries, VIEs and VIE’s subsidiary located in the PRC are maintained in their local currencies, the Renminbi (“RMB”), which are also the functional currencies of these entities. The financial records of the Group’s subsidiaries located in Hong Kong are maintained in U.S. dollar, which are also the functional currencies of these entities.
Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at the rates of exchange ruling at the balance sheet date. Transactions in currencies other than the functional currency during the year are converted into functional currency at the applicable rates of exchange prevailing when the transactions occurred. Transaction gains and losses are recognized in the statement of operations.
The Group’s entities with functional currency of RMB, translate their operating results and financial position into the U.S. dollar, the Group’s reporting currency. Assets and liabilities are translated using the exchange rates in effect on the balance sheet date. Revenues, expenses, gains and losses are translated using the average rate for the year. Translation adjustments are reported as cumulative translation adjustments and are shown as a separate component of other comprehensive income.
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, 2009 and 2010. The Group did not incur any interest and penalties related to potential underpaid income tax expenses and also believed that the Group’s unrecognized tax benefits would not change significantly within 12 months from December 31, 2010.

 

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Table of Contents

CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE 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
 
   
Comprehensive income
Comprehensive income includes net income and foreign currency translation adjustments. Comprehensive income for the years presented has been disclosed within the consolidated statements of changes in equity and comprehensive income.
Financial instruments
Financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, the Put Option, long-term investment, amount due from a related party, amount due to related parties, the principle amount of senior secured convertible promissory notes (the “Convertible Notes”) and derivatives embedded in the Convertible Notes.
The carrying values of all these financial instruments except for long-term investment, the Put Option and derivatives embedded in the Convertible Notes approximate their fair values due to the short-term nature of these instruments. Estimates of fair values of long-term investments in non-marketable securities including cost and equity method investments other than those subjected to other than temporary impairment cannot be practicably made without incurring excessive costs. The Put Option and derivatives embedded in the Convertible Notes are carried at fair value. The fair value of the debt host of the Convertible Notes was $10,183 as determined by the management with the assistance from an independent appraisal firm as of December 31, 2009. The Convertible Notes were fully converted in the year 2010.
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 Group’s major customers is summarized in Note 25.

 

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Table of Contents

CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE 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
 
   
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.
Shares awards issued to non-employees (other than non-employee directors), such as consultants, are measured at fair value at the earlier of the commitment date or the date the service is completed and recognized over the period the service is provided.
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. The effect of the stock options is computed using the treasury stock method.
Accounting pronouncements not yet adopted
In October 2009, the Financial Accounting Standards Board (FASB) issued amended revenue recognition guidance for arrangements with multiple deliverables. The new guidance eliminates the residual method of revenue recognition and allows the use of management’s best estimate of selling price for individual elements of an arrangement when vendor specific objective evidence (VSOE), vendor objective evidence (VOE) or third-party evidence (TPE) is unavailable. Prospective application of this new guidance for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with earlier application permitted. Alternatively, an entity can elect to adopt this guidance on a retrospective basis. The Group is in the process of evaluating what effect the adoption of this pronouncement will have on our consolidated financial condition and results of operations.

 

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Table of Contents

CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE 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
Accounting pronouncements not yet adopted — continued
In October 2009, the FASB issued authoritative guidance which amends the scope of existing software revenue recognition accounting. Tangible products containing software components and non-software components that function together to deliver the product’s essential functionality would be scoped out of the accounting guidance on software and accounted for based on other appropriate revenue recognition guidance. Prospective application of this new guidance for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with earlier application permitted. Alternatively, an entity can elect to adopt this new guidance on a retrospective basis. The Group is in the process of evaluating what effect the adoption of this pronouncement will have on our consolidated financial condition and results of operations.
In April 2010, the FASB issued an authoritative pronouncement regarding the 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 pronouncement 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 what effect the adoption of this pronouncement will have on our consolidated financial condition and results of operations.
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) entity’s 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 entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition, and therefore should be considered an equity award assuming all other criteria for equity classification are met. The pronouncement is 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 what effect the adoption of this pronouncement will have on our consolidated financial condition and results of operations.

 

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Table of Contents

CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE 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
Accounting pronouncements not yet adopted — continued
In December 2010, the FASB issued an authoritative pronouncement on when to perform Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts. The amendments in this update modify Step 1 so that for those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with existing guidance, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce that fair value of a reporting unit below its carrying amount. For public entities, the guidance is effective for impairment tests performed during entities’ fiscal years (and interim periods within those years) that begin after December 15, 2010. Early adoption will not be permitted. The Group does not expect the adoption of this pronouncement will have a significant effect on our consolidated financial position or results of operations.
In December 2010, the FASB issued an authoritative pronouncement on disclosure of supplementary pro forma information for business combinations. The objective of this guidance is to address diversity in practice regarding the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations. The amendments in this update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, non-recurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments affect any public entity as defined by Topic 805 that enters into business combinations that are material on an individual or aggregate basis. The amendments will be effective for business combinations consummated in periods beginning after December 15, 2010, and should be applied prospectively as of the date of adoption. Early adoption is permitted. The Group does not expect the adoption of this pronouncement will have a significant effect on our consolidated financial position or results of operations.

 

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Table of Contents

CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
3.  
RESTATEMENT
In 2009, the 798 Entertainment, a subsidiary of the Group, issued the Convertible Notes to a group of unrelated third party investors (the “Note Holders”). The Convertible Notes had a principal value of $10,000 and was issued at par less issuance costs of $417. We recorded the Convertible Notes as a liability at the amount of the net proceeds of $9,583. The Convertible Notes included a number of embedded derivatives, principally a right to convert into shares of 798 Entertainment or the shares of the Company at the Note Holders’ discretion. The Group determined that the fair value of these embedded derivatives at the date of issuance was $12,759 and pursuant to the authoritative literature were required to be bifurcated from the debt host and subsequently marked to market through earnings. In 2009 the loss charged to the income statement arising from the increase in the fair value of the derivatives was $5,270. In the Group’s previously reported 2009 financial statements, the Group first allocated the proceeds to the embedded derivatives equal to the fair value of these embedded derivatives and then allocated the remaining carrying amount to the debt host. Since the fair value of the embedded derivatives exceeded the net proceeds of the Convertible Notes and hence, resulted in a debit amount of $3,176 for the debt host at the date of the issuance. The Group accreted the residual amount (the residual amount of the debt host after deducting the embedded derivatives) to the amount due on the redemption of the debt over the life of the debt instrument assuming no conversion on redemption. In 2009 the charge to the income statement in respect of the accretion of interest was $588. (The Convertible Notes were subsequently converted into equity of 798 Entertainment and the Company pursuant to the original conversion terms in September 2010).
While the Group believed that the accounting applied was in compliance with the relevant authoritative literature, it has subsequently determined that the more correct accounting upon the issuance of the debt was to recognize the embedded derivatives at their fair value of $12,759 but to recognize the difference between that amount and the amount of the net proceeds as a loss upon the issuance of the Convertible Notes. Consequently we have restated certain amounts in our financial statements for the year ended December 31, 2009 as follows:
         
Impact on current earnings for year ended December 31, 2009:
       
Decrease in net income in 2009
  $ (2,588 )
Increase in net loss attributable to noncontrolling interest
  $ 665  
 
     
Decrease in retained earning
  $ (1,923 )
 
     

 

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Table of Contents

CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
3.  
RESTATEMENT — continued
The following table shows the impact of the restatement on the consolidated balance sheet as of December 31, 2009.
                         
    As of December 31, 2009  
    Previously     Increase        
    reported     (decrease)     Restated  
ASSETS
                       
 
                       
Current assets:
                       
Cash and cash equivalents
  $ 130,544     $     $ 130,544  
Accounts receivable, net of allowances of $9,151
    28,992             28,992  
Amount due from a related party
    9,941             9,941  
Inventories
    22,937             22,937  
Prepaid expenses and other current assets
    12,420             12,420  
 
                 
Total current assets
    204,834             204,834  
 
                 
Plant, machinery and equipment, net
    44,582             44,582  
Acquired intangible assets, net
    645             645  
Goodwill
    606             606  
 
                 
TOTAL ASSETS
  $ 250,667     $     $ 250,667  
 
                 
 
                       
LIABILITIES AND EQUITY
                       
 
                       
Current liabilities:
                       
Accounts payable
  $ 10,514     $     $ 10,514  
Amounts due to related parties
    266             266  
Accrued expenses and other current liabilities
    10,026             10,026  
Advance from customers
    4,720             4,720  
Deferred revenue
    755             755  
Income tax payable
    1,162             1,162  
Put option liability
    1,257             1,257  
 
                 
Total current liabilities
    28,700             28,700  
 
                 
Convertible notes and embedded derivatives
    15,441       2,588       18,029  
 
                 
Total liabilities
    44,141       2,588       46,729  
 
                 
 
                       
Equity:
                       
Ordinary shares of par value $0.00002:
                       
50,000,000,000,000 shares authorized; shares issued and outstanding, 650,156,045 in 2009
    13             13  
Additional paid-in capital
    113,657             113,657  
Treasury stock, at cost (918,000 shares)
    (199 )           (199 )
Accumulated other comprehensive income
    23,863             23,863  
Statutory reserve
    10,993             10,993  
Retained earnings
    55,866       (1,923 )     53,943  
 
                 
 
                       
Total China Techfaith Wireless Communication Technology Limited shareholders’ equity
    204,193       (1,923 )     202,270  
 
                 
Noncontrolling interests
    2,333       (665 )     1,668  
 
                 
Total equity
    206,526       (2,588 )     203,938  
 
                 
TOTAL LIABILITIES AND EQUITY
  $ 250,667     $     $ 250,667  
 
                 

 

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Table of Contents

CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
3.  
RESTATEMENT — continued
The following table shows the impact of the restatement on the consolidated statement of operations for the year ended December 31, 2009.
                         
    For the Year ended December 31, 2009  
    Previously     Increase        
    reported     (decrease)     Restated  
Revenues:
                       
ODP
  $ 210,588     $     $ 210,588  
Game
    488             488  
 
                 
Total net revenues
    211,076             211,076  
 
                 
Cost of revenues:
                       
ODP
    (172,801 )           (172,801 )
Game
    (64 )           (64 )
 
                 
Total cost of revenues
    (172,865 )           (172,865 )
 
                 
Gross profit
    38,211             38,211  
 
                 
Operating expenses:
                       
General and administrative
    (9,600 )           (9,600 )
Research and development
    (12,040 )           (12,040 )
Selling and marketing
    (3,241 )           (3,241 )
 
                 
Total operating expenses
    (24,881 )           (24,881 )
 
                 
Government subsidy income
    481             481  
 
                 
Income from operations
    13,811             13,811  
 
                 
Interest expenses
    (623 )     588       (35 )
Interest income
    667             667  
Loss on issuance of convertible notes
          (3,176 )     (3,176 )
Other income
    115             115  
Change in fair value of put option
    (84 )           (84 )
Change in fair value of derivatives embedded in convertible notes
    (5,270 )           (5,270 )
 
                 
Income before income taxes
    8,616       (2,588 )     6,028  
Income tax expenses
    (3,642 )           (3,642 )
 
                 
Net income
    4,974       (2,588 )     2,386  
Less: Net loss attributable to noncontrolling interests
    1,363       665       2,028  
 
                 
Net income attributable to China Techfaith Wireless Communication Technology Limited
  $ 6,337     $ (1,923 )   $ 4,414  
 
                 
Net income per share attributable to China Techfaith Wireless Communication Technology Limited:
                       
Basic
  $ 0.01     $     $ 0.01  
 
                 
Diluted
  $ 0.01     $     $ 0.01  
 
                 
Weighted average shares used in computation:
                       
Basic
    650,057,866             650,057,866  
 
                 
Diluted
    720,889,120             720,889,120  
 
                 

 

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Table of Contents

CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
4.  
ACQUISITION
On February 10, 2010, the Group acquired Citylead together with its subsidiaries and VIE, QIGI Technology, a domestic brand mobile phone company.
The consideration paid 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 acquisition agreements based on QIGI Technology’s operating performance. If QIGI Technology does not meet the performance target for year 2010 or 2011 as stipulated in the share purchase agreement, the former shareholders of Citylead are obligated to return certain number of ordinary shares of the Company back to the Group based on a pre-determined formula. Such contingent share receivable was initially recorded as contingent consideration receivable at fair value as of the acquisition date and subsequently remeasured at fair value at each period end.
Through this acquisition the Group expanded its branding business to target enterprise users and operator tailored customers.
The transaction was considered an acquisition of a business and accordingly the purchase method of accounting has been applied.
The purchase price allocation of the transaction was determined by the Group with the assistance of an independent valuation firm, which was allocated to assets acquired and liabilities assumed as of the date of acquisition as follows:
         
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  
 
Cash acquired
  $ 11,183          
Intangible assets:
               
Contract backlog
    20     0.1 year  
Customer base
    680     5 years  
Trade name & domain name
    1,670     Indefinite life  
Goodwill
    1,242          
Deferred tax liability
    (170 )        
Other net liabilities acquired
    (1,486 )        
 
             
Total
  $ 13,139          
 
             

 

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Table of Contents

CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
4.  
ACQUISITION — continued
The goodwill is mainly attributable to intangible assets that cannot be recognized separately as identifiable assets under U.S. GAAP, and comprise (a) the assembled work force and (b) the expected but unidentifiable business growth as a result of the synergy resulting from the acquisition.
The change of fair value of the contingent consideration from date of acquisition to December 31, 2010 was determined to be a decrease in asset of $107, which was recognized in other income (expense) in the consolidated statement of operations in the period of year 2010.
The following pro forma information summarizes the results of operations for the Group as if the acquisition had occurred as of January 1, 2009 and 2010. 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:
                 
    Year ended December 31,  
    2009     2010  
 
               
Total Revenue
  $ 240,755     $ 273,340  
Net income attributable to China Techfaith Wireless Communication Technology Limited
  $ 8,356     $ 27,591  
 
           
Net income per share attributable to China Techfaith Wireless Communication Technology Limited
               
- Basic
  $ 0.01     $ 0.04  
- Diluted
  $ 0.01     $ 0.03  
 
           

 

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CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
5.  
ACCOUNTS RECEIVABLE
Accounts receivable consists of the following:
                 
    December 31,  
    2009     2010  
 
               
Billed receivables
  $ 28,316     $ 19,241  
Unbilled receivables
    676        
 
           
 
  $ 28,992     $ 19,241  
 
           
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,  
    2008     2009     2010  
 
                       
Balance at beginning of year
  $ 3,838     $ 7,128     $ 9,151  
Charge to expenses
    2,996       2,081       8,204  
Utilized during the year
          (62 )     (4,498 )
Exchange difference
    294       4       276  
 
                 
Balance at end of year
  $ 7,128     $ 9,151     $ 13,133  
 
                 
6.  
INVENTORIES
Inventories consist of the following:
                 
    December 31,  
    2009     2010  
 
               
Work in progress
  $ 480     $ 31  
Raw materials
    21,443       16,525  
Finished goods
    1,014       1,189  
 
           
Inventories, net
  $ 22,937     $ 17,745  
 
           
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 $648, $409 and $2,186 in 2008, 2009 and 2010, respectively.

 

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Table of Contents

CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
7.  
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following:
                 
    December 31,  
    2009     2010  
 
               
Value added taxes recoverable
  $ 3,739     $ 3,061  
Advance to EMS providers
    4,216       1,042  
Rebate receivable
    2,817       796  
Rental receivable
          703  
Deposits
    358       642  
Social insurance borne by employee
    183       560  
Prepaid software license fee
    280       384  
Prepaid testing and tooling fee
    261       302  
Staff advances
    217       251  
Prepaid commercial insurance
    94       99  
Contingent acquisition receivable
          89  
Other prepaid and current assets
    255       68  
 
           
 
  $ 12,420     $ 7,997  
 
           
8.  
PLANT, MACHINERY AND EQUIPMENT, NET
Plant, machinery and equipment, net consist of the following:
                 
    December 31,  
    2009     2010  
 
               
Construction in progress
  $ 23,680     $ 2,576  
Office building
    19,236       42,020  
Leasehold improvements
    1,653       1,807  
Motor vehicles
    721       745  
Plant and machinery
    11,988       11,749  
Furniture, fixtures and equipment
    4,968       5,244  
Software
    7,555       7,789  
 
           
 
    69,801       71,930  
Less: Accumulated depreciation
    (25,219 )     (27,522 )
 
           
Plant, machinery and equipment, net
  $ 44,582     $ 44,408  
 
           
The Group recorded depreciation expenses of $6,103, $4,213 and $2,769 for the years ended December 31, 2008, 2009 and 2010, respectively.
The Group recognized impairment loss of $253, $nil and $nil for the years ended December 31, 2008, 2009 and 2010, respectively.

 

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CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
9.  
ACQUIRED INTANGIBLE ASSETS, NET
Acquired intangible assets, net consist of the following:
                                                 
    December 31, 2009     December 31, 2010  
    Gross             Net     Gross             Net  
    carrying     Accumulated     carrying     carrying     Accumulated     carrying  
    amount     amortization     amount     amount     amortization     amount  
 
                                               
Intangible assets with definite life:
                                               
Software license
  $ 2,593     $ (1,962 )   $ 631     $ 3,013     $ (2,453 )   $ 560  
Certification of internet content provider
    15       (1 )     14       15       (5 )     10  
Customer base
                      680       (121 )     559  
Contract backlog
                      20       (20 )      
 
                                   
 
    2,608       (1,963 )     645       3,728       (2,599 )     1,129  
 
                                   
Intangible assets with indefinite life:
                                               
Trade name and domain name
                      1,670             1,670  
 
                                   
 
  $ 2,608     $ (1,963 )   $ 645     $ 5,398     $ (2,599 )   $ 2,799  
 
                                   
The Group had recorded amortization expenses of $794, $377 and $616 for the years ended December 31, 2008, 2009 and 2010, respectively.
The Group recognized impairment loss of $627, $nil and $nil for the years ended December 31, 2008, 2009 and 2010, respectively.
The future amortization expenses for the net carrying amount of intangible assets with definite lives as of December 31, 2010 were as follows:
         
Year 2011
  $ 415  
Year 2012
    384  
Year 2013
    181  
Year 2014
    138  
Year 2015
    11  
 
     
 
  $ 1,129  
 
     

 

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Table of Contents

CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
10.  
GOODWILL
Changes in the carrying amount of goodwill by reportable segments for the years ended December 31, 2009 and 2010, consisted of the following:
                         
            Brand name        
    ODP     phone sales     Total  
 
                       
Balance as of January 1, 2009
  $ 606           $ 606  
 
                 
Balance as of December 31, 2009
  $ 606           $ 606  
 
                 
Balance as of January 1, 2010
  $ 606           $ 606  
Acquisition of Citylead (Note 4)
        $ 1,242     $ 1,242  
 
                 
Balance as of December 31, 2010
  $ 606     $ 1,242     $ 1,848  
 
                 
11.  
LONG-TERM INVESTMENTS
The Group has one equity method investment and one cost method investment with accumulated carrying value of $nil as of December 31, 2010.
BYTE
On March 15, 2007, BYTE Holding Ltd. (“BYTE”) was established by Techfaith BVI and BYD Co., Ltd. (“BYD”) in the BVI. BYTE’s 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. As of December 31, 2010, Techfaith BVI had not injected capital in BYTE. The Group could not obtain BYTE’s financial statements for 2009 and 2010. Since the Group has no obligation to fund BYTE’s loss, the Group did not record its share of BYTE’s result. The investment in BYTE is reported as a cost method investment in 2010 as the Group does not have the ability to exercise significant influence over BYTE’s operating and financial policies.
Arasor
On July 20, 2007, the Group 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 world’s emerging markets. As of December 31, 2010, both the Group and Arasor had not injected capital in Joined Fame and Joined Fame had not started its business.

 

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Table of Contents

CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
12.  
OTHER ASSET
In 2010, the Group negotiated with Guanghua Xinwang Limited (“Guanghua”) to sell a portion of the office building and the transaction was taken a form as follows. On July 19, 2010, the Group jointly formed a company named Beijing Ruike Xinwang Limited (“Ruike”) in Beijing with a third party as designated by Guanghua. The Group legally owned 70% equity interest of Ruike by injecting the portion of the office building with a carrying amount of $3,155 which was agreed to be sold to Guanghua verbally. In January 2011, the Group signed the agreement with Guanghua to sell the 70% equity interest in Ruike with a consideration of $4,058 in cash.
The Group considered the substance of the arrangement was to sell the office building with carrying amount of $3,155 at a price of $4,058. Since the transaction was not closed in 2010, the Group did not recognize the gain from disposal in 2010. The office building with carrying amount of $3,155 was reclassified from plant, machinery and equipment account to other asset on the balance sheet and ceased the depreciation from July 2010. In addition, the Group received $2,773 security deposit in connection with the arrangements from Guanghua in 2010 and recorded the amount as a current liability as set out in Note 13 as of December 31, 2010.
13.  
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
                 
    December 31,  
    2009     2010  
 
               
Deposit received for disposal of other asset (Note 12)
  $     $ 2,773  
Business tax, value added tax and other tax payables
    1,840       2,141  
Social insurance payables
    931       2,113  
Accrued professional fees
    752       1,356  
Accrued royalty and license fee
    1,116       1,157  
Prepayment from suppliers
    1,076       870  
Accrued wages
    416       647  
Accrued testing fee
    988       495  
Government grants
    59       394  
Accrued facility fee
    481       391  
Warranty provision
    377       277  
Rental payable
    149       210  
Customer deposits for minimum purchase
    218       152  
Payable for purchase of software
    799        
Others
    824       839  
 
           
 
  $ 10,026     $ 13,815  
 
           

 

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Table of Contents

CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
14.  
RESTRUCTURING PLAN
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, 2009 and 2010.
15.  
INCOME TAXES
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, 2008, 2009 and 2010 on the basis that Techfaith HK, Technology HK, QIGI HK and Media Chance did not have any assessable profits arising in or derived from Hong Kong for the years.
PRC
On March 16, 2007, the National People’s 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 have obtained HNTE under the old EIT law and obtained the new HNTE in December 2008 under the New EIT Law. They were entitled to a three-years tax exemption followed by a 50% reduction in tax rate for the subsequent three years, starting from and 2003 and 2006, respectively.

 

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Table of Contents

CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
15.  
INCOME TAXES — continued
PRC — continued
Techfaith Shanghai has qualified as manufacturing foreign investment enterprise (the “FIE”) located in Shanghai Pudong according to the old EIT law and obtained HNTE in December 2008. It was entitled to a preferential tax rate of 15% prior to year 2008, with two-years exemption followed by a 50% reduction in tax rate for the subsequent three years under the old EIT law starting from 2005. According to the transition rule from the old EIT law to the New EIT Law, in 2008 and 2009, Techfaith Shanghai is entitled a tax rate of 18% and 20%, respectively. Start from 2010, the tax rate for Techfaith Shanghai is 15%.
Techfaith Shenzhen is located in Shenzhen “Special Economic Zone”, and entitled to a preferential tax rate of 15% under the old EIT law in 2007, with a two-year exemption followed by a 50% reduction in tax rate in the following three years starting from year 2008. In accordance with the transition rules of the New EIT Law, the applicable tax rate from year 2008 to year 2012 are 18%, 20%, 22%, 24% and 25%.
Techfaith Hangzhou and TechSoft are foreign investment enterprises which were entitled with a two-year exemption followed by a 50% reduction in tax rate for the subsequent three years over the statuary tax rate of 25% starting from 2007 and 2008, respectively.
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 and VIE’s subsidiary   2008     2009     2010     2011     2012  
 
                                       
Techfaith China (1)
    7.5 %     15.0 %     15.0 %     15.0 %     15.0 %
Techfaith Intelligent Handset Beijing (1)
    0.0 %     7.5 %     7.5 %     7.5 %     15.0 %
Techfaith Shanghai (1)
    9.0 %     10.0 %     15.0 %     15.0 %     15.0 %
Techfaith Shenzhen
    0.0 %     0.0 %     11.0 %     12.0 %     12.5 %
Techfaith Hangzhou
    0.0 %     12.5 %     12.5 %     12.5 %     25.0 %
TechSoft
    0.0 %     0.0 %     12.5 %     12.5 %     12.5 %
     
(1)  
The new HNTE status obtained by Techfaith China, Techfaith Intelligent Handset Beijing and Techfaith Shanghai 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.

 

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CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
15.  
INCOME TAXES — continued
PRC — 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 China’s 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 new EIT Law and its implementation rules, dividends generated after January 1, 2008 and payable by a foreign-invested enterprise in China to its foreign investors who are nonresident enterprises are subject to a 10% withholding tax, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement.
Aggregate undistributed earnings of the Company’s subsidiaries, VIEs and VIE’s subsidiary located in the PRC that are taxable upon distribution to the Company of approximately $95,110 and $117,483 at December 31, 2009 and 2010, 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, 2010.
The current and deferred components of the income tax expense appearing in the consolidated statements of operation are as follows:
                         
    Year ended December 31,  
    2008     2009     2010  
 
                       
Current tax
  $ 36     $ 3,513     $ 9,651  
Deferred tax
    (129 )     129       (193 )
 
                 
 
  $ (93 )   $ 3,642     $ 9,458  
 
                 
All of the income taxes are related to the PRC entities of the Group.

 

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CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
15.  
INCOME TAXES — continued
PRC — continued
The principal components of the Group’s deferred tax assets and liabilities are as follows:
                 
    Year ended December 31,  
    2009     2010  
 
               
Deferred tax assets — current:
               
Accrued expense
  $ 190     $ 361  
Product warranty provision
    32       32  
Allowance for doubtful accounts
    1,077       723  
Inventory provision
    337       460  
Less: Valuation allowance
    (1,636 )     (1,413 )
 
           
Net deferred tax assets — current
  $     $ 163  
 
           
 
Deferred tax assets — non-current:
               
Depreciation and amortization
  $ 691     $ 405  
Net operating loss carry forwards
    8,894       8,685  
Less: Valuation allowance
    (9,585 )     (9,090 )
 
           
Net deferred tax assets non-current
  $     $  
 
           
                 
    Year ended December 31,  
    2009     2010  
 
               
Deferred tax liability — non-current:
               
Acquired intangible asset
  $     $ 140  
 
           
As of December 31, 2010, operating loss carry forwards amounted to $46,883 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.
In 2010, Interactive Internet has begun to generate taxable profit due to the newly introduced Game business. It is expected that this will continue to generate taxable profit and will realize all deferred tax assets in the future years, accordingly no valuation allowance is provided for Interactive Internet. The rest 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 for the rest of entities of the Group.

 

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CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
15.  
INCOME TAXES — continued
PRC — continued
Reconciliation between the provision for income tax computed by PRC enterprise income tax rate of 25% to income before income taxes and actual provision for income taxes is as follows:
                         
    Year ended December 31,  
    2008     2009     2010  
    (As restated)  
Income before income tax
  $ 7,256     $ 6,028     $ 38,116  
Tax provision at PRC enterprise income tax rate of 25%
    1,814       1,507       9,529  
Expenses not deductible for tax purposes
    1,294       153       2,428  
Tax exemption and preferential tax rates granted to PRC entities
    (5,448 )     (2,825 )     (3,629 )
Effect of the different income tax rates in other jurisdiction
    2,235       2,493       1,848  
Changes in valuation allowances
    12       2,314       (718 )
 
                 
 
  $ (93 )   $ 3,642     $ 9,458  
 
                 
Without the tax exemption and preferential tax rates granted to PRC entities, income tax expense would have been increased by approximately $6,701, $3,505 and $5,793 for the years ended December 31, 2008, 2009 and 2010, respectively, representing a decrease in the basic and diluted earnings per share of $0.01, $0.01 and $0.01, for the years ended December 31, 2008, 2009 and 2010, respectively.
The Group did not identify significant unrecognized tax benefits for the years ended December 31, 2008, 2009 and 2010. The Group did not incur any interest and penalties related to potential underpaid income tax expenses and also believed that the adoption of pronouncement issued by FASB regarding accounting for uncertainty in income taxes did not have a significant impact on the unrecognized tax benefits within 12 months from December 31, 2010.
Since January 1, 2008, the relevant tax authorities of the Group’s subsidiaries, VIEs and VIE’s subsidiary have not conducted a tax examination on the Group’s subsidiaries, VIEs and VIE’s subsidiary. In accordance with relevant PRC tax administration laws, tax years from 2006 to 2010 of the Group’s PRC subsidiaries, VIEs and VIE’s subsidiary remain subject to tax audits as of December 31, 2010, at the tax authority’s discretion.

 

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CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
16.  
PUT OPTION LIABILITY
In March 2006, the Group entered into the Agreement with QUALCOMM to establish a 70%-owned subsidiary, TechSoft Holding, as set out in Note 1. The exercise price for both the Put Option and the Call Option as set out in Note 1 shall be the higher of, the original purchase price per share 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 QUALCOMM’s percentage of shareholding on a fully-diluted as converted basis. The Put Option was recorded as a liability re-measured at fair value.
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 18).
The fair value of TechSoft Holding’s 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 22%. The fair value of TechSoft Holding’s ordinary shares as of December 31, 2010 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 2009
  $ 1,173  
Change in fair value of the Put Option
    84  
 
     
 
Balance at the beginning of 2010
    1,257  
Change in fair value of the Put Option
    123  
 
     
Balance at the end of 2010
  $ 1,380  
 
     
17.  
CONVERTIBLE NOTES
On June 9, 2009, 798 Entertainment, a subsidiary of the Group, issued $10,000 principal amount of the Convertible Notes due June 8, 2012, to 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.

 

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CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
17.  
CONVERTIBLE NOTES — continued
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 Entertainment’s Class B Ordinary Shares, par value $0.01 per share at the conversion price of $28.92 per share, or
 
  (ii)  
The Company’s shares, par value $0.00002 per share at the conversion price of $0.0793 per share. The total number of the Company’s 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 Convertible Notes will automatically convert into 798 Entertainment’s 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 Entertainment’s 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 Entertainment’s Class B Ordinary Shares or then into the 798 Entertainment’s Ordinary Shares.

 

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CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
17.  
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 Company’s Ordinary Shares at a conversion price equal to the lesser of (i) the conversion price to convert the Convertible Notes to the Company’s ordinary share then in effect, and (ii) the weighted average price of the Company’s 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 Company’s 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 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 has exceeded the principle amount of the Convertible Notes by $3,176, this amount is write off in 2009 as loss on issuance of the Convertible Notes. The remaining debt discount of $10,000 was amortized into interest expense over the term of the Convertible Notes using the effective interest rate method. During 2009 and 2010 (till September 8, 2010, which was the conversion date), the amortized discount of $nil and $1 was recorded as part of the interest expense in these periods.

 

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CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
17.  
CONVERTIBLE NOTES — continued
As of December 31, 2009 and 2010, the carrying value of the Convertible Notes and the embedded derivatives consist of the followings:
                 
    December 31,  
    2009     2010  
    (As restated)        
Principal amount of the Convertible Notes
  $ (10,000 )      
Unamortized debt discount
    10,000        
Fair value of the embedded derivative in the Convertible Notes
    (18,029 )      
 
           
 
Carrying value of the Convertible Notes and embedded derivative
  $ (18,029 )      
 
           
The initial fair value of these derivatives was $12,759 on the issuance date. The change in the fair value of derivatives during 2009 and 2010 (till September 8, 2010, which was the conversion date as described below) was a loss of $5,270, and a gain of $1,280 was recorded in earnings in both years, respectively.
On September 8, 2010 the Convertible Notes was converted into the Company’s ordinary shares and 798 Entertainment’s class B ordinary shares by 62.5% and 37.5% of the face value of the Convertible notes, respectively, upon the choice of the Notes Holders.
The carrying amount of the Convertible Notes as of the conversion date was $16,750, which comprised of the principal amount of the Convertible Notes $10,000 less the unamortized discount of $9,999 as of the conversion date and the carrying amounts of the conversion rights and interest reset features which were carried at their fair values as of the conversion date for $16,749, was credited to the equity accounts to reflect the ordinary shares issued by the Company and its subsidiary, 798 Entertainment and no gain or loss was recognized. As a result of this conversion, 78,814,628 of the Company’s ordinary shares with par value of $0.00002 and 129,668 of 798 Entertainment’s class B ordinary share with par value of 0.01 are issued to the Note Holders.

 

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CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
18.  
FAIR VALUE
  (a)  
Assets and liabilities measured at fair value on a recurring basis
  (i)  
Put Option
 
     
The Put Option the Group offered to QUALCOMM as set out in Note 16 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 Group’s assessment of the assumptions market participants would use in valuing these derivatives.
 
  (ii)  
Derivatives embedded in the Convertible Notes
 
     
Derivatives embedded in the Convertible Notes as set out in Note 17 were classified as Level 3 liabilities because the Group used unobservable inputs to value them, reflecting the Group’s assessment of the assumptions market participants would use in valuing these derivatives.
 
  (iii)  
Contingent consideration receivable
 
     
The contingent consideration receivable as set out in Note 4 is considered as Level 3 asset because the Group used unobservable inputs, reflecting the Group’s assessment of the assumptions market participants would use in valuing this asset.
                                 
    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  
 
                       

 

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CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
18.  
FAIR VALUE — continued
  (a)  
Assets and liabilities measured at fair value on a recurring basis — continued
                                 
    December 31, 2010  
    Quoted price                    
    in active     Significant              
    markets     other     Significant        
    for identical     observable     unobservable        
    investments     inputs     inputs        
    Level 1     Level 2     Level 3     Total  
Asset:
                               
Contingent consideration receivable
  $     $     $ 89     $ 89  
 
                       
Total asset at fair value
  $     $     $ 89     $ 89  
 
                       
Liability:
                               
Put Option
  $     $     $ 1,380     $ 1,380  
 
                       
Total liability at fair value
  $     $     $ 1,380     $ 1,380  
 
                       
The following table summarizes the movement of the balances of the Group’s financial asset and liabilities measured at fair value on a recurring basis:
         
Asset:
       
 
       
Balance at January 1, 2009
     
Balance at January 1, 2010
     
 
     
Initial recognition of the contingent consideration receivable
  $ 196  
Change in fair value of the contingent consideration receivable
    (107 )
 
     
Balance at December 31, 2010
  $ 89  
 
     
 
       
Liabilities:
       
 
       
Balance at January 1, 2009
  $ 1,173  
Change in fair value of the Put Option
    84  
Initial recognition of fair value of the derivatives embedded in the Convertible Notes
    12,759  
Change in fair value of the derivatives embedded in the Convertible Notes
    5,270  
 
     
 
Balance at December 31, 2009
    19,286  
 
     
Change in fair value of the Put Option
    123  
Change in fair value of the derivatives embedded in the Convertible Notes
    (1,280 )
Conversion of the Convertible Notes
    (16,749 )
 
     
Balance at December 31, 2010
  $ 1,380  
 
     

 

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CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
18.  
FAIR VALUE — continued
  (b)  
Assets and liabilities measured at fair value on a nonrecurring basis
 
     
The Group acquired Citylead on February 10, 2010. 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 Group’s assessment of the assumptions market participants would use in valuing these purchased intangible asset.
19.  
SHARE-BASED PAYMENT
During 2008, 2009, and 2010, the Group recognized compensation expense, net of forfeitures, of $147, $20 and $1, 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 Group’s 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.
Under the Plan, the Group granted certain stock options to its employees prior to 2009, which were all vested as of January 1, 2009. The Group did not recognize share-based compensation for the stock options granted during the year ended December 31, 2008, 2009 and 2010, respectively.
As of December 31, 2010, 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 4.7 years. No share option was exercised during the year ended December 31, 2010.

 

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CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
19.  
SHARE-BASED PAYMENT — continued
 
   
Nonvested shares
         
    Number of  
    nonvested shares  
 
       
Unvested at January 1, 2010
  $ 16,454  
Granted during the year
     
Vested during the year
    (16,454 )
Forfeited during the year
     
 
     
Unvested at December 31, 2010
  $  
 
     
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 the Plan. The fair value of nonvested shares as of the grant date was $0.98 per share, based on the closing price of the Company’s 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 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 evenly. The fair value of nonvested shares as of the grant date was $0.28 per share. The Group recognized share based compensation expenses of $7, $3 and $1 for these nonvested shares for the years ended December 31, 2008, 2009 and 2010, respectively.
The intrinsic value of nonvested shares vested for the years ended December 31, 2008, 2009 and 2010 is $33, $20 and $3, respectively.

 

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CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
20.  
SHARE CAPITAL
The Company has 50,000,000,000,000 ordinary shares authorized with par value of $0.00002 per share.
As of January 1, 2008, the Company had 649,913,136 shares issued and outstanding.
In 2008, the Company issued 121,454 ordinary shares upon the vesting of the nonvested shares.
In 2009, the Company issued 121,455 ordinary shares upon the vesting of the nonvested shares.
On September 29, 2008, the Group’s 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.
On February 10, 2010, the Company issued 65,934,066 ordinary shares for the acquisition of Citylead (Note 4). On September 8, 2010, the Company issued 78,814,628 ordinary shares for the conversion of the Convertible Notes (Note 17). In addition, the Company also issued 16,454 ordinary shares upon the vesting of nonvested shares in 2010.
21.  
OTHER OPERATING INCOME
Other operating income for year ended December 31, 2008 represented a gain of $2,443 recognized in connection with the reversal of the excess amount of accrued contribution recorded in previous years pursuant to the government-mandated defined contribution employee benefit plan upon the verification by the local government agency. For the year ended December 31, 2010 the other operating income of $1,109 mainly represented rental income recognized for renting out unoccupied office building space.

 

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CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
22.  
RELATED PARTY TRANSACTIONS
Techfaith Technology (Shenyang) Ltd. (“Techfaith Technology”) and De Ming Technology (Hangzhou) Ltd. (“De Ming”) (formerly known as Kang Mu Ni Electronics (Hangzhou) Ltd.) are subsidiaries of Techfaith Electronics Limited, a company established in September 2007, of which the Group’s Founder and CEO holds 43% equity interest.
For the years ended December 31, 2008, 2009 and 2010, purchase of raw materials, mobile phone products and services from related parties are as follow:
                         
    Year ended December 31,  
    2008     2009     2010  
 
                       
Techfaith Technology
  $ 17,031     $ 3,479     $ 10,662  
De Ming
    2,373       1,154       125  
 
                 
Total
  $ 19,404     $ 4,633     $ 10,787  
 
                 
For the years ended December 31, 2008, 2009 and 2010, sales of raw materials to related parties are as follow:
                         
    Year ended December 31,  
    2008     2009     2010  
 
                       
Techfaith Technology
  $ 18,805     $ 833     $ 838  
De Ming
                21  
 
                 
Total
  $ 18,805     $ 833     $ 859  
 
                 
As of December 31, 2009 and 2010, amounts due from a related party are as follow:
                 
    December 31,  
    2009     2010  
 
               
Trade receivable:
               
Techfaith Technology
  $ 9,941     $ 8,061  
 
           

 

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CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
22.  
RELATED PARTY TRANSACTIONS — continued
As of December 31, 2009 and 2010, amounts due to related parties are as follows:
                 
    December 31,  
    2009     2010  
Trade payable:
               
Techfaith Technology
  $ 7     $ 14  
De Ming
    259       32  
 
           
Total
  $ 266     $ 46  
 
           
23.  
OPERATING SEGMENT AND GEOGRAPHIC INFORMATION
The Group’s 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.
As a result of acquisition of Citylead in February 2010, the Group adjusted its segment reporting since then. The business activities of previously reported handset design segment and product sales segment are now combined into one segment, named as original developed products (the “ODP”) segment. The business activities of QIGI Technology acquired in 2010 are now representing a new segment of the Group, named as brand name phone sales segment. Prior-year figures have been adjusted retrospectively.
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     2010  
Revenues
                       
ODP
  $ 208,850     $ 210,588     $ 222,549  
Brand name phone sales
                38,462  
Game
          488       10,866  
 
                 
Total net revenues
    208,850       211,076       271,877  
 
                 
 
Cost of sales
                       
ODP
    (167,685 )     (172,801 )     (180,517 )
Brand name phone sales
                (22,066 )
Game
          (64 )     (2,202 )
 
                 
Total cost of revenues
    (167,685 )     (172,865 )     (204,785 )
 
                 
Gross profit
  $ 41,165     $ 38,211     $ 67,092  
 
                 
     
1  
The Group’s chief operating decision maker only reviews revenue and cost for each operating segment. Expenses are not allocated to each segment.

 

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CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
23.  
OPERATING SEGMENT AND GEOGRAPHIC INFORMATION — continued
                 
    Year ended December 31,  
    2009     2010  
Assets
               
ODP
  $ 184,863     $ 208,131  
Brand name phone sales
          31,675  
Game
    21,574       19,703  
Reconciling amounts
    44,230       44,444  
 
           
Total assets
  $ 250,667     $ 303,953  
 
           
 
               
Reconciling amounts:
               
Corporate assets
  $ 44,230     $ 44,444  
 
           
                         
    Year ended December 31,  
    2008     2009     2010  
 
                       
Total expenditures for additions to long-lived assets
                       
ODP
  $ 2,194     $ 733     $ 3,254  
Brand name phone sales
                 
Game
          334       953  
Corporate assets
    12,559       288       75  
 
                 
Total capital expenditure
  $ 14,753     $ 1,355     $ 4,282  
 
                 
Revenues for the Group’s products and services are shown in the table below:
                         
    Year ended December 31,  
    2008     2009     2010  
 
Net revenues
                       
Products sales
  $ 189,727     $ 206,106     $ 219,037  
Design fees
    16,863       2,335       1,752  
Component sales related to design
    2,260       2,147       1,760  
 
                 
Revenues related to ODP
    208,850       210,588       222,549  
 
                 
Revenue related to Brand name phone sales
                38,462  
 
                 
Wireless gaming service
          470       5,625  
Motion game device
                5,097  
PC online game
                103  
Mobile phone game design
          18       41  
 
                 
Revenue related to Game
          488       10,866  
 
                 
Total net revenues
  $ 208,850     $ 211,076     $ 271,877  
 
                 

 

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CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
23.  
OPERATING SEGMENT AND GEOGRAPHIC INFORMATION — continued
 
   
Geographic information
Revenues, classified by the major geographic areas in which the Group’s 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,  
    2008     2009     2010  
 
                       
Revenues from the PRC
  $ 157,411     $ 192,644     $ 257,044  
Revenues from countries other than the PRC
    51,439       18,432       14,833  
 
                 
Total revenues
  $ 208,850     $ 211,076     $ 271,877  
 
                 
24.  
COMMITMENTS
  (a)  
Purchase commitments
 
     
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, 2010, the Group had commitments under non-cancellable contracts that future minimum purchases are $1,865 in 2011.
 
  (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, 2008, 2009 and 2010 were $514, $1,152 and $1,093, respectively.
 
     
Future minimum rental lease payments under non-cancellable operating leases agreements are $279 which will be due in 2011.
 
  (c)  
Capital commitments
 
     
As of December 31, 2010, capital commitments for construction of property and purchase of plant, machinery and equipment are $3,106 which will be due in 2011.

 

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CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
25.  
MAJOR CUSTOMERS
The following tables summarize net revenues and accounts receivable from customers that accounted for 10% or more of the Group’s net revenues and accounts receivable:
                         
    Net revenues  
    Year ended December 31,  
    2008     2009     2010  
 
                       
A
    N/A       N/A       11.4 %
B
    N/A       N/A       10.9 %
C
    12.3 %     N/A       N/A  
D
    N/A       14.1 %     N/A  
E
    N/A       10.1 %     N/A  
F
    N/A       10.0 %     N/A  
 
                 
 
    12.3 %     34.2 %     22.3 %
 
                 
A small number of customers have historically accounted for a substantial portion of our net revenue. In 2008, 2009 and 2010, our top three customers collectively accounted for approximately 28.8%, 34.2% and 30.4%, respectively, of our net revenues.
                 
    Accounts receivable  
    As of December 31,  
    2009     2010  
 
               
G
    N/A       34.5 %
H
    16.7 %     12.7 %
I
    N/A       10.6 %
J
    18.3 %     N/A  
 
           
 
    35.0 %     57.8 %
 
           

 

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CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
26.  
NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income per share for the years indicated:
                         
    Year ended December 31,  
    2008     2009     2010  
    (As restated)  
Net income attributable to ChinaTechfaith Wireless Communication Technology Limited (numerator), basic
  $ 8,001     $ 4,414     $ 27,840  
Convertible Notes interest
                1  
Change in fair value of derivatives embedded in Convertible Notes
                (1,280 )
 
                 
Net income attributable to ChinaTechfaith Wireless Communication Technology Limited (numerator), diluted
  $ 8,001     $ 4,414     $ 26,561  
 
                 
Shares (denominator):
                       
Weighted average ordinary shares outstanding
    649,972,306       650,057,866       732,784,822  
Effect of dilutive securities:
                       
Weighted average shares from assumed vest of nonvested shares
    90,006       6,054       7,080  
Weighted average shares from the Convertible Notes, if converted
          70,825,200       63,051,703  
 
                 
Weighted average shares used in computing diluted net income per share
    650,062,312       720,889,120       795,843,605  
 
                 
 
Net income attributable to ChinaTechfaith Wireless Communication Technology Limited per share, basic
  $ 0.01     $ 0.01     $ 0.04  
 
                 
 
Net income attributable to ChinaTechfaith Wireless Communication Technology Limited per share, diluted
  $ 0.01     $ 0.01     $ 0.03  
 
                 
As of December 31, 2008, 2009 and 2010, the Group had share options outstanding equivalents to 131,636 ordinary shares that could have potentially diluted basic income per share in the future, but which were excluded in the computation of diluted income per share in the years presented, as their effect would have been anti-dilutive.
In 2009, the Convertible Notes could have potentially diluted basic income per share in the future, but which were excluded in the computation of diluted income per share in 2009, as its effect would have been anti-dilutive. Accordingly, the change in fair value of derivatives embedded in the Convertible Notes was not considered in calculating the net income attributable to China Techfaith Wireless Communication Technology Limited used for the calculation of diluted net income per share in 2009.

 

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CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
27.  
EMPLOYEE BENEFIT PLAN
Full time employees of the Group located in the PRC participate in a government-mandated defined contribution plan pursuant to which certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. The Group accrues for these benefits based on certain percentages of the employees’ salaries.
The total provisions for such employee benefits were $4,511, $2,244 and $2,505 for the years ended December 31, 2008, 2009 and 2010, respectively.
28.  
STATUTORY RESERVES AND RESTRICTED NET ASSETS
As stipulated by the relevant law and regulations in the PRC, the Company’s subsidiaries, VIEs and VIE’s subsidiary 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 (the “PRC GAAP”). 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 $10,993 and $16,679 as of December 31, 2009 and 2010, respectively.
As a result of PRC laws and regulations, which require that distributions by PRC entities can only be paid out of distributable profits computed in accordance with PRC GAAP, the PRC entities are restricted from transferring a portion of their net assets to the Group. Amounts restricted include paid-in capital and the statutory reserves of the Company’s PRC subsidiaries, VIEs and VIE’s subsidiary. As of December 31, 2010, the aggregate amounts of capital and statutory reserves restricted which represented the amount of net assets of the relevant subsidiaries, VIEs and VIE’s subsidiary in the Group not available for distribution was $120,370.

 

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CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
29.  
NONCONTROLLING INTERESTS
Techsoft Holding and its subsidiary
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 Holding’s share capital, respectively.
798 Entertainment, its subsidiaries and VIE
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 $28.92 per share (“Base Price”), with par value of $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 Entertainment’s 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 Entertainment’s 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 Entertainment’s 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 Entertainment’s Class B Ordinary Share as if these Class B Ordinary Shares had been converted into 798 Entertainment’s 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 noncontrolling’s 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 Group.

 

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CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
29.  
NONCONTROLLING INTERESTS — continued
798 Entertainment, its subsidiaries and VIE — continued
On September 8, 2010, the Note Holders of Convertible Notes issued by 798 Entertainment have converted 37.5% of the Convertible Notes’ face value to class B ordinary shares of 798 Entertainment at the predetermined conversion price of $28.92, and 129,668 class B ordinary shares were issued to the Note Holders with par value of $0.01. Upon this conversion of the Convertible Notes, the Group retained its control of 798 Entertainment, but further redued its share ownership in 798 Entertainment from 74.3% to 67.8%. 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, $3,546, is calculated as the net assets of the investee, 798 Entertainment, times the noncontrolling’s percentage, 32.2%, then less the value of the noncontrolling interest just before the conversion of Convertible Notes.
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.
30.  
SUBSEQUENT EVENT
Issuance of share option
On April 21, 2011, the Group granted 1,800,000 share options to its director, independent directors and an external consultant at the exercise price of $0.272 per share. 50% of these share options will be vested on the grant date and the remaining will be vested on April 21, 2012. The Group is in the progress of evaluating the grant date fair value of the options.
Establishment of new subsidiaries
In April, 2011, Techfaith Hangzhou, Techfaith Intelligent Handset Beijing and Beijing E-town International Investment and Development Co Ltd (“BEIID”) entered into an agreement to set up a company to develop a mobile phone production line in Beijing. Techfaith Hangzhou and Techfaith Intelligent Handset Beijing will hold 49% and 11% of equity interest of the company, respectively and BEIID will hold 40% of equity interest of the company.
In May, 2011, Techfaith BVI and Administration Committee of Shenyang Puhe New Town (“PuHe”) entered into an agreement to set up a company to develop a mobile phone research facility and a production line in Shenyang. Techfaith BVI will hold 83.3% of equity interest of the company and PuHe will hold 16.7% of equity interest of the company.

 

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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)
                 
    Years ended  
    December 31,  
    2009     2010  
    (As restated)        
ASSETS
               
 
               
Current assets:
               
Cash and cash equivalents
  $ 649     $ 73  
Amounts due from subsidiaries
    100,840       107,030  
Prepaid expenses and other current assets
    65       17  
 
           
Total current assets
    101,554       107,120  
 
           
 
Intangible assets
    6       6  
Investment in subsidiaries
    101,978       157,749  
 
           
 
TOTAL ASSETS
  $ 203,538     $ 264,875  
 
           
 
               
LIABILITIES AND EQUITY
               
 
               
Current liabilities:
               
Accrued expenses and other current liabilities
  $ 1,268     $ 1,490  
 
           
Total current liabilities
    1,268       1,490  
 
           
 
               
Equity:
               
Ordinary shares of par value $0.00002:
               
50,000,000,000,000 shares authorized; shares issued and outstanding, 650,156,045 in 2009 and 794,003,193 in 2010
    13       16  
Additional paid-in capital
    113,657       139,495  
Treasury stock, at cost (918,000 and nil shares as of December 31, 2009 and 2010, respectively)
    (199 )      
Accumulated other comprehensive income
    23,863       31,098  
Retained earnings
    64,936       92,776  
 
           
Total equity
    202,270       263,385  
 
           
TOTAL LIABILITIES AND EQUITY
  $ 203,538     $ 264,875  
 
           

 

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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)
                         
    Years ended December 31,  
    2008     2009     2010  
    (As restated)  
 
                       
Net revenues
  $     $     $  
 
                 
Operating expenses:
                       
General and administrative
    (250 )     (84 )     (177 )
 
                 
Total operating expenses
    (250 )     (84 )     (177 )
 
                 
Loss from operations
    (250 )     (84 )     (177 )
Interest income
    346       1        
Equity in earnings of subsidiaries
    8,760       4,581       28,247  
Change in fair value of the Put Option
    (855 )     (84 )     (123 )
Change in fair value of contingent acquisition consideration
                (107 )
 
                 
Income before income taxes
    8,001       4,414       27,840  
Income taxes
                 
 
                 
Net income
  $ 8,001     $ 4,414     $ 27,840  
 
                 

 

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CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
ADDITIONAL INFORMATION — SCHEDULE 1
CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY (CONTINUED)
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     Retained     holders’     prehensive  
    Number     Amount     capital     stock     income     earnings     equity     income  
 
                                                               
Balance at January 1, 2008
    649,913,136     $ 13     $ 110,327     $ (4,628 )   $ 13,629     $ 52,521     $ 171,862          
Cancellation of treasury stock
                (4,628 )     4,628                            
Foreign currency translation adjustments
                            10,466             10,466     $ 10,466  
Share-based compensation
    121,454             147                         147          
Net income
                                  8,001       8,001       8,001  
 
                                               
Balance at December 31, 2008
    650,034,590       13       105,846             24,095       60,522       190,476     $ 18,467  
 
                                                             
Repurchase of ordinary shares
                      (199 )                 (199 )        
Foreign currency translation adjustments
                            77             77     $ 77  
Share-based compensation
    121,455             20                         20          
Capital contribution by a noncontrolling shareholder
                7,791             (309 )           7,482          
Net income (as restated)
                                  4,414       4,414       4,414  
 
                                               
Balance at December 31, 2009 (as restated)
    650,156,045       13       113,657       (199 )     23,863       64,936       202,270     $ 4,491  
 
                                                             
 
                                                               
Issue of ordinary shares for acquisition of Citylead
    65,934,066       1       12,834                         12,835          
Cancellation of treasury stock
    (918,000 )           (199 )     199                            
Conversion of the Convertible Notes
    78,814,628       2       13,202                         13,204          
Foreign currency translation adjustments
                            7,235             7,235     $ 7,235  
Share-based compensation
    16,454             1                         1          
Net income
                                  27,840       27,840       27,840  
 
                                               
Balance at December 31, 2010
    794,003,193     $ 16     $ 139,495           $ 31,098     $ 92,776     $ 263,385     $ 35,075  
 
                                               

 

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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)
                         
    Years ended December 31,  
    2008     2009     2010  
    (As restated)  
Operating activities:
                       
Net income
  $ 8,001     $ 4,414     $ 27,840  
Adjustments to reconcile net income to net cash used in operating activities:
                       
Share-based compensation
    147       20       1  
Change in fair value of the Put Option
    855       84       123  
Gain on investment in subsidiaries, VIEs and VIE’s subsidiary
    (8,768 )     (4,598 )     (21,997 )
Change in operating assets and liabilities:
                       
Amounts due from subsidiaries
    (17,646 )     (4,780 )     (6,190 )
Prepaid expenses and other current assets
    28       71       48  
Accrued expenses and other current liabilities
    6       4       99  
 
                 
Net cash used in operating activities
    (17,377 )     (4,785 )     (76 )
 
                 
Investing activity
                       
Cash consideration paid for business acquisition of Citylead
                (500 )
 
                 
Net cash used in investing activity
                (500 )
 
                 
Financing activity
                       
Repurchase of ordinary shares from market
          (199 )      
 
                 
Net cash used in financing activity
          (199 )      
 
                 
Net decrease in cash and cash equivalents
    (17,377 )     (4,984 )     (576 )
Cash and cash equivalents at the beginning of the year
    23,010       5,633       649  
 
                 
Cash and cash equivalents at the end of the year
  $ 5,633     $ 649     $ 73  
 
                 

 

F - 62


Table of Contents

CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
ADDITIONAL INFORMATION — SCHEDULE 1
Note:
1.  
BASIS FOR PREPARATION
The Condensed Financial Information of the Company only has been prepared using the same accounting policies as set out in the Company’s consolidated financial statements except that the Company has used equity method to account for its investment in its subsidiaries and variable interest entities.
2.  
INVESTMENTS IN SUBSIDIARIES AND VARIABLE INTEREST ENTITIES
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 Company’s stand-alone financial statements, its investments in subsidiaries and variable interest entities are reported using the equity method of accounting. The Company’s 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.
3.  
INCOME TAXES
The Company is a tax exempted company incorporated in the Cayman Islands.

 

F - 63

Exhibit 4.14
SHARE PURCHASE AGREEMENT
This SHARE PURCHASE AGREEMENT (the “ Agreement ”) is made on the 1st day of January, 2010, by and among CITYLEAD LIMITED, a company limited by shares duly incorporated and validly existing under the Laws of the British Virgin Islands (the “ Company ”), the purchaser listed on Schedule 1 attached to this Agreement (the “ Purchaser ”), ACTIVE CENTURY HOLDINGS LIMITED, a company limited by shares duly incorporated and validly existing under the Laws of British Virgin Islands (the “ Founder Holdco ”), the Persons listed on Schedule 2 attached to this Agreement (each a “ Founder ” and collectively the “ Founders ”, and together with the Founder Holdco, the “ Key Holders ” and each a “ Key Holder ”), QIGI&BODEE Technology Limited, a company organized and existing under the Laws of Hong Kong (the “ HK Co ”), and QIGI&BODEE Technology (Beijing) Co., Ltd., a domestic company duly incorporated and validly existing under the Laws of the PRC (the “ Domestic Company ”). Each of the Company, the HK Co, the Purchaser, the Key Holders, and the Domestic Company shall be referred to individually as a “ Party ” and collectively as the “ Parties ”. Capitalized terms used herein shall have the meaning set forth in Schedule 3 attached hereto.
RECITALS
WHEREAS , prior to the Closing and pursuant to the Plan of Restructuring, the HK Co shall form a wholly owned foreign enterprise organized and existing under the Laws of the PRC (the “ WFOE ”), which shall become a party to this Agreement by executing and delivering a counterpart signature page hereto.
WHEREAS , this Agreement shall be effective as to all parties except for the WFOE as of the date hereof, and effective all parties and the WFOE as of the date of its execution and delivery of its counterpart signature page.
WHEREAS , the Purchaser desires to purchase from the Company the Shares (as defined in Section 1.1 ) and the Company desires to sell the Shares (as defined in Section 1.1 ) to the Purchaser pursuant to the terms and subject to the conditions of this Agreement.
NOW, THEREFORE, THE PARTIES HEREBY AGREE AS FOLLOWS:
1.   PURCHASE AND SALE OF SHARES.
 
1.1   Sale and Issuance of Share .
Subject to the terms and conditions of this Agreement, the Purchaser agrees to purchase at the Closing (as defined below) and the Company agrees to sell and issue to the Purchaser at the Closing that number of Class B Ordinary Shares of the Company set forth opposite the Purchaser’s name on Schedule 1 , at a purchase price of US$125,000 per share for an aggregate purchase price of US$500,000 (the “ Purchase Price ”). The Class B Ordinary Shares issued to the Purchaser pursuant to this Agreement shall be referred to in this Agreement as the “ Shares ”.

 

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1.2   Closing; Delivery.
  (a)   The purchase and sale of the Shares shall take place remotely via the exchange of documents and signatures, on a date specified by the Parties, or at such other time and place as the Company and the Purchaser mutually agree upon, which date shall be no later than five (5) Business Days after the satisfaction or waiver of each condition to the Closing set forth in Section 2 and Section 3 (other than conditions that by their nature ate to be satisfied at the Closing, but subject to the satisfaction or waiver of such conditions) (which time and place are designated as the “ Closing ”)
  (b)   At the Closing, the Company shall cause its register of members to be updated to reflect the Shares purchased by the Purchaser and deliver a copy of such updated share register certified by the Company’s registered agent to the Purchaser.
  (c)   At the Closing, the Purchaser shall deposit the Purchase Price as indicated on Schedule 1 by wire transfer of immediately available U S dollar hunds into a bank account of the Company acceptable to the Purchaser. All bank charges and related expenses for remittance and receipt of funds shall be for the account of the Company.
  (d)   Within five (5) Business Days after the Closing, the Company shall deliver to the Purchaser one or more certificates representing the Shares being purchased by the Purchaser hereunder at the Closing as set forth on Schedule 1 .
1.3   Use of Proceeds.
In accordance with the directions of the Board of Directors, as it shall be constituted in accordance with the Shareholders’ Agreement, the Company shall use the proceeds from the sale of the Shares for general working capital and other general corporate purposes for the Group Companies.
1.4   Termination of Agreement.
This Agreement may be terminated before the Closing as follows:
  (a)   at the election of the Purchaser on or after March 31, 2010, if the Closing shall not have occurred on or before such date unless such date is extended by the mutual written consent of the Company and the Purchaser, provided that: (i) the Purchaser is not in material default of any of their obligations hereunder, and (ii) the right to terminate this Agreement pursuant to this Section 1.4(a) shall not be available to the Purchaser if its breach of any provision of this Agreement has been the cause of, or resulted, directly or indirectly, in, the failure of the Closing to be consummated by March 31, 2010;
  (b)   by mutual written consent of Company and the Purchaser as evidenced in writing signed by each of the Company and the Purchaser;
  (c)   by the Purchaser’ in the event of any breach or violation of any representation or warranty, covenant or agreement contained herein or in any of the other Transaction Documents by any Warrantor that is not cured or curable within ten (10) Business Days of written notice;

 

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  (d)   by the Purchaser if any event, circumstance or change shall have occurred that, individually or in the aggregate with one or more other events, circumstances or changes, have had or reasonably could be expected to have a Material Adverse Effect on the Company or any other Group Company; or
  (e)   by the Company in the event of any breach or violation of any representation or warranty, covenant or agreement contained herein or in any of the other Transaction Documents by the Purchaser with respect to such Purchaser that is not cured or curable within ten (10) Business Days of written notice.
The date of termination of this Agreement pursuant to this Section 1.4 hereof shall be referred to as “T ermination Date ”. In the event of termination by the Company and/or the Purchaser pursuant to this Section 1.4 hereof, written notice thereof shall forthwith be given to the other Party and this Agreement shall terminate, and the purchase of the Shares hereunder shall be abandoned and rescinded, without further action by the Parties hereto.
1.5   Effect of Termination.
In the event that this Agreement is validly terminated pursuant to Section 1.4 , then each of the Parties shall be relieved of their duties and obligations arising under this Agreement after the date of such termination and such termination shall be without liability to the Company or the Purchaser; provided that no such termination shall relieve any Party hereto from liability for any breach of this Agreement. The provisions of this Section 1.5 , Section 7 , Section 8.1 , Section 8.2 , Section 8.9 , and Section 8.15 , hereof shall survive any termination of this Agreement
2.   CONDITIONS TO THE OBLIGATIONS OF THE PURCHASER AT CLOSING.
The obligations of the Purchaser to purchase the Shares at the Closing are subject to the fulfillment, on or before the Closing, of each of the following conditions, unless otherwise waived in writing by the Purchaser:
2.1   Completion of Due Diligence.
The Purchaser shall have satisfactorily completed its business, legal and financial due diligence review, including but not limited to the receipt by the Purchaser of the Financial Statements with respect to each Group Company hereof at the Company’s expense.
2.2   Material Adverse Effect.
Since the date of this Agreement, no event, circumstance or change shall have occurred that, individually or in the aggregate with one or more other events, circumstances or changes, have had or reasonably could be expected to have a Material Adverse Effect on the Company or any other Group Company.
2.3   Proceedings and Documents.
All corporate and other proceedings in connection with the transactions contemplated at the Closing and all documents incident thereto shall be reasonably satisfactory in form and substance to the Purchaser, and the Purchaser (or its legal counsel) shall have received all such counterpart original and certified or other copies of such documents as reasonably requested. The Group Companies shall have performed and complied with all covenants, agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by such Group Companies on or before the Closing.

 

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2.4   Authorizations.
The Warrantors shall have obtained all authorizations, approvals, waivers or permits of any Person or any Governmental Authority necessary for the consummation of all of the transactions contemplated by this Agreement and other Transaction Documents, including without limitation any authorizations, approvals, waivers or permits that are required in connection with the lawful issuance of the Shares and all such authorizations, approvals, waivers and permits shall be effective as of the Closing. The Company shall have fully satisfied (including with respect to rights of timely notification) or obtained enforceable waivers in respect of any preemptive or similar rights directly or indirectly affecting any of its shares or securities, as applicable.
2.5   Business Plan.
The Company shall have submitted the Business Plan for the fiscal year of 2010 and 2011 to the satisfaction of the Purchaser.
2.6   Representations and Warranties.
The representations and warranties of the Warrantors contained in Schedule 5 shall be true, complete and correct as of the Closing, except for those representations and warranties that address matters only as of a particular date, which representations will have been true and correct as of such particular date.
2.7   Restated Articles.
The memorandum and articles of association of the Company shall have been amended as set forth in the form attached hereto as Exhibit B (the “ Restated Articles ”). Such Restated Articles shall have been duly adopted by all necessary actions of the Board of Directors and/or the members of the Company, and shall have been duly filed with the Registrar of Companies of the British Virgin Islands.
2.8   Shareholders’ Agreement.
The Company, the Key Holders, the Domestic Company, the WFOE and the HK Co shall have executed and delivered the Shareholders’ Agreement in the form attached hereto as Exhibit C .
2.9   Letters of Commitment and Non-Compete.
Each Founder shall have entered into a Letter of Commitment and Non-compete in the form and substance attached hereto as Exhibit D .

 

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2.10   Board of Directors.
As of the Closing, the authorized size of the Board of Directors of the Company, HK Co and WFOE shall be respectively three {3), and the Board of Directors of the Company, HK Co and WFOE shall be comprised of the following members: DONG Defu , DONG Deyou and XU Enhai as set forth in the register of directors, a copy of which shall be certified by the registered agent and shall be delivered to the Purchaser. As of the Closing, the authorized size of the Board of Directors of the Domestic Company shall be three (3), and the Board of Directors of the Domestic Company shall be comprised of the following members: DONG Defu , DONG Deyou and XU Enhai as registered with the relevant company registration authority in Beijing, PRC.
2.11   Employment Agreements.
Each Key Employee listed on Schedule 4 shall have entered into an employment agreement {the “ Employment Agreement ”) with the WFOE in form and substance attached hereto as Exhibit E .
Each employee of the WFOE or the Domestic Company other than the Key Employees shall enter into an employment agreement with the WFOE or the Domestic Company (where applicable) in the form and substance satisfactory and acceptable to the Purchaser.
2.12   Proprietary Information and Inventions Assignment Agreements.
Each employee (including the Key Employees) and each consultant of each Group Company shall have entered into a confidentiality and proprietary information agreement in the form and substance satisfactory and acceptable to the Purchaser that shall include provisions relating to the assignment of inventions, non-solicitation and non-competition, and the Company shall provide evidence of such agreements to the Purchaser.
2.13   Compliance Certificates.
The Purchaser shall have received (a) a certificate executed and delivered by a director of the Company in the form attached hereto as Exhibit F-1 , and (b) a certificate executed and delivered by each Founder in the form attached as Exhibit F-2 .
2.14   Indemnification Agreement.
The Company shall have executed and delivered to the Purchaser the Indemnification Agreement in the form and substance attached hereto as Exhibit G .
2.15   Management Rights Letter.
The Company shall have executed and delivered to the Purchaser a Management Rights Letter in the form attached hereto as Exhibit H .
2.16   Compliance with Circular 75.
Each direct and indirect equity interest holder of the Company shall have complied with the registration requirements under Circular 75 issued by the State Administration of Foreign Exchange (“ SAFE ”) of the PRC on October 21, 2005, titled “ Notice Regarding Certain Administrative Measures on Financing and Inbound Investments by PRC Residents Through Offshore Special Purpose Vehicles ”, effective as of November 1, 2005 (“ Circular 75 ”), or any successor rule or regulation under PRC law, in relation to the transactions contemplated under this Agreement and the Plan of Restructuring.

 

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2.17   WFOE; Documentation for the Restructuring.
The WFOE shall have been lawfully incorporated under the laws of the PRC. The Company, the Key Holders, the Domestic Company and the WFOE shall have completed the key documentation in connection with the transactions contemplated under the plan of restructuring substantially in the form and substance as attached hereto as Exhibit A-1 (the “ Plan of Restructuring ”), as may be amended from time to time as required by the Purchaser or as may be approved by the Purchaser, such Plan of Restructuring shall have been completed, and each of the Control Documents attached hereto as Exhibit A-2 shall have been executed and delivered as of the Closing.
2.18   Intellectual Property Assignment.
The Domestic Company shall have entered into an intellectual property assignment agreement with the WFOE in form and substance attached hereto as Exhibit I .
3.   CONDITIONS OF THE OBLIGATIONS OF THE COMPANY AT CLOSING.
The obligations of the Company to sell Shares to the Purchaser at the Closing are subject to the fulfillment by such Purchaser, on or before the Closing, of each of the following conditions, unless otherwise waived by writing:
3.1   Representations and Warranties.
The representations and warranties of the Purchaser contained in Schedule 7 shall be true, complete and correct in all material respects as of the Closing.
3.2   Performance.
The Purchaser shall have performed and complied with all covenants, agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by it on or before the Closing.
3.3   Qualifications.
All authorizations, approvals or permits, if any, of any Governmental Authority that are required in connection with the lawful issuance and sale of the Share pursuant to this Agreement shall be obtained and effective as of the Closing.
3.4   Shareholders’ Agreement.
The Purchaser shall have executed and delivered the Shareholders’ Agreement.

 

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4.   REPRESENTATIONS AND WARRANTIES OF THE WARRANTORS.
The Company, the Group Companies and the Key Holders (collectively the “ Warrantors ”), jointly and severally, represent and warrant to the Purchaser that the statements contained in Schedule 5 attached hereto are true, correct and complete with respect to each Warrantor on and as of the Execution Date, with the same effect as if made on and as of the date of the Closing, except as set forth on the Disclosure Schedule attached hereto as Schedule 6 (the “ Disclosure Schedule ”), which exceptions shall be deemed to be representations and warranties as if made hereunder. The Disclosure Schedule shall be arranged in sections corresponding to the numbered and lettered sections and subsections contained in Schedule 5 , and the disclosures in any section or subsection of the Disclosure Schedule shall qualify other sections and subsections in Schedule 5 only to the extent it is readily apparent from a reading of the disclosure that such disclosure is applicable to such other sections and subsections.
5.   REPRESENTATIONS AND WARRANTIES OF THE PURCHASER.
The Purchaser represents and warrants to the Company that the statements contained in Schedule 7 attached hereto are true, correct and complete with respect to such Purchaser as of the Closing.
6.   UNDERTAKINGS.
6.1   Ordinary Course of Business.
From the Execution Date until the earlier of the Termination Date or the Closing, the Key Holders shall cause each of the Group Companies to be conducted in the ordinary course of business and shall use its commercially reasonable efforts to maintain the present character and quality of the business, including without limitation, its present operations, physical facilities, working conditions, goodwill and relationships with lessors, licensors, suppliers, customers, employees and independent contractors. Commencing with the execution and delivery of this Agreement and continuing until the earlier of the Termination Date or the Closing, no Group Company may take any of the actions specified in Section 6.1 of the Shareholders Agreement without satisfying the conditions as provided therein.
6.2   Exclusivity.
From the Execution Date until the earlier of the Termination Date or the Closing, the Group Companies agree not to (i) discuss the sale of any equity securities or any other instruments convertible into the equity securities of any Group Company with any third party, or (ii) to provide any information with respect to any Group Company to a third patty in connection with a potential investment by such third party in any equity securities or any other instruments convertible into the equity securities of such Group Company, or (iii) to close any financing transaction of any equity securities or any other instruments convertible into the equity securities of any Group Company with any third party (the “ Exclusivity Period ”). This Section 6.2 shall terminate and be of no further force and effect immediately following the Closing.

 

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6.3   Regulatory Filings.
The Group Companies and the Key Holders shall complete all filings and registrations with the PRC authorities as required by the applicable Laws, including but not limited to the relevant filing and registrations with the Ministry of Commerce, the State Administration of Industry and Commerce, the SAFE, etc. Specifically, each direct and indirect equity interest holder of the Company shall update its registration with the Beijing Branch of the SAFE in accordance with the requirements of Circular 75 or any successor rule or regulation under PRC law within thirty (30) days following the Closing.
6.4   Use of Purchaser’s Name or Logo.
Except with the prior written authorization of the Purchaser, none of the Company or the Group Companies shall be entitled to use, publish or reproduce the name, trademark or logo of “ Techfaith ”, or any similar name, trademark and/or logo in any of their marketing, advertising or promotion materials or otherwise for any marketing, advertising or promotional purposes.
7.   CURE OF BREACHES; INDEMNITY.
7.1   In the event of (a) any breach or violation of or inaccuracy or misrepresentation in, any representation or warranty made by the Warrantors contained herein or any of the other Transaction Documents or (b) any breach or violation of any covenant or agreement contained herein or any of the other Transaction Documents (each of (a) or (b), a “ Breach ”, the Key Holders shall, jointly and severally, or cause the other Warrantors to, cure such Breach (to the extent that such Breach is curable) to the satisfaction of the Purchaser (it being understood that any cure shall be without recourse to cash or assets of any Group Companies). Notwithstanding the foregoing, the Key Holders shall also, jointly and severally, indemnify the Purchaser and its respective Affiliates, limited partners, members, stockholders, employees, agents and representatives (each, an “ Indemnitee ”) for any and all losses, liabilities, damages, liens, claims, obligations, penalties, settlements, deficiencies, costs and expenses, including without limitation reasonable advisor’s fees and other reasonable expenses of investigation, defense and resolution of any Breach paid, suffered, sustained or incurred by the Indemnitees (each, an “ Indemnifiable Loss ”), resulting from, or arising out of or due to, directly or indirectly, any Breach.

 

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7.2   Notwithstanding the foregoing, the Key Holders shall, jointly and severally, indemnify and keep indemnified the Indemnitees at all times and hold them harmless against any and all Indemnifiable Losses resulting from, or arising out of or due to, directly or indirectly, any claim for tax which has been made or may hereafter be made against any Group Company wholly or partly in respect of or in consequence of any event occurring or any income, profits or gains earned, accrued or received by such Group Company on or before the Closing and any reasonable costs, fees or expenses incurred and other liabilities which such Group Company may properly incur in connection with the investigation, assessment or the contesting of any claim, the settlement of any claim for tax, any legal proceedings in which any Group Company claims for tax and in which an arbitration award or judgment is given for such Group Company and the enforcement of any such arbitration award or judgment whether or not such tax is chargeable against or attributable to any other person, provided , however, that the Key Holders shall be under no liability in respect of taxation:
  (a)   that is promptly cured without recourse to cash or other assets of any Group Company;
  (b)   to the extent that provision, reserve or allowance has been made for such tax in the audited consolidated financial statement of the Company;
  (c)   if it has arisen in and relates to the ordinary course of business of the Group Companies;
  (d)   to the extent that the liability arises as a result only of a provision or reserve in respect of the liability made in the Financial Statement being insufficient by reason of any increase in rates of tax announced after the Closing with retrospective effect; and
  (e)   to the extent that the liability arises as a result of legislation which comes into force after the Closing and which is retrospective in effect.
The survival period for any indemnity obligation relating to claims for tax matters arising under this Section 7.2 shall be the applicable statue of limitations for tax claims.
7.3   In the event that an Indemnitee suffers an Indemnifiable Loss as provided in Section 7.1 or 7.2 and the Key Holders are either unwilling or unable to fulfill their obligations under Section 7.1 or 7.2 to indemnify the Indemnitees for the full amount of such Indemnifiable Loss within sixty (60) days of receipt of written notice thereof from the Purchaser, then the Company (or any other Warrantor selected by a majority in interest of the Indemnitees) shall indemnify the Indemnitees such that the Indemnitees shall receive the full amount of such Indemnifiable Loss. Any indemnification provided by the Warrantors other than the Key Holders pursuant to this Section 7.3 shall not prejudice or otherwise affect the right of the Indemnitees to seek indemnification from the Key Holders pursuant to Section 7.1 or 7.2 ; provided, however, that to the extent the Indemnitees are able to recover any Indemnifiable Loss fiom the Key Holders, the Warrantors other than the Key Holders shall not be obligated to indemnify the Indemnitees with respect to such amount.
7.4   If the Purchaser or other Indemnitee believes that it has a claim that may give rise to an obligation of any Wanantor pursuant to this Section 7 , it shall give prompt notice thereof to the Warrantors stating specifically the basis on which such claim is being made, the material facts related thereto, and the amount of the claim asserted. In the event of a third party claim against an Indemnitee for which such Indemnitee seeks indemnification from the Warrantors pursuant to this Section 7 , no settlement shall be deemed conclusive with respect to whether there was an Indemnifiable Loss or the amount of such Indemnifiable Loss unless such settlement is consented to by one Key Holder acting on behalf of the other Key Holders, which shall not be unreasonably withheld. Any dispute related to this Section 7 shall be resolved pursuant to Section 8.15 of this Agreement.
7.5   This Section 7 shall not be deemed to preclude or otherwise limit the Purchaser in any way the exercise of any other rights or pursuit of other remedies for any breach of this Agreement or any other Transaction Documents.

 

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8.   MISCELLANEOUS.
8.1   Survival of Warranties.
Unless otherwise set forth in this Agreement, the representations and warranties of the Warrantors contained in or made pursuant to this Agreement shall survive the execution and delivery of this Agreement and the Closing and shall in no way be affected by any investigation or knowledge of the subject matter thereof made by or on behalf of the Purchaser or the Company.
8.2   Confidentiality.
  (a)   Disclosure of Terms . The terms and conditions of this Agreement, any term sheet or memorandum of understanding entered into pursuant to the transactions contemplated hereby, all exhibits and schedules attached hereto and thereto, and the transactions contemplated hereby and thereby (collectively, the “ Transaction Terms ”), including their existence, shall be considered confidential information and shall not be disclosed by any Party hereto to any third party except as permitted in accordance with the provisions set forth below.
  (b)   Permitted Disclosures . Notwithstanding the foregoing, the Company may disclose the transaction terms to its current shareholders, employees, bankers, lenders, accountants and legal counsels, in each case only where such persons or entities are under appropriate nondisclosure obligations substantially similar to those set forth in this Section 8.2 , or to any person or entity to which disclosure is approved in writing by the Purchaser, which such approval is not to be unreasonably withheld. The Purchaser may disclose (x) the existence of the investment and the Transaction Terms to any Affiliate, partner, limited partner, former partner, potential partner or potential limited partner of the Purchaser or other third patties and (y) the fact of the investment to the public, in each case as it deems appropriate in its sole discretion. Any Party hereto may also provide disclosure in order to comply with applicable Laws, as set forth in Section 8.2(c) below.
  (c)   Legally Compelled Disclosure . In the event that any Party is requested or becomes legally compelled (including without limitation, pursuant to any applicable tax, securities, or other Laws and regulations of any jurisdiction) to disclose the existence of this Agreement or content of any of the Transaction Terms, such Party (the “ Disclosing Party ”) shall provide the other Parties with prompt written notice of that fact and shall consult with the other Patties regarding such disclosure. At the request of another Party, the Disclosing Party shall, to the extent reasonably possible and with the cooperation and reasonable efforts of the other Parties, seek a protective order, confidential treatment or other appropriate remedy. In any event, the Disclosing Party shall furnish only that portion of the information that is legally required and shall exercise reasonable efforts to obtain reliable assurance that confidential treatment will be accorded such information.

 

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  (d)   Other Exceptions. Notwithstanding any other provision of this Section 8.2 , the confidentiality obligations of the Parties shall not apply to: (i) information which a restricted Party learns from a third party having the right to make the disclosure, provided the restricted Party complies with any restrictions imposed by the third party; (ii) information which is rightfully in the restricted Party’s possession prior to the time of disclosure by the protected Party and not acquired by the restricted Patty under a confidentiality obligation; or (iii) information which enters the public domain without breach of confidentiality by the restricted Party.
  (e)   Press Releases, Etc . No announcements regarding the Purchaser’s investment in the Company may be made by any Party hereto in any press conference, professional or trade publication, marketing materials or otherwise to the public without the prior written consent of the Purchaser.
  (f)   Other Information . The provisions of this Section 8.2 shall terminate and supersede the provisions of any separate nondisclosure agreement executed by any of the Parties with respect to the transactions contemplated hereby
8.3   Transfer, Successors and Assigns.
The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the Parties. Save as expressly provided in this Agreement, nothing in this Agreement, express or implied, is intended to confer upon any party other than the Parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement.
8.4   Governing Law.
This Agreement shall be governed by and construed in accordance with the Law of Hong Kong as to matters within the scope hereof, without regard to its principles of conflicts of laws.
8.5   Counterparts; Facsimile.
This Agreement may be executed and delivered by facsimile or other electronic signature and in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
8.6   Titles and Subtitles.
The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement.
8.7   Notices.
All notices and other communications given or made pursuant to this Agreement shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the Party to be notified, (b) when sent by confirmed electronic mail or facsimile if sent during normal business hours of the recipient, and if not so confirmed, then on the next business day, (c) five (5) days after having been delivered by registered or certified mail, return receipt requested, postage prepaid, or (d) one (1) day after delivery by an internationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the respective Parties at their address as set forth on the signature pages, Schedule 1 or Schedule 2 , as the case may be, or to such e-mail address, facsimile number or address as subsequently modified by written notice given in accordance with this Section 8.7 .

 

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8.8   No Finder’s Fees.
Each Party represents that it neither is nor will be obligated for any finder’s fee or commission in connection with this transaction The Purchaser agrees to indemnify and to hold harmless the Company from any liability for any commission or compensation in the nature of a finder’s or broker’s fee arising out of this transaction (and the costs and expenses of defending against such liability or asserted liability) for which the Purchaser or any of its officers, employees, or representatives is responsible. The Company agrees to indemnify and hold harmless the Purchaser from any liability for any commission or compensation in the nature of a finder’s or broker’s fee arising out of this transaction (and the costs and expenses of defending against such liability or asserted liability) for which the Company or any of its officers, employees or representatives is responsible.
8.9   Fees and Expenses.
  (a)   The Company shall pay all of its own costs and expenses incurred in connection with the negotiation, execution, delivery and performance of this Agreement and other Transaction Documents and the transactions contemplated hereby and thereby.
  (b)   The Company shall pay the legal costs and expenses incurred or to be incurred by the Purchaser, up to US$50,000 plus taxes and disbursements, including all reasonable costs and expenses in conducting legal due diligence investigations on the Group Companies and in preparing, negotiating and executing all documentation by the outside legal counsel of the Purchaser, which may be deducted at the Purchaser election at Closing from the cash consideration payable by the Purchaser.
  (c)   In the event that the Closing does not proceed as a result of a termination by the Purchaser in accordance with Section 1.4(a) , (c) or (d) , the Company shall bear all the legal costs and expenses incurred by or on behalf of the Purchaser in the preparation of the agreements(s) and all other documents.
8.10   Attorney’s Fees.
If any action at law or in equity (including arbitration) is necessary to enforce or interpret the terms of any of the Transaction Documents, the prevailing Party shall be entitled to reasonable attorney’s fees, costs and necessary disbursements in addition to any other relief to which such Party may be entitled.
8.11   Amendments and Waivers.
Any term of this Agreement may be amended, terminated or waived only with the written consent of the Company and the Purchaser. Any amendment or waiver effected in accordance with this Section 8.11 shall be binding upon the Company, the Key Holders, the Purchaser, and each transferee of the Shares and each future holder of all such securities.

 

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8.12   Severability.
The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision.
8.13   Delays or Omissions.
No delay or omission to exercise any right, power or remedy accruing to any Party under this Agreement, upon any breach or default of any other Party under this Agreement, shall impair any such right, power or remedy of such non-breaching or non-defaulting Party nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any Party of any breach or default under this Agreement, or any waiver on the part of any Party of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to any Patty, shall be cumulative and not alternative.
8.14   Entire Agreement.
This Agreement (including the Schedules and Exhibits hereto), the Restated Articles and the other Transaction Documents constitute the fukk and entire understanding and agreement between the Patties with respect to the subject matter hereof, and any other written or oral agreement relating to the subject matter hereof existing between the Parties are expressly canceled.
8.15   Dispute Resolution.
  (a)   Any dispute, controversy or claim arising out of or relating to this Agreement, or the interpretation, breach, termination or validity hereof, shall first be subject to resolution through consultation of the parties to such dispute, controversy or claim. Such consultation shall begin within seven (7) days after one Party hereto has delivered to the other Parties involved a written request for such consultation. If within thirty (30) days following the commencement of such consultation the dispute cannot be resolved, the dispute shall be submitted to arbitration upon the request of any Party with notice to the other Parties.
  (b)   The arbitration shall be conducted in Hong Kong under the auspices of the Hong Kong International Arbitration Centre (the “ HKIA C”) There shall be three arbitrators. The complainant and the respondent to such dispute shall each select one arbitrator within thirty (.30) days after giving or receiving the demand for arbitration. Such arbitrators shall be freely selected, and the Parties shall not be limited in their selection to any prescribed list. The Chairman of the HKIAC shall select the third arbitrator, who shall be qualified to practice Law in Hong Kong. If either party to the arbitration does not appoint an arbitrator who has consented to participate within thirty (30) days after selection of the first arbitrator, the relevant appointment shall be made by the Chairman of the HKIAC.

 

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  (c)   The arbitration proceedings shall be conducted in English. The arbitration tribunal shall apply the Arbitration Rules of the HKIAC in effect at the time of the arbitration. However, if such rules are in conflict with the provisions of this Section 8.15 , including the provisions concerning the appointment of arbitrators, the provisions of this Section 8.15 shall prevail.
  (d)   The arbitrators shall decide any dispute submitted by the parties to the arbitration strictly in accordance with the substantive Law of Hong Kong and shall not apply any other substantive law.
  (e)   Each Party hereto shall cooperate with any party to the dispute in making full disclosure of and providing complete access to all information and documents requested by such party in connection with such arbitration proceedings, subject only to any confidentiality obligations binding on the Party receiving the request.
  (f)   The award of the arbitration tribunal shall be final and binding upon the disputing parties, and any party to the dispute may apply to a court of competent jurisdiction for enforcement of such award.
  (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.
8.16   No Commitment for Additional Financing.
The Company acknowledges and agrees that no Purchaser has made any representation, undertaking, commitment or agreement to provide or assist the Company in obtaining any financing, investment or other assistance, other than the purchase of the Shares as set forth herein and subject to the conditions set forth herein. In addition, the Company acknowledges and agrees that (i) no oral statements made by the Purchaser or its representatives on or after the date of this Agreement shall create an obligation, commitment or agreement to provide or assist the Company in obtaining any financing or investment, (ii) the Company shall not rely on any such statement by the Purchaser or its representatives and (iii) an obligation, commitment or agreement to provide or assist the Company in obtaining any financing or investment may only be created by a written agreement, signed by such Purchaser and the Company, setting forth the terms and conditions of such financing or investment and stating that the Parties intend for such writing to be a binding obligation or agreement. The Purchaser shall have the right, in it sole and absolute discretion, to refuse or decline to participate in any other financing of or investment in the Company, and shall have no obligation to assist or cooperate with the Company in obtaining any financing, investment or other assistance.

 

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8.17   Rights Cumulative.
Each and all of the various rights, powers and remedies of a Party 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 not the waiver of any other right, power or remedy available to such Party.
8.18   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.
8.19   No Presumption.
The Parties acknowledge 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.
8.20   Third Party Beneficiaries.
Each of the Indemnitees shall be a third party beneficiary of this Agreement with the full ability to enforce Section 7 of this Agreement as if it were a Party hereto.
[ Remainder of Page Intentionally Left Blank ]

 

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IN WITNESS WHEREOF, the Parties have executed this Share Purchase Agreement as of the date firs written above.
COMPANY
CITYLEAD LIMITED
         
By:   /s/ XU Enhai      
  Name:   XU Enhai     
  Capacity: Director     
HK CO
QIGI&BODEE TECHNOLOGY LIMITED
         
By:   /s/ XU Enhai      
  Name:   XU Enhai     
  Capacity: Director     

 

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IN WITNESS WHEREOF, the Parties have executed this Share Purchase Agreement as of the date firs written above.
WFOE
QIGI&BODEE INTERNATIONAL TECHNOLOGY (BEIJING) CO., LTD.
         
By:   /s/ XU Enhai      
  Name:   XU Enhai     
  Capacity: Board Chairman     

 

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IN WITNESS WHEREOF, the Parties have executed this Share Purchase Agreement as of the date firs written above.
DOMESTIC COMPANY
QIGI&BODEE TECHNOLOGY (BEIJING) CO., LTD.
         
By:   /s/ XU Enhai      
  Name:   XU Enhai     
  Capacity: Board Chairman     

 

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IN WITNESS WHEREOF, the Parties have executed this Share Purchase Agreement as of the date firs written above.
KEY HOLDERS
ACTIVE CENTURY HOLDINGS LIMITED
         
By:   /s/ XU Enhai      
  Name:   XU Enhai     
  Capacity: Director     
XU ENHAI
         
By:   /s/ XU Enhai      
HAN DELING
         
By:   /s/ HAN Deling      

 

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IN WITNESS WHEREOF, the Parties have executed this Share Purchase Agreement as of the date firs written above.
PURCHASER
CHINA TECHFAITH WIRELESS COMMUNICATION TECHNOLOGY LIMITED
         
By:   /s/ Dong Defu      
  Name:   DONG Defu     
  Capacity: Director     

 

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SCHEDULE AND EXHIBITS
     
Schedules    
 
   
Schedule 1
  Schedule of Purchaser
 
   
Schedule 2
  Schedule of Key Holders
 
   
Schedule 3
  Definitions
 
   
Schedule 4
  Schedule of Key Employees
 
   
Schedule 5
  Representations and Warranties of the Warrantors
 
   
Schedule 6
  Disclosure Schedule
 
   
Schedule 7
  Representations and Warranties of the Purchaser
 
   
Schedule 8
  Capitalization Table
     
Exhibits    
 
   
Exhibit A-1
  Plan of Restructuring
 
   
Exhibit A-2
  Control Documents
 
   
Exhibit B
  Form of Restated Articles
 
   
Exhibit C
  Shareholders’ Agreement
 
   
Exhibit D
  Letter of Commitment and Non-Compete
 
   
Exhibit E
  Form of Employment Agreement
 
   
Exhibit F
  Form of Compliance Certificates
 
   
Exhibit G
  Form of Indemnification Agreement
 
   
Exhibit H
  Form of Management Rights Letter
 
   
Exhibit I
  Form of Intellectual Property Assignment Agreement

 

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SCHEDULE 1
SCHEDULE OF PURCHASER
                 
Purchaser   Purchase Price     Number of Shares  
CHINA TECHFAITH WIRELESS COMMUNICATION TECHNOLOGY LIMITED
  US$ 500,000       4  
Address for Notices:
           
P. O. Box 309GT, Ugland House, South Church Street, George Town, Grand Cayman, Cayman Islands
               

 

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SCHEDULE 2
SCHEDULE OF KEY HOLDERS
     
Name   Addresses and Fax No. for Notice
ACTIVE CENTURY HOLDINGS LIMITED
  Address: PO. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands

Facsimile: (8610) 6263-8372
XU, ENHAI
  Address: No. 2399 Liaoning Road, Chaoyang District, Changchun City, Jilin Province, PRC

Facsimile: (8610) 6263-8372
HAN, DELING
  Address: 402 Hu, Unit 4, No 2 Building, No. 49 Dunhua Road, Shibei District, Qingdao City, Shandong Province, PRC

Facsimile: (8610) 6263-8372

 

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SCHEDULE 3
DEFINITIONS
Affiliate ” means, with respect to any specified Person, any other Person who or which, directly or indirectly, controls, is controlled by, or is under common control with such specified Person, including, without limitation, any partner, officer, director, member or employee of such Person and any venture capital fund now or hereafter existing that is controlled by or under common control with one or more general partners or managing members of, or shares the same management company with, such Person.
Agreement ” has the meaning ascribed to it in Preamble to this Agreement.
Breach ” has the meaning set forth in Section 7.1 .
Business Day ” means any day, other than a Saturday, Sunday or other day on which the commercial banks in Hong Kong or Beijing are authorized or required to be closed for the conduct of regular banking business.
Business Plan ” has the meaning set forth in Section 25 of Schedule 5.
Circular 75 ” has the meaning ascribed to it in Section 2.16 .
Class B Ordinary Shares ” means Class B Ordinary Shares of the Company, US$1 per share, which shares are convertible into Company Ordinary Shares in accordance with the terms of Restated Articles
Closing ” has the meaning ascribed to it in Section 1.2(a).
Company ” has the meaning ascribed to it in the Preamble to this Agreement.
Company Intellectual Property ” means all patents, patent applications, trademarks, trademark applications, service marks, trade names, copyrights, trade secrets, licenses, domain names, mask works, information and proprietary rights and processes as are necessary to the conduct of the Company’s business as now conducted and as presently proposed to be conducted.
Confidential Information Agreements ” has the meaning ascribed to it in Section 19 of Schedule 5 .
Contract ” means a legally binding contract, agreement, understanding, indenture, note, bond, loan, instrument, lease, mortgage, franchise or license.
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, which 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 (50%) 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 “Controlling” and “Controlled” have meanings correlative to the foregoing.

 

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Control Documents ” means the following set of contracts in form and substance attached hereto as Exhibit A-2: the Framework Agreement, the Exclusive Business Cooperation Agreement, the Exclusive Option Agreement, the Proxy and the Equity Pledge Agreement.
Convertible Securities ” means, with respect to any specified Person, Securities convertible or exchangeable into any shares of any class of such specified Person, however described and whether voting or non-voting.
Directors ” means the members of the Board of Directors.
Disclosing Party ” has the meaning ascribed to it in Section 8.2(c) .
Disclosure Schedule ” has the meaning ascribed to it in Section 4 .
Domestic Company ” has the meaning ascribed to it in Preamble to this Agreement.
Employee Benefit Plans ” has the meaning ascribed to it in Section 16.7 of Schedule 5 .
Employment Agreements ” has the meaning ascribed to it in Section 2.11 .
Exclusivity Period ” has the meaning ascribed to it in Section 6.2 .
Execution Date ” shall mean the date of this Agreement.
Financial Statements ” shall mean the consolidated balance sheet, income statement and statement of cash flows, prepared in accordance with the PRC generally accepted accounting principles (“ PRC GAAP ”) and applied on a consistent basis throughout the periods indicated.
Founder ” or “ Founders ” shall mean each of XU, ENHAI and HAN, DELING as listed in Schedule 2 .
Founders Holdco ” means ACTIVE CENTURY HOLDINGS LIMITED as listed in Schedule 2 .
Governmental Authority ” means the government of any nation, province, state, city, locality or other political subdivision of any thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, regulation or compliance, and any corporation or other entity owned or controlled, through share or capital ownership or otherwise, by any of the foregoing.
Group Companies ” means the Company, the HK Co, the WFOE, the Domestic Company and any other direct or indirect Subsidiary of any Group Company, whether in existence now or in the future, collectively, and “ Group Company ” means any one of them.
GC Product or Service ” has the meaning ascribed to it in Section 8.7 of Schedule 5 .
HKIAC ” has the meaning ascribed to it in Section 8.15(b).
Hong Kong ” means the Hong Kong Special Administrative Region of the PRC.
Indemnifiable Loss ” has the meaning set forth in Section 7.1 .
Indemnitee ” has the meaning set forth in Section 7.1 .

 

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Intellectual Property ” means all patents, patent applications, trademarks, service marks, trade names, copyrights, trade secrets, processes, compositions of matter, formulas, designs, inventions, proprietary rights, know-how and any other confidential or proprietary information owned or otherwise used by the Company Group.
Key Employee ” means each of the Persons listed in Schedule 4 .
Knowledge ” including the phrase “ to the Warrantors’ knowledge ” shall mean the actual knowledge after reasonable investigation of the Founders.
Law ” means any constitutional provision, statute or other law, rule, regulation, official policy or interpretation of any Governmental Authority and any injunction, judgment, order, ruling, assessment or writ issued by any Governmental Authority.
Lien ” means any mortgage, pledge, claim, security interest, encumbrance, title defect, lien, charge or other restriction or limitation.
Material Adverse Effect ” means a material adverse effect on the business, assets (including intangible assets), liabilities, financial condition, property, prospects or results of operations of the Group Companies, taken as a whole.
Material Agreements ” has the meaning ascribed to such term in Section 10.1 of Schedule 5 .
Order ” means any order, injunction, judgment, decree, ruling, writ, assessment or arbitration award of a Governmental Authority.
Ordinary Share ” means Ordinary Shares of the Company, US$1 per share.
Party ” or “ Parties ” has the meaning set forth in the Preamble hereof.
Person ” means any individual, corporation, partnership, limited partnership, proprietorship, association, limited liability company, firm, trust, estate or other enterprise or entity
Plan of Restructuring ” has the meaning ascribed to it in Section 2.17.
PRC ” or “ China ” means the Peoples’ Republic of China, excluding Hong Kong, the Macau Special Administrative Region and Taiwan.
Projections ” has the meaning ascribed to such term in Section 24 of Schedule 5.
Public Official ” means an employee of a Governmental Authority, a member of a political party, a political candidate, an officer of a public international organization, or an officer or employee of a state-owned enterprise, including a PRC state-owned enterprise.
Public Software ” has the meaning ascribed to it in Section 8.7 of Schedule 5 .
Purchaser ” has the meaning ascribed to such term in Preamble hereof.
Purchase Price ” has the meaning ascribed to it in Section 1.1 .

 

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Related Party Transaction ” means any transaction between any Group Company on the one hand, and any Founder, or any Affiliate of any Founder on the other hand, other than transactions arising in the ordinary course of an employer/employee relationship
Reserve ” or “ Reservation ” has the meaning ascribed to such term in Section 4 of Schedule 5 .
Restated Articles ” has the meaning ascribed to such term in Section 2.7 .
RMB ” means the Renminbi, the lawful currency of the PRC.
SAFE ” has the meaning ascribed to it in Section 2.16 .
Securities Act ” means the United States Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder (or comparable Laws in jurisdictions other than the United States).
Shareholders’ Agreement ” means the agreement proposed to be entered into among the Company, the Key Holders, the Purchaser and certain other parties thereto, in the form of Exhibit C attached to this Agreement.
Shares ” has the meaning ascribed to it in Section 1.1 .
Subsidiary ” or “ subsidiary ” means, as of the relevant date of determination, with respect to any Person (the “ subject entity ”), (i) any Person (x) more than 50% of whose shares or other interests entitled to vote in the election of directors or (y) more than a 50% interest in the profits or capital of such Person are owned or controlled directly or indirectly by the subject entity or through one (1) or more Subsidiaries of the subject entity, (ii) any Person whose assets, or portions thereof, are consolidated with the net earnings of the subject entity and are recorded on the books of the subject entity for financial reporting purposes in accordance with the PRC GAAP or U S. GAAP, or (iii) any Person with respect to which the subject entity has the power to otherwise direct the business and policies of that entity directly or indirectly through another subsidiary. For the avoidance of doubt, the Subsidiaries of the Company shall include the Group Companies.
Techfaith ” means China Techfaith Wireless Communication Technology Limited, including their respective successors and permitted assigns.
Transaction Documents ” means this Agreement, the Shareholders’ Agreement, the Control Documents and any other agreements, instruments or documents entered into in connection with this Agreement.
Transaction Terms ” has the meaning ascribed to such term in Section 8.2(a).
US$ ” means the United States dollar, the lawful currency of the United States of America.
Warrantors ” has the meaning ascribed to such term in Section 4 .
WFOE ” has the meaning ascribed to it in Recitals to this Agreement.

 

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SCHEDULE 4
SCHEDULE OF KEY EMPLOYEES
     
NAME:   ID Number
    XU Enhai
   220224197109224214
    KE Zhonghui
   341021197807242418
    RAO Xiaobo
   6012219701216721X

 

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SCHEDULE 5
REPRESENTATIONS AND WARRANTIES OF THE WARRANTORS
9.   Organization, Good Standing, Corporate Power and Qualification.
Each Group Company is a corporation duly organized, validly existing and in good standing under the laws of their jurisdiction of incorporation and has all requisite corporate power and authority to carry on its business as presently conducted and as proposed to be conducted. Each Group Company is duly qualified to transact business and is in good standing in each jurisdiction in which the failure to so qualify would have a Material Adverse Effect.
10.   Capitalization of the Company.
The authorized shares of the Company consist, immediately prior to the Closing, of:
10.1   49,000 Ordinary Shares and 1,000 Class B Ordinary Shares, of which 96 Ordinary Shares are issued and outstanding, immediately prior to the Closing. All of the outstanding Ordinary Shares have been duly authorized, are fully paid and non-assessable and were issued in compliance with all applicable securities laws. The Company holds no treasury shares.
10.2   Schedule 8 sets forth the capitalization of the Company immediately following the Closing including the number of shares of the following: (i) issued and outstanding Ordinary Shares and Class B Ordinary Shares, and (ii) warrants or stock purchase rights, if any. Except for the rights provided in the Shareholders’ Agreement, there are no outstanding options, warrants, rights (including conversion or preemptive rights and rights of first refusal or similar rights) or agreements, orally or in writing, to purchase or acquire from the Company any Ordinary Share or any securities convertible into or exchangeable for Ordinary Share.
10.3   The Company is the sole legal and beneficial owner of one hundred percent (100%) of the equity interest of the HK Co. The HK Co is the sole legal and beneficial owner of one hundred percent (100%) of’ the equity interest of the WFOE.
10.4   The Founders and the Founder Holdco are the sole legal and beneficial owners of the Ordinary Shares of the Company.
11.   Subsidiaries.
Except as set forth in Section 3 of the Disclosure Schedule , the Company and each Group Company do not currently own or control, directly or indirectly, any interest in any other company, corporation, partnership, trust, joint venture, association, or other business entity. Neither the Company nor any Group Company is a participant in any joint venture, partnership or similar arrangement.

 

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12.   Authorization.
All corporate action required to be taken by each Group Company’s board of directors and shareholders in order to authorize each respective Group Company to enter into the Transaction Documents to which each such Group Company is a party, and to issue the Shares at the Closing, has been taken or will be taken prior to the Closing. All action on the part of the officers of each Group Company necessary for the execution and delivery of the Transaction Documents, the performance of all obligations of such Group Company under the Transaction Documents to be performed as of the Closing, and the issuance and delivery of the Shares has been taken or will be taken prior to the Closing. All action on the part of the officers of each Group Company necessary for the performance of all obligations of such Group Company under the Transaction Documents to be performed as of the Closing has been taken or will be taken prior to the Closing. The Transaction Documents, when executed and delivered by each Group Company, shall constitute valid and legally binding obligations of each Group Company, enforceable against each Group Company in accordance with their respective terms except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, or other laws of general application relating to or affecting the enforcement of creditors’ rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies, or (iii) to the extent the indemnification provisions contained in the Shareholders’ Agreement and the Indemnification Agreement may be limited by applicable securities laws. The issuance of any Shares is not subject to any preemptive rights or rights of first refusal, or if any such preemptive rights or rights of first refusal exist, waiver of such rights has been obtained from the holders thereof. For the purpose only of this Agreement, “ reserve ,” “ reservation ” or similar words with respect to a specified number of Ordinary Shares of the Company shall mean that the Company shall, and the Board of Directors shall procure that the Company shall, refrain from issuing such number of shares so that such number of shares will remain in the authorized but unissued share capital of the Company until the conversion rights of the holders of any Convertible Securities exercisable for such shares are exercised in accordance with the Restated Articles or otherwise.
13.   Valid Issuance of Shares.
13.1   The Shares, when issued, sold and delivered in accordance with the terms and for the consideration set forth in this Agreement, will be validly issued, fully paid and nonassessable and free of restrictions on transfer other than restrictions on transfer under the this agreement, the Shareholders’ Agreement, applicable securities laws and liens or encumbrances created by or imposed by the Purchaser. Subject in part to the accuracy of the representations of the Purchaser in Schedule 7 of this Agreement, the Shares will be issued in compliance with all applicable securities laws. Immediately following the Closing, the Purchaser will be the sole legal and beneficial owner of; and will have good and marketable title to the Shares.
13.2   All presently outstanding Ordinary Shares of the Company were duly and validly issued, fully paid and non-assessable, and are free and clear of any liens and free of restrictions on transfer (except for any restrictions on transfer under applicable securities laws) and have been issued in compliance in all material respects with the requirements of all applicable securities laws and regulations, including, to the extent applicable, the Securities Act.

 

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14.   Governmental Consents and Filings.
No consent, approval, order or authorization of or registration, qualification, designation, declaration or filing with, any Governmental Authority is required on the part of the Company is required in connection with the valid execution, delivery and consummation of the transactions contemplated by this Agreement, Shareholder’s Agreement or the offer, sale, issuance or reservation for issuance of the Shares.
15.   Litigation.
There is no claim, action, suit, proceeding, arbitration, complaint, charge or investigation pending or to the Warrantors’ knowledge, currently threatened (i) against any Group Company or any officer, director or Employee of any Group Company that would either individually or in aggregate, reasonably be expected to have a Material Adverse Effect; or (ii) to the Warrantors’ knowledge, that questions the validity of the Transaction Documents or the right of any Group Company to enter into them, or to consummate the transactions contemplated by the Transaction Documents. None of the Group Companies, its officers or directors, is a party or is named as subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality which would either individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. There is no action, suit, proceeding or investigation by any Group Company pending or which any Group Company intends to initiate. The foregoing includes, without limitation, actions, suits, proceedings or investigations pending or threatened in writing (or any basis therefor known to the Warrantors’) involving the prior employment of any of the Group Company’s employees, their services provided in connection with Group Company’s business, or any information or techniques allegedly proprietary to any of their former employers, or their obligations under any agreements with prior employers.
16.   Intellectual Property.
16.1   Each Group Company owns or possesses sufficient legal tights to (i) all trademarks, service marks, trade names, copyrights, trade secrets, licenses, information and proprietary rights and processes and (ii) to the Warrantors’ knowledge, all patents and patent rights, as are necessary to the conduct of such Group Company’s business as now conducted and as presently proposed to be conducted, without any known conflict with, or infringement of, the rights of others. Section 8.1 of the Disclosure Schedule contains a complete and accurate list of all Intellectual Property owned, licensed to or used by each Group Company, whether registered or not, and a complete and accurate list of all licenses granted by such Group Company to any third party with respect to any Intellectual Property. No product or service marketed or sold (or proposed to be marketed or sold) by any Group Company violates or will violate any license or infringe any intellectual property rights of any other party.
16.2   No Group Company has received any communications alleging that any Group Company has violated or, by conducting its business, would violate any of the patents, trademarks, service marks, trade names, copyrights, trade secrets or other proprietary rights or processes of any other person or entity. Except as set forth in Section 8.2 of the Disclosure Schedule , each Group Company has obtained and possesses valid licenses to use all of the software programs present on the computers and other software-enabled electronic devices that it owns or leases or that it has otherwise provided to its employees for their use in connection with such Group Company’s business. To the Warrantors’ knowledge, it will not be necessary to use any inventions of any of its employees (or persons it currently intends to hire) made prior to their employment by a Group Company. Each Employee has assigned to the Group Companies all intellectual property rights he or she owns that are related to the Group Companies’ business as now conducted.

 

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16.3   Other than with respect to commercially available software products under standard end-user object code license agreements, there are no outstanding options, licenses, agreements, claims, encumbrances or shared ownership interests of any kind relating to the foregoing, nor is any Group Company bound by or a party to any options, licenses or agreements of any kind with respect to the patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information, proprietary rights and processes of any other person or entity.
16.4   No proceedings or claims in which any Group Company alleges that any person is infringing upon, or otherwise violating, its Intellectual Property rights are pending, and none has been served, instituted or asserted by any Group Company.
16.5   None of the employees of any Group Company or the Founders is obligated under any Contract (including a Contract of employment), or subject to any judgment, decree or order of any court or administrative agency, that would interfere with the use of his or her best efforts to promote the interests of the Company Group, or that would conflict with the business of any Group Company as presently conducted. To the knowledge of the Warrantors, it will not be necessary to utilize in the course of the any Group Company’s business operations any inventions of any of the employees of any Group Company made prior to their employment by the such Group Company, except for inventions that have been validly and properly assigned or licensed to such Group Company as of the date hereof.
16.6   Each Group Company has taken all security measures that in the judgment of such Person are commercially prudent in order to protect the secrecy, confidentiality, and value of its material Intellectual Property.
16.7   No Public Software (as defined below) forms part of the any product or service provided by any the Group Company (“ GC Product or Service ”) and no Public Software was or is used in connection with the development of any GC Product or Service or is incorporated into, in whole or in part, or has been distributed with, in whole or in part, any GC Product or Service. As used in this Section 8.7 , “ Public Software ” means any software that contains, or is derived in any manner (in whole or in part) from, any software that is distributed as free software (as defined by the Free Software Foundation), open source software (e.g., Linux or software distributed under any license approved by the Open Source Initiative as set forth www opensource.org) or similar licensing or distribution models which require the distribution or making available of source code as well as object code of the software to licensees without charge (except for the cost of the medium) and (b) the right of the licensee to modify the software and redistribute both the modified and unmodified versions of the software, including software licensed or distributed under any of the following licenses: (i) GNU’s General Public License (GPL) or Lesser/Library GPL (LGPL); (ii) the Artistic License (e g , PERL); (iii) the Mozilla Public License; (iv) the Netscape Public License; (v) the BSD License; or (vi) the Apache License.

 

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17.   Compliance with Other Instruments.
The Group Companies and the Key Holders are not in violation or default (i) of any provisions of its Memorandum of Association (if any), Articles of Association or any other applicable constitutional document, (ii) of any instrument, judgment, order, writ or decree, (iii) under any note, indenture or mortgage, or (iv) under any lease, agreement, contract or purchase order to which it is a party or by which it is bound that is required to be listed on the Disclosure Schedule, or, of any provision of statute, rule or regulation applicable to such Group Company, the violation of which would either individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. The execution, delivery and performance of the Transaction Documents and the consummation of the transactions contemplated by the Transaction Documents will not result in any such violation or be in conflict with or constitute, with or without the passage of time and giving of notice, either (i) a default under any such provision, instrument, judgment, order, writ, decree, contract or agreement or (ii) an event which results in the creation of any lien, charge or encumbrance upon any assets of any Group Company or the suspension, revocation, forfeiture, or nonrenewal of any material permit or license applicable to any Group Company, which would either individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
18.   Agreements; Actions.
18.1   Save for the agreements set out in Section 10.1 of the Disclosure Schedule (the “ Material Agreements ”) and the Transaction Documents, there are no other agreements, understandings, instruments, contracts or proposed transactions entered into during the period from January 1, 2009, and September. 30, 2009, to which any Group Company is a party or by which it is bound that involve (i) obligations (contingent or otherwise) of or payments to, any Group Company in excess of US$10,000 per annum or in excess of US$25,000 in the aggregate, (ii) the transfer or license of any patent, copyright, trade secret or other proprietary right to or from any Group Company, other than from or to another Group Company or from a Key Holder to a Group Company, (iii) the grant of rights to manufacture, produce, assemble, license, market, or sell its products to any other person or affect any Group Company’s exclusive tight to develop, manufacture, assemble, distribute, market or sell its products, or (iv) indemnification by any Group Company with respect to infringements of proprietary rights. All the Material Agreements are valid, binding and enforceable obligations of the patties thereto and the terms thereof have been complied with by the relevant Group Company, and to the knowledge of the Warrantors’, by all the other parties thereto. There are to the knowledge of the Warrantors’, no circumstances likely to give rise to any material breach of such terms, no grounds for rescission, avoidance or repudiation of any of the Material Agreements which would have a Material Adverse Effect and no notice of termination or of intention to terminate has been received in respect of any Material Agreement.

 

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18.2   Save as set out in Section 10.2 of the Disclosure Schedule , the Company has not declared or paid any dividends, or authorized or made any distribution upon or with respect to any class of its share capital, and no Group Company has (i) incurred any indebtedness for money borrowed or incurred any other liabilities individually in excess of US$10,000 or in excess of US$25,000 in the aggregate, (ii) made any loans or advances to any person, other than ordinary advances for travel expenses and trade receivables in the ordinary course of business, or (iii) sold, exchanged or otherwise disposed of any of its assets or rights, other than the sale of its inventory in the ordinary course of business or otherwise envisaged in this Agreement. For the purposes of Sections 10.1 and 10.2 of this Schedule 5 all indebtedness, liabilities, agreements, understandings, instruments, contracts and proposed transactions involving the same person or entity shall be aggregated for the purpose of meeting the individual minimum dollar amounts of such subsection.
18.3   No Group Company is a guarantor or indemnitor of any indebtedness of any other person, firm or corporation that is not a Group Company.
18.4   Save as set out in Section 10.4 of the Disclosure Schedule or in connection with this Agreement and the other Transaction Documents, no Group Company has engaged in the past three (3) months in any discussion with any representative of any corporation, partnership, trust, joint venture, limited liability company, association or other entity, or any individual, regarding (i) a sale of all or substantially all of such Group Company’s assets, or (ii) any merger, consolidation or other business combination transaction of such Group Company with or into another corporation, entity or person.
19.   Conflict of Interest.
19.1   Other than (i) standard employee benefits generally made available to all employees, (ii) standard director and officer indemnification agreements approved by the Board of Directors, and (iii) the purchase of the Company’s share capital in accordance with applicable law, in each instance, disclosed in Section 11.1 of the Disclosure Schedule , there are no agreements, understandings or proposed transactions between any Group Company and any of its officers, directors, consultants or Employees, or any Affiliate thereof, respectively.
19.2   No Group Company is indebted, directly or indirectly, to any of its directors, officers or employees or to their respective spouses or children or to any Affiliate of any of the foregoing, other than in connection with expenses or advances of expenses incurred in the ordinary course of business or employee relocation expenses. None of the Group Companies’ directors, officers or employees, or any members of their immediate families, or any Affiliate of the foregoing (i) are, directly or indirectly, indebted to any Group Company or, (ii) to the Warrantors’ knowledge, have any direct or indirect ownership interest in any firm or corporation with which the Company is affiliated or with which any Group Company has a business relationship, or any firm or corporation which competes with any Group Company except that directors, officers or employees or shareholders of the Company may own shares in (but not exceeding one percent (1%) of the outstanding shares of) publicly traded companies that may compete with any Group Company. To the Warrantors’ knowledge, none of the Group Companies’ employees or directors or any members of their immediate families or any Affiliate of any of the foregoing are, directly or indirectly, interested in any contract with any Group Company. None of the directors or officers, or any members of their immediate families, has any material commercial, industrial, banking, consulting, legal, accounting, charitable or familial relationship with any of the Group Companies’ five (5) largest business relationship partners, service providers, joint venture partners, licensees and competitors.

 

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19.3   Except for the Group Companies and the entities set forth in Section 11.3 of Disclosure Schedule , there are no corporations, partnerships, trusts, joint ventures, limited liability companies or other business entities in which any Key Holder owns or controls, directly or indirectly, 10% or more of the outstanding voting interests.
20.   Rights of Registration and Voting Rights.
Except as provided in the Shareholders’ Agreement, no Group Company is under any obligation to register under the Securities Act or any other applicable securities laws, any of its currently outstanding securities or any securities issuable upon exercise or conversion of its currently outstanding securities. To the Warrantors’ knowledge, except as contemplated in the Shareholders’ Agreement, no shareholder of any Group Company has entered into any agreements with respect to the voting of shares in the capital of the Company. Except as contemplated by or disclosed in the Transaction Documents, no Founder is a party to or has any knowledge of any agreements, written or oral, relating to the acquisition, disposition, registration under the Securities Act, or voting of the shares or securities of any Group Company.
21.   Absence of Liens.
Except as provided in Section 13 of the Disclosure Schedule , the property and assets owned by the Group Companies are flee and clear of all mortgages, deeds of trust, liens, loans and encumbrances, except for statutory liens for the payment of current taxes that are not yet delinquent and encumbrances and liens that arise in the ordinary course of business and do not materially impair the Group Companies’ ownership or use of such property or assets With respect to the property and assets it leases, each Group Company is in compliance with such leases and, to the Warrantors’ knowledge, holds a valid leasehold interest free of any liens, claims or encumbrances other than those of the lessors of such property or assets.
22.   Financial Statements.
The Domestic Company has delivered to the Purchaser its audited Financial Statements for the fiscal year ended December 31, 2007, and December 31, 2008, and for the 9 month period ended September 30, 2009. The Financial Statements fairly present in all material respects the financial condition and operating results of the Domestic Company as of the dates, and for the periods, indicated therein. Except as set forth in the Financial Statements, the Domestic Company has no material liabilities or obligations, contingent or otherwise, as of December 31, 2008, other than (i) liabilities incurred in the ordinary course of business subsequent to December 31, 2008; (ii) obligations under contracts and commitments incurred in the ordinary course of business and (iii) liabilities and obligations of a type or nature not required under the PRC GAAP to be reflected in the Financial Statements, which, in all such cases, individually and in the aggregate would not have a Material Adverse Effect. However, the Domestic Company commits to maintain a standard system of accounting established and administered in accordance with U.S. GAAP.

 

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23.   Changes.
Since December 31, 2008, except as set forth in Section 15 of the Disclosure Schedule or as contemplated by this Agreement or the Transaction Documents, there has not been:
  (a)   any change in the assets, liabilities, financial condition or operating results of any Group Company from that reflected in the Financial Statements, except changes in the ordinary course of business that have not caused, in the aggregate, a Material Adverse Effect on a Group Company;
  (b)   any damage, destruction or loss, whether or not covered by insurance, that would have a Material Adverse Effect on a Group Company;
  (c)   any waiver or compromise by any Group Company of a valuable right or of a material debt owed to it;
  (d)   any satisfaction or discharge of any lien, claim, or encumbrance or payment of any obligation by any Group Company, except in the ordinary course of business and the satisfaction or discharge of which would not have a Material Adverse Effect;
  (e)   any material change to a material contract or agreement by which any Group Company or any of its assets is bound or subject;
  (f)   any material change in any compensation arrangement or agreement with any employee, officer, director or shareholder;
  (g)   any resignation or termination of employment of any officer or Employee of any Group Company;
  (h)   any mortgage, pledge, transfer of a security interest in, or lien, created by any Group Company, with respect to any of its material properties or assets, except liens for taxes not yet due or payable and liens that arise in the ordinary course of business and do not materially impair such Company’s ownership or use of such property or assets;
  (i)   any dividend, loans or guarantees made by any Group Company to or for the benefit of its employees, officers or directors, or any members of their immediate families, other than travel advances and other advances made in the ordinary course of its business;
  (j)   any declaration, setting aside or payment or other distribution in respect of any Group Company’s share capital, or any direct or indirect redemption, purchase, or other acquisition of any of such shares by any Group Company;
  (k)   any sale, assignment or transfer of any Group Company Intellectual Property that could reasonably be expected to result in a Material Adverse Effect;
  (l)   receipt of notice that there has been a loss of, or material order cancellation by, any major customer of any Group Company;

 

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  (m)   to the Warrantors’ knowledge, any other event or condition of any character, other than events affecting the economy or the Company’s industry generally, that could reasonably be expected to result in a Material Adverse Effect; or
  (n)   any arrangement or commitment by the Company to do any of the things described in this Section 15 .
24.   Employee Matters.
24.1   Section 16.1 of the Disclosure Schedule sets forth a detailed description of all compensation, including salary, bonus, severance obligations and deferred compensation payable for each officer, employee, consultant and independent contractor of any Group Company who is anticipated to receive compensation in excess of US$50,000 for the fiscal year ending December 31, 2009.
24.2   To the Warrantors’ knowledge, no employee of any Group Company is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would materially interfere with such employee’s ability to promote the interest of the Group Companies or that would conflict with the Group Companies’ business. Neither the execution or delivery of the Transaction Documents, nor the carrying on of the Company’s business by the employees of the Group Companies, nor the conduct of the business as now conducted and as presently proposed to be conducted, will, to the Warrantors’ knowledge, conflict with or result in a breach of the terms, conditions, or provisions of, or constitute a default under, any contract, covenant or instrument under which any such employee is now obligated.
24.3   No Group Company is delinquent in payments to any of its employees, consultants, or independent contractors for any wages, salaries, commissions, bonuses, or other direct compensation for any service performed for it to the date hereof or amounts required to be reimbursed to such employees, consultants, or independent contractors. Each Group Company has complied in all material respects with all applicable laws related to employment, including those related to wages, hours, worker classification, and collective bargaining, and the payment and withholding of taxes and other sums as required by law except where noncompliance with any applicable law would not result in a Material Adverse Effect. Each Group Company has withheld and paid to the appropriate governmental entity or is holding for payment not yet due to such governmental entity all amounts required to be withheld from employees of such Group Company and is not liable for any arrears of wages, taxes, penalties, or other sums for failure to comply with any of the foregoing.
24.4   To the Warrantors’ knowledge, no employee intends to terminate employment with any Group Company or is otherwise likely to become unavailable to continue as an employee, nor does any Group Company have a present intention to terminate the employment of any of the foregoing The employment of each employee of the Company is terminable at the will of the Company Except as set forth in Section 16.4 of the Disclosure Schedule or as required by law, upon termination of the employment of any such employees, no severance or other payments will become due. Except as set forth in Section 16.4 of the Disclosure Schedule , the Company has no policy, practice, plan, or program of paying severance pay or any form of severance compensation in connection with the termination of employment services.

 

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24.5   The Company has not made any representations regarding equity incentives to any officer, employees, director or consultant that are inconsistent with the share amounts and terms set forth in the Company’s board minutes.
24.6   Each former employee whose employment was terminated by the Company has entered into an agreement with the Company providing for the full release of any claims against the Company or any related party arising out of such employment.
24.7   Section 16.7 of the Disclosure Schedule sets forth each and every employee benefit plan maintained, established or sponsored by any Group Company, or in which any Group Company participates in or contributes to in any jurisdiction, including without limitation, the PRC (the “ Employee Benefit Plans ”). Save as set out in Section 16.7 of the Disclosure Schedule , there is no other pension, retirement, profit-sharing, deferred compensation, bonus, incentive or other employee benefit program, arrangement, agreement or understanding to which any Group Company contributes, is bound, or under which any employees or former employees (or their beneficiaries) are eligible to participate or derive a benefit. Each Group Company has made all required contributions under all the Employee Benefit Plans including without limitation all contributions required to be made under the PRC social insurance and housing schemes, and has complied in all material respects with all applicable laws of any jurisdiction, in relation to the Employee Benefit Plans.
24.8   No Group Company is bound by or subject to (and none of its assets or properties is bound by or subject to) any written or oral, express or implied, contract, commitment or arrangement with any labor union, and no labor union has requested or, to the Warrantors’ knowledge, has sought to represent any of the employees, representatives or agents of any Group Company. There is no strike or other labor dispute involving any Group Company pending, or to the Warrantors’ knowledge, threatened, which could have a Material Adverse Effect, nor is the Company aware of any labor organization activity involving its employees.
24.9   To the Warrantors’ knowledge, none of the employees or directors of any Group Company during the previous three (3) years, has been (a) subject to voluntary or involuntary petition under any applicable bankruptcy laws or any state insolvency laws or the appointment of manager, a receiver or similar officer by a court for his business or property; (b) convicted in a criminal proceeding or named as a subject of a pending criminal proceeding (excluding traffic violations and other minor offenses); (c) subject to any order, judgment, or decree (not subsequently reversed, suspended, or vacated) of any court of competent jurisdiction permanently or temporarily enjoining him from engaging, or otherwise imposing limits or conditions on his engagement in any securities, investment advisory, banking, insurance, or other type of business or acting as an officer or director of a public company; or (d) found by a court of competent jurisdiction in a civil action or by any relevant regulatory organization to have violated any applicable securities, commodities, or unfair trade practices law, which such judgment or finding has not been subsequently reversed, suspended, or vacated.

 

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25.   Tax Matters.
25.1   The provisions for taxes as shown on the balance sheet included in the Financial Statements are sufficient in all material respects for the payment of all accrued and unpaid applicable taxes of the Group Companies as of’ the date of each such balance sheet, whether or not assessed or disputed as of the date of each such balance sheet. Except as set forth in Section 17 of the Disclosure Schedule , there have been no extraordinary examinations or audits of any tax returns or reports by any applicable Governmental Authority. Except as set forth in Section 17 of the Disclosure Schedule , each Group Company has filed or caused to be filed on a timely basis all tax returns that are or were required to be filed (to the extent applicable), all such returns are correct and complete, and each Group Company has paid all taxes that have become due, or have reflected such taxes in accordance with the PRC GAAP as a reserve for taxes on the Financial Statements. There are in effect no waivers of applicable statutes of limitations with respect to taxes for any year.
25.2   No member of the Company Group is, nor expects to become, a passive foreign investment company (“ PFIC ”) as described in Section 1297 of the United States Internal Revenue Code of 1986, as amended (the “ Code ”).
25.3   No shareholder of any member of a Group Company, solely by virtue of its status as shareholder of such Group Company, have personal liability under local law for the debts and claims of such Group Company. There has been no communication from any tax authority relating to or affecting the tax classification of any member of the Company Group.
26.   Insurance.
Section 18 of the Disclosure Schedule provides a complete list of each Group Company’s insurance policies currently in effect. No Group Company has done or omitted to do or suffered anything to be done or not to be done other than any acts in the ordinary course of business which has or would render any policies of insurance taken out by it or by any other person in relation to any of such Group Company’s assets void or voidable or which would result in an increase in the rate of premiums on the said policies and there are no claims outstanding and no circumstances which would give rise to any claim under any of such policies of insurance.
27.   Confidential Information and Invention Assignment Agreements.
Each current and former employee, consultant and officer of the Company or any Group Company has executed an agreement with the Company or that Group Company regarding confidentiality and proprietary information substantially in the form or forms delivered to the counsel for the Purchaser (the “ Confidential Information Agreements ”). No current or former employee has excluded works or inventions from his or her assignment of inventions pursuant to such employee’s Confidential Information Agreement. The Company and any Group Company are not aware that any of their Key Employees is in violation thereof.
28.   Governmental and Other Permits.
Each Group Company has all franchises, governmental permits, licenses and any similar authority necessary for the conduct of its business. No Group Company is in default in any material respect under any of such franchises, Governmental permits, licenses or other similar authority.

 

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29.   Corporate Documents.
The memorandum of association, articles of association, and all other. constitutional documents (or analogous constitutional documents) of each Group Company are in the form provided to the Purchaser. The copy of the minute books of the Company provided to the Purchaser contains minutes of all meetings of directors and shareholders and all actions by written consent without a meeting by the directors and shareholders since the date of incorporation and accurately reflects in all material respects all actions by the directors (and any committee of directors) and shareholders with respect to all transactions referred to in such minutes.
30.   Liabilities.
Except as set forth in Section 22 of the Disclosure Schedule or arising under the instruments set forth in Section 10 of the Disclosure Schedule , the Company has no liabilities of any nature, whether accrued, absolute, contingent or otherwise, and whether due or to become due, except for (i) liabilities set forth in the Financial Statements, (ii) trade or business liabilities incurred in the ordinary course of business, and (iii) other liabilities that do not exceed US$5,000 in the aggregate.
31.   Compliance with Laws.
31.1   Except as set forth in Section 23.1 of the Disclosure Schedule , each Group Company is in material compliance with all applicable Laws applicable to it or to the conduct or operation of its business or the ownership or use of any of its assets or properties.
31.2   Except as set forth in Section 23.2 of the Disclosure Schedule , no event has occurred and no circumstance exists that to the Warrantors’ knowledge (1) may constitute or result in a violation by any Group Company, or a failure on the part of any Group Company to comply with any Law, or (ii) may give rise to any obligation on the part of any Group Company to undertake, or to bear all or any portion of the cost of any remedial action of any nature, except for such violations or failures by a Group Company that, individually or in the aggregate, would not result in any Material Adverse Effect.
31.3   No Group Company has received any written notice from any Governmental Authority regarding (i) any actual, alleged or likely material violation of; or material failure to comply with, any Law, or (ii) any actual, alleged or likely material obligation on the part of any Group Company to undertake, or to bear all or any portion of the cost of any remedial action of any nature.
31.4   No Group Company, nor any director, agent, employee or any other person acting for or on behalf of any Group Company, has directly or indirectly (i) made any contribution, gift, bribe, payoff, influence payment, kickback, or any other fraudulent payment in any form, whether in money, property, or services to any public official or otherwise (A) to obtain favorable treatment in securing business for a Group Company, (B) to pay for favorable treatment for business secured, or (C) to obtain special concessions or for special concessions already obtained, for or in respect of any Group Company, in each case which would have been in violation of any applicable Law or (ii) established or maintained any fund or assets in which any Group Company shall have proprietary rights that have not been recorded in the books and records of a Group Company.

 

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31.5   During the previous five (5) years, no Founder has been (i) subject to voluntary or involuntary petition under any applicable bankruptcy laws or any applicable insolvency law or the appointment of a manager, receiver, or similar officer by a court for his business or property; (ii) convicted in a criminal proceeding or named as a subject of a pending criminal proceeding (excluding traffic violations and other minor offences); (iii) subject to any order, judgment, or decree (not subsequently reversed, suspended, or vacated) of any court of competent jurisdiction permanently or temporarily enjoining him from engaging, or otherwise imposing limits or conditions on his engagement in any securities, investment advisory, banking, insurance, or other type of business or acting as an officer or director of a public company; or (iv) found by a court of competent jurisdiction in a civil action or by any regulatory organization to have violated any applicable securities, commodities or unfair trade practices law whatsoever, which such judgment or finding has not been subsequently reversed, suspended, or vacated,
32.   Disclosure; Projections.
The Company has made available to the Purchaser all the information reasonably available to the Company that the Purchaser has requested for deciding whether to acquire the Shares, including certain of the Company’s financial projections (the “ Projections ”), each of which were prepared in good faith. To the Warrantors’ knowledge, no representation or warranty of any Warrantor contained in this Agreement, as qualified by the Disclosure Schedule, and no certificate furnished or to be furnished to the Purchaser at the Closing contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading in light of the circumstances under which they were made.
33.   Use of Proceeds Plan and Budget.
The Company has delivered to the Purchaser on or before the Closing an interim use of proceeds plan and operation budget (the “ Business Plan ”) in accordance with Section 2.5 . Such Business Plan was prepared in good faith based upon assumptions and projections which the Founders believe are reasonable and not materially misleading.
34.   Entire Business.
There are no material facilities, services, assets or properties shared with any entity other than the Group Company which are used in connection with the business of the Domestic Company.

 

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SCHEDULE 6
DISCLOSURE SCHEDULE
Section 1 Introduction
1.1   This Disclosure Schedule forms an inseparable part of the Share Purchase Agreement (the “ Agreement ”) relating to the subscription of Class B Ordinary Shares of CITYLEAD Limited, a company limited by shares duly incorporated and validly existing under the Laws of the British Virgin Islands (the “ Company ”). Unless the context otherwise specifies, all capitalized terms used herein shall have the meanings given to such terms in the Agreement.
1.2   The purpose of this Disclosure Schedule is to disclose matters which may be relevant to and/or to qualify the representations and warranties made by certain parties contained in Schedule 5 of the Agreement (collectively, the “ Warranties ” and each, a “ Warranty ”).
1.3   In the event that any inconsistency is revealed between any provision of the Agreement and any part of this Disclosure Schedule, this Disclosure Schedule shall prevail and shall be deemed to be the relevant disclosure.
1.4   The matters disclosed in this Disclosure Schedule be deemed to be representations and warranties under Schedule 5 of the Agreement.
1.5   Inclusion of any item in this Disclosure Schedule (i) does not represent a determination that such item is material or establish a standard of materiality; (ii) does not represent a determination that such item did not arise in the ordinary course of business; (iii) except as specifically set forth herein, does not represent a determination that the transactions contemplated in the Agreement require the consent of third parties.
1.6   The section numbers below correspond to the section numbers of the Warranties in the Schedule 5 of this Agreement; provided however, that any information disclosed herein under any section number shall be deemed-disclosed and incorporated into any other sections of this Disclosure Schedule to which there is an express cross-reference.

 

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Section 2 Disclosure Schedule
             
Section Number   Specific Disclosure
Section 3     nil
Section 8.1     Trademark in the process of application:
     
1. “QiGi” (Application date: 1-10-2008; Application number: 6501874; Category: 09)
     
2. “QIGI (piture)” (Application date: 3-11-2009; Application number: 7247382; Category: 09)
     
3. “i-mate” (Application date: 9-27-2007; Application number: 6299651; Category: 09)
      Domain names:
     
1. qigi.cc;
     
2. bode cc
Section 8.2     nil
Section 10.1
    1.     Sales contract dated January 5, 2009, between the Domestic Company (hereinafter referred to as “QiGI” in this section of the Disclosure Schedule) and Henan Jielong Tongxing Technology Co., Ltd.;
 
    2.     Sales contract dated January 5, 2009, between QiGi and Taiwan Tianfu Weiye Communications Equipment Co., Ltd.;
 
    3.     Sales contract dated .January 5, 2009, between QiGi and Tianjin Everyday Commerce Co., Ltd.;
 
    4.     Sales contract dated January 7, 2009, between QiGi and Changde Yongxiang Trade Co., Ltd.;
 
    5.     Sales contract dated .January 8, 2009, between QiGi and Foshan Nanhaitian Electronics Co., Ltd.;
 
    6.     Sales contract dated January 9, 2009, between QiGi and Chongqing Century Communications Technology Development Co., Ltd.;
 
    7.     Sales contract dated January 9, 2009, between QiGi and Chongqing Tiandi Sheyuan Shangmao Co., Ltd.;
 
    8.     Sales contract dated .January 12, 2009, between QiGi and Chengdu Hua- Shangmao Co., Ltd.;
 
    9.     Sales contract dated January 12, 2009, between QiGi and Guangzhou Xiangjin Digital Technology Co., Ltd.;
 
    10.     Sales contract dated January 13, 2009, between QiGi and Dongguan Lianyu Electronics Co., Ltd.;
 
    11.     Sales contract dated .January 15, 2009, between QiGi and Guangzhou Chuangwei Electronics Technology Co., Ltd.;
 
    12.     Sales contract dated January 15, 2009, between QiGi and Hanzhou Quanyong Maoyi Co., Ltd.;
 
    13.     Sales contract dated January 15, 2009, between QiGi and Kunming Wuyao Tongxun Shebei Co., Ltd.;
 
    14.     Sales contract dated January 15, 2009, between QiGi and Quanzhou Huachen Telecommunications Maoyi Co., Ltd.;
 
    15.     Sales contract dated January 15, 2009, between QiGi and Shanghai Kun- Shiye Co., Ltd.;
 
    16.     Sales contract dated January 15, 2009, between QiGi and Chengdu Sanling Shengan Information Systems Co., Ltd.;

 

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Section Number   Specific Disclosure
 
    17.     Sales contract dated January 16, 2009, between QiGi and Kunming Jingzheng Technology Electronics Co., Ltd.;
 
    18.     Sales contract dated .January 16, 2009, between QiGi and Shanghai Boxuan Tongxun Technology Co., Ltd.;
 
    19.     Sales contract dated January 16, 2009, between QiGi and Xiamen Huidesheng Maoyi Co., Ltd.;
 
    20.     Sales contract dated January 19, 2009, between QiGi and Shenzhen Linda Microelectronics Shiye Co., Ltd.;
 
    21.     Sales contract dated January 20, 2009, between QiGi and Wuhan Jiayuan Digital Technology Co., Ltd.;
 
    22.     Sales contract dated January 20, 2009, between QiGi and Beijing Hanming Xingtong Technology Co., Ltd.;
 
    23.     Sales contract dated January 21, 2009, between QiGi and Guiyang Naming District Huamei Tongxun Equipment Co., Ltd.;
 
    24.     Sales contract dated January 21, 2009, between QiGi and JInan Depu Tongxing Equipment Co., Ltd.;
 
    25.     Sales contract dated .January 21, 2009, between QiGi and Shanghai Shoushang Intelligence Communication Equipment Co., Ltd.;
 
    26.     Sales contract dated January 21, 2009, between QiGi and Shanghai Situman Electronic Technology Co., Ltd.;
 
    27.     Sales contract dated January 23, 2009, between QiGi and Shanxi Fanggeng Technology Development Co., Ltd.;
 
    28.     Sales contract dated February 1, 2009, between QiGi and Hanzhou Renxing Digital Technology Co., Ltd.;
 
    29.     Machinery purchase contract dated February 1, 2009, between QiGi and Guangdong Hexing Technology Co., Ltd.;
 
    30.     Sales contract dated February 3, 2009, between QiGi and Shenzen Quanqi Digital Co., Ltd.;
 
    31.     Sales contract dated February 3, 2009, between QiGi and Shenzhen Jingyu Shikong Tongxun Equipment Co., Ltd.;
 
    32.     Sales contract dated February 3, 2009, between QiGi and Suzhou Jingpai Mobile Phone Internet Co., Ltd.;
 
    33.     Sales contract dated February 3, 2009, between QiGi and Zhuhai Sanken Electronics Technology Co., Ltd.;
 
    34.     Sales contract dated February 3, 2009, between QiGi and Chengdu Hanbo Shangmao Co., Ltd.;
 
    35.     Sales contract dated February 3, 2009, between QiGi and Chongqing Bada Electronics Construction Co., Ltd.;
 
    36.     Sales contract dated February 3, 2009, between QiGi and Jinan Depu Tongxun Equipment Co., Ltd.;
 
    37.     Sales contract dated February 3, 2009, between QiGi and Yunnan Gelin Digital Technology Co., Ltd.;
 
    38.     Order form dated February 3, 2009, between QiGi and Dexing Intelligence Mobile Phone Technology (HK) Co., Ltd.;
 
    39.     Order form dated February 4, 2009, between QiGi and Dexing Intelligence Mobile Phone Technology (HK) Co., Ltd.;
 
    40.     Sales contract dated February 4, 2009, between QiGi and Changsha Jianfeng Chaoliu Tongxun Equipment Co., Ltd.;

 

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Section Number   Specific Disclosure
 
    41.     Sales contract dated February 4, 2009, between QiGi and Shenzhen Linda Mictroelectronics Shiye Co., Ltd.;
 
    42.     Sales contract dated February 5, 2009, between QiGi and Shanghai E-te Digital Co., Ltd.;
 
    43.     Sales contract dated February 5, 2009, between QiGi and Beijing Sanren Weiye Shangmao Co., Ltd.;
 
    44.     Machinery purchase contract dated February 5, 2009, between QiGi and Guangzhou Gaoke Tongxing Technology Co., Ltd.;
 
    45.     Sales contract dated February 7, 2009, between QiGi and Taiyuan Tianfu Weiye Tongxun Equipment Co., Ltd.;
 
    46.     Sales contract dated February 7, 2009, between QiGi and Tianjin Meiritong Shangmao Co., Ltd.;
 
    47.     Sales contract dated February 7, 2009, between QiGi and Hefei Jiada Tongxun Technology Co., Ltd.;
 
    48.     Sales contract dated February 7, 2009, between QiGi and Shijiazhuang Tianwen Communication Tongxun Equipment Co., Ltd.;
 
    49.     Machinery purchase contract dated February 7, 2009, between QiGi and Guangdong Hexin Technology Co., Ltd.;
 
    50.     Sales contract dated February 8, 2009, between QiGi and Wuhan Zhongyu Electronics Co., Ltd.;
 
    51.     Sales contract dated February 10, 2009, between QiGi and Beijing Yihengteng Technology Development Co., Ltd.;
 
    52.     Sales contract dated February 13, 2009, between QiGi and Nanjing Lanbiao Digital Technology Co., Ltd.
 
    53.     Sales contract dated February 13, 2009, between QiGi and Henan Jielong Tongxun Technology Co., Ltd.;
 
    54.     Sales contract dated February 13, 2009, between QiGi and Beijing Mobile Xingzhi Tongxun Technology Co., Ltd.;
 
    55.     Sales contract dated February 1.3, 2009, between QiGi and Taiyuan Huilin Tongxun Information Technology Co., Ltd.;
 
    56.     Sales contract dated February 14, 2009, between QiGi and Qingdao Jingwei Tiandi Electronics Co., Ltd.;
 
    57.     Sales contract dated February 14, 2009, between QiGi and Huizhou Yicheng Technology Co., Ltd.;
 
    58.     Sales contract dated February 14, 2009, between QiGi and Quhan Jiayuan Digital Technology Co., Ltd.;
 
    59.     Sales contract dated February 14, 2009, between QiGi and Nanjing Runchang Electronics Co., Ltd.;
 
    60.     Sales contract dated February 18, 2009, between QiGi and Guangzhou Yuanchang Moayi Co., Ltd.;
 
    61.     Order form dated February 24, 2009, between QiGi and Dexing Intelligence Mobile Phone Technology (HK) Co., Ltd.;
 
    62.     Order form dated February 24, 2009, between QiGi and Dexing Wireless Tongxun Technology (Beijing) Co., Ltd.;
 
    63.     Order form dated February 26, 2009, between QiGi and Dexing Intelligence Mobile Phone Technology (Beijing) Co., Ltd.;
 
    64.     Sales contract dated March 2, 2009, between QiGi and Nanning Hengrongchang Shangmao Co., Ltd.;
 
    65.     Sales contract dated March 26, 2009, between QiGi and Wuhan Bohong Information Technology Co., Ltd.;

 

45


 

             
Section Number   Specific Disclosure
 
    66.     Sales contract dated March 2, 2009, between QiGi and Tianjing Chiwuxian Tongxun Technology Co., Ltd.;
 
    67.     Sales contract dated March 3, 2009, between QiGi and Shishi Fanhua Dianxun Maoyi Co., Ltd.;
 
    68.     Sales contract dated March 3, 2009, between QiGi and Shenzhen Jinbaolong Digital Technology Co., Ltd.;
 
    69.     Sales contract dated March, 2009, between QiGi and Shenzhen Chuangfeier Electronics Technology Co., Ltd.;
 
    70.     Sales contract dated March, 2009, between QiGi and Shanghai Yitianxia Technology Co., Ltd.;
 
    71.     Sales contract dated Match, 2009, between QiGi and Shanghai Longding Shangwu Co., Ltd.;
 
    72.     Sales contract dated March, 2009, between QiGi and Shanghai Zhengqi Shiye Co., Ltd.;
 
    73.     Sales contract dated March, 2009, between QiGi and Rizhao Taitong Electronics Co., Ltd.;
 
    74.     Sales contract dated March, 2009, between QiGi and Nanjing Puhan Gongmao Shiye Co., Ltd.;
 
    75.     Sales contract dated March, 2009, between QiGi and Hunan Bopu Technology Co., Ltd.;
 
    76.     Sales contract dated March, 2009, between QiGi and Changzhou Yuntuo Shangmao Co., Ltd.;
 
    77.     Machinery purchase contract dated March 5, 2009, between QiGi and Guangzhou Gaoke Tongxing Technology Co., Ltd.;
 
    78.     Sales contract dated March 6, 2009, between QiGi and Kunming Bangsheng Technology Co., Ltd.;
 
    79.     Sales contract dated March 7, 2009, between QiGi and Henan Zhongzheng Tongxun Co., Ltd.;
 
    80.     Sales contract dated March 7, 2009, between QiGi and Guangzhou Yuanchang Maoyi Co., Ltd.;
 
    81.     Sales contract dated March 7, 2009, between QiGi and Fujian Huaqiao Shiye Group Company;
 
    82.     Sales contract dated March 8, 2009, between QiGi and Hangzhou Jingpusheng Technology Co., Ltd.;
 
    83.     Sales contract dated March 8, 2009, between QiGi and Guangzhou Hengmi Maoyi Co., Ltd.;
 
    84.     Sales contract dated March 8, 2009, between QiGi and Dongguan Shilongjingyingtong Electronics Co., Ltd.;
 
    85.     Sales contract dated March 8, 2009, between QiGi and Chongmingyali Tongxun Technology Co., Ltd.;
 
    86.     Machinery purchase contract dated March 9, 2009, between QiGi and Guangdong Hexin Technology Co., Ltd.;
 
    87.     Machinery purchase contract dated March 10, 2009, between QiGi and Hangzhou Guanyuan Technology Co., Ltd.;
 
    88.     Sales contract dated March 12, 2009, between QiGi and Changsha Zhongtian Tongxun Technology Co., Ltd.;
 
    89.     Sales contract dated March 16, 2009, between QiGi and Kunming Wuyao Tongxun Equipment Co., Ltd.;
 
    90.     Sales contract dated March 16, 2009, between QiGi and Beijing Hanming Tongxing Technology Co., Ltd.;

 

46


 

             
Section Number   Specific Disclosure
 
    91.     Sales contract dated March 16, 2009, between QiGi and Nanjing Yingshui Tongxun Co., Ltd.;
 
    92.     Sales contract dated March 16, 2009, between QiGi and Hunan Yingyuan Zhongxing Information Technology Co., Ltd.;
 
    93.     Sales contract dated March 16, 2009, between QiGi and Kunming Xingkangcheng Information Technology Co., Ltd.;
 
    94.     Order form dated March 25, 2009, between QiGi and Dexing Wireless Tongxun Technology (Beijing) Co., Ltd.;
 
    95.     Sales contract dated March 2’7, 2009, between QiGi and Yiwu Daoye Internet Technology Co., Ltd.;
 
    96.     Sales contract dated April 1, 2009, between QiGi and Yancheng Ninghu Qiandao Tongxun Equipment Co., Ltd.;
 
    97.     Sales contract dated April 2, 2009, between QiGi and Xuzhou Sanjiu Intelligence Tongxun Co., Ltd.;
 
    98.     Sales contract dated April 2, 2009, between QiGi and Xiamen Huidesheng Maoyi Co., Ltd.;
 
    99.     Sales contract dated April 2, 2009, between QiGi and Wuhan Feiyang Technology Co., Ltd.;
 
    100.     Sales contract dated April 3, 2009, between QiGi and Tianjing Meiritong Shangmao Co., Ltd.;
 
    101.     Sales contract dated April 3, 2009, between QiGi and Suzhou Jingpai Mobile Internet Co., Ltd.;
 
    102.     Sales contract dated April 3, 2009, between QiGi and Shenzhen Guoxing Tongxun Technology Co., Ltd.;
 
    103     Sales contract dated April 3, 2009, between QiGi and Shanghai Shoushang Intelligence Tongxun Equipment Company;
 
    104.     Machinery purchase contract dated April 3, 2009, between QiGi and Shenzhen Zhongketianbo Technology Co., Ltd.;
 
    105.     Sales contract dated April, 2009, between QiGi and Shenzhen Quanqi Digital Co., Ltd.;
 
    106.     Sales contract dated April, 2009, between QiGi and Hefei Jiada Tongxun Technology Co., Ltd.;
 
    107.     Sales contract dated April 4, 2009, between QiGi and Shanghai Liangzeng Gongmao Co., Ltd.;
 
    108.     Sales contract dated April 4, 2009, between QiGi and Qingdao Jingweitiandi Electronics Co., Ltd.;
 
    109.     Sales contract dated April 4, 2009, between QiGi and Nanjing Lanbiao Digital Technology Co., Ltd.;
 
    110     Sales contract dated April 4, 2009, between QiGi and Nanjing Chaoyue Tongxun Equipment Co., Ltd.;
 
    111.     Sales contract dated April 4, 2009, between QiGi and Kunming Hengsheng Tongxun Co., Ltd.;
 
    112.     Sales contract dated April 6, 2009, between QiGi and Jinan Depu Tongxing Equipment Co., Ltd.;
 
    113.     Sales contract dated April 6, 2009, between QiGi and Huizhou Yicheng Technology Co., Ltd.;
 
    114.     Sales contract dated April 7, 2009, between QiGi and Henan Ruite Tongxun Equipment Co., Ltd.;
 
    115.     Sales contract dated April 8, 2009, between QiGi and Hangzhou Maoyi Co., Ltd.;

 

47


 

             
Section Number   Specific Disclosure
 
    116.     Sales contract dated April 8, 2009, between QiGi and Guangzhou Chuangwei Electronics (CHINESE CHARACTERS) Technology Co., Ltd.;
 
    117.     Sales contract dated April 8, 2009, between QiGi and Hanzhou Renxing Digital Technology Co., Ltd.;
 
    118.     Sales contract dated April 8, 2009, between QiGi and Foshan Nanhai Tianjun Electronics Co., Ltd.;
 
    119.     Sales contract dated April 8, 2009, between QiGi and Dongguan Lianyu Electronics Co., Ltd.;
 
    120.     Sales contract dated April 8, 2009, between QiGi and Dalian Sanhe Weiye Digital Technology Co., Ltd.;
 
    121.     Sales contract dated April 8, 2009, between QiGi and BeijingBode Technology Service Co., Ltd.;
 
    122.     Sales contract dated April, 2009, between QiGi and Chengdu Huadao Shangmao Co., Ltd.;
 
    123.     Sales contract dated April, 2009, between QiGi and Changde Yongxiang Maoyi Co., Ltd.;
 
    124.     Sales contract dated April, 2009, between QiGi and Wuhan Zhongguang Tongxing Company;
 
    125.     Sales contract dated April, 2009, between QiGi and Shandong Zhonglu Tongxing Technology Co., Ltd.;
 
    126.     Sales contract dated April, 2009, between QiGi and Zhenzhou Ridian Huaxing Technology Co., Ltd.;
 
    127.     Sales contract dated April, 2009, between QiGi and Yunnan Dianxing Co., Ltd. Information Technology Branch;
 
    128.     Machinery purchase contract dated April 15, 2009, between QiGi and Zhejiang Rongxing Technology Development Co., Ltd.;
 
    129.     Machinery purchase contract dated April 16, 2009, between QiGi and Guangzhou Technology Tongxing Technology Co., Ltd.;
 
    130.     Machinery purchase contract dated April 16, 2009, between QiGi and Hangzhou Guangyuan Technology Co., Ltd.;
 
    131.     Machinery purchase contract dated April 18, 2009, between QiGi and Guangdong Hexing Technology Co., Ltd.;
 
    132.     Sales contract dated May 4, 2009, between QiGi and Tianjing Meiritong Shangmao Co., Ltd.;
 
    133.     Sales contract dated May 5, 2009, between QiGi and Changsha Jianfengchaoliu Tongxun Equipment Company;
 
    134.     Sales contract dated May 6, 2009, between QiGi and Shenzhen Lindawei Electronics Technology Shiye Co., Ltd.;
 
    135.     Sales contract dated May 6, 2009, between QiGi and Chongming Yali Tongxun Technology Co., Ltd.;
 
    136.     Sales contract dated May 7, 2009, between QiGi and Jinan Putongxing Equipment Co., Ltd.;
 
    137.     Sales contract dated May 7, 2009, between QiGi and Guangzhou Yuanchang Maoyi Co., Ltd.;
 
    138.     Sales contract dated May 7, 2009, between QiGi and Chengdu Hanbo Shangmao Co., Ltd.;
 
    139.     Sales contract dated May 8, 2009, between QiGi and Chongqing Badatong Electronics Gongcheng Co., Ltd.;
 
    140.     Sales contract dated May 8, 2009, between QiGi and Taiyuan Tianfuweiye Tongxun Equipment Co., Ltd.;

 

48


 

             
Section Number   Specific Disclosure
 
    141.     Machinery purchase contract dated May 10, 2009, between QiGi and Shenzhen Zhongketianbo Technology Co., Ltd.
 
    142.     Machinery purchase contract dated May II, 2009, between QiGi and Zhejiang Rongxing Technology Development Co., Ltd.;
 
    143.     Sales contract dated May 11, 2009, between QiGi and Shenzhen Jingyushikong Tongxun Equipment Co., Ltd.;
 
    144     Sales contract dated May 2009, between QiGi and Shenzhen Quanqi Digital Co., Ltd.;
 
    145.     Machinery purchase contract dated May 12, 2009, between QiGi and Guangzhou Gaoketongxing Technology Co., Ltd.;
 
    146.     Machinery purchase contract dated May 12, 2009, between QiGi and Hanzhou Guangyuan Technology Co., Ltd.;
 
    147.     Sales contract dated May 12, 2009, between QiGi and Wuhan Zhongyu Electronics Co., Ltd.;
 
    148.     Sales contract dated May 12, 2009, between QiGi and Shanghai E-Te Digital Co., Ltd.;
 
    149.     Sales contract dated May 13, 2009, between QiGi and Yunnan Geling Digital Technology Co., Ltd.;
 
    150     Sales contract dated May 13, 2009, between QiGi and Beijing Yiheng Technology Development Co., Ltd.;
 
    151     Sales contract dated May 14, 2009, between QiGi and; Huizhou Yicheng Technology Co., Ltd.
 
    152.     Sales contract dated May 14, 2009, between QiGi and Shijiazhuang Tianwen Tongxun Equipment Co., Ltd.;
 
    153.     Sales contract dated May 15, 2009, between QiGi and Nanjing Runchang Electronics Co., Ltd.;
 
    154.     Sales contract dated May 15, 2009, between QiGi and Wuhan Jiayuan Digital Technology Co., Ltd.;
 
    155.     Sales contract dated May 18, 2009, between QiGi and Nanjing Lanbiao Digital Technology Co., Ltd.;
 
    156.     Sales contract dated May 18, 2009, between QiGi and Hanzhong Yongquan Maoyi Co., Ltd.;
 
    157.     Sales contract dated May 19, 2009, between QiGi and Guangzhou Chuangwei Electronics Technology Co., Ltd.;
 
    158.     Sales contract dated May 20, 2009, between QiGi and Foshan Nanhai Tianjun Electronics Co., Ltd.;
 
    159.     Sales contract dated May 22, 2009, between QiGi and Hennan Jielong Tongxing Technology Co., Ltd.;
 
    160.     Order formdated May 22, 2009, between QiGi and Dexig Intelligent Mobile Technology(Beijing) Co., Ltd.;
 
    161.     Sales contract dated May 25, 2009, between QiGi and Guangzhou Xiangjing Digital Technology Co., Ltd.;
 
    162     Sales contract dated May 28, 2009, between QiGi and Changde Yongxiang Maoyi Co., Ltd.;
 
    163.     Sales contract dated May 28, 2009, between QiGi and Langfang Langbo Tongxun Electronics Technology Co., Ltd.;
 
    164.     Sales contract dated May 29, 2009, between QiGi and Chengdu Jiashi Shiye Jingchukou Maoyi Co., Ltd.;
 
    165.     Sales contract dated May 29, 2009, between QiGi and Xingqiang Gongzhong Information Chanye Co., Ltd.;

 

49


 

             
Section Number   Specific Disclosure
 
    166.     Sales contract dated June 1, 2009, between QiGi and Henan Zhongzheng Tongxun Co., Ltd.;
 
    167.     Sales contract dated June 1, 2009, between QiGi and Hangzhou Jingpusheng Technology Co., Ltd.;
 
    168.     Sales contract dated June 2, 2009, between QiGi and Kunming Bangsheng Technology Co., Ltd.;
 
    169.     Machinery purchase contract dated June 3, 2009, between QiGi and Zhejiang Rongxing Technology Development Co., Ltd.;
 
    170.     Order form dated June 4, 2009, between QiGi and Dexing Intelligent Mobile Technology (HK) Co., Ltd.;
 
    171.     Sales contract dated June 5, 2009, between QiGi and Kunming Wuyao Tongxun Equipment Co., Ltd.;
 
    172.     Machinery purchase contract dated June 7, 2009, between QiGi and Shenzhen Zhongketianbo Technology Co., Ltd.;
 
    173.     Sales contract dated June 8, 2009, between QiGi and Nanning Hengrongchang Shangmao Co., Ltd.;
 
    174.     Sales contract dated June 8, 2009, between QiGi and Rizhao Taitong Electronics Co., Ltd.;
 
    175.     Machinery purchase contract dated June 8, 2009, between QiGi and Hangzhoug Guangyuan Technology Co., Ltd.;
 
    176.     Machinery purchase contract dated June 9, 2009, between QiGi and Guangzhou Gaoke Tongxing Technology Co., Ltd.;
 
    177.     Sales contract dated June 9, 2009, between QiGi and Zhuhai Sankeng Electronics Technology Co., Ltd.;
 
    178.     Sales contract dated June 10, 2009, between QiGi and Zhuhai Shunlian Electronics Co., Ltd.;
 
    179.     Sales contract dated June 10, 2009, between QiGi and Chongqing Kemei Tongxun Equipment Co., Ltd.;
 
    180.     Sales contract dated June 11, 2009, between QiGi and Zhengzhou Yuguang Shangmao Copmany;
 
    181.     Sales contract dated June 11, 2009, between QiGi and Shijiazhuang Tianwen Tongxun Equipment Co., Ltd.;
 
    182.     Sales contract dated June 12, 2009, between QiGi and Beijing Yihengteng Technology Development Co., Ltd.;
 
    183.     Sales contract dated June 15, 2009, between QiGi and Qingdao Jingweitiandi Electronics Co., Ltd.;
 
    184.     Sales contract dated June 15, 2009, between QiGi and Shanghai Situman Sianxing Technology Co., Ltd.;
 
    185.     Sales contract dated June 2009, between QiGi and Quanzhou Huacheng Dianxing Maoyi Co., Ltd.;
 
    186.     Sales contract dated June 18, 2009, between QiGi and Guangzhou Hengyoumi Maoyi Co., Ltd.;
 
    187.     Sales contract dated June 19, 2009, between QiGi and Guangzhou Yuanchang Maoyi Co., Ltd.;
 
    188.     Sales contract dated June, 2009, between QiGi and Fujian Huaqiao Group Shiye Company;
 
    189.     Sales contract dated June, 2009, between QiGi and Changzhou Yuntuo Shangmao Co., Ltd.;
 
    190.     Sales contract dated June 22, 2009, between QiGi and Changsha Zhongtian Tongxun Technology Co., Ltd.;

 

50


 

             
Section Number   Specific Disclosure
 
    191.     Sales contract dated June 22, 2009, between QiGi and Nanjing Yingshui Tongxun Co., Ltd.;
 
    192.     Sales contract dated June 23, 2009, between QiGi and Shanghai Yitianxia Technology Co., Ltd.;
 
    193.     Sales contract dated June, 2009, between QiGi and Shenzhen Chuangfeier Electronics Technology Co., Ltd.;
 
    194.     Sales contract dated June, 2009, between QiGi and Shanghai Longding Shangwu Co., Ltd.;
 
    195.     Sales contract dated June 26, 2009, between QiGi and Shenzhen Jingbaolong Digital Technology Co., Ltd.;
 
    196.     Sales contract dated June 26, 2009, between QiGi and Shishi Fanhua Dianxun Maoyi Co., Ltd.;
 
    197.     Sales contract dated .June 26, 2009, between QiGi and Tianjing Chiwuxian Tongxun Technology Co., Ltd.;
 
    198.     Sales contract dated June 29, 2009, between QiGi and Wuhan Bohong Information Technology Co., Ltd.;
 
    199.     Sales contract dated .June 29, 2009, between QiGi and Shanxi Fanggeng Technology Development Co., Ltd.;
 
    200.     Sales contract dated June 30, 2009, between QiGi and Tianjing Tiandi Weiye Technology Co., Ltd.;
 
    201.     Sales contract dated June, 2009, between QiGi and Shandong Yiwei Information Technology Co., Ltd.;
 
    202.     Sales contract dated June, 2009, between QiGi and Beijing Taixing Jiye Technology Development Co., Ltd.;
 
    203.     Sales contract dated July 1, 2009, between QiGi and Chongqing Zhangshangqiankun Digital Technology Co., Ltd.;
 
    204.     Sales contract dated July 1, 2009, between QiGi and Dalian Sanhe Weiye Digital Technology Co., Ltd.;
 
    205.     Sales contract dated .July 2, 2009, between QiGi and Beijing Bote Technology Services Co., Ltd.;
 
    206.     Machinery purchase contract dated July 2, 2009, between QiGi and Hangzhou Guangyuan Technology Co., Ltd.;
 
    207.     Machinery purchase contract dated .July 3, 2009, between QiGi and Shenzhen Zhongketianbo Technology Co., Ltd.;
 
    208.     Sales contract dated .July 3, 2009, between QiGi and Dongguan Lianyu Electronics Co., Ltd.;
 
    209.     Sales contract dated July, 2009, between QiGi and Guangzhou Chuangwei Electronics Technology Co., Ltd.;
 
    210.     Sales contract dated July, 2009, between QiGi and Hangzhou Yongquan Maoyi Co., Ltd.;
 
    211.     Sales contract dated July, 2009, between QiGi and Nanjing Chaoyue Tongxun Equipment Co., Ltd.;
 
    212.     Sales contract dated July, 2009, between QiGi and Wuhan Feiyang Technology Co., Ltd.;
 
    213.     Sales contract dated July, 2009, between QiGi and Chengdu Sanling Shengan Information System Co., Ltd.;
 
    214.     Sales contract dated .July 6, 2009, between QiGi and Hanzhou Renxing Digital Technology Co., Ltd.;
 
    215.     Sales contract dated July 6, 2009, between QiGi and Hefei JIada Tongxun Technology Co., Ltd.;

 

51


 

             
Section Number   Specific Disclosure
 
    216.     Sales contract dated .July 7, 2009, between QiGi and Huizhou Yicheng Technology Co., Ltd.;
 
    217.     Machinery purchase contract dated .July 7, 2009, between QiGi and Zhejiang Rongxing Technology Development Co., Ltd.;
 
    218.     Sales contract dated .July 8, 2009, between QiGi and Henan Ruite Tongxun Equipment Co., Ltd.;
 
    219.     Sales contract dated July 8, 2009, between QiGi and Henan Depu Tongxing Equipment Co., Ltd.;
 
    220.     Sales contract dated July 9, 2009, between QiGi and Kunming Hengsheng Tongxun Co., Ltd.;
 
    221.     Sales contract dated .July 9, 2009, between QiGi and Nanjing Lanbiao Digital Technology Co., Ltd.;
 
    222.     Sales contract dated July 10, 2009, between QiGi and Shanghai Liangzeng Gongcheng Co., Ltd.;
 
    223.     Sales contract dated .July 10, 2009, between QiGi and Qingdao Weitiandi Electronics Co., Ltd.;
 
    224.     Sales contract dated July 13, 2009, between QiGi and Shenzhen Quanqi Digital Co., Ltd.;
 
    225.     Machinery purchase contract dated July 13, 2009, between QiGi and Guangzhou Gaoke Tongxing Technology Co., Ltd.;
 
    226.     Sales contract dated July 13, 2009, between QiGi and Shanghai Shoushang Intelligence Tongxun Equipment Company;
 
    227.     Sales contract dated July 15, 2009, between QiGi and Shenzhen Guoxing Tongxun Technology Co., Ltd.;
 
    228.     Sales contract dated July 15, 2009, between QiGi and Suzhou Jingpai Mibile Phone Network Co., Ltd.;
 
    229.     Sales contract dated July 16, 2009, between QiGi and Xiamen Huidesheng Maoyi Co., Ltd.;
 
    230.     Sales contract dated July 16, 2009, between QiGi and Xuzhou Sanjiu Intelligence Tongxun Co., Ltd.;
 
    231.     Sales contract dated .July 18, 2009, between QiGi and Yanhu Ninghu District Qiandao Tongxun Equipment Co., Ltd.;
 
    232.     Sales contract dated July 20, 2009, between QiGi and Yiwu Daoye Internet Technology Co., Ltd.;
 
    233.     Sales contract dated July 20, 2009, between QiGi and Kunming Changcheng Information Technology Co., Ltd.;
 
    234.     Sales contract dated .July 21, 2009, between QiGi and Beijing Mobile Xingzhi Tongxun Technology Co., Ltd.;
 
    235.     Sales contract dated .July 21, 2009, between QiGi and Taiyuan Huiling Tongxing Information Technology Co., Ltd.;
 
    236.     Machinery purchase contract dated August 2, 2009, between QiGi and Shenzhen Zhongketianbo Technology Co., Ltd.;
 
    237.     Machinery purchase contract dated August 3, 2009, between QiGi and Zhejiang Rongxing Technology Development Co., Ltd.;
 
    238.     Sales contract dated August 4, 2009, between QiGi and Chengdu Huadao Shangmao Co., Ltd.;
 
    239.     Sales contract dated August 4, 2009, between QiGi and Guangzhou Zhongxian Electronics Technology Co., Ltd.;
 
    240.     Sales contract dated August 4, 2009, between QiGi and Wuxi Intelligence Mobile Phone Technology Service Company;

 

52


 

             
Section Number   Specific Disclosure
 
    241.     Machinery purchase contract dated August 5, 2009, between QiGi and Guangzhou Gaoke Tongxung Technology Co., Ltd.;
 
    242.     Sales contract dated August, 2009, between QiGi and Xuzhou Yitong Intelligence Tongxun Co., Ltd.;
 
    243.     Sales contract dated August, 2009, between QiGi and Chongqing Feihong Mobile Tongxun Equipment Co., Ltd.;
 
    244.     Sales contract dated August, 2009, between QiGi and Taiyuan Tianfu Weiye Tongxun Equipment Co., Ltd.;
 
    245.     Sales contract dated August, 2009, between QiGi and Shanghai E-Te Digital Co., Ltd.;
 
    246.     Sales contract dated August, 2009, between QiGi and Wuhan Jiayuan Digital Technology Co., Ltd.;
 
    247.     Sales contract dated August, 2009, between QiGi and Nanjing Lanbiao Digital Technology Co., Ltd.;
 
    248.     Sales contract dated August, 2009, between QiGi and Foshan Nanhai Tianjun Electronics Co., Ltd.;
 
    249.     Sales contract dated August, 2009, between QiGi and Zhengzhou Ridianhua Information Technology Co., Ltd.;
 
    250.     Sales contract dated August, 2009, between QiGi and Yunnan Dianxing Co., Ltd. Information Technology Branch;
 
    251.     Sales contract dated August 7, 2009, between QiGi and Jinan Depu Tongxing Equipment Co., Ltd.;
 
    252.     Sales contract dated August 7, 2009, between QiGi and Chongming Yali Tongxun Technology Co., Ltd.;
 
    253.     Sales contract dated August 10, 2009, between QiGi and Shenzhen Lindawei Electronics Technology Shiye Co., Ltd.;
 
    254.     Sales contract dated August 10, 2009, between QiGi and Changsha Jianfenghu Chaoliu Tongxun Equipment Company;
 
    255.     Sales contract dated August 13, 2009, between QiGi and Tianjin Miritong Shangmao Co., Ltd.;
 
    256.     Sales contract dated August 17, 2009, between QiGi and Shenzhen (CHINESE CHARACTERS) Tongxun Equipment Co., Ltd.;
 
    257.     Sales contract dated August 19, 2009, between QiGi and Shenzhen (CHINESE CHARACTERS) Digital Co., Ltd.;
 
    258.     Sales contract dated August 19, 2009, between QiGi and Wuhan Zhongyu Electronics Co., Ltd.;
 
    259.     Sales contract dated August 21, 2009, between QiGi and Yunnan Gelin Digital Technology Co., Ltd.;
 
    260.     Sales contract dated August 21, 2009, between QiGi and Beijing Yihenteng Technology Development Co., Ltd.;
 
    261.     Sales contract dated August 24, 2009, between QiGi and Huizhou Yicheng Technology Co., Ltd.;
 
    262.     Sales contract dated August 27, 2009, between QiGi and Guangzhou Chuangwei Electronics (CHINESE CHARACTERS) Technology Co., Ltd.;
 
    263.     Sales contract dated August 28, 2009, between QiGi and Henan Jielong Tongxin Technology Co., Ltd.;
 
    264.     Sales contract dated August 28, 2009, between QiGi and Guangzhou Xiangjin Digital Technology Co., Ltd.;
 
    265.     Sales contract dated August 31, 2009, between QiGi and Changde Yongxiang Maoyi Co., Ltd.;

 

53


 

             
Section Number   Specific Disclosure
 
    266.     Sales contract dated August 31, 2009, between QiGi and Hunan Yingyuan Zhongxing Information Technology Co., Ltd.;
 
    267.     Sales contract dated September 1, 2009, between QiGi and Yunnan Dianxing Co., Ltd. Information Technology Branch;
 
    268.     Sales contract dated September 1, 2009, between QiGi and Shanghai Yitianxia Technology Co., Ltd.;
 
    269.     Sales contract dated September 2, 2009, between QiGi and Shenzhen Jingbaolong Digital Technology Co., Ltd.;
 
    270.     Machinery purchase contract dated September 2, 2009, between QiGi and Zhejiang Rongxing Technology Development Co., Ltd.;
 
    271.     Machinery purchase contract dated September 2, 2009, between QiGi and Shenzhen Zhongke Tianbo Technology Co., Ltd.;
 
    272.     Machinery purchase contract dated September 3, 2009, between QiGi and Shenzhen Zhongke Tianbo Technology Co., Ltd.;
 
    273.     Sales contract dated September, 2009, between QiGi and Shenzhen Chuangfeier Electronics Technology Co., Ltd.;
 
    274.     Sales contract dated September, 2009, between QiGi and Nanjing Yingshui Tongxun Co., Ltd.;
 
    275.     Sales contract dated September, 2009, between QiGi and Guangzhou Hengmi Maoyi Co., Ltd.;
 
    276.     Sales contract dated September, 2009, between QiGi and Beijing Hanming Xingtong Technology Co., Ltd.;
 
    277.     Sales contract dated September, 2009, between QiGi and Kunming Bangsheng Technology Co., Ltd.;
 
    278.     Sales contract dated September, 2009, between QiGi and Kunming Wuyao Tongxun Equipment Co., Ltd.;
 
    279.     Sales contract dated September, 2009, between QiGi and Dongguan Lianyu Electronics Co., Ltd.;
 
    280.     Sales contract dated September, 2009, between QiGi and Shijiazhuang Tainwen Tongxun Equipment Co., Ltd.;
 
    281.     Sales contract dated September, 2009, between QiGi and Changzhou Yuntuo Shangmao Co., Ltd.;
 
    282.     Sales contract dated September, 2009, between QiGi and Chengdu Jiashi Shiye Jingchukou Maoyi Co., Ltd.;
 
    283.     Sales contract dated September, 2009, between QiGi and Zhenzhou Ridianhua Information Technology Co., Ltd.;
 
    284.     Sales contract dated September, 2009, between QiGi and Xingqiang Gongzhong Information Chanye Co., Ltd.;
 
    285.     Sales contract dated September, 2009, between QiGi and Langfang Langbo Tongxun Electronics Technology Co., Ltd.;
 
    286.     Sales contract dated September 4, 2009, between QiGi and Shanghai Longding Shangwu Co., Ltd.;
 
    287.     Sales contract dated September 4, 2009, between QiGi and Changsha Zhongtian Tongxun Technology Co., Ltd.;
 
    288.     Sales contract dated September 4, 2009, between QiGi and Shanghai Longding Shangwu Co., Ltd.;
 
    289.     Sales contract dated September 7, 2009, between QiGi and Guangzhou Yuanchang Maoyi Co., Ltd.;
 
    290.     Machinery purchase contract dated September 8, 2009, between QiGi and Guangzhou Gaoke Tongxing Technology Co., Ltd.;

 

54


 

             
Section Number   Specific Disclosure
 
    291.     Advertising information distribution contract dated September 8, 2009, between QiGi and Beiheng Chaomeng Wangxing Technology Co., Ltd.;
 
    292.     Sales contract dated September 9, 2009, between QiGi and Quanzhou Huachen Dianxun Maoyi Co., Ltd.;
 
    293.     Sales contract dated September 9, 2009, between QiGi and Qingdao Jingwei Tiandi Electronics Co., Ltd.;
 
    294.     Machinery purchase contract dated September 10, 2009, between QiGi and Zhejiang Rongxing Technology Development Co., Ltd.;
 
    295.     Machinery purchase contract dated September 10, 2009, between QiGi and Shenzhen Zhongke Tianbo Technology Co., Ltd.;
 
    296.     Sales contract dated September 11, 2009, between QiGi and Hefei Jiada Tongxun Technology Co., Ltd.;
 
    297.     Sales contract dated September 11, 2009, between QiGi and Xiamen Huidesheng Maoyi Co., Ltd.;
 
    298.     Sales contract dated September 14, 2009, between QiGi and Chongqing Tiandisheyuan Shangmao Co., Ltd.;
 
    299.     Sales contract dated September 14, 2009, between QiGi and Henan Zhongzheng Tongxun Co., Ltd.;
 
    300.     Sales contract dated September 16, 2009, between QiGi and Hangzhou Jingpu Technology Co., Ltd.;
 
    301.     Sales contract dated September 17, 2009, between QiGi and Nanning Hengrongchang Shangmao Co., Ltd.;
 
    302.     Sales contract dated September 17, 2009, between QiGi and Rizhao Taitong Electronics Co., Ltd.;
 
    303.     Machinery purchase contract dated September 20, 2009, between QiGi and Zhejiang Rongxing Technology Development Co., Ltd.;
 
    304.     Sales contract dated September 21, 2009, between QiGi and Zhuhai Sanken Electronics Technology Co., Ltd.;
 
    305.     Sales contract dated September 21, 2009, between QiGi and Chongqing Kemei Tongxun Shebei Co., Ltd.;
 
    306.     Sales contract dated September 23, 2009, between QiGi and Zhengzhou Yuguang Shangmao Co., Ltd.;
 
    307.     Sales contract dated September 25, 2009, between QiGi and Beijing Yihengteng Technology Development Co., Ltd.;
 
    308.     Sales contract dated September 28, 2009, between QiGi and Shanghai Tuman Dianxing Technology Co., Ltd.;
 
    309.     Sales contract dated September 28, 2009, between QiGi and Fujian Huaqiao Shiye Group Co., Ltd.;
 
    310.     Sales contract dated September 29, 2009, between QiGi and Shandong Zhonglu Tongxing Technology Co., Ltd.;
 
    311.     Sales contract dated September 30, 2009, between QiGi and Tianjin Tiandi Weiye Technology Co., Ltd.

 

55


 

             
Section Number   Specific Disclosure
Section 10.4   nil
Section 11.1   nil
Section 11.3   nil
Section 13   nil
Section 15   nil
Section 16.1   nil
Section 16.7   All the employees of the Domestic Company has participated in the mandatory social insurance scheme and the housing funds scheme.
Section 17   nil
Section 18   nil
Section 22   nil
Section 23.1   nil
Section 23.2   nil

 

56


 

SCHEDULE 7
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser represents and warrants to the Company that the statements contained in this Schedule 7 attached hereto are true, correct and complete with respect to such Purchaser as of the Closing.
1.   Authorization.
The Purchaser has full power, authority and legal capacity to enter into, deliver and perform the Transaction Documents. The Transaction Documents to which the Purchaser is a party, when executed and delivered by such Purchaser, will constitute valid and legally binding obligations of the Purchaser, enforceable in accordance with their terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, and any other laws of general application affecting enforcement of creditors’ rights generally, and as limited by laws relating to the availability of a specific performance, injunctive relief, or other equitable remedies, or (ii) to the extent the indemnification provisions contained in the Shareholders’ Agreement may be limited by applicable securities laws.
2.   Compliance with other Instruments.
The execution, delivery and performance by the Purchaser of the Transaction Documents does not and will not contravene, breach or violate the terms of any agreement, document or instrument to which such Purchaser is a party or by which any of such Purchaser ‘s assets or properties are bound.
3.   Disclosure of Information.
The Purchaser has had an opportunity to discuss the Group Companies’ business, management, financial affairs and the terms and conditions of the offering of the Shares with the Group Companies’ management and has had an opportunity to review the Group Companies’ facilities. The foregoing, however, does not limit or modify the representations and warranties of the Warrantor in Section 4 of this Agreement, or the right of the Purchaser to rely thereon save as set forth in the Disclosure Schedule.
4.   Purchase Entirely for Own Account.
This Agreement is made with the Purchaser in reliance upon the Purchaser’s representation to the Company, which by the Purchaser’s execution of this Agreement, the Purchaser hereby confirms, that the Shares to be acquired by the Purchaser will be acquired for investment for the Purchaser’s own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and that the Purchaser has no present intention of selling, granting any participation in, or otherwise distributing the same. By executing this Agreement, the Purchaser further represents that the Purchaser does not presently have any contract, undertaking, agreement or arrangement with any Person to sell, transfer or grant participations to such Person or to any third Person, with respect to any of the Shares. The Purchaser has not been formed for the specific purpose of acquiring the Shares.

 

57


 

SCHEDULE 8
CAPITALIZATION TABLE
                     
    Shareholders            
Shareholders   (Class B Ordinary            
(Ordinary Shares)   Shares)   Number     Percentage  
 
 
Active Century Holdings Limited
        96       96 %
 
  China Techfaith Wireless Communication Technology Limited     4       4 %
 
                   
Total
        100       100 %

 

58


 

EXHIBIT A-1
PLAN OF RESTRUCTURING
(attached)

 

59


 

EXHIBIT A-2
FORM OF CONTROL DOCUMENTS
(attached)

 

60


 

EXHIBIT B
RESTATED ARTICLES
(attached)

 

61


 

EXHIBIT C
SHAREHOLDERS’ AGREEMENT
(attached)

 

62


 

EXHIBIT D
LETTER OF COMMITMENT AND NON-COMPETE
(attached)

 

63


 

EXHIBIT E
FORM OF EMPLOYMENT AGREEMENT
(attached)

 

64


 

EXHIBIT F-1
FORM OF DIRECTOR COMPLIANCE CERTIFICATE
(attached)

 

65


 

EXHIBIT F-2
FORM OF FOUNDERS COMPLIANCE CERTIFICATE
(attached)

 

66


 

EXHIBIT G

FORM OF INDEMNIFICATION AGREEMENT
(attached)

 

67


 

EXHIBIT H
FORM OF MANAGEMENT RIGHTS LETTER
(attached)

 

68


 

EXHIBIT I
FORM OF INTELLECTUAL PROPERTY ASSIGNMENT AGREEMENT
(attached)

 

69

Exhibit 4.15
SHARE PURCHASE AGREEMENT
This SHARE PURCHASE AGREEMENT (the “ Agreement ”) is made on the 4 th day of January, 2010, by and among ACTIVE CENTURY HOLDINGS LIMITED, a company limited by shares duly incorporated and validly existing under the Laws of British Virgin Islands (the “ Seller ”), the purchaser listed on Schedule 1 attached to this Agreement (the “ Purchaser ”) , CITYLEAD LIMITED, a company limited by shares duly incorporated and validly existing under the Laws of the British Virgin Islands (the “ Company ”) , the Persons listed on Schedule 2 attached to this Agreement (each a “ Founder ” and collectively the “ Founders ”, and together with the Seller, the “ Key Holders ” and each a “ Key Holder ”), QIJI&BODEE Technology Limited, a company organized and existing under the Laws of Hong Kong (the “ HK Co ”), QIGI&BODEE Technology (Beijing) Co., Ltd., a domestic company duly incorporated and validly existing under the Laws of the PRC (the “ Domestic Company ”). Each of the Seller, the Purchaser, the Company, the HK Co, the Key Holders, the WFOE and the Domestic Company shall be referred to individually as a “ Party ” and collectively as the “ Parties ”. Capitalized terms used herein shall have the meaning set forth in Schedule 3 attached hereto.
RECITALS
WHEREAS , the Parties entered into a Share Purchase Agreement on January 1, 2010 (the “ First Share Purchase Agreement ”), pursuant to which the Company issued and sold to the Purchaser 4 Class B Ordinary Shares for an aggregate purchase price of US$500,000 so that the Purchaser is a shareholder of the Company holding 4% of the outstanding shares (“ First Share Purchase Transaction ”);
WHEREAS, prior to the closing of the transactions contemplated under the First Share Purchase Agreement and pursuant to the Plan of Restructuring, the HK Co shall form a wholly owned foreign enterprise organized and existing under the Laws of the PRC (the “ WFOE ”), which shall become a party to the First Share Purchase Agreement and this Agreement by executing and delivering a counterpart signature page to each of the aforementioned two agreements;
WHEREAS, this Agreement shall be effective as to all parties except for the WFOE as of the date hereof, and effective all parties and the WFOE as of the date of its execution and delivery of its counterpart signature page;
WHEREAS, the Purchaser desires to purchase from the Seller the Shares (as defined in Section 1.1) and the Seller desires to sell the Shares (as defined in Section 1.1) to the Purchaser pursuant to the terms and subject to the conditions of this Agreement.
NOW, THEREFORE, THE PARTIES HEREBY AGREE AS FOLLOWS:
1.  
PURCHASE AND SALE OF SHARES.
1.1  
Sale of Share and Consideration .
Subject to the terms and conditions of this Agreement, the Purchaser agrees to purchase at the Closing (as defined below) and the Seller agrees to sell to the Purchaser at the Closing that number of Ordinary Shares of the Company set forth opposite the Purchaser’s name on Schedule 1 . As the consideration, the Purchaser shall issue 65,934,066 ordinary shares to the Seller (the “ Consideration ”). The Ordinary Shares of the Company sold to the Purchaser by the Seller pursuant to this Agreement shall be referred to in this Agreement as the “ Shares ”; the ordinary shares of the Purchaser issued to the Seller as the consideration for the Shares pursuant to this Agreement shall be referred to in this Agreement as the “ Consideration Shares ”.

 

1


 

1.2  
Closing; Delivery .
  (a)  
The purchase and sale of the Shares shall take place remotely via the exchange of documents and signatures, on a date specified by the Parties, or at such other time and place as the Seller and the Purchaser mutually agree upon, which date shall be no later than. five (5) Business Days after the satisfaction or waiver of each condition to the Closing set forth in Section 2 and Section 3 (other than conditions that by their nature are to be satisfied at the Closing, but subject to the satisfaction or waiver of such conditions) (which time and place are designated as the “ Closing ”).
  (b)  
At the Closing, the Company shall cause its register of members to be updated to reflect the Shares purchased by the Purchaser and deliver a copy of such updated share register certified by the Company’s registered agent to the Purchaser.
  (c)  
At the Closing, the Purchaser shall deliver a certified true copy of the draft register of members of Purchaser as at the date of the Closing and giving effect to the issuance of 65,934,066 Consideration Shares of Purchaser, par value US$0.00002 per share, certified by a director of the Purchaser to be true and complete copies thereof (to be followed by the delivery of certified true copies of the final, original register of members within five (5) Business Days from the date of the Closing).
  (d)  
Within three (3) Business Days after the Closing, the Company shall deliver to the Purchaser one or more certificates representing the Shares being purchased by the Purchaser hereunder at the Closing as set forth on Schedule 1.
1.3  
Consequence of the Sale of Shares .
At the Closing, the Company becomes a 100% subsidiary of the Purchaser.
At the Closing, the memorandum and articles of association of the Company shall be amended as set forth in the form attached hereto as Exhibit A (the “ Restated Articles ”). Such Restated Articles have been duly adopted by all necessary actions of the Board of Directors and/or the members of the Company, and shall be duly filed with the Registrar of Companies of the British Virgin Islands.

 

2


 

1.4  
Termination of Agreement.
This Agreement may be terminated before the Closing as follows:
  (a)  
at the election of the Purchaser on or after April 30, 2010, if the Closing shall not have occurred on or before such date unless such date is extended by the mutual written consent of the Seller and the Purchaser, provided that: (i) the Purchaser is not in material default of any of their obligations hereunder, and (ii) the right to terminate this Agreement pursuant to this Section 1.4(a) shall not be available to the Purchaser if its breach of any provision of this Agreement has been the cause of, or resulted, directly or indirectly, in, the failure of the Closing to be consummated by April 30, 2010;
  (b)  
by mutual written consent of Seller and the Purchaser as evidenced in writing signed by each of the Seller and the Purchaser;
  (c)  
by the Purchaser in the event of any breach or violation of any representation or warranty, covenant or agreement contained herein or in any of the other Transaction Documents by any Warrantor that is not cured or curable within ten (10) Business Days of written notice;
  (d)  
by the Purchaser if any event, circumstance or change shall have occurred that, individually or in the aggregate with one or more other events, circumstances or changes, have had or reasonably could be expected to have a Material Adverse Effect on the Company or any other Group Company; or
  (e)  
by the Seller in the event of any breach or violation of any representation or warranty, covenant or agreement contained herein or in any of the other Transaction Documents by the Purchaser with respect to such Purchaser that is not cured or curable within ten (10) Business Days of written notice.
The date of termination of this Agreement pursuant to this Section 1.4 hereof shall be referred to as “ Termination Date ”. In the event of termination by the Seller and/or the Purchaser pursuant to this Section 1.4 hereof, written notice thereof shall forthwith be given to the other Party and this Agreement shall terminate, and the purchase of the Shares hereunder shall be abandoned and rescinded, without further action by the Parties hereto.
1.5  
Effect of Termination .
In the event that this Agreement is validly terminated pursuant to Section 1.4, then each of the Parties shall be relieved of their duties and obligations arising under this Agreement after the date of such termination and such termination shall be without liability to the Seller or the Purchaser; provided that no such termination shall relieve any Party hereto from liability for any breach of this Agreement. The provisions of this Section 1.5 , Section 7 , Section 8.1 , Section 8.2 , Section 8.9 , and Section 8.15, hereof shall survive any termination of this Agreement.
1.6  
Earning Adjustment to the Consideration Shares .
  (a)  
If the Domestic Company’s audited Net Profit for the finance year 2010 is less than US$9,000,000, then following delivery of the Audited Financial Statements for the finance year 2010 to the Domestic Company and the Purchaser, the Seller shall deliver to the Purchasers the number of ordinary shares of the Purchaser as computed using the following formula (the “ 2010 Reduced Consideration Shares ”):
(EQUATION)

 

3


 

  (b)  
If the Domestic Company’s audited Net Profit for the finance year 2010 is less than US$9,000,000, and the Domestic Company’s audited Net Profit for the finance year 2011 is less than US$11,000,000, then following delivery of the Audited Financial Statements for the finance year 2011 to the Domestic Company and the Purchaser, the Seller shall deliver to the Purchasers the number of ordinary shares of the Purchaser as computed using the following formula:
(EQUATION)
  (c)  
If the Domestic Company’s audited Net Profit for the finance year 2010 is not less than US$9,000,000, but the Domestic Company’s audited Net Profit for the finance year 2011 is less than US$11,000,000, then following delivery of the Audited Financial Statements for the finance year 2011 to the Domestic Company and the Purchaser, the Seller shall deliver to the Purchasers the number of ordinary shares of the Purchaser as computed using the following formula:
(EQUATION)
For purposes of this Section 1.6, “Audited Financial Statements” means auditor’s reports on the audited consolidated income statements of the Domestic Company for the finance year 2010 and 2011 audited by an auditor accepted by the Purchaser and prepared in accordance with U.S. GAAP; “Net Profit” means the Domestic Company’s consolidated net income after tax as reflected in the Audited Financial Statements, but excluding any income or loss outside of the ordinary course of business.
The Domestic Company shall provide to the Purchaser the Audited Financial Statements no later than four (4) months after the conclusion of each relevant finance year.
2.  
CONDITIONS TO THE OBLIGATIONS OF THE PURCHASER AT CLOSING.
The obligations of the Purchaser to purchase the Shares at the Closing are subject to the fulfillment, on or before the Closing, of each of the following conditions, unless otherwise waived in writing by the Purchaser:
2.1  
Completion of Due Diligence .
The Purchaser shall have satisfactorily completed its business, legal and financial due diligence review, including but not limited to the receipt by the Purchaser of the Financial Statements with respect to each Group Company hereof at the Company’s expense.

 

4


 

2.2  
Material Adverse Effect .
Since the closing of the First Share Purchase Transaction, no event, circumstance or change shall have occurred that, individually or in the aggregate with one or more other events, circumstances or changes, have had or reasonably could be expected to have a Material Adverse Effect on the Company or any other Group Company.
2.3  
Proceedings and Documents .
All corporate and other proceedings in connection with the transactions contemplated at the Closing and all documents incident thereto shall be reasonably satisfactory in form and. substance to the Purchaser, and the Purchaser (or its legal counsel) shall have received all, such counterpart original and certified or other copies of such documents as reasonably requested. The Group Companies shall have performed and complied with all covenants, agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by such Group Companies on or before the Closing.
2.4  
Authorizations .
The Warrantors shall have obtained all authorizations, approvals, waivers or permits of any Person or any Governmental Authority necessary for the consummation of all of the transactions contemplated by this Agreement and other Transaction Documents, including without limitation any authorizations, approvals, waivers or permits that are required in connection with the lawful sale of the Shares and all such authorizations, approvals, waivers and permits shall be effective as of the Closing. The Company shall have fully satisfied (including with respect to rights of timely notification) or obtained enforceable waivers in respect of any preemptive or similar rights directly or indirectly affecting any of its shares or securities, as applicable.
2.5  
Business Plan .
The Company shall have submitted the Business Plan for the fiscal, year of 2010 and 2011 to the satisfaction of the Purchaser.
2.6  
Representations and Warranties .
The representations and warranties of the Warrantors contained in Schedule 4 shall be true, complete and correct as of the Closing, except for those representations and warranties that address matters only as of a particular date, which representations will have been true and correct as of such particular date.
2.7  
Shareholders’ Agreement .
The Shareholders’ Agreement by and among the Company, the Key Holders, the Domestic Company, the WFOE and the HK Co as being executed and delivered pursuant to the First Share Purchase Agreement dated January 1, 2010, is in full force immediately before the Closing and there is no current or pending violation of provisions, breach of duties or obligations or disputes among the parties in relation to the Shareholders’ Agreement.

 

5


 

2.8  
Letters of Commitment and Non-Compete .
The Letter of Commitment and Non-compete in the form and substance pursuant to the First Share Purchase Agreement dated January 1, 2010, is in full force and there is no current or pending violation or breach of duties or obligations in relation to such Letter of Commitment and Non-compete.
2.9  
Board of Directors .
As of the Closing, the authorized size of the Board of Directors of the Company, HK Co. and WFOE shall be respectively three (3), and the Board of Directors of the Company, HK Co. and WFOE shall be comprised of the following members: DONG Defu, DONG Deyou and XU Enhai as set forth in the register of directors, a copy of which shall be certified by the registered agent and shall be delivered to the Purchaser; As of the Closing, the authorized size of the Board of Directors of the Domestic Company shall be three (3), and the Board of Directors of the Domestic Company shall be comprised of the following members: DONG Defu, DONG Deyou and XU Enhai as registered with the relevant company registration authority in Beijing, PRC.
2.10  
Employment Agreements .
The employment agreements that each Key Employee entered into with the WFOE pursuant to the First Share Purchase Agreement are in full force and there is no current or pending violation of provisions, breach of duties or obligations or disputes among the relevant parties in relation to such Employment Agreements.
The employment agreement that each employee of the WFOE or the Domestic Company other than the Key Employees entered into with the WFOE or the Domestic Company (where applicable) pursuant to the First Share Purchase Agreement are in full force and there is no current or pending violation of provisions, breach of duties or obligations or disputes among the relevant parties in relation to such Employment Agreements.
2.11  
Proprietary Information and Inventions Assignment Agreements .
The confidentiality and proprietary information agreement each employee (including the Key Employees) and each consultant of each Group Company entered into in the form and substance satisfactory and acceptable to the Purchaser pursuant to the First Share Purchase Agreement are in full force and there is no current or pending violation of provisions, breach of duties or obligations or disputes among the relevant parties in relation to such confidentiality and proprietary information agreements.
2.12  
Compliance Certificates .
The Purchaser shall have received (a) a certificate executed and delivered by a director of the Seller . in the form attached hereto as Exhibit B-1, and (b) a certificate executed and delivered by each Founder in the form attached as Exhibit B-2 .
2.13  
Indemnification Agreement .
The Company shall have executed and delivered to the Purchaser the Indemnification Agreement in the form and substance attached hereto as Exhibit C.

 

6


 

2.14  
WFOE; Documentation for the Restructuring .
The WFOE shall have been lawfully incorporated under the laws of the PRC. The Control Documents that the Company, the Key Holders, the Domestic Company and the WFOE have executed and delivered in connection with the transactions contemplated under the plan of restructuring (the “Plan of Restructuring”) pursuant to the First Share Purchase Agreement are in full force and there is no current or pending violation of provisions, breach of duties or obligations or disputes among the relevant parties in relation to such Control Documents.
3.  
CONDITIONS OF THE OBLIGATIONS OF THE SELLER AT CLOSING.
The obligations of the Seller to sell Shares to the Purchaser at the Closing are subject to the fulfillment by such Purchaser, on or before the Closing, of each of the following conditions, unless otherwise waived by writing:
3.1  
Representations and Warranties .
The representations and warranties of the Purchaser contained in Schedule 6 shall be true, complete and correct in all material respects as of the Closing.
3.2  
Performance .
The Purchaser shall have performed and complied with all covenants, agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by it on or before the Closing.
3.1  
Qualifications.
All authorizations, approvals or permits, if any, of any Governmental Authority that are required in connection with the lawful issuance and sale of the Share pursuant to this Agreement shall be obtained and effective as of the Closing.
4.  
REPRESENTATIONS AND WARRANTIES OF THE WARRANTORS.
The Company, the Group Companies and the Key Holders (collectively the “Warrantors” ), jointly and severally, represent and warrant to the Purchaser that the statements contained in Schedule 4 attached hereto are true, correct and complete with respect to each Warrantor on and as of the Execution Date, with the same effect as if made on and as of the date of the Closing, except as set forth on the Disclosure Schedule attached hereto as Schedule 5 (the “Disclosure Schedule” ), which exceptions shall be deemed to be representations and warranties as if made hereunder. The Disclosure Schedule shall be arranged in sections corresponding to the numbered and lettered sections and subsections contained in Schedule 4, and the disclosures in any section or subsection of the Disclosure Schedule shall qualify other sections and subsections in Schedule 4 only to the extent it is readily apparent from a reading of the disclosure that such disclosure is applicable to such other sections and subsections.

 

7


 

5.  
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER.
The Purchaser represents and warrants to the Seller that the statements contained in Schedule 6 attached hereto are true, correct and complete with respect to such Purchaser as of the Closing.
6.  
UNDERTAKINGS.
6.1  
Ordinary Course of Business .
From the Execution Date until the earlier of the Termination Date or the Closing, the Key Holders shall cause each of the Group Companies to be conducted in the ordinary course of business and shall use its commercially reasonable efforts to maintain the present character and quality of the business, including without limitation, its present operations, physical facilities, working conditions, goodwill and relationships with lessors, licensors, suppliers, customers, employees and independent contractors. Commencing with the execution and delivery of this Agreement and continuing until the earlier of the Termination Date or the Closing, no Group Company may take any of the actions specified in Section 6.1 of the Shareholders Agreement without satisfying the conditions as provided therein.
6.2  
Exclusivity .
From the Execution Date until the earlier of the Termination Date or the Closing, the Key Holders agree not to (i) discuss the sale of any equity securities or any other instruments convertible into the equity securities of any Group Company with any third party, or (ii) to provide any information with respect to any Group Company to a third party in connection with a potential investment by such third party in any equity securities or any other instruments convertible into the equity securities of such Group Company, or (iii) to close any financing transaction of any equity securities or any other instruments convertible into the equity securities of any Group Company with any third party (the “ Exclusivity Period ”) . This Section 6.2 shall terminate and be of no further force and effect immediately following the Closing.
7.  
CURE OF BREACHES; INDEMNITY.
7.1  
In the event of (a) any breach or violation of, or inaccuracy or misrepresentation in, any representation or warranty made by the Warrantors contained herein or any of the other Transaction Documents or (b) any breach or violation of any covenant or agreement contained herein or any of the other Transaction Documents (each of (a) or (b), a “ Breach ”, the Key Holders shall, jointly and severally, or cause the other Warrantors to, cure such Breach (to the extent that such Breach is curable) to the satisfaction of the Purchaser (it being understood that any cure shall be without recourse to cash or assets of any Group Companies). Notwithstanding the foregoing, the Key Holders shall also, jointly and severally, indemnify the Purchaser and its respective Affiliates, limited partners, members, stockholders, employees, agents and representatives (each, an “ lndemnitee ”) for any and all losses, liabilities, damages, liens, claims, obligations, penalties, settlements, deficiencies, costs and expenses, including without limitation reasonable advisor’s fees and other reasonable expenses of investigation, defense and resolution of any Breach paid, suffered, sustained or incurred by the Indemnitees (each, an “ Indemnifiable Loss ”), resulting from, or arising out of, or due to, directly or indirectly, any Breach.

 

8


 

7.2  
Notwithstanding the foregoing, the Key Holders shall, jointly and severally, indemnify and keep indemnified the Indemnitees at all times and hold them harmless against any and all Indemnifiable Losses resulting from, or arising out of, or due to, directly or indirectly, any claim for tax which has been made or may hereafter be made against any Group Company wholly or partly in respect of or in consequence of any event occurring or any income, profits or gains earned, accrued or received by such Group Company on or before the Closing and any reasonable costs, fees or expenses incurred and other liabilities which such Group Company may properly incur in connection with the investigation, assessment or the contesting of any claim, the settlement of any claim for tax, any legal proceedings in which any Group Company claims for tax and in which an arbitration award or judgment is given for such Group Company and the enforcement of any such arbitration award or judgment whether or not such tax is chargeable against or attributable to any other person, provided , however, that the Key Holders shall be under no liability in respect of taxation:
  (a)  
that is promptly cured without recourse to cash or other assets of any Group Company;
  (b)  
to the extent that provision, reserve or allowance has been made for such tax in the audited consolidated financial statement of the Company;
  (c)  
if it has arisen in and relates to the ordinary course of business of the Group Companies;
  (d)  
to the extent that the liability arises as a result only of a provision or reserve in respect of the liability made in the Financial Statement being insufficient by reason of any increase in rates of tax announced after the Closing with retrospective effect; and
  (e)  
to the extent . that the liability arises as a result of legislation which comes into force after the Closing and which is retrospective in effect.
The survival. period for any indemnity obligation relating to claims for tax matters arising under this Section 7.2 shall be the applicable statue of limitations for tax claims.
7.3  
In the event that an Indemnitee suffers an Indemnifiable Loss as provided in Section 7.1 or 7.2 , and the Key Holders are either unwilling or unable to fulfill their obligations under Section 7.1 or 7.2 to indemnify the Indemnitees for the full amount of such Indemnifiable Loss within, sixty (60) days of receipt of written notice thereof from the Purchaser, then the Company (or any other Warrantor selected by a majority in interest of the Indemnitees) . shall indemnify the Indemnitees such that the Indemnitees shall receive the full amount of such Indemnifiable Loss. Any indemnification provided by the Warrantors other than the Key Holders pursuant to this Section 7.3 shall not prejudice or otherwise affect the right of the Indemnitees to seek indemnification from the Key Holders pursuant to Section 7.1 or 7.2 ; provided, however, that to the extent the Indemnitees are able to recover any Indemnifiable Loss from the Key Holders, the Warrantors other than the Key Holders shall not be obligated to indemnify the Indemnitees with respect to such amount.

 

9


 

7.4  
If the Purchaser or other Indemnitee believes that it has a claim that may give rise to an obligation of any Warrantor pursuant to this Section 7 , it shall give prompt notice thereof to the Warrantors stating specifically the basis on which such claim is being made, the material facts related thereto, and the amount of the claim asserted. In the event of a third party claim against an Indemnitee for which such Indemnitee seeks indemnification from the Warrantors pursuant to this Section 7 , no settlement shall be deemed conclusive with respect to whether. there was an Indemnifiable Loss or the amount of such Indemnifiable Loss unless such settlement is consented to by one Key Holder acting on behalf of the other Key Holders, which shall not be unreasonably withheld. Any dispute related to this Section 7 shall be resolved pursuant to Section 8.15 .
7.5  
This Section 7 shall not be deemed to preclude or otherwise limit the Purchaser in any way the exercise of any other rights or pursuit of other remedies for any breach of this Agreement or any other Transaction Documents.
8.  
MISCELLANEOUS.
8.1  
Survival of Warranties .
Unless otherwise set forth in this Agreement, the representations and warranties of the Warrantors . contained in or made pursuant to this Agreement shall survive the execution and delivery of this Agreement and the Closing and shall in no way be affected by any investigation or knowledge of the subject matter thereof made by or on behalf of the Purchaser or the Company.
8.2  
Confidentiality .
  (a)  
Disclosure of Terms . The terms and conditions of this Agreement, any term sheet or memorandum of understanding entered into pursuant to the transactions contemplated hereby, all exhibits and schedules attached hereto and thereto, and the transactions contemplated hereby and thereby (collectively, the “ Transaction Terms ”), including their existence, shall be considered confidential information and shall not be disclosed by any Party hereto to any third party except as permitted in accordance with the provisions set forth below.
  (b)  
Permitted Disclosures . Notwithstanding the foregoing, the Seller may disclose the transaction terms to its current shareholders, employees, bankers, lenders, accountants and legal counsels, in each case only where such persons or entities are under appropriate nondisclosure obligations substantially similar to those set forth in this Section 8.2, or to any person or entity to which disclosure is approved in writing by the Purchaser, which such approval is not to be unreasonably withheld. The Purchaser may disclose (x) the existence of the investment and the Transaction Terms to any Affiliate, partner, limited partner, former partner, potential partner or potential limited partner of the Purchaser or other third parties and (y) the fact of the investment to the public, in each case as it deems appropriate in its sole discretion. Any Party hereto may also provide disclosure in order to comply with applicable Laws, as set forth in Section 8.2(c) below.

 

10


 

  (c)  
Legally Compelled Disclosure . In the event that any Party is requested or becomes legally compelled (including without limitation, pursuant to any applicable tax, securities, or other Laws and regulations of any jurisdiction) to disclose the existence of this Agreement or content of any of the Transaction Terms, such Party (the “ Disclosing Party ”) shall provide the other Parties with prompt written notice of that fact and shall consult with the other Parties regarding such disclosure. At the request of another Party, the Disclosing Party shall, to the extent reasonably possible and with the cooperation and reasonable efforts of the other Parties, seek a protective order, confidential treatment or other appropriate remedy. In any event, the Disclosing Party shall furnish only that portion of the information that is legally required and shall exercise reasonable efforts to obtain reliable assurance that confidential treatment will be accorded such information.
  (d)  
Other Exceptions . Notwithstanding any other provision of this Section 8.2, the confidentiality obligations of the Parties shall not apply to: (i) information which a restricted Party learns from a third party having the right to make the disclosure, provided the restricted Party complies with any restrictions imposed by the third party; (ii) information which is rightfully in the restricted Party’s possession prior to the time of disclosure by the protected Party and not acquired by the restricted Party under a confidentiality obligation; or (iii) information which enters the public domain without breach of confidentiality by the restricted Party.
  (e)  
Press Releases, Etc . No announcements regarding the Purchaser’s purchase of the Shares may be made by any Party hereto in any press conference, professional or trade publication, marketing materials or otherwise to the public without the prior written consent of the Purchaser.
  (f)  
Other Information . The provisions of this Section 8.2 shall terminate and supersede the provisions of any separate nondisclosure agreement executed by any of the Parties with respect to the transactions contemplated hereby.
8.3  
Transfer; Successors and Assigns .
The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the Parties. Save as expressly provided in this Agreement, nothing in this Agreement, express or implied, is intended to confer upon any party other than the Parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement.
8.4  
Governing Law .
This Agreement shall be governed by and construed in accordance with the Law of Hong Kong as to matters within the scope hereof, without regard to its principles of conflicts of laws.

 

11


 

8.5  
Counterparts; Facsimile .
This Agreement may be executed and delivered by facsimile or other electronic signature and in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
8.6  
Titles and Subtitles .
The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement.
8.7  
Notices .
All notices and other communications given or made pursuant to this Agreement shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the Party to be notified, (b) when sent by confirmed electronic mail or facsimile if sent during normal business hours of the recipient, and if not so confirmed, then on the next business day, (c) five (5) days after having been delivered by registered or certified mail, return receipt requested, postage prepaid, or (d) one (1) day after delivery by an internationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the respective Parties at their address as set forth on the signature pages, Schedule 1 or Schedule 2 , as the case may be, or to such e-mail address, facsimile number or address as subsequently modified by written notice given in accordance with this Section 8.7 .
8.8  
No Finder’s Fees .
Each Party represents that it neither is nor will be obligated for any finder’s fee or commission in connection with this transaction. The Purchaser agrees to indemnify and to hold harmless the Seller from any liability for any commission or compensation in the nature of a finder’s or broker’s fee arising out of this transaction (and the costs and expenses of defending against such liability or asserted liability) for which the Purchaser or any of its officers, employees, or representatives is responsible. The Seller agrees to indemnify and hold harmless the Purchaser from any liability for any commission or compensation in the nature of a finder’s or broker’s fee arising out of this transaction (and the costs and expenses of defending against such liability or asserted liability) for which the Seller or any of its officers, employees or representatives is responsible.
8.9  
Fees and Expenses.
  (a)  
The Seller shall pay all of its own costs and expenses incurred in connection with the negotiation, execution, delivery and performance of this Agreement and other Transaction Documents and the transactions contemplated hereby and thereby.
  (b)  
The Seller shall pay the legal costs and expenses incurred or to be incurred by the Purchaser, up to US$50,000 plus taxes and disbursements, including all reasonable costs and expenses in conducting legal due diligence investigations on the Group Companies and in preparing, negotiating and executing all documentation by the outside legal counsel of the Purchaser, which may be deducted at the Purchaser election at Closing from the cash consideration payable by the Purchaser.
  (c)  
In the event that the Closing does not proceed as a result of a termination by the Purchaser in accordance with Section 1.4(a) , (c) or, (d) , the Seller shall bear all the legal costs and expenses incurred by or on behalf of the Purchaser in the preparation of the agreements(s) and all other documents.

 

12


 

8.10  
Attorney’s Fees .
If any action at law or in equity (including arbitration) is necessary to enforce or interpret the terms of any of the Transaction Documents, the prevailing Party shall be entitled to reasonable attorney’s fees, costs and necessary disbursements in addition to any other relief to which such Party may be entitled.
8.11  
Amendments and Waivers .
Any term of this Agreement may be amended, terminated or waived only with the written consent of the Company and the Purchaser. Any amendment or waiver effected in accordance with this Section 8.11 shall be binding upon the Company, the Key Holders, the Purchaser, and each transferee of the Shares and each future holder of all such securities.
8.12  
Severability .
The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision.
8.13  
Delays or Omissions .
No delay or omission to exercise any right, power or remedy accruing to any Party under this Agreement, upon any breach or default of any other Party under this Agreement, shall impair any such right, power or remedy of such non-breaching or non-defaulting Party nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any Party of any breach or default under this Agreement, or any waiver on the part of any Party of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to any Party, shall be cumulative and not alternative.
8.14  
Entire Agreement .
This Agreement (including the Schedules and Exhibits hereto) ; the Restated Articles and the other Transaction Documents constitute the full and entire understanding and agreement between the Parties with respect to the subject matter hereof, and any other written or oral agreement relating to the subject matter hereof existing between the Parties are expressly canceled.

 

13


 

8.15  
Dispute Resolution .
  (a)  
Any dispute, controversy or claim arising out of or relating to this Agreement, or the interpretation, breach, termination or validity hereof, shall first be subject to resolution through consultation of the parties to such dispute, controversy or claim. Such consultation shall begin within seven (7) days after one Party hereto has delivered to the other. Parties involved a written request for such consultation. If within thirty (30) days following the commencement of such consultation the dispute cannot be resolved, the dispute shall be submitted to arbitration upon the request of any Party with notice to the other Parties.
  (b)  
The arbitration shall be conducted in Hong Kong under the auspices of the Hong Kong International Arbitration Centre (the “ HKIAC ”). There shall be three arbitrators. The complainant and the respondent to such dispute shall each select one arbitrator within thirty (30) days after giving or receiving the demand for arbitration. Such arbitrators shall be freely selected, and the Parties shall not be limited in their selection to any prescribed list. The Chairman of the HKIAC shall select the third arbitrator, who shall be qualified to practice Law in Hong Kong. If either party to the arbitration does not appoint an arbitrator who has consented to participate within thirty (30) days after selection of the first arbitrator, the relevant appointment shall be made by the Chairman of the HKIAC.
  (c)  
The arbitration proceedings shall be conducted in English. The arbitration tribunal shall apply the Arbitration Rules of the HKIAC in effect at the time of the arbitration. However, if such rules are in conflict with the provisions of this Section 8.15, including the provisions concerning the appointment of arbitrators, the provisions of this Section 8.15 shall prevail.
  (d)  
The arbitrator shall decide any dispute submitted by the parties to the arbitration strictly in accordance with the substantive Law of Hong Kong and shall not apply any other substantive law.
  (e)  
Each Party hereto shall cooperate with any party to the dispute in making full disclosure of and providing complete access to all information and documents requested by such party in connection with such arbitration proceedings, subject only to any confidentiality obligations binding on the Party receiving the request.
  (f)  
The award of the arbitration tribunal shall be final and binding upon the disputing parties, and any party to the dispute may apply to a court of competent jurisdiction for enforcement of such award.
  (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.

 

14


 

8.16  
No Commitment for Additional Financing .
The Company acknowledges and agrees that no Purchaser has made any representation, undertaking, commitment or agreement to provide or assist the Company in obtaining any financing, investment or other assistance, other than the purchase of the Shares as set forth herein and subject to the conditions set forth herein. In addition, the Company acknowledges and agrees that (i) no oral statements made by the Purchaser or its representatives on or after the date of this Agreement shall create an obligation, commitment or agreement to provide or assist the Company in obtaining any financing or investment, (ii) the Company shall not rely on any such statement by the Purchaser or its representatives and (iii) an obligation, commitment or agreement to provide or assist the Company in obtaining any financing or investment may only be created by a written agreement, signed by such Purchaser and the Company, setting forth the terms and conditions of such financing or investment and stating that the Parties intend for such writing to be a binding obligation or agreement. The Purchaser shall have the right, in it sole and absolute discretion, to refuse or decline to participate in any other financing of or investment in the Company, and shall have no obligation to assist or cooperate with the Company in obtaining any financing, investment or other assistance.
8.17  
Rights Cumulative .
Each and all of the various rights, powers and remedies of a Party 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.
8.18  
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.
8.19  
No Presumption .
The Parties acknowledge 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.
8.20  
Third Party Beneficiaries .
Each of the Indemnitees shall be a third party beneficiary of this Agreement with the full ability to enforce Section 7 of this Agreement as if it were a Party hereto.
[Remainder of Page Intentionally Left Blank]

 

15


 

Exhibit 4.15
IN WITNESS WHEREOF, the Parties have executed this Share Purchase Agreement as of the date first written above.
             
COMPANY   CITYLEAD LIMITED    
 
           
 
  By:  
/s/ XU Enhai 
Name: XU Enhai
   
 
      Capacity: Director    
 
           
HK CO   QIJI&BODEE TECHNOLOGY LIMITED    
 
           
 
  By:  
/s/ XU Enhai 
Name: XU Enhai
   
 
      Capacity: Director    
SIGNATURE PAGE TO SHARE PURCHASE AGREEMENT

 

16


 

IN WITNESS WHEREOF, the Parties have executed this Share Purchase Agreement as of the date first written above.
             
DOMESTIC COMPANY   QIGI&BODEE TECHNOLOGY (BEIJING) CO., LTD.    
 
           
 
  By:  
/s/ XU Enhai
Name: XU Enhai
   
 
      Capacity: Board Chairman    
SIGNATURE PAGE TO SHARE PURCHASE AGREEMENT

 

 


 

IN WITNESS WHEREOF, the Parties have executed this Share Purchase Agreement as of the date first written above.
             
WFOE   QIGI&BODEE INTERNATIONAL
TECHNOLOGY (BEIJING) CO., LTD.
   
 
           
 
  By:   
/s/ XU Enhai 
Name: XU Enhai
   
 
      Capacity: Board Chairman    

 

 


 

IN WITNESS WHEREOF, the Parties have executed this Share Purchase Agreement as of the date first written above.
             
KEY HOLDERS   SELLER:    
 
   
    ACTIVE CENTURY HOLDINGS LIMITED    
 
           
 
  By:  
/s/ XU Enhai 
Name: XU Enhai
   
 
      Capacity: Director    
 
           
    FOUNDERS:    
 
           
    XU ENHAI    
 
           
 
  By:  
/s/ XU Enhai 
   
 
           
    HAN DELING    
 
           
 
  By:  
/s/ HAN Deling 
   

 

 


 

IN WITNESS WHEREOF, the Parties have executed this Share Purchase Agreement as of the date first written above.
             
PURCHASER:   CHINA TECHFAITH WIRELESS COMMUNICATION TECHNOLOGY LIMITED    
 
           
 
  By:  
/s/ DONG Defu  
Name: DONG Defu
   
 
      Capacity: Director    

 

 


 

SCHEDULE AND EXHIBITS
     
Schedules    
 
   
Schedule 1
  Schedule of Purchaser
 
   
Schedule 2
  Schedule of Key Holders
 
   
Schedule 3
  Definitions
 
   
Schedule 4
  Representations and Warranties of the Warrantors
 
   
Schedule 5
  Disclosure Schedule
 
   
Schedule 6
  Representations and Warranties of the Purchaser
 
   
Schedule 7
  Capitalization Table
     
Exhibits    
 
   
Exhibit A
  Form of Restated Articles
 
   
Exhibit B-1
  Form of Director Compliance Certificate
 
   
Exhibit B-2
  Form of Founders Compliance Certificate
 
   
Exhibit C
  Form of Indemnification Agreement
SCHEDULE AND EXHIBITS

 

 


 

SCHEDULE 1
SCHEDULE OF PURCHASER
         
        Number of
        Purchased Shares
Purchaser   Consideration   of the Company
 
       
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY
LIMITED
  65,934,066 ordinary shares of the Purchaser   96 Ordinary Shares
 
       
Address for Notices:
       
P.O. Box 309GT, Ugland House, South
Church Street, George Town,
Grand Cayman, Cayman Islands
       

 

 


 

SCHEDULE 2
SCHEDULE OF KEY HOLDERS
     
Name   Addresses and Fax No. for Notice
 
   
ACTIVE CENTURY HOLDINGS LIMITED
  Address: P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands
 
   
 
  Facsimile: (8610) 6263-8372
 
   
XU, ENHAI
  Address: No. 2399 Liaoning Road, Chaoyang District, Changchun City, Jilin Province, PRC
 
   
 
  Facsimile: (8610) 6263-8372
 
   
HAN, DELING
  Address: 402 Hu, Unit 4, No. 2 Building, No. 49 Dunhua Road, Shibei District, Qingdao City, Shandong Province, PRC
 
   
 
  Facsimile: (8610) 6263-8372

 

 


 

SCHEDULE 3
DEFINITIONS
Affiliate ” means, with respect to any specified Person, any other Person who or which, directly or indirectly, controls, is controlled by, or is under common control with such specified Person, including, without limitation, any partner, officer, director, member or employee of such Person and any venture capital fund now or hereafter existing that is controlled by or under common control with one or more general partners or managing members of, or shares the same management company with, such Person.
Agreement ” has the meaning ascribed to it in Preamble to this Agreement.
Breach ” has the meaning set forth in Section 7.1 .
Business Day ” means any day, other than a Saturday, Sunday or other day on which the commercial banks in Hong Kong or Beijing are authorized or required to be closed for the conduct of regular banking business.
Business Plan ” has the meaning set forth in Section 25 of Schedule 4 .
Closing ” has the meaning ascribed to it in Section 1.2(a) .
Company ” has the meaning ascribed to it in the Preamble to this Agreement.
Company Intellectual Property ” means all patents, patent applications, trademarks, trademark applications, service marks, trade names, copyrights, trade secrets, licenses, domain names, mask works, information and proprietary rights and processes as are necessary to the conduct of the Company’s business as now conducted and as presently proposed to be conducted.
Confidential Information Agreements ” has the meaning ascribed to it in Section 19 of Schedule 4 .
Contract ” means a legally binding contract, agreement, understanding, indenture, note, bond, loan, instrument, lease, mortgage, franchise or license.
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, which 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 (50%) 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 “Controlling” and “Controlled” have meanings correlative to the foregoing.
Control Documents ” means the following set of contracts in form and substance attached as Exhibit A-2 of the First Share Purchase Agreement: the Framework Agreement, the Exclusive Business Cooperation Agreement, the Exclusive Option Agreement, the Proxy and the Equity Pledge Agreement.

 

 


 

Convertible Securities ” means, with respect to any specified Person, Securities convertible or exchangeable into any shares of any class of such specified Person, however described and whether voting or non-voting.
Directors ” means the members of the Board of Directors.
Disclosing Party ” has the meaning ascribed to it in Section 8.2(c) .
Disclosure Schedule ” has the meaning ascribed to it in Section 4 .
Domestic Company ” has the meaning ascribed to it in Preamble to this Agreement.
Employment Agreements ” has the meaning ascribed to it in Section 2.10 .
Exclusivity Period ” has the meaning ascribed to it in Section 6.2 .
Execution Date ” shall mean the date of this Agreement.
Financial Statements ” shall mean the consolidated balance sheet, income statement and statement of cash flows, prepared in accordance with the P.RC generally accepted accounting principles (“ PRC GAAP ”) and applied on a consistent basis throughout the periods indicated.
First Share Purchase Agreement ” has the meaning ascribed to it in Preamble to this Agreement.
Founder ” or “ Founders ” shall mean each of XU, ENHAI and HAN, DELING as listed in Schedule 2 .
Governmental Authority ” means the government of any nation, province, state, city, locality or other political subdivision of any thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, regulation or compliance, and any corporation or other entity owned or controlled, through share or capital ownership or otherwise, by any of the foregoing.
Group Companies ” means the Company, the HK Co, the WFOE, the Domestic Company and any other direct or indirect Subsidiary of any Group Company, whether in existence now or .in the future, collectively, and “Group Company” means any one of them.
GC Product or Service ” has the meaning ascribed to it in Section 8. 7 of Schedule 4 .
HKIAC ” has the meaning ascribed to it in Section 8.15(b).
Hong Kong ” means the Hong Kong Special Administrative Region of the PRC.
Indemnifiable Loss ” has the meaning set forth in Section 7.1 .
Indemnitee ” has the meaning set forth in Section 7.1 .
Intellectual Property ” means all patents, patent applications, trademarks, service marks, trade names, copyrights, trade secrets, processes, compositions of matter, formulas, designs, inventions, proprietary rights, know-how and any other confidential or proprietary information owned or otherwise used by the Company Group.

 

 


 

Key Employee ” means each of the Persons listed in Schedule 4 of the First Share Purchase Agreement.
Knowledge ” including the phrase “ to the Warrantors’ knowledge ” shall mean the actual knowledge after reasonable investigation of the Founders.
Law ” means any constitutional provision, statute or other law, rule, regulation, official policy or interpretation of any Governmental Authority and any injunction, judgment, order, ruling, assessment or writ issued by any Governmental Authority.
Lien ” means any mortgage, pledge, claim, security interest, encumbrance, title defect, lien, charge or other restriction or limitation.
Material Adverse Effect ” means a material adverse effect on the business, assets (including intangible assets), liabilities, financial condition, property, prospects or results of operations of the Group Companies, taken as a whole.
Material Agreements ” has the meaning ascribed to such term in Section 10.1 of Schedule 4 .
Order ” means any order, injunction, judgment, decree, ruling, writ, assessment or arbitration award of a Governmental Authority.
Ordinary Share ” has the meaning ascribed to in the Recitals to this Agreement, being an Ordinary Share of par value US$1 in the capital of the Company.
Party ” or “ Parties ” has the meaning set forth in the Preamble hereof.
Person ” means any individual, corporation, partnership, limited partnership, proprietorship, association, limited liability company, firm, trust, estate or other enterprise or entity.
Plan of Restructuring ” has the meaning ascribed to it in Section 2.14 .
PRC ” or “ China ” means the Peoples’ Republic of China, excluding Hong Kong, the Macau Special Administrative Region and Taiwan.
Projections ” has the meaning ascribed to such term in Section 24 of Schedule 4.
Public Official ” means an employee of a Governmental Authority, a member of a political party, a political candidate, an officer of a public international organization, or an officer or employee of a state-owned enterprise, including a PRC state-owned enterprise.
Public Software ” has the meaning ascribed to it in Section 8.7 of Schedule 4. “Purchaser” has the meaning ascribed to such term in Preamble hereof.
Related Party Transaction ” means any transaction between any Group Company on the one hand, and any Founder, or any Affiliate of any Founder on the other hand, other than transactions arising in the ordinary course of an employer/employee relationship.
Reserve ” or “ Reservation ” has the meaning ascribed to such term in Section 4 of Schedule 4 .
Restated Articles ” has the meaning ascribed to such term in Section 1.3 .

 

 


 

RMB ” means the Renminbi, the lawful currency of the PRC.
Securities Ac t” means the United States Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder (or comparable Laws in jurisdictions other than the United States).
Shareholders’ Agreement ” means the agreement proposed to be entered into among the Company, the Key Holders, the Purchaser and certain other parties thereto, in the form of Exhibit C attached to the First Share Purchase Agreement.
Shares ” has the meaning ascribed to it in Section 1.1 .
Subsidiary ” or “ subsidiary ” means, as of the relevant data of determinations, with respect to any Person (the “ subject entity ”), (i) any Person (x) more than 50% of whose shares or other interests entitled to vote in the election of directors or (y) more than a 50% interest in the profits or capital of such Person are owned or controlled directly or indirectly by the subject entity or through one (1) or more Subsidiaries of the subject entity, (ii) any Person whose assets, or portions thereof, are consolidated with the net earnings of the subject entity and are recorded on the books of the subject entity for financial reporting purposes in accordance with International Financial Reporting Standards or U.S. GAAP, or (iii) any Person with respect to which the subject entity has the power to otherwise direct the business and policies of that entity directly or indirectly through another subsidiary. For the avoidance of doubt, the Subsidiaries of the Company shall include the Group Companies.
Transaction Documents ” means this Agreement, the First Share Purchase Agreement, and the Shareholders’ Agreement, the Control Documents and any other agreements, instruments or documents entered into in connection with the First Share Purchase Agreement.
Transaction Terms ” has the meaning ascribed to such term in Section 8.2(a).
US$ ” means the United States dollar, the lawful currency of the United States of America.
Warrantors ” has the meaning ascribed to such term in Section 4 .
WFOE ” has the meaning ascribed to it in Recitals to this Agreement.

 

 


 

SCHEDULE 4
REPRESENTATIONS AND WARRANTIES OF
THE WARRANTORS
1.  
Organization, Good Standing, Corporate Power and Qualification .
Each Group Company is a corporation duly organized, validly existing and in good standing under the laws of their jurisdiction of incorporation and has all requisite corporate power and authority to carry on its business as presently conducted and as proposed to be conducted. Each Group Company is duly qualified to transact business and is in good standing in each jurisdiction in which the failure to so qualify would have a Material Adverse Effect.
2.  
Capitalization of the Company .
The authorized capital of the Company consists, immediately prior to the Closing, of:
2.1  
49,000 Ordinary Shares, of which 96 are issued and outstanding, and 1,000 Class B Ordinary Shares, of which 4 are issued and outstanding, immediately prior to the Closing. All of the outstanding Ordinary Shares have been duly authorized, are fully paid and nonassessable and were issued in compliance with all applicable securities laws. The Company holds no treasury shares.
2.2  
Schedule 7 sets forth the capitalization of the Company immediately following the Closing including the number of shares of the following: (i) issued and outstanding Ordinary Shares and Class B Ordinary Shares; and (v) warrants or stock purchase rights, if any. Except for the rights provided in the Shareholders’ Agreement, there are no outstanding options, warrants, rights (including conversion or preemptive rights and rights of first refusal or similar rights) or agreements, orally or in writing, to purchase or acquire from the Company any Ordinary Share or any securities convertible into or exchangeable for Ordinary Share.
2.3  
The Company is the sole legal and beneficial owner of one hundred percent (100%) of the equity interest of the HK Co. The HK Co is the sole legal and beneficial owner of one hundred percent (100%) of the equity interest of the WFOE.
2.4  
The Founders and the Seller are the sole legal and beneficial owners of the Ordinary Shares of the Company.
3.  
Subsidiaries .
Except as set forth in Section 3 of the Disclosure Schedule, the Company and each Group Company do not currently own or control, directly or indirectly, any interest in any other company, corporation, partnership, trust, joint venture, association, or other business entity. Neither the Company nor any Group Company is a participant in any joint venture, partnership or similar arrangement.

 

 


 

4.  
Authorization .
All corporate action required to be taken by each Group Company’s board of directors and shareholders in order to authorize each respective Group Company to enter into the Transaction Documents to which each such Group Company is a party, and to issue the Shares at the Closing, has been taken or will be taken prior to the Closing. All action on the part of the officers of each Group Company necessary for the execution and delivery of the Transaction Documents, the performance of all obligations of such Group Company under the Transaction Documents to be performed as of the Closing, and the issuance and delivery of the Shares has been taken or will be taken prior to the Closing. All action on the part of the officers of each Group Company necessary for the performance of all obligations of such Group Company under the Transaction Documents to be performed as of the Closing has been taken or will be taken prior to the Closing. The Transaction Documents, when executed and delivered by each Group Company, shall constitute valid and legally binding obligations of each Group Company, enforceable against each Group Company in accordance with their respective terms except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, or other laws of general application relating to or affecting the enforcement of creditors’ rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies, or (iii) to the extent the indemnification provisions contained in the Shareholders’ Agreement and the Indemnification Agreement may be limited by applicable securities laws. The issuance of any Shares is not subject to any preemptive rights or rights of first refusal, or if any such preemptive rights or rights of first refusal exist, waiver of such rights has been obtained from the holders thereof. For the purpose only of this Agreement, “ reserve ,” “ reservation ” or similar words with respect to a specified number of Ordinary Shares of the Company shall mean that the Company shall, and the Board of Directors shall procure that the Company shall, refrain from issuing such number of shares so that such number of shares will remain in the authorized but unissued share capital of the Company until the conversion rights of the holders of any Convertible Securities exercisable for such shares are exercised in accordance with the Restated Articles or otherwise.
5.  
Valid Issuance of Shares .
5.1  
The Shares, when issued, sold and delivered in accordance with the terms and for the consideration set forth in this Agreement, will be validly issued, fully paid and nonassessable and free of restrictions on transfer other than restrictions on transfer under the this agreement, the Shareholders’ Agreement, applicable securities laws and liens or encumbrances created by or imposed by the Purchaser. Subject in part to the accuracy of the representations of the Purchaser in Schedule 6 of this Agreement, the Shares will be issued in compliance with all applicable securities laws. Immediately following the Closing, the Purchaser will be the sole legal and beneficial owner of, and will have good and marketable title to the Shares.
5.2  
All presently outstanding Ordinary Shares of the Company were duly and validly issued, fully paid and non-assessable, and are free and clear of any liens and free of restrictions on transfer (except for any restrictions on transfer under applicable securities laws) and have been issued in compliance in all material respects with the requirements of all applicable securities laws and regulations, including, to the extent applicable, the Securities Act.

 

 


 

6.  
Governmental Consents and Filings .
No consent, approval, order or authorization of or registration, qualification, designation, declaration or filing with, any Governmental Authority is required on the part of the Company is required in connection with the valid execution, delivery and consummation of the transactions contemplated by this Agreement, Shareholder’s Agreement or the offer, sale, issuance or reservation for issuance of the Shares.
7.  
Litigation .
There is no claim, action, suit, proceeding, arbitration, complaint, charge or investigation pending or to the Warrantors’ knowledge, currently threatened (i) against any Group Company or any officer, director or Employee of any Group Company that would either individually or in aggregate, reasonably be expected to have a Material Adverse Effect; or (ii) to the Warrantors’ knowledge, that questions the validity of the Transaction Documents or the right of any Group Company to enter into them, or to consummate the transactions contemplated by the Transaction Documents. None of the Group Companies, its officers or directors, is a party or is named as subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality which would either individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. There is no action, suit, proceeding or investigation by any Group Company pending or which any Group Company intends to initiate. The foregoing includes, without limitation, actions, suits, proceedings or investigations pending or threatened in writing (or any basis therefor known to the Warrantors’) involving the prior employment of any of the Group Company’s employees, their services provided in. connection with Group Company’s business, or any information or techniques allegedly proprietary to any of their former employers, or their obligations under any agreements with prior employers.
8.  
Intellectual Property .
8.1  
Each Group Company owns or possesses sufficient legal rights to (i) all trademarks, service marks, trade names, copyrights, trade secrets, licenses, information and proprietary rights and processes and (ii) to the Warrantors’ knowledge, all patents and patent rights, as are necessary to the conduct of such Group Company’s business as now conducted and as presently proposed to be conducted, without any known conflict with, or infringement of, the rights of others. Section 8.1 of the Disclosure Schedule contains a complete and accurate list of all Intellectual Property owned, licensed to or used by each Group Company, whether registered or not, and a complete and accurate list of all licenses granted by such Group Company to any third party with respect to any Intellectual Property. No product or service marketed or sold (or proposed to be marketed or sold) by any Group Company violates or will violate any license or infringe any intellectual property rights of any other party.

 

 


 

8.2  
No Group Company has received any communications alleging that any Group Company has violated or, by conducting its business, would violate any of the patents, trademarks, service marks, trade names, copyrights, trade secrets or other proprietary rights or processes of any other person or entity. Except as set forth in Section 8.2 of the Disclosure Schedule , each Group Company has obtained and possesses valid licenses to use all of the software programs present on the computers and other software-enabled electronic devices that it owns or leases or that it has otherwise provided to its employees for their use in connection with such Group Company’s business. To the Warrantors’ knowledge, it will not be necessary to use any inventions of any of its employees (or persons it currently intends to hire) made prior to their employment by a Group Company. Each Employee has assigned to the Group Companies all intellectual property rights he or she owns that are related to the Group Companies’ business as now conducted.
8.3  
Other than with respect to commercially available software products under standard end-user object code license agreements, there are no outstanding options, licenses, agreements, claims, encumbrances or shared ownership interests of any kind relating to the foregoing, nor is any Group Company bound by or a party to any options, licenses or agreements of any kind with respect to the patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information, proprietary rights and processes of any other person or entity.
8.4  
No proceedings or claims in which any Group Company alleges that any person is infringing upon, or otherwise violating, its intellectual Property rights are pending, and none has been served, instituted or asserted by any Group Company.
8.5  
None of the employees of any Group Company or the Founders is obligated under any Contract (including a Contract of employment), or subject to any judgment, decree or order of any court or administrative agency, that would interfere with the use of his or her best efforts to promote the interests of the Company Group, or that would conflict with the business of any Group Company as presently conducted. To the knowledge of the Warrantors, it will not be necessary to utilize in the course of the any Group Company’s business operations any inventions of any of the employees of any Group Company made prior to their employment by the such Group Company, except for inventions that have been validly and properly assigned or licensed to such Group Company as of the date hereof.
8.6  
Each Group Company has taken all security measures that in the judgment of such Person are commercially prudent in order to protect the secrecy, confidentiality, and value of its material Intellectual Property.
8.7  
No Public Software (as defined below) forms part of the any product or service provided by any the Group Company (“ GC Product or Service ”) and no Public Software was or is used in connection with the development of any GC Product or Service or is incorporated into, in whole or in part, or has been distributed with, in whole or in part, any GC Product or Service. As used in this Section 8.7, “ Public Software ” means any software that contains, or is derived in any manner (in whole or in part) from, any software that is distributed as free software (as defined by the Free Software Foundation), open source software (e.g., Linux or software distributed under any license approved by the Open Source Initiative as set forth www.opensource.org) or similar licensing or distribution models which require the distribution or making available of source code as well as object code of the software to licensees without charge (except for the cost of the medium) and (b) the right of the licensee to modify the software and redistribute both the modified and unmodified versions of the software, including software licensed or distributed under any of the following licenses: (i) GNU’s General Public License (GPL) or Lesser/Library GPL (LGPL); (ii) the Artistic License (e.g., PERL); (iii) the Mozilla Public License; (iv) the Netscape Public License; (v) the SSD License; or (vi) the Apache License.

 

 


 

9.  
Compliance with Other Instruments .
The Group Companies and the Key Holders are not in violation or default (i) of any provisions of its Memorandum of Association (if any), Articles of Association or any other applicable constitutional document, (ii) of any instrument, judgment, order, writ or decree, (iii) under any note, indenture or mortgage, or (iv) under any lease, agreement, contract or purchase order to which it is a party or by which it is bound that is required to be listed on the Disclosure Schedule, or, of any provision of statute, rule or regulation applicable to such Group Company, the violation of which would either individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. The execution, delivery and performance of the Transaction Documents and the consummation of the transactions contemplated by the Transaction Documents will not result in any such violation or be in conflict with or constitute, with or without the passage of time and giving of notice, either (i) a default under any such provision, instrument, judgment, order, writ, decree, contract or agreement or (ii) an event which results in the creation of any lien, charge or encumbrance upon any assets of any Group Company or the suspension, revocation, forfeiture, or nonrenewal of any material permit or license applicable to any Group Company, which would either individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
10.  
Agreements; Actions .
10.1  
Save for the agreements set out in Section 10.1 of the Disclosure Schedule (the “ Material Agreements ”) and the Transaction Documents, there are no other agreements, understandings, instruments, contracts or proposed transactions entered into during the period from January 1, 2009, and September 30, 2009, to which any Group Company is a party or by which it is bound that involve (i) obligations (contingent or otherwise) of, or payments to, any Group Company in excess of US$10,000 per annum or in excess of US$25,000 in the aggregate, (ii) the transfer or license of any patent, copyright, trade secret or other proprietary right to or from any Group Company, other than from or to another Group Company or from a Key Holder to a Group Company, (iii) the grant of rights to manufacture, produce, assemble, license, market, or sell its products to any other person or affect any Group Company’s exclusive right to develop, manufacture, assemble, distribute, market or sell its products, or (iv) indemnification by any Group Company with respect to infringements of proprietary rights. All the Material Agreements are valid, binding and enforceable obligations of the parties thereto and the terms thereof have been complied with by the relevant Group Company, and to the knowledge of the Warrantors’, by all the other parties thereto. There are to the knowledge of the Warrantors’, no circumstances likely to give rise to any material breach of such terms, no grounds for rescission, avoidance or repudiation of any of the Material Agreements which would have a Material Adverse Effect and no notice of termination or of intention to terminate has been received in respect of any Material Agreement.

 

 


 

10.2  
Save as set out in Section 10.2 of the Disclosure Schedule , the Company has not declared or paid any dividends, or authorized or made any distribution upon or with respect to any class of its share capital, and no Group Company has (i) incurred any indebtedness for money borrowed or incurred any other liabilities individually in excess of US$10,000 or in excess of US$25,000 in the aggregate, (ii) made any loans or advances to any person, other than ordinary advances for travel expenses and trade receivables in the ordinary course of business, or (iii) sold, exchanged or otherwise disposed of any of its assets or rights, other than the sale of its inventory in the ordinary course of business or otherwise envisaged in this Agreement. For the purposes of Sections 10.1 and 10.2 of this Schedule 4 all indebtedness, liabilities, agreements, understandings, instruments, contracts and proposed transactions involving the same person or entity shall be aggregated for the purpose of meeting the individual minimum dollar amounts of such subsection.
10.3  
No Group Company is a guarantor or indemnitor of any indebtedness of any other person, firm or corporation that is not a Group Company.
10.4  
Save as set out in Section 10.4 of the Disclosure Schedule or in connection with this Agreement and the other Transaction Documents, no Group Company has engaged in the past three (3) months in any discussion with any representative of any corporation, partnership, trust, joint venture, limited liability company, association or other entity, or any individual, regarding (i) a sale of all or substantially all of such Group Company’s assets, or (ii) any merger, consolidation or other business combination transaction of such Group Company with or into another corporation, entity or person.
11.  
Conflict of Interest .
11.1  
Other than (i) standard employee benefits generally made available to all employees, (ii) standard director and officer indemnification agreements approved by the Board of Directors, and (iii) the purchase of the Company’s share capital in accordance with applicable law, in each instance, disclosed in Section 11.1 of the Disclosure Schedule , there are no agreements, understandings or proposed transactions between any Group Company and any of its officers, directors, consultants or Employees, or any Affiliate thereof, respectively.
11.2  
No Group Company is indebted, directly or indirectly, to any of its directors, officers or employees or to their respective spouses or children or to any Affiliate of any of the foregoing, other than in connection with expenses or advances of expenses incurred in the ordinary course of business or employee relocation expenses. None of the Group Companies’ directors, officers or employees, or any members of their immediate families, or any Affiliate of the foregoing (i) are, directly or indirectly, indebted to any Group Company or, (ii) to the Warrantors’ knowledge, have any direct or indirect ownership interest in any firm or corporation with which the Company is affiliated or with which any Group Company has a business relationship, or any firm or corporation which competes with any Group Company except that directors, officers or employees or shareholders of the Company may own shares in (but not exceeding one percent (1%) of the outstanding shares of) publicly traded companies that may compete with any Group Company. To the Warrantors’ knowledge, none of the Group Companies’ employees or directors or any members of their immediate families or any Affiliate of any of the foregoing are, directly or indirectly, interested in any contract with any Group Company. None of the directors or officers, or any members of their immediate families, has any material commercial, industrial, banking, consulting, legal, accounting, charitable or familial relationship with any of the Group Companies’ five (5) largest business relationship partners, service providers, joint venture partners, licensees and competitors.

 

 


 

11.3  
Except for the Group Companies and the entities set forth in Section 11.3 of the Disclosure Schedule , there are no corporations, partnerships, trusts, joint ventures, limited liability companies or other business entities in which any Key Holder owns or controls, directly or indirectly, 10% or more of the outstanding voting interests.
12.  
Rights of Registration and Voting Rights .
Except as provided in the Shareholders’ Agreement, no Group Company is under any obligation to register under the Securities Act or any other applicable securities laws, any of its currently outstanding securities or any securities issuable upon exercise or conversion of its currently outstanding securities. To the Warrantors’ knowledge, except as contemplated in the Shareholders’ Agreement, no shareholder of any Group Company has entered into any agreements with respect to the voting of, shares in the capital of the Company. Except as contemplated by or disclosed in the Transaction Documents, no Founder is a party to or has any knowledge of any agreements, written or oral, relating to the acquisition, disposition, registration under the Securities Act, or voting of the shares or securities of any Group Company.
13.  
Absence of Liens .
Except as provided in Section 13 of the Disclosure Schedule , the property and assets owned by the Group Companies are free and clear of all mortgages, deeds of trust, liens, loans and encumbrances, except for statutory liens for the payment of current taxes that are not yet delinquent and encumbrances and liens that arise in the ordinary course of business and do not materially impair the Group Companies’ ownership or use of such property or assets. With respect to the property and assets it leases, each Group Company is in compliance with such, leases and, to the Warrantors’ knowledge, holds a valid leasehold interest free of any liens, claims or encumbrances other than those of the lessors of such property or assets.
14.  
Financial Statement s.
The Domestic Company has delivered to the Purchaser its audited Financial Statements for the fiscal year ended December 31, 2007, and December 31, 2008, and for the 9 month period ended September 30, 2009. The Financial Statements fairly present in all material respects the financial condition and operating results of the Domestic Company as of the dates, and for the periods, indicated therein. Except as set forth in the Financial Statements, the Domestic Company has no material liabilities or obligations, contingent or otherwise, as of December 31, 2008, other than (i) liabilities incurred in the ordinary course of business subsequent to December 31, 2008; (ii) obligations under contracts and commitments incurred in the ordinary course of business and (iii) liabilities and obligations of a type or nature not required under the PRC GAAP to be reflected in the Financial Statements, which, in all such cases, individually and in the aggregate would not have a Material Adverse Effect. However, the Domestic Company commits to maintain a standard system of accounting established and administered in accordance with U.S. GAAP.

 

 


 

15.  
Changes .
Since December 31, 2008, except as set forth in Section 15 of the Disclosure Schedule or as contemplated by this Agreement or the Transaction Documents, there has not been:
  (a)  
any change in the assets, liabilities, financial condition or operating results of any Group Company from that reflected in the Financial Statements, except changes in the ordinary course of business that have not caused, in the aggregate, a Material Adverse Effect on a Group Company;
  (b)  
any damage, destruction or loss, whether or not covered by insurance, that would have a Material Adverse Effect on a Group Company;
  (c)  
any waiver or compromise by any Group Company of a valuable right or of a material debt owed to it;
  (d)  
any satisfaction or discharge of any lien, claim, or encumbrance or payment of any obligation by any Group Company, except in the ordinary course of business and the satisfaction or discharge of which would not have a Material Adverse Effect;
  (e)  
any material change to a material contract or agreement by which any Group Company or any of its assets is bound or subject;
  (f)  
any material change in any compensation arrangement or agreement with any employee, officer, director or shareholder;
  (g)  
any resignation or termination of employment of any officer or Employee of any Group Company;
  (h)  
any mortgage, pledge, transfer of a security interest in, or lien, created by any Group Company, with respect to any of its material properties or assets, except liens for taxes not yet due or payable and liens that arise in the ordinary course of business and do not materially impair such Company’s ownership or use of such property or assets;
  (i)  
any dividend, loans or guarantees made by any Group Company to or for the benefit of its employees, officers or directors, or any members of their immediate families, other than travel advances and other advances made in the ordinary course of its business;
  (j)  
any declaration, setting aside or payment or other distribution in respect of any Group Company’s share capital, or any direct or indirect redemption, purchase, or other acquisition of any of such shares by any Group Company;
  (k)  
any sale, assignment or transfer of any Group Company Intellectual Property that could reasonably be expected to result in a Material Adverse Effect;
  (l)  
receipt of notice that there has been a loss of, or material order cancellation by, any major customer of any Group Company;
  (m)  
to the Warrantors’ knowledge, any other event or condition of any character, other than events affecting the economy or the Company’s industry generally, that could reasonably be expected to result in a Material Adverse Effect; or
  (n)  
any arrangement or commitment by the Company to do any of the things described in this Section 15.

 

 


 

16.  
Employee Matters .
16.1  
Section 16.1 of the Disclosure Schedule sets forth a detailed description of all compensation, including salary, bonus, severance obligations and deferred compensation payable for each officer, employee, consultant and independent contractor of any Group Company who is anticipated to receive compensation in excess of US$50,000 for the fiscal year ending December 31, 2009.
16.2  
To the Warrantors’ knowledge, no employee of any Group Company is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would materially interfere with such employee’s ability to promote the interest of the Group Companies or that would conflict with the Group Companies’ business. Neither the execution or delivery of the Transaction Documents, nor the carrying on of the Company’s business by the employees of the Group Companies, nor the conduct of the business as now conducted and as presently proposed to be conducted, will, to the Warrantors’ knowledge, conflict with or result in a breach of the terms, conditions, or provisions of, or constitute a default under, any contract, covenant or instrument under which any such employee is now obligated.
16.3  
No Group Company is delinquent in payments to any of its employees, consultants, or independent contractors for any wages, salaries, commissions, bonuses, or other direct compensation for any service performed for it to the date hereof or amounts required to be reimbursed to such employees, consultants, or independent contractors. Each Group Company has complied in all material respects with all applicable laws related to employment, including those related to wages, hours, worker classification, and collective bargaining, and the payment and withholding of taxes and other sums as required by law except where noncompliance with any applicable law would not result in a Material Adverse Effect. Each Group Company has withheld and paid to the appropriate governmental entity or is holding for payment not yet due to such governmental entity all amounts required to be withheld from employees of such Group Company and is not liable for any arrears of wages, taxes, penalties, or other sums for failure to comply with any of the foregoing.
16.4  
To the Warrantors’ knowledge, no employee intends to terminate employment with any Group Company or is otherwise likely to become unavailable to continue as an employee, nor does any Group Company have a present intention to terminate the employment of any of the foregoing. The employment of each employee of the Company is terminable at the will of the Company. Except as set forth in Section 16.4 of the Disclosure Schedule or as required by law, upon termination of the employment of any such employees, no severance or other payments will become due. Except as set forth in Section 16.4 of the Disclosure Schedule , the Company has no policy, practice, plan, or program of paying severance pay or any form of severance compensation in connection with the termination of employment services.

 

 


 

16.5  
The Company has not made any representations regarding equity incentives to any officer, employees, director or consultant that are inconsistent with the share amounts and terms set forth in the Company’s board minutes.
16.6  
Each former employee whose employment was terminated by the Company has entered into an agreement with the Company providing for the full release of any claims against the Company or any related party arising out of such employment.
16.7  
Section 16.7 of the Disclosure Schedule sets forth each and every employee benefit plan maintained, established or sponsored by any Group Company, or in which any Group Company participates in or contributes to in any jurisdiction, including without limitation, the PRC (the “ Employee Benefit Plans ”). Save as set out in Section 16.7 of the Disclosure Schedule , there is no other pension, retirement, profit-sharing, deferred compensation, bonus, incentive or other employee benefit program, arrangement, agreement or understanding to which any Group Company contributes, is bound, or under which any employees or former employees (or their beneficiaries) are eligible to participate or derive a benefit. Each Group Company has made all required contributions under all the Employee Benefit Plans including without limitation all contributions required to be made under the PRC social insurance and housing schemes, and has complied in all material respects with all applicable laws of any jurisdiction, in relation to the Employee Benefit Plans.
16.8  
No Group Company is bound by or subject to (and none of its assets or properties is bound by or subject to) any written or oral, express or implied, contract, commitment or arrangement with any labor union, and no labor union has requested or, to the Warrantors’ knowledge, has sought to represent any of the employees, representatives or agents of any Group Company. There is no strike or other labor dispute involving any Group Company pending, or to the Warrantors’ knowledge, threatened, which could have a Material Adverse. Effect, nor is the Company aware of any labor organization activity involving its employees.
16.9  
To the Warrantors’ knowledge, none of the employees or directors of any Group Company during the previous three (3) years, has been (a) subject to voluntary or involuntary petition under any applicable bankruptcy laws or any state insolvency laws or the appointment of manager, a receiver or similar officer by a court for his business or property; (b) convicted in a criminal proceeding or named as a subject of a pending criminal proceeding (excluding traffic violations and other minor offenses); (c) subject to any order, judgment, or decree (not subsequently reversed, suspended, or vacated) of any court of competent jurisdiction permanently or temporarily enjoining him from engaging, or otherwise imposing limits or conditions on his engagement in any securities, investment advisory, banking, insurance, or other type of business or acting as an officer or director of a public company; or (d) found by a court of competent jurisdiction in a civil action or by any relevant regulatory organization to have violated any applicable securities,.. commodities, or unfair trade practices law, which such judgment or finding has not been subsequently reversed, suspended, or vacated.

 

 


 

17.  
Tax Matters .
17.1  
The provisions for taxes as shown on the balance sheet included in the Financial Statements are, sufficient in all material respects for the payment of all accrued and unpaid applicable taxes of the Group Companies as of the date of each such balance sheet, whether or not assessed or disputed as of the date of each such balance sheet. Except as set forth in Section 17 of the Disclosure Schedule , there have been no extraordinary examinations or audits of any tax returns or reports by any applicable Governmental Authority. Except as set forth in Section 17 of the Disclosure Schedule, each Group Company has filed or caused to be filed on a timely basis all tax returns that are or were required to be filed (to the extent applicable), all such returns are correct and complete, and each Group Company has paid all taxes that have become due, or have reflected such taxes in accordance with IFRS as a reserve for taxes on the Financial Statements. There are in effect no waivers of applicable statutes of limitations with respect to taxes for any year.
17.2  
No member of the Company Group is, nor expects to become, a passive foreign investment company (“ PFIC ”) as described in Section 1297 of the United States Internal Revenue Code of 1986, as amended (the “ Code ”).
17.3  
No shareholder of any member of a Group Company, solely by virtue of its status as shareholder of such Group Company, have personal liability under local law for the debts and claims of such Group Company. There has been no communication from any tax authority relating to or affecting the tax classification of any member of the Company Group.
18.  
Insurance .
Section 18 of the Disclosure Schedule provides a complete list of each Group Company’s insurance policies currently in effect. No Group Company has done or omitted to do or suffered anything to be done or not to be done other than any acts in the ordinary course of business which has or would render any policies of insurance taken out by it or by any other person in relation to any of such Group Company’s assets void or voidable or which would result in an increase in the rate of premiums on the said policies and there are no claims outstanding and no circumstances which would give rise to any claim under any of such policies of insurance.
19.  
Confidential Information and Invention Assignment Agreements .
Each current and former employee, consultant and officer of the Company or any Group Company has executed an agreement with the Company of Group Company regarding confidentiality and proprietary information substantially in the form or forms delivered to the counsel for the Purchaser (the “ Confidential Information Agreements ”), No current or former employee has excluded works or inventions from his or her assignment of inventions pursuant to such employee’s Confidential Information Agreement. The Company and any Group Company are not aware that any of their Key Employees is in violation thereof.
20.  
Governmental and Other Permits .
Each Group Company has all franchises, governmental permits, licenses and any similar authority necessary for the conduct of its business. No Group Company is in default in any material respect under any of such franchises, Governmental permits, licenses or other similar authority.

 

 


 

21.  
Corporate Documents .
22.  
The memorandum of association, articles of association, and all other constitutional documents (or analogous constitutional documents) of each Group Company are in the form provided to the Purchaser. The copy of the minute books of the Company provided to the Purchaser contains minutes of all meetings of directors and shareholders and all actions by written consent without a meeting by the directors and shareholders since the date of incorporation and accurately reflects in all material respects all actions by the directors (and any committee of directors) and shareholders with respect to all transactions referred to in such minutes.
23.  
Liabilities .
Except as set forth in Section 22 of the Disclosure Schedule or arising under the instruments set forth in Section 10 of the Disclosure Schedule , the Company has no liabilities of any nature, whether accrued, absolute, contingent or otherwise, and whether due or to become due, except for (i) liabilities set forth in the Financial Statements, (ii) trade or business liabilities incurred in the ordinary course of business, and (iii) other liabilities that do not exceed US$5,000 in the aggregate.
24.  
Compliance with Laws .
24.1  
Except as set forth in Section 23.1 of the Disclosure Schedule , each Group Company is in material compliance with all applicable Laws applicable to it or to the conduct or operation of its business or the ownership or use of any of its assets or properties.
24.2  
Except as set forth in Section 23.2 of the Disclosure Schedule , no event has occurred and no circumstance exists that to the Warrantors’ knowledge (i) may constitute or result in a violation by any Group Company, or a failure on the part of any Group Company to comply with any Law, or (ii) may give rise to any obligation on the part of any Group Company to undertake, or to bear all or any portion of the cost of, any remedial action of any nature, except for such violations or failures by a Group Company that, individually or in the aggregate, would not result in any Material Adverse Effect.
24.3  
No Group Company has received any written notice from any Governmental Authority regarding (i) any actual, alleged or likely material violation of, or material failure to comply with, any Law, or (ii) any actual, alleged or likely material obligation on the part of any Group Company to undertake, or to bear all or any portion of the cost of, any remedial action of any nature.
24.4  
No Group Company, nor any director, agent, employee or any other person acting for or on behalf of any Group Company, has directly or indirectly (i) made any contribution, gift, bribe, payoff, influence payment, kickback, or any other fraudulent payment in any form, whether in money, property, or services to any public official or otherwise (A) to obtain favorable treatment in securing business for a Group Company, (B) to pay for favorable treatment for business secured, or (C) to obtain special concessions or for special concessions already obtained, for or in respect of any Group Company, in each case which would have been in violation of any applicable Law or (ii) established or maintained any fund or assets in which any Group Company shall have proprietary rights that have not been recorded in the books and records of a Group Company.

 

 


 

24.5  
During the previous five (5) years, no Founder has been (i) subject to voluntary or involuntary petition under any applicable bankruptcy laws or any applicable insolvency law or the appointment of a manager, receiver, or similar officer by a court for his business or property; (ii) convicted in a criminal proceeding or named as a subject of a pending criminal proceeding (excluding traffic violations and other minor offences); (iii) subject to any order, judgment, or decree (not subsequently reversed, suspended, or vacated) of any court of competent jurisdiction permanently or temporarily enjoining him from engaging, or otherwise imposing limits or conditions on his engagement in any securities, investment advisory, banking, insurance, or other type of business or acting as an officer or director of a public company; or (iv) found by a court of competent jurisdiction in a civil action or by any regulatory organization to have violated any applicable securities, commodities or unfair trade practices law whatsoever, which such judgment or finding has not been subsequently reversed, suspended, or vacated.
25.  
Disclosure; Projections .
The Company has made available to the Purchaser all the information reasonably available to the Company that the Purchaser has requested for deciding whether to acquire the Shares, including certain of the Company’s financial projections (the “ Projections ”), each of which were prepared in good faith. To the Warrantors’ knowledge, no representation or warranty of any Warrantor contained in this Agreement, as qualified by the Disclosure Schedule, and no certificate furnished or to be furnished to the Purchaser at the Closing contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading in light of the circumstances under which they were made.
26.  
Use of Proceeds Plan and Budget .
The Company has delivered to the Purchaser on or before the Closing an interim use of proceeds plan and operation budget (the “ Business Plan ”) in accordance with Section 2.5 . Such Business. Plan was prepared in good faith based upon assumptions and projections which the Founders believe are reasonable and not materially misleading.
27.  
Entire Business .
There are no material facilities, services, assets or properties shared with any entity other than the Group Company which are used in connection with the business of the Domestic Company.

 

 


 

SCHEDULE 5
DISCLOSURE SCHEDULE
Section 1  
Introduction
1.1  
This Disclosure-Schedule forms an inseparable part of the Share Purchase Agreement (the “ Agreement ”) relating to the purchase by CHINA TECHFAITH WIRELESS COMMUNICATION TECHNOLOGY LIMITED from ACTIVE CENTURY HOLDINGS LIMITED of 96 Ordinary Shares of CITYLEAD Limited, a company limited by shares duly incorporated and validly existing under the Laws of the British Virgin Islands (the “ Company ”). Unless the context otherwise specifies, all capitalized terms used herein shall have the meanings given to such terms in the Agreement.
1.2  
The purpose of this Disclosure Schedule is to disclose matters which may be relevant to and/or to qualify the representations and warranties made by certain parties contained in Schedule 4 of the Agreement (collectively, the “ Warranties ” and each, a “ Warranty ”).
1.3  
In the event that, any inconsistency is revealed between any provision of the Agreement and any part of this Disclosure Schedule, this Disclosure Schedule shall prevail and shall be. deemed to be the relevant disclosure.
1.4  
The matters disclosed, in this Disclosure Schedule shall be deemed to be representations and warranties under Schedule 4 of the Agreement.
1.5  
Inclusion of any item in this Disclosure Schedule (i) does not represent a determination that such item is material or. establish a standard of materiality; (ii) does not represent a determination that such item did not arise in the ordinary course of business; (iii) except as specifically set forth herein, does not represent a determination that the transactions contemplated in the Agreement require the consent of third parties.
1.6  
The section numbers below correspond to the section numbers of the Warranties in the Schedule 4 of this Agreement; provided however, that any information disclosed herein under any section number shall be deemed-disclosed and incorporated into any other sections of this Disclosure Schedule to which there is an express cross-reference.

 

 


 

Section 2  
Disclosure Schedule
                 
Section Number   Specific Disclosure
 
   
Section 3
  nil            
Section 8.1     Trademark in the process of application:
 
        1.     “QiGi” (Application date: 1-10-2008; Application number: 6501874; Category: 09)
 
        2.     “QIGI (picture)” (Application date: 3-11-2009; Application number: 7247382; Category: 09)
 
        3.     “i-mate” (Application date: 9-27-2007; Application number: 6299651; Category: 09)
      Domain names:
 
        1.     qigi.cc;
 
        2.     bodee.cc
             
Section 8.2
  nil    
Section 10.1
    1.     Sales Contract dated January 5, 2009, between the Domestic Company (hereinafter referred to as “QiGI” in this section of the Disclosure Schedule) and Henan Jielong Tongxing Technology Co., Ltd.;
 
    2.     Sales Contract dated January 5, 2009, between QiGi and Taiyuan Tianfuweiye Tongxun Machinery Co., Ltd.;
 
    3.     Sales Contract dated January 5, 2009, between QiGi and Tianjin Meiritong Shangmao Co., Ltd.;
 
    4.     Sales Contract dated January 7, 2009, between QiGi and Changde Yongxiang Maoyi Co., Ltd.;
 
    5.     Sales Contract dated January 8, 2009, between QiGi and Foshan Nanhaitianjun Electronics Co., Ltd.;
 
    6.     Sales Contract dated January 9, 2009, between QiGi and Chongqing Shiji Tongxun Technology Development Co., Ltd.;

 

 


 

             
Section Number   Specific Disclosure
 
           
 
    7.     Sales Contract dated January 9, 2009, between QiGi and Chongqing Taindisheyuan Shangmao Co., Ltd.;
 
    8.     Sales Contract dated January 12, 2009, between QiGi and Chengdu Huadao Shangmao Co., Ltd.:
 
    9.     Sales Contract dated January 12, 2009, between QiGi and Guangzhou Xiangjin Digital Technology Co., Ltd.;
 
    10.     Sales Contract dated January 13, 2009, between QiGi and Dongguang Lianyu Electronics Co., Ltd.;
 
    11.     Sales Contract dated January 15, 2009, between QiGi and Guangzhou Chuangwei Electronics (CHINESE CHARACTERS) Technology Co., Ltd.;
 
    12.     Sales Contract dated January 15, 2009, between QiGi and Hangzhou Quanyong Maoyi Co., Ltd.;
 
    13.     Sales Contract dated January 15, 2009, between QiGi and Kunming Wuyao Tongxun Equipment Co., Ltd.;
 
    14.     Sales Contract dated January 15, 2009, between QiGi and Quanzhou Huachen Dianxun Maoyi Co., Ltd.;
 
    15.     Sales Contract dated January 15, 2009, between QiGi and Shanghai Kunqian Shiye Co., Ltd.;
 
    16.     Sales Contract dated January 15, 2009, between QiGi and Chengdu Gonglin Shenan Information Systems Co., Ltd.;
 
    17.     Sales Contract dated January 16, 2009, between QiGi and Kunming Jingzheng Technology Electronics Co., Ltd.;
 
    18.     Sales Contract date January 16, 2009, between QiGi and Shanghai Boxuan Tongxun Technology Co., Ltd.;
 
    19.     Sales Contract dated January 16, 2009, between QiGi and Xiamen Huidesheng Maoyi Co., Ltd.;
 
    20.     Sales Contract dated January 19, 2009, between QiGi and Shenzhen Lindawei Electronics Technology Shiye Co., Ltd.;
 
    21.     Sales Contract dated January 20, 2009, between QiGi and Wuhan Jiayuan Digital Technology Co., Ltd.;
 
    22.     Sales Contract dated January 20, 2009 between QiGi and Beijing Hanminxintong Technology Co., Ltd.;

 

 


 

             
Section Number   Specific Disclosure
 
           
 
    23.     Sales Contract dated January 21, 2009, between QiGi and Guizhou Nanming District Huamei Tongxun Machinery Co., Ltd.;
 
    24.     Sales Contract dated January 21, 2009, between QiGi and Jinan Depu Tongxing Equipment Co., Ltd.;
 
    25.     Sales Contract dated January 21, 2009, between QiGi and Shanghai Shoushang Intelligence Tongxun Equipment Company;
 
    26.     Sales Contract dated January 21, 2009, between QiGi and Shanghai Situman Dianxing Technology Co., Ltd.;
 
    27.     Sales Contract dated January 23, 209, between QiGi and Shanxi Fanggeng Technology Development Co., Ltd.;
 
    28.     Sales Contract dated February 1, 2009, between QiGi and Hanzhou Renxing Digital Technology Co., Ltd.;
 
    29.     Machinery Purchase Contract dated February 1, 2009, between QiGi and Guangdong Hexing Technology Co., Ltd.;
 
    30.     Sales Contract dated February 3, 2009, between QiGi and Shenzhen Quanqi Digital Co., Ltd.;
 
    31.     Sales Contract dated February 3, 2009, between QiGi and Shenzhen JingyushikongTongxun Equipment Co., Ltd.;
 
    32.     Sales Contract dated February 3, 2009, between QiGi and Suzhou Jingpai Mobile Phone Internet Co., Ltd.;
 
    33.     Sales Contract dated February 3, 2009, between QiGi and Zhuhai Sankeng Electronics Technology Co., Ltd.;
 
    34.     Sales Contract dated February 3, 2009 between QiGi and Chengdu Hanbo Shangmao Co., Ltd.;
 
    35.     Sales Contract dated February 3, 2009, between QiGi and Chongqing Bada Electronics Construction Co., Ltd.;
 
    36.     Sales Contract dated February 3, 2009, between QiGi and Jinan Depu Tongxing Equipment Co., Ltd.;
 
    37.     Sales Contract dated February 3, 2009 between QiGi and Yunnan Geling Digital Technology Co., Ltd.;
 
    38.     Order Form dated February 3, 2009, between QiGi and Dexing Intelligence Mobile Phone Technology (HK) Co., Ltd.;

 

 


 

             
Section Number   Specific Disclosure
 
           
 
    39.     Order Form dated February 4, 2009, between QiGi and Dexing Intelligence Mobile Phone Technology (HK) Co., Ltd.;
 
    40.     Sales Contract dated February 4, 2009, between QiGi and Changsha Jianfengchaoliu Tongxun Equipment Company;
 
    41.     Sales Contract dated February 4, 2009, between QiGi and Shenzhen LindaweiElectronics Technology Shiye Co., Ltd.;
 
    42.     Sales Contract dated February 5, 2009, between QiGi and Shanghai E-te Digital Co., Ltd.;
 
    43.     Sales Contract dated February 5, 2009, between QiGi and Beijing Gongrenweiye Shangmao Co., Ltd.;
 
    44.     Machinery Purchase Contract dated February 5, 2009, between QiGi and Guangzhou Technology Tongxing Technology Co., Ltd.;
 
    45.     Sales Contract dated February 7, 2009, between QiGi and Taiyuan Tianfuweiye Tongxun Machinery Co., Ltd.;
 
    46.     Sales Contract dated February 7, 2009, between QiGi and Tianjing Meiritong Shangmao Co., Ltd.;
 
    47.     Sales Contract dated February 7, 2009, between QiGi and Hefi Jiada Tongxun Technology Co., Ltd.;
 
    48.     Sales Contract dated February 7, 2009, between QiGi and Shijiazhuang Tianwen Tongxun Machinery Co., Ltd.;
 
    49.     Machinery Purchase Contract dated February 7, 2009, between QiGi and Guangdong Hexing Technology Co., Ltd.;
 
    50.     Sales Contract dated February 8, 2009, between QiGi and Wuhan Zhongyu Electronics Co., Ltd.;
 
    51.     Sales Contract dated February 10, 2009, between QiGi and Beijing Zehengteng Technology Development Co., Ltd.;
 
    52.     Sales Contract dated February 13, 2009, between QiGi and Nanjing Lanbiao Digital Technology Co., Ltd.;
 
    53.     Sales Contract dated February 13, 2009, between QiGi and Henan Jielong Tongxun 7 Technology Co., Ltd.;
 
    54.     Sales Contract dated February 13, 2009, between QiGi and Beijing Mobile Xingzhi Tongxun Technology Co., Ltd.;

 

 


 

             
Section Number   Specific Disclosure
 
           
 
    55.     Sales Contract dated February 13, 2009, between QiGi and Taiyuan Huiling Tongxing Information Technology Co., Ltd.;
 
    56.     Sales Contract dated February 14, 2009, between QiGi and Qingdao Jingweitiandi Electronics Co., Ltd.;
 
    57.     Sales Contract dated February 14, 2009, between QiGi and Huizhou Yicheng Technology Co., Ltd.;
 
    58.     Sales Contract dated February 14, 2009, between QiGi and Wuhan JiayuanDigital Technology Co., Ltd.;
 
    59.     Sales Contract dated February 14, 2009, between QiGi and Nanjing Runchang Electronics Co., Ltd.;
 
    60.     Sales Contract dated February 18, 2009, between QiGi and Guangzhou Yuanchang Maoyi Co., Ltd.;
 
    61.     Order Form dated February 24, 2009, between QiGi and Dexing Intelligence Mobile Phone Technology (HK);
 
    62.     Order Form dated February 24, 2009, between QiGi and Dexing Wireless Tongxun Technology ( Beijing ) Co., Ltd.;
 
    63.     Order Form dated February 26, 2009, between QiGi and Dexing Intelligence Mobile Phone Technology ( Beijing ) Co., Ltd.;
 
    64.     Sales Contract dated March 2, 2009, between QiGi and Nanning Hengrongchang Shangmao Co., Ltd.;
 
    65.     Sales Contract dated March 26, 2009, between QiGi and Wuhan Bohong Information Technology Co., Ltd.;
 
    66.     Sales Contract dated March 2, 2009, between QiGi and Tianjing Chiwuxian Tongxun Technology Co., Ltd.;
 
    67.     Sales Contract dated March 3, 2009, between QiGi and Shishi Fanhua Dianxun Maoyi Co., Ltd.;
 
    68.     Sales Contract dated March 3, 2009, between QiGi and Shenzhen Jingbaolong Digital Technology Co., Ltd.;
 
    69.     Sales Contract dated March, 2009, between QiGi and Shenzhen Chuangfeier Electronics Technology Co., Ltd.;
 
    70.     Sales Contract dated March, 2009, between QiGi and Shanghai Yitianxia Technology Co., Ltd.;
 
    71.     Sales Contract dated March, 2009, between QiGi and Shanghai Longding Shangwu Co., Ltd.

 

 


 

             
Section Number   Specific Disclosure
 
           
 
    72.     Sales Contract dated March, 2009, between QiGi and Shanghai Kunqian Shiye Co., Ltd.;
 
    73.     Sales Contract dated March, 2009, between QiGi and Rizhao Taitong Electronics Co., Ltd.;
 
    74.     Sales Contract dated March, 2009, between QiGi and Nanjing Puhan Gongmao Shiye Co., Ltd.;
 
    75.     Sales Contract dated March, 2009, between QiGi and Hunan Bopu Technology Co., Ltd.;
 
    76.     Sales Contract dated March, 2009, between QiGi and Changzhou Yuntuo Shangmao Co., Ltd.;
 
    77.     Machinery Purchase Contract dated March 5, 2009, between QiGi and Guangzhou Technology Tongxing Technology Co., Ltd.;
 
    78.     Sales Contract dated March 6, 2009, between QiGi and Kunming Bangsheng Technology Co., Ltd.;
 
    79.     Sales Contract dated March 7, 2009, between QiGi and Henan Zhongzheng Tongxun Co., Ltd.;
 
    80.     Sales Contract dated March 7, 2009, between QiGi and Guangzhou Yuanchang Maoyi Co., Ltd.;
 
    81.     Sales Contract dated March 7, 2009, between QiGi and Fujian Huaqiao Shiye Group Company;
 
    82.     Sales Contract dated March 8, 2009, between QiGi and Hangzhou Jingpusheng Technology Co., Ltd.;
 
    83.     Sales Contract dated March 8, 2009, between QiGi and Guangzhou Hengmi Maoyi Co., Ltd.;
 
    84.     Sales Contract dated March 8, 2009, between QiGi and Dongguang Shilong Jingyingtong Electronics Co., Ltd.;
 
    85.     Sales Contract dated March 8, 2009, between QiGi and Dingming Yali Tongxun Technology Co., Ltd.;
 
    86.     Machinery Purchase Contract dated March 9, 2009, between QiGi and Guangdong Hexing Technology Co., Ltd.;
 
    87.     Machinery Purchase Contract dated March 10, 2009, between QiGi and Hangzhou Guangyuan Technology Co., Ltd.;

 

 


 

             
Section Number   Specific Disclosure
 
           
 
    88.     Sales Contract dated March 12, 2009, between QiGi and Changsha Zhongtian Tongxun Technology Co., Ltd.;
 
    89.     Sales Contract dated March 16, 2009, between QiGi and Kunming Wuyao Tongxun Equipment Co., Ltd.;
 
    90.     Sales Contract dated March 16, 2009, between QiGi and Beijing Hanming Tongxing Technology Co., Ltd.;
 
    91.     Sales Contract dated March 16, 2009, between QiGi and Nanjing Yingxshui Tongxun Co., Ltd.;
 
    92.     Sales Contract dated March 16, 2009, between QiGi and Hunan Yinyuan Zhongxing Information Technology Co., Ltd.;
 
    93.     Sales Contract dated March 16, 2009, between QiGi and Kunming Xingkangcheng Information Technology Co., Ltd.;
 
    94.     Order Form dated March 25, 2009, between QiGi and Dexing Wireless Tongxun Technology ( Beijing ) Co., Ltd.;
 
    95.     Sales Contract dated March 27, 2009, between QiGi and Yiwu Daoye Internet Technology Co., Ltd.;
 
    96.     Sales Contract dated April 1, 2009, between QiGi and Yancheng Tinghu District Qiandao Tongxun Machinery Co., Ltd.;
 
    97.     Sales Contract dated April 2, 2009, between QiGi and Xuzhou Sanjiu Intelligence Tongxun Co., Ltd.;
 
    98.     Sales Contract dated April 2, 2009, between QiGi and Xiamen Huidesheng Maoyi Co., Ltd.;
 
    99.     Sales Contract dated April 2, 2009, between QiGi and Wuhan Feiyang Technology Co., Ltd.;
 
    100.     Sales Contract dated April 3, 2009, between QiGi and Tianjing Meiritong Shangmao Co., Ltd. ;
 
    101.     Sales Contract dated April 3, 2009, between QiGi and Suzhou Jingpai Mobile Phone Internet Co., Ltd.;
 
    102.     Sales Contract dated April 3, 2009, between QiGi and Shenzhen Guoxing Tongxun Technology Co., Ltd.;
 
    103.     Sales Contract dated April 13, 2009, between QiGi and Shanghai Shoushang Intelligence Tongxun Equipment Company;

 

 


 

             
Section Number   Specific Disclosure
 
           
 
    104.     Machinery Purchase Contract dated April 3, 2009, between QiGi and Shenzhen Zhongke Tianbo Technology Co., Ltd.;
 
    105.     Sales Contract dated April, 2009, between QiGi and Shenzhen Quanqi Digital Co., Ltd.;
 
    106.     Sales Contract dated April, 2009, between QiGi and Hefei Jiada Tongxun Technology Co., Ltd.;
 
    107.     Sales Contract dated April 4, 2009, between QiGi and Shanghai Liangzeng Gongmao Co., Ltd.;
 
    108.     Sales Contract dated April 4, 2009, between QiGi and Qingdao Jingweitiandi Electronics Co., Ltd.;
 
    109.     Sales Contract dated April 4, 2009, between QiGi and Nanjing Lanbiao Digital Technology Co., Ltd.;
 
    110.     Sales Contract dated April 4, 2009, between QiGi and Nanjing Chaoyue Tongxun Equipment Co., Ltd.;
 
    111.     Sales Contract dated April 4, 2009, between QiGi and Kunming Hengshen Tongxun Co., Ltd.;
 
    112.     Sales Contract dated April 6, 2009, between QiGi and Jinan Depu Tongxing Equipment Co., Ltd.;
 
    113.     Sales Contract dated April 6, 2009, between QiGi and Huizhou Yicheng Technology Co., Ltd.;
 
    114.     Sales Contract dated April 7, 2009, between QiGi and Henan Ruite Tongxun Equipment Co., Ltd.;
 
    115.     Sales Contract dated April 8, 2009, between QiGi and Hangzhou Yongquan Maoyi Co., Ltd.;
 
    116.     Sales Contract dated April 8, 2009, between QiGi and Guangzhou Chuangwei Electronics (CHINESE CHARACTERS) Technology Co., Ltd.;
 
    117.     Sales Contract dated April 8, 2009, between QiGi and Hanzhou Renxing Digital Technology Co., Ltd.;
 
    118.     Sales Contract dated April 8, 2009, between QiGi and Foshan Nanhaitianjun Electronics Co., Ltd.;
 
    119.     Sales Contract dated April 8, 2009, between QiGi and Dongguang Lianyu Electronics Co., Ltd.;
 
    120.     Sales Contract dated April 8, 2009, between QiGi and Dalian Sanheweiye Digital Technology Co., Ltd.;

 

 


 

             
Section Number   Specific Disclosure
 
           
 
    121.     Sales Contract dated April 8, 2009, between QiGi and; Beijing Bode Technology Service Co., Ltd.
 
    122.     Sales Contract dated April, 2009, between QiGi and Chengdu Huadao Shangmao Co., Ltd.;
 
    123.     Sales Contract dated April, 2009, between QiGi and Changde Yongxiang Maoyi Co., Ltd.;
 
    124.     Sales Contract dated April, 2009, between QiGi and Wuhan Zhongguang Tongxing Company;
 
    125.     Sales Contract dated April, 2009, between QiGi and Shandong Zhonglu Tongxing Technology Co., Ltd.;
 
    126.     Sales Contract dated April, 2009, between QiGi and Zhengzhou Ridianhua Information Technology Co., Ltd.;
 
    127.     Sales Contract dated April, 2009, between QiGi and Yunan Dianxing Co., Ltd. Information Technology (CHINESE CHARACTERS) Company;
 
    128.     Machinery Purchase Contract dated April 15, 2009, between QiGi and Zhejiang Rongxing Technology Development Co., Ltd.;
 
    129.     Sales Contract dated April 16, 2009, between QiGi and Guangzhou Technology Tongxing Technology Co., Ltd.;
 
    130.     Machinery Purchase Contract dated April 16, 2009, between QiGi and Hangzhou Guangyuan Technology Co., Ltd.;
 
    131.     Machinery Purchase Contract dated April 18, 2009, between QiGi and Guangdong Hexing Technology Co., Ltd.;
 
    132.     Sales Contract dated May 4, 2009, between QiGi and Tianjing Meiritong Shangmao Co., Ltd.;
 
    133.     Sales Contract dated May 5, 2009, between QiGi and Changsha Jianfengchaoliu Tongxun Equipment Company;
 
    134.     Sales Contract dated May 6, 2009, between QiGi and Shenzhen Lindawei Electronics Technology Shiye Co., Ltd. ;
 
    135.     Sales Contract dated May 6, 2009, between QiGi and Chongming Yali Tongxun Technology Co., Ltd.;
 
    136.     Sales Contract dated May 7, 2009, between QiGi and Jinan Depu Tongxing Equipment Co., Ltd.;

 

 


 

             
Section Number   Specific Disclosure
 
           
 
    137.     Sales Contract dated May 7, 2009, between QiGi and Guangzhou Yuanchang Maoyi Co., Ltd.;
 
    138.     Sales Contract dated May 7, 2009, between QiGi and Chengdu Hanbo Shangmao Co., Ltd.
 
    139.     Sales Contract dated May 8, 2009, between QiGi and Chongqing Bada Electronics Constructino Co., Ltd.;
 
    140.     Sales Contract dated May 8, 2009, between QiGi and Taiyuan Tianfuweiye Tongxun Machinery Co., Ltd.;
 
    141.     Machinery Purchase Contract dated May 10, 2009, between QiGi and Shenzhen Zhongke Tianbo Technology Co., Ltd.;
 
    142.     Machinery Purchase Contract dated May 11, 2009, between QiGi and Zhejiang Rongxing Technology Development Co., Ltd.;
 
    143.     Sales Contract dated May 11, 2009, between QiGi and Shenzhen Jingyushikong Tongxun Equipment Co., Ltd.;
 
    144.     Sales Contract dated May 12, 2009, between QiGi and Shenzhen Quanqi Digital Co., Ltd.;
 
    145.     Machinery Purchase Contract dated May 12, 2009, between QiGi and Guangzhou Technology Tongxing Technology Co., Ltd.;
 
    146.     Machinery Purchase Contract dated May 12, 2009, between QiGi and Hangzhou Guangyuan Technology Co., Ltd.;
 
    147.     Sales Contract dated May 12, 2009, between QiGi and Wuhan Zhongyu Electronics Co., Ltd.;
 
    148.     Sales Contract dated May 12, 2009, between QiGi and Shanghai E-te Digital Co., Ltd.;
 
    149.     Sales Contract dated May 13, 2009, between QiGi and Yunan Geling Digital Technology Co., Ltd.;
 
    150.     Sales Contract dated May 13, 2009, between QiGi and Beijing Yihengteng Technology Development Co., Ltd.;
 
    151.     Sales Contract dated May 14, 2009, between QiGi and Huizhou Yicheng Technology Co., Ltd.;
 
    152.     Sales Contract dated May 14, 2009, between QiGi and Shijiazhuang Tianwen Tongxun Machinery Co., Ltd.;
 
    153.     Sales Contract dated May 15, 2009, between QiGi and Nanjing Runlv Electronics Co., Ltd.;

 

 


 

             
Section Number   Specific Disclosure
 
           
 
    154.     Sales Contract dated May 15, 2009, between QiGi and Wuhan Jiayuan Digital Technology Co., Ltd.;
 
    155.     Sales Contract dated May 18, 2009, between QiGi and Nanjing Lanbiao Digital Technology Co., Ltd.;
 
    156.     Sales Contract dated May 18, 2009, between QiGi and Hangzhou Yongquan Maoyi Co., Ltd.;
 
    157.     Sales Contract dated May i9, 2009, between QiGi and Guangzhou Chuangwei Electronics (CHINESE CHARACTERS) Technology Co., Ltd.;
 
    158.     Sales Contract dated May 20, 2009, between QiGi and Foshan Nanhai Tianjun Electronics Co., Ltd.;
 
    159.     Sales Contract dated May 22, 2009, between QiGi and Henan Jielong Tongxing Technology Co., Ltd.;
 
    160.     Order Form dated May 22, 2009, between QiGi and Dexing Intelligence Mobile Phone Technology ( Beijing ) Co., Ltd.;
 
    161.     Sales Contract dated May 25, 2009, between QiGi and Guangzhou Xiangjin Digital Technology Co., Ltd.;
 
    162.     Sales Contract dated May 28, 2009, between QiGi and Changde Yongxiang Maoyi Co., Ltd.;
 
    163.     Sales Contract dated May 28, 2009, between QiGi and Langfang Langbo Tongxun Electronics Technology Co., Ltd.;
 
    164.     Sales Contract dated May 29, 2009, between QiGi and Chengdu Jiashi Shiye Jingchukou Maoyi Co., Ltd.;
 
    165.     Sales Contract ated May 29, 2009, between QiGi and Xingqianggongzhong Information Chanye Co., Ltd.;
 
    166.     Sales Contract dated June 1, 2009, between QiGi and Henan Zhongzheng Tongxun Co., Ltd.;
 
    167.     Sales Contract dated June 1, 2009, between QiGi and Hangzhou Jingpusheng Technology Co., Ltd.;
 
    168.     Sales Contract dated June 2, 2009, between QiGi and Kunming Bangsheng Technology Co., Ltd.
 
    169.     Machinery Purchase Contract dated June 3, 2009, between QiGi and Zhejiang Rongxing Technology Development Co., Ltd.;

 

 


 

             
Section Number   Specific Disclosure
 
           
 
    170.     Order Form dated June 4, 2009, between QiGi and Dexing Intelligence Mobile Phone Technology (HK) Co., Ltd.;
 
    171.     Sales Contract dated June 5, 2009, between QiGi and Kunming Wuyao Tongxun Equipment Co., Ltd.;
 
    172.     Machinery Purchase Contract dated June 7, 2009, between QiGi and Shenzhen Zhongketianbo Technology Co., Ltd.;
 
    173.     Sales Contract dated June 8, 2009, between QiGi and Nanning Hengrongchang Shangmao Co., Ltd.;
 
    174.     Sales Contract dated June 8, 2009, between QiGi and Rizhao Taitong Electronics Co., Ltd.;
 
    175.     Machinery Purchase Contract dated June 8, 2009, between QiGi and Hangzhou Guangyuan Technology Co., Ltd.;
 
    176.     Machinery Purchase Contract dated June 9, 2009, between QiGi and Guangzhou Technology Tongxing Technology Co., Ltd.;
 
    177.     Sales Contract dated June 9, 2009, between QiGi and Zhuhai Sankeng Electronics Technology Co., Ltd.;
 
    178.     Sales Contract dated June 10, 2009, between QiGi and Zhuhai Shunlian Electronics Co., Ltd.;
 
    179.     Sales Contract dated June 10, 2009, between QiGi and Chongqing Kemei Tongxun Equipment Co., Ltd.;
 
    180.     Sales Contract dated June 11, 2009, between QiGi and Zhenzhou Yuguang Shangmao Company;
 
    181.     Sales Contract dated June 11, 2009, between QiGi and Shijiazhuang Tianwen Tongxun Machinery Co., Ltd.;
 
    182.     Sales Contract dated June 12, 2009, between QiGi and Beijing Yihengteng Technology Development Co., Ltd.;
 
    183.     Sales Contract dated June 15, 2009, between QiGi and Qingdao Jingweitiandi Electronics Co., Ltd.;
 
    184.     Sales Contract dated June 15, 2009, between QiGi and Shanghai Situman Dianxing Technology Co., Ltd.;
 
    185.     Sales Contract dated June, 2009, between QiGi and Quanzhou Huachen Dianxun Maoyi Co., Ltd.;
 
    186.     Sales Contract dated June 18, 2009, between QiGi and Guangzhou Hengyoumi Maoyi Co., Ltd.

 

 


 

             
Section Number   Specific Disclosure
 
           
 
    187.     Sales Contract dated June 19, 2009, between QiGi and Guangzhou Yuanchang Maoyi Co., Ltd.;
 
    188.     Sales Contract dated June, 2009, between QiGi and Fujian Huaqiao Shiye Group Company;
 
    189.     Sales Contract dated June, 2009, between QiGi and Changzhou Yuntuo Shangmao Co., Ltd.;
 
    190.     Sales Contract dated June 22, 2009, between QiGi and Changsha Zhongtiantong Technology Co., Ltd.;
 
    191.     Sales Contract dated June 22, 2009, between QiGi and Nanjing Yingshui Tongxun Co., Ltd.;
 
    192.     Sales Contract dated June 23, 2009, between QiGi and Shanghai Yitianxia Technology Co., Ltd.;
 
    193.     Sales Contract dated June, 2009, between QiGi and Shenzhen Chuangfeier Electronics Technology Co., Ltd.;
 
    194.     Sales Contract dated June, 2009, between QiGi and Shanghai Longding Shangwu Co., Ltd.;
 
    195.     Sales Contract dated June 26, 2009, between QiGi and Shenzhen Jingbaolong Digital Technology Co., Ltd.;
 
    196.     Sales Contract dated June 26, 2009, between QiGi and Shishi Fanhua Dianxun Maoyi Co., Ltd.;
 
    197.     Sales Contract dated June 26, 2009, between QiGi and Tianjing Chiwu Tongxun Technology Co., Ltd.;
 
    198.     Sales Contract dated June 29, 2009, between QiGi and Wuhan Bohong Information Technology Co., Ltd.;
 
    199.     Sales Contract dated June 29, 2009, between QiGi and Shanxi Fanggeng Technology Development Co., Ltd.;
 
    200.     Sales Contract dated June 30, 2009, between QiGi and Tianjin Tiandiweiye Technology Co., Ltd.;
 
    201.     Sales Contract dated June, 2009, between QiGi and Shandong Yiwei Information Technology Co., Ltd.;
 
    202.     Sales Contract dated June, 2009, between QiGi and Beijing Taihang Jiye Technology Development Co., Ltd.;
 
    203.     Sales Contract dated July 1, 2009, between QiGi and Chongqing Zhangshangqiankun Digital Technology Co., Ltd.;

 

 


 

             
Section Number   Specific Disclosure
 
           
 
    204.     Sales Contract dated July 1, 2009, between QiGi and Dalian Sanheweiye Digital Technology Co., Ltd.;
 
    205.     Sales Contract dated July 2, 2009, between QiGi and Beijing Bode Technology Service Co., Ltd. ;
 
    206.     Machinery Purchase Contract dated July 2, 2009, between QiGi and Hangzhou Guanyuan Technology Co., Ltd.;
 
    207.     Machinery Purchase Contract dated July 3, 2009, between QiGi and Hangzhou Guanyuan Technology Co., Ltd.;
 
    208.     Sales Contract ated July 3, 2009, between QiGi and Dongguang Lianyu Electronics Co., Ltd.;
 
    209.     Sales Contract dated July, 2009, between QiGi and Guangzhou Chuangwei Electronics (CHINESE CHARACTERS) Technology Co., Ltd.;
 
    210.     Sales Contract dated July, 2009, between QiGi and Hangzhou Yongquan Maoyi Co., Ltd.;
 
    211.     Sales Contract dated July, 2009, between QiGi and Nanjing Chaoyue Tongxun Equipment Co., Ltd.;
 
    212.     Sales Contract dated July, 2009, between QiGi and Wuhan Feiyang Technology Co., Ltd.;
 
    213.     Sales Contract dated July, 2009, between QiGi and Chengdu Gongling Shengan Information Systems Co., Ltd.;
 
    214.     Sales Contract dated July 6, 2009, between QiGi and Hanzhou Renxingshu Technology Co., Ltd. ;
 
    215.     Sales Contract dated July 6, 2009, between QiGi and Hefei Jiada Tongxun Technology Co., Ltd. ;
 
    216.     Sales Contract dated July 7, 2009, between QiGi and Huizhou Yicheng Technology Co., Ltd.;
 
    217.     Machinery Purchase Contract dated July 7, 2009, between QiGi and Zhejiang Rongxing Technology Development Co., Ltd.;
 
    218.     Sales Contract dated July 8, 2009, between QiGi and Henan Ruite Tongxun Equipment Co., Ltd.;
 
    219.     Sales Contract dated July 8, 2009, between QiGi and Henan Depu Tongxing Equipment Co., Ltd. ;

 

 


 

             
Section Number   Specific Disclosure
 
           
 
    220.     Sales Contract dated July 9, 2009, between QiGi and Kunming Hengsheng Tongxun Co., Ltd.;
 
    221.     Sales Contract dated July 9, 2009, between QiGi and Nanjing Lanbiao Digital Technology Co., Ltd.;
 
    222.     Sales Contract dated July 10, 2009, between QiGi and Shanghai Liangzenggongmao Co., Ltd.;
 
    223.     Sales Contract dated July 10, 2009, between QiGi and Qingdao Jingweitiandi Electronics Co., Ltd.;
 
    224.     Sales Contract dated July 13, 2009, between QiGi and Shenzhen Quangqi Digital Co., Ltd.;
 
    225.     Machinery Purchase Contract dated July 13, 2009, between QiGi and Guangzhou Technology Tongxing Technology Co., Ltd.
 
    226.     Sales Contract dated July 13, 2009, between QiGi and Shanghai Shoushang Intelligence Tongxun Equipment Company;
 
    227.     Sales Contract dated July 15, 2009, between QiGi and Shenzhen Guoxing Tongxun Technology Co., Ltd.;
 
    228.     Sales Contract dated July 15, 2009, between QiGi and Suzhou Jingpai Mobile Phone Internet Co., Ltd.;
 
    229.     Sales Contract dated July 16, 2009, between. QiGi and Xiamen Huidesheng Maoyi Co., Ltd.;
 
    230.     Sales Contract dated July 16, 2009, between QiGi and Xuzhou Sanjiu Intelligence Tongxun Co., Ltd.;
 
    231.     Sales Contract dated July 18, 2009, between QiGi and Yanhu Tinghu District Qiandao Tongxun Machinery Co., Ltd.;
 
    232.     Sales Contract dated July 20, 2009, between QiGi and Yiwu Daoye Internet Technology Co., Ltd.;
 
    233.     Sales Contract dated July 20, 2009, between QiGi and Kunming Xingkangcheng Information Technology Co., Ltd.;
 
    234.     Sales Contract dated July 21, 2009, between QiGi and Beijing Mobile Xingzhi Tongxun Technology Co., Ltd.;
 
    235.     Sales Contract dated July 21, 2009, between QiGi and Taiyuan Huilin Tongxing Information Technology Co., Ltd.;

 

 


 

             
Section Number   Specific Disclosure
 
           
 
    236.     Machinery Purchase Contract dated August 2, 2009, between QiGi and Shenzhen Zhongke Tianbo Technology Co., Ltd.;
 
    237.     Machinery Purchase Contract dated August 3, 2009, between QiGi and Zhejiang Rongxing Technology Development Co., Ltd.;
 
    238.     Sales Contract dated August 4, 2009, between QiGi and Chengdu Huadao Shangmao Co., Ltd.;
 
    239.     Sales Contract dated August 4, 2009, between QiGi and Guangzhou Zhongxian Electronics Technology Co., Ltd. ;
 
    240.     Sales Contract dated August 4, 2009, between QiGi and Wuxi Intelligence Mobile Phone Technology Service Company;
 
    241.     Machinery Purchase Contract dated August 5, 2009, between QiGi and Guangzhou (CHINESE CHARACTERS) Technology Tongxing Technology Co., Ltd.;
 
    242.     Sales Contract dated August, 2009, between QiGi and Xuzhou Yitong Intelligence Tongxun Co., Ltd.;
 
    243.     Sales Contract dated August, 2009, between QiGi and Chongqing Feihong Mobile Tongxun Machinery Co., Ltd.;
 
    244.     Sales Contract dated August, 2009, between QiGi and Taiyuan Tianfuweiye Tongxun Machinery Co., Ltd.;
 
    245.     Sales Contract dated August, 2009, between QiGi and Shanghai E-te Digital Co., Ltd.;
 
    246.     Sales Contract dated August, 2009, between QiGi and Wuhan Jiayuan Digital Technology Co., Ltd.;
 
    247.     Sales Contract dated August, 2009, between QiGi and Nanjing Lanbiao Digital Technology Co., Ltd.;
 
    248.     Sales Contract dated August, 2009, between QiGi and Foshan Nanhaitianjun Electronics Co., Ltd.;
 
    249.     Sales Contract dated August, 2009, between QiGi and Zhenzhou Ridianhua Information Technology Co., Ltd.;
 
    250.     Sales Contract dated August, 2009, between QiGi and Yunnan Dianxing Co., Ltd. Information Technology (CHINESE CHARACTERS) Company;

 

 


 

             
Section Number   Specific Disclosure
 
           
 
    251.     Sales Contract dated August 7, 2 009, between QiGi and Jinan Depu Tongxing Equipment Co., Ltd.;
 
    252.     Sales Contract dated August 7, 2009, between QiGi and Dingmingyali Tongxun Technology Co., Ltd.;
 
    253.     Sales Contract dated August 10, 2009, between QiGi and Shenzhen Lindawei Electronics Technology Shiye Co., Ltd. ;
 
    254.     Sales Contract dated August 10, 2009, between QiGi and Changshajianchaoliu Tongxun Equipment Company;
 
    255.     Sales Contract dated August 13, 2009, between QiGi and Dianjin Meiritong Shangmao Co., Ltd.;
 
    256.     Sales Contract dated August 17, 2009, between QiGi and Shenzhen Jinyushikong Tongxun Equipment Co., Ltd.;
 
    257.     Sales Contract dated August 19, 2009, between QiGi and Shenzhen Quanqi Digital Co., Ltd.;
 
    258.     Sales Contract dated August 19, 2009, between QiGi and Wuhan Zhongyu Electronics Co., Ltd.;
 
    259.     Sales Contract dated August 21, 2009, between QiGi and Yunnan Gelin Digital Technology Co., Ltd.;
 
    260.     Sales Contract dated August 21, 2009, between QiGi and Beijing Yihengteng Technology Development Co., Ltd.;
 
    261.     Sales Contract dated August 24, 2009, between QiGi and Huizhou Yicheng Technology Co., Ltd.;
 
    262.     Sales Contract dated August 27, 2009, between QiGi and Guangzhou Chuangwei Electronics (CHINESE CHARACTERS) Technology Co., Ltd.;
 
    263.     Sales Contract dated August 28, 2009, between QiGi and Henan Jielong Tongxing Technology Co., Ltd.;
 
    264.     Sales Contract dated August 28, 2009, between QiGi and Guangzhou Xiangjing Digital Technology Co., Ltd.;
 
    265.     Sales Contract dated August 31, 2009, between QiGi and Changde Yongxiang Maoyi Co., Ltd.;
 
    266.     Sales Contract dated August 31, 2009, between QiGi and Hunan Yingyuan Zhongxing Information Technology Co., Ltd.;

 

 


 

             
Section Number   Specific Disclosure
 
           
 
    267.     Sales Contract dated September 1, 2009, between QiGi and Yunan Dianxing Co., Ltd.;
 
    268.     Sales Contract dated September 1, 2009, between QiGi and Shanghai Yitianxia Technology Co., Ltd.;
 
    269.     Sales Contract dated September 2, 2009, between QiGi and Shenzhen Jingbaolong Digital Technology Co., Ltd.;
 
    270.     Machinery Purchase Contract dated September 2, 2009, between QiGi and Zhejiang Rongxing Technology Development Co., Ltd.;
 
    271.     Machinery Purchase Contract dated September 2, 2009, between QiGi and Shenzhen Zhongketianbo Technology Co., Ltd.;
 
    272.     Machinery Purchase Contract dated September 3, 2009, between QiGi and Shenzhen Zhongketianbo Technology Co., Ltd.;
 
    273.     Sales Contract dated September, 2009, between QiGi and Shenzhen Chuangfeier Electronics Technology Co., Ltd.;
 
    274.     Sales Contract dated September, 2009, between QiGi and Nanjing Yingshui Tongxun Co., Ltd.;
 
    275.     Sales Contract dated September, 2009, between QiGi and Guangzhou HengmiMaoyi Co., Ltd.;
 
    276.     Sales Contract dated September, 2009, between QiGi and Beijing Hanmingtongxing Technology Co., Ltd.;
 
    277.     Sales Contract dated September, 2009, between QiGi and Kunming Zhaosheng Technology Co., Ltd.;
 
    278.     Sales Contract dated September, 2009, between QiGi and Kunming Wuyao Tongxun Equipment Co., Ltd. ;
 
    279.     Sales Contract dated September, 2009, between QiGi and Dongguang Lianyu Electronics Co., Ltd.;
 
    280.     Sales Contract dated September, 2009, between QiGi and Shijiazhuang Tianwen Tongxun Machinery Co., Ltd.
 
    281.     Sales Contract dated September, 2009, between QiGi and Changzhou Yuntuo Shangmao Co., Ltd.;
 
    282.     Sales Contract dated September, 2009, between QiGi and Chengdu Jiashi Shiye Jingchukou Maoyi Co., Ltd.;

 

 


 

             
Section Number   Specific Disclosure
 
           
 
    283.     Sales Contract dated September, 2009, between QiGi and Zhengzhou Ridianhua Information Technology Co., Ltd.;
 
    284.     Sales Contract dated September, 2009, between QiGi and Xingqianggongzhong Information Chanye Co., Ltd.;
 
    285.     Sales Contract dated September, 2009, between QiGi and Langzhou Bolang Tongxun Electronics Technology Co., Ltd.;
 
    286.     Sales Contract dated September 4, 2009, between QiGi and Shanghai Longdingshangwu Co., Ltd.;
 
    287.     Sales Contract dated September 4, 2009, between QiGi and Changsha Zhongtian Tongxun Technology Co., Ltd.;
 
    288.     Sales Contract dated September 4, 2009, between QiGi and Shanghai Longding Shangwu Co., Ltd.;
 
    289.     Sales Contract dated September 7, 2009, between QiGi and Guangzhou Yuanchang Maoyi Co., Ltd.;
 
    290.     Machinery Purchase Contract dated September 8, 2009, between QiGi and Guangzhou Technology Tongxing Technology Co., Ltd.;
 
    291.     Advertising Information Distribution Contract dated September 8, 2009, between QiGi and Beijing Chaomeng Internet Xingkemao Co., Ltd.;
 
    292.     Sales Contract dated September 9, 2009, between QiGi and Quanzhou Huachendianxun Maoyi Co., Ltd.;
 
    293.     Sales Contract dated September 9, 2009, between QiGi and Qingdao Jingweitiandi Electronics Co., Ltd.;
 
    294.     Machinery Purchase Contract dated. September 10, 2009, between QiGi and Zhejiang Rongxing Technology Development Co., Ltd.;
 
    295.     Machinery Purchase Contract dated September 10, 2009, between QiGi and Shenzhen Zhongketianbo Technology Co., Ltd.;
 
    296.     Sales Contract dated September 11, 2009, between QiGi and Hefei Jiada Tongxun Technology Co., Ltd.;
 
    297.     Sales Contract dated September 11, 2009, between QiGi and Xiamen Shihuidesheng Maoyi Co., Ltd.;

 

 


 

             
Section Number   Specific Disclosure
 
           
 
    298.     Sales Contract dated September 14, 2009, between QiGi and Chongqing Tiandisheyuan Shangmao Co., Ltd.;
 
    299.     Sales Contract dated September 14, 2009, between QiGi and Henan Zhongzheng Tongxun Co., Ltd.;
 
    300.     Sales Contract dated September 16, 2009, between QiGi and Hangzhou Jingpusheng Technology Co., Ltd.;
 
    301.     Sales Contract dated September 17, 2009, between QiGi and Nanning Hengrongchang Shangmao Co., Ltd.;
 
    302.     Sales Contract dated September 17, 2009, between QiGi and Rizhao Taitong Electronics Co., Ltd.;
 
    303.     dated September 20, 2009, between QiGi and Zhejiang Rongxing Technology Development Co., Ltd.;
 
    304.     Sales Contract dated September 21, 2009, between QiGi and Zhuhai Sankeng Electronics Technology Co., Ltd.;
 
    305.     Sales Contract dated September 21, 2009, between QiGi and Chongqing Kemei Tongxun Equipment Co., Ltd.;
 
    306.     Sales Contract dated September 23, 2009, between QiGi and Zhengzhou Yuguang Shangmao Company;
 
    307.     Sales Contract dated September 25, 2009, between QiGi and Beijing Yihengteng Technology Development Co., Ltd.;
 
    308.     Sales Contract dated September 28, 2009, between QiGi and Shanghai Situmandianxing Technology Co., Ltd.;
 
    309.     Sales Contract dated September 28, 2009, between QiGi and Fujian Huaqiao Shiye Group Company;
 
    310.     Sales Contract dated September 29, 2009, between QiGi and Shandongzhonglu Tongxing Technology Co., Ltd.;
 
    311.     Sales Contract dated September 30, 2009, between QiGi and Tianjin Tiandiweiye Technology Co., Ltd.

 

 


 

     
Section Number   Specific Disclosure
 
   
Section 10.2
  nil
Section 10.4
  nil
Section 11.1
  nil
Section 11.3
  nil
Section 13
  nil
Section 15
  nil
Section 16.1
  nil
Section 16.4
  nil
Section 16.7
  All the employees of the Domestic Company have participated in the mandatory social insurance scheme and the housing funds scheme.
Section 17
  nil
Section 18
  nil
Section 22
  nil
Section 23.1
  nil
Section 23.2
  nil

 

 


 

SCHEDULE 6
REPRESENTATIONS AND WARRANTIES OF
THE PURCHASER
The Purchaser represents and warrants to the Seller that the statements contained in this Schedule 6 attached hereto are true, correct and complete with respect to such Purchaser as of the Closing.
1.  
Authorization .
The Purchaser has full power, authority and legal capacity to enter into, deliver and perform the Transaction Documents. The Transaction Documents to which the Purchaser is a party, when executed and delivered by such Purchaser, will constitute valid and legally binding obligations of the Purchaser, enforceable in accordance with their terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, and any other laws of general application affecting enforcement of creditors’ rights generally, and as limited by laws relating to the availability of a specific performance, injunctive relief, or other equitable remedies, or (ii) to the extent the indemnification provisions contained in the Shareholders’ Agreement may be limited by applicable securities laws.
2.  
Compliance with other Instruments .
The execution, delivery and performance by the Purchaser of the Transaction Documents does not and will not contravene, breach or violate the terms of any agreement, document or instrument to which such Purchaser is a party or by which any of such Purchaser ‘s assets or properties are bound.
3.  
Disclosure of Information .
The Purchaser has had an opportunity to discuss the Group Companies’ business, management, financial affairs and the terms and conditions of the offering of the Shares with the Group Companies’ management and has had an opportunity to review the Group Companies’ facilities. The foregoing, however, does not limit or modify the representations and warranties of the Warrantor in Section 4 of this Agreement, or the right of the Purchaser to rely thereon save as set forth in the Disclosure Schedule.
4.  
Purchase Entirely for Own Account .
This Agreement is made with the Purchaser in reliance upon the Purchaser’s representation to the Seller, which by the Purchaser’s execution of this Agreement, the Purchaser hereby confirms, that the Shares to be acquired by the Purchaser will be acquired for investment for the Purchaser’s own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and that the Purchaser has no present intention of selling, granting any participation in, or otherwise distributing the same. By executing this Agreement, the Purchaser further represents that the Purchaser does not presently have any contract, undertaking, agreement or arrangement with any Person to sell, transfer or grant participations to such Person or to any third Person, with respect to any of the Shares. The Purchaser has not been formed for the specific purpose of acquiring the Shares.

 

 


 

SCHEDULE 7
CAPITALIZATION TABLE
                     
    Shareholders            
Shareholders   (Class B Ordinary            
(Ordinary Shares)   Shares)   Number     Percentage  
 
                   
 
        96       96 %
 
                   
China Techfaith Wireless Communication Technology Limited
                   
 
                   
 
  China Techfaith Wireless Communication Technology Limited     4       4 %
 
                   
Total
        100       100 %

 

 


 

EXHIBIT A
RESTATED ARTICLES
(attached)

 

 

Exhibit 4.16
Shareholders’ Agreement
among
Techfaith Wireless Communication Technology (Hangzhou) Ltd.
and
Techfaith Intelligent Handset Technology (Beijing) Ltd.
and
Beijing E-Town International Investment & Development Co., Ltd.
on
Incorporation of a Joint Venture Company

 

 


 

Shareholders’ Agreement
This Shareholders’ Agreement (the “Agreement”) is made and entered into this day of April 22, 2011 in Beijing, the People’s Republic of China (excluding the Hong Kong Special Administrative Region, the Macao Special Administrative Region, and Taiwan area for purpose of the Agreement, hereinafter referred to as the “PRC”) by and among the following parties:
1.  
Techfaith Wireless Communication Technology (Hangzhou) Ltd., a limited liability company duly incorporated and validly existing under the laws of the PRC, with its domicile at the podium building of Building 1, No. 4028 South Ring Road, Binjiang District, Hangzhou, its registration number of business license for enterprise legal person being 330100400006332, and its legal representative being Wang Zhongbao (hereinafter referred to as “Party A”);
2.  
Techfaith Intelligent Handset Technology (Beijing) Ltd., a limited liability company duly incorporated and validly existing under the laws of the PRC, with its domicile at Building 1, No. 13 Yong Chang North Road, Beijing Economic-Technological Development Area (Yizhuang), Beijing, its registration number of business license for enterprise legal person being 110000410270278, and its legal representative being Dong Deyou (hereinafter referred to as “Party B”); and
3.  
Beijing E-Town International Investment & Development Co., Ltd., a limited liability company duly incorporated and validly existing under the laws of the PRC, with its domicile at Room 405, No. 10 Hongda North Road, Beijing Economic-Technological Development Area, Beijing, its registration number of business license for enterprise legal person being 10302011626480, and its legal representative being Zhao Guangyi (hereinafter referred to as “Party C”).
Party A, Party B, and Party C are collectively referred to as “a Party” individually, and as “the Parties” collectively, and a Party’s opposite parties are referred to as the “other Parties”.
WHEREAS,
For the purposes of actively responding to the call of the Action Plan for Stimulating the Development of Southern Area of the City formulated by Beijing Municipal Government and building a new area of modern manufacturing industry in the southern area, the Parties intend to start the Techfaith High-end Manufacture Project in Daxing District, Beijing. The project will make full use of the industrial and resource advantages of Beijing, Daxing and Beijing Economic-Technological Development Area, combine excellent product designs with advanced production lines, and gather manufacturers of accessories and parts so as to build Daxing District into the largest manufacturing base of high-end smart mobile terminal products such as smart mobile phones and tablet computers in China in three to five years and an advanced manufacturing center with an output value of RMB tens of billions.

 

 


 

NOW THEREFORE, the Parties agree on the establishment of a joint venture company by joint investment through friendly consultations as follows:
1.  
Representation and Warranties
Each Party represents and warrants that the following representations and warranties made by it are true and accurate:
1.1  
It did not participate in any fraudulent activities that will cause significant adverse effects on any matters under the Agreement or on the Other Parities;
1.2  
The Parties guarantee that their signing and performance of the Agreement does not violate any existing applicable laws of the PRC, any existing provisions of any Chinese government department, any existing judgment, ruling or decision of any court, arbitral tribunal or administrative department, any of their corporate documents, or any agreement, license or any other document binding upon them, made when or before the Agreement is executed; and
1.3  
The parties guarantee that they are not subjects of dissolution, liquidation, or bankruptcy, did not and will not distribute their assets among their creditors and/or shareholders for the purpose of cease of their operations; they have not received any administrative order on, filed any application for, adopted any resolution on, or convened any meeting for dissolution, liquidation, or bankruptcy; and no event that can or will cause the filing of an application for any abovementioned dissolution, liquidation, or bankruptcy of them according to any applicable laws, regulations, or policies has occurred.
2.  
Incorporation of the Joint Venture Company
2.1  
The Parties agree that they will incorporate a joint venture company in accordance with the Company Law of the People’s Republic of China , other relevant laws and regulations and the provisions in this Agreement as soon as possible after the execution of the Agreement.
2.2  
The joint venture company is a limited liability company to be incorporated in Daxing District, Beijing under the laws of the PRC.
3.  
Business Scope and Term of the Joint Venture Company
3.1  
The business scope of the joint venture company covers the development and production of mobile communication terminal equipment; manufacture of mobile phones, base stations, exchange equipment, and digital-set system equipment of mobile communication systems (including GSM, CDMA, DCS1800, DECT, and IMT2000); transfer of self-owned technology, technological development, technical consultations; and sales of self-made products.
3.2  
The Parities shall make joint efforts to appropriately expand the business scope of the joint venture company according to its business development needs in accordance with relevant laws and regulations of the PRC through friendly consultations.

 

 


 

3.3  
The operating period of the joint venture company under the Agreement shall be thirty (30) years.
4.  
Registered Capital of the Joint Venture Company
4.1  
Registered capital. The registered capital of the joint venture company under the Agreement shall be RMB five hundred million (RMB 500,000,000).
4.2  
Capital contribution. The contribution to the registered capital shall be made in four installments. In the first installment, Party A and Party C shall make contribution to the registered capital in monetary form; in the second installment, Party B shall make contribution to the registered capital with its land-use right the value of which is shalll be the evaluated price accepted by the Parties, and the deficiency (if any) of the value of the land-use right shall be made up by Party B in monetary form. The evaluation of the land-use right shall be conducted by reference to the cost price paid by Party B for acquiring the land-use right by a qualified assets evaluation company that is engaged by the joint venture company and recognized by the Parties and the aforementioned cost price shall include and be limited to the sum of the transaction price as well as relevant taxes and charges that have been paid by Party B for acquiring the land-use right and can be verified by Party B by presenting relevant transaction evidences such as the invoice; in the third installment, Party C shall make contribution to the registered capital in monetary form; and in the fourth installment, Party A and Party C shall make contribution to the registered capital in monetary form.
4.3  
Proportion of equity. Party A shall hold 49%, Party B 11%, and Party C 40% of the shares of the joint venture company.
4.4  
Amount (unit: RMB ten thousand), time and form of the capital contributions are as follows:
                 
Name of Shareholder   Party A   Party B   Party C   Total
Subscribed capital contribution
  24,500   5,500   20,000   50,000
Ratio of contribution
  49%   11%   40%   100%
The first installment
               
Amount of capital contribution
  9,000       6,000   15,000
Form of capital contribution
  In monetary form       In monetary form    
Time of capital contribution
  Prior to April 30, 2011       Prior to April 30, 2011    

 

 


 

                 
Name of Shareholder   Party A   Party B   Party C   Total
The second installment
               
Amount of capital contribution
      5,500       5,500
Form of capital contribution
      Land-use right, the deficiency of which shall be made up in monetary form        
Time of capital contribution
      Prior to November 30, 2011        
The third installment
               
Amount of capital contribution
          3,667   3,667
Form of capital contribution
          In monetary form    
Time of capital contribution
          Prior to December 30, 2011    
The fourth installment
               
Amount of capital contribution
  15,500       10,333   25,833
Form of capital contribution
  In monetary form       In monetary form    
Time of capital contribution
  Prior to April 30, 2013       Prior to April 30, 2013    
5.  
The Shareholders’ Meeting of the Joint Venture Company
5.1  
The shareholders’ meetings shall be composed of all the shareholders and is the authority of the joint venture company. The shareholders’ meetings include regular meetings, which shall be convened yearly by the board of directors and presided over by the chairman of the board of directors, and temporary meetings, which shall be convened upon the decision by the shareholder(s) holding no less than one tenth (1/10) of the voting power or the proposal by no less than one third (1/3) of the directors or supervisors of the joint venture company.
5.2  
The shareholders’ meeting of the joint venture company has the powers and rights to:
1) determine operational guidelines and investment plans;
2) elect and replace the directors and supervisors who are not the employees’ representatives and determine the matters relating to the remuneration of relevant directors and supervisors;

 

 


 

3) review and approve the reports of the board of directors;
4) review and approve the reports of the supervisors;
5) review and approve the annual financial budgetary plans and final accounting plans;
6) review and approve the profit distribution plans and loss make-up plans ;
7) make decisions on increasing or decreasing the registered capital;
8) make decisions on issuing corporate bonds;
9) make decisions on merger, separation, dissolution, liquidation or alteration of organizational form of the joint venture company or on establishment of any branch or subsidiary;
10) modify the articles of association;
11) determine the scope of authority of the chairman and the deputy chairman of the board of directors; and
12) review and approve the equity incentive scheme for the senior management.
5.3  
The shareholders may exercise their voting rights in accordance with the proportions of their capital contributions at shareholders’ meetings. The shareholders’ resolutions shall be approved by shareholder(s) holding more than half of total voting rights, and the resolutions on any of the matters set out in the items 6) to 12) of the section 5.2 hereof shall be approved by shareholder(s) holding more than two thirds of total voting rights.
5.4  
Other matters relating to the shareholders’ meeting’s powers and rights, convening and resolutions shall be specified separately in the articles of association of the joint venture company.
6.  
The Board of Directors of the Joint Venture Company
6.1  
The joint venture company shall establish a board of directors which is the executive body of the joint venture company. The board of directors shall be composed of five (5) directors, of whom two (2) shall be nominated by Party A, one (1) shall be nominated by Party B, and two (2) shall be nominated by Party C.
6.2  
The board of directors shall have one chairman to be nominated by Party A and one deputy chairman to be nominated by Party C, and both the chairman and the deputy chairman shall be elected by the board of directors.
6.3  
In the event of increase or decrease of the share capital of the joint venture company, the number of director(s) to be nominated by each Party shall be determined according to each Party’s shareholding in the joint venture company after such increase or decrease, and the members of the board of directors shall be re-elected.

 

 


 

6.4  
The board of directors of the joint venture company has the powers and rights to:
1) convene shareholders’ meetings and report to them;
2) implement the shareholders’ resolutions;
3) make decisions on the matters relating to operational licensing, being licensed with, transfer of, and acceptance as a transferee of any know-how, patent or trademark;
4) prepare operational plans and investment plans;
5) prepare annual financial budgetary plans and final accounting plans;
6) prepare the profit distribution plans and loss make-up plans;
7) prepare plans on increasing or decreasing the registered capital or issuing corporate bonds;
8) prepare plans on merger, separation, alteration of organizational form of the joint venture company, or dissolution;
9) determine the establishment of internal managementarial organizations and the scope of authority of the senior management;
10) establish basic management systems, including the systems of internal control, finance and remuneration;
11) determine the appointment or dismissal of the general manager nominated by Party A, deputy general manager nominated by Party B and the chief financial officer nominated by Party C and their remuneration as well as the remuneration of the core technicians and business personnel;
12) make decisions on the joint venture company’s investment in, guarantee for, loan to or assets disposal (including transfer, acceptance of assets as the transferee and donation) to any entity, the amount of which shall be no more than RMB 4,000,000 within one year (365 days); and
13) make decisions on the joint venture company’s investment in, guarantee for, loan to or assets disposal (including transfer, acceptance of assets as the transferee and donation) to any entity, the amount of which shall be no more than RMB 4,000,000 within one year (365 days).
6.5  
The meetings of the board of directors of the joint venture company can be duly convened when being attended by more than two thirds (2/3) of the directors.
6.6  
Any resolution of the meeting of the board of directors shall be approved by affirmative votes of more than half (1/2) of the directors, and the resolutions on any of the matters specified in item 13) of the section Article 6.4 hereof shall be approved by affirmative votes of more than two thirds (2/3) of the directors. In the process of voting at any meeting of the board of directors, the one-man-one-vote system shall apply.

 

 


 

6.7  
Other matters relating to the meeting of the board of directors’ powers and rights, convening and resolutions shall be specified in the articles of association of the joint venture company.
7.  
Supervisors of the Joint Venture Company
7.1  
The joint venture company does not establish any board of supervisors and shall have two (2) supervisors, of whom one shall be nominated by Party A and the other shall be nominated by Party C, and the supervisors shall be elected by shareholders’ meeting.
7.2  
The supervisors’ powers and rights shall be specified in the articles of association.
8.  
Senior Management of the Joint Venture Company
8.1  
The joint venture company shall have one (1) general manager who shall be nominated by Party A. The appointment or dismissal of the general manager shall be determined by the board of directors.
8.2  
The joint venture company shall have one (1) deputy general manager who shall be nominated by Party B. The appointment or dismissal of the deputy general manager shall be determined by the board of directors.
8.3  
The joint venture company shall have one (1) chief financial officer, who shall be nominated by Party C. The appointment or dismissal of the chief financial officer shall be determined by the board of directors.
9.  
Share Transfer
The transfer of the shares in the joint venture company held by Party C shall be subject to the administrative measures on government equity investments formulated by the Financial Bureau of Beijing Municipal People’s Government for the commercialization of scientific and technological achievements and overall planning of industrial projects.
10.  
Capital Increase
Upon the resolutions two thirds (2/3) of the shareholders, the joint venture company may increase its registered capital from time to time. The Parties are entitled to contribute to the additional capital preemptively according to their respective proportion of shareholding in the joint venture company upon such increase.
11.  
Distribution of Profits in the Joint Venture Company
The Parties agree that the joint venture company shall distribute its distributable and lawful profits of each fiscal year among the Parties in proportion to their respective shareholding percentages of the shares of the joint venture company according to the profit distribution plan adopted by the shareholders’ meeting.

 

 


 

12.  
Transfer of this Agreement
Without the prior written consent of the other Parities, any Party shall not transfer or assign its rights or obligations hereunder. This Agreement shall be binding upon each Party and its successors and assignees recognized by the other Parties.
13.  
Severability of this Agreement
In the event that any provision of this Agreement is determined to be invalid in whole or in part, other provisions shall be performed by the Parties.
14.  
No Partnership, Cooperative Operation, Joint Operation, or Agency among the Parties
No provision of the Agreement may be deemed as establishment of any partnership, cooperative operation or joint operation among the Parties for any purpose, nor shall any Party be treated as the agent of the other Parties.
15.  
Taxes and Other Expenses
Unless otherwise provided or agreed in this Agreement or by the Parties in writing, each Party shall bear its own taxes and other expenses incurred in the preparation, negotiation, execution and performance of this Agreement.
16.  
Breach and Remedy
16.1  
A Party is in breach of this Agreement if:
i) it breaches its representations or warranties in this Agreement;
ii) it or its representative breaches any provision of this Agreement in the process of exercising its voting power at shareholders’ meeting;
iii) the director(s) nominated by it breaches any provision of this Agreement in the process of exercising its voting power at any meeting of the board of directors;
iv) any other breach occurs, including the breaches specified in sections 17.2.3 (ii) or (iii) hereof; or
v) it breaches the articles of association and harms the interests of the joint venture company or any other shareholder.
16.2  
In the event that a breaching Party fails to effectively remedy the breach within thirty (30) days after receiving the other Parties’ notice, either of the other Parties is entitled to take, at its sole discretion, one or more remedy measures set out below:
i) to suspend the performance of its obligations under this Agreement and resume such performance after the abovementioned breach has been remedied (Notes: such suspended performance does not constitute any failure of delay of performance of any obligations);

 

 


 

ii) to claim for compensation for the losses of the joint venture company or the non-breaching parties according to relevant laws and regulations and the provisions of this Agreement; to require, in its own name and on behalf of the joint venture company, the breaching party to compensate for the losses of the joint venture company;
iii) to require the breaching party hereto to specifically perform its obligations under this Agreement and to apply to the arbitral authority specified in section 23 hereof for making an arbitration award requiring the specific performance of the breaching party’s obligations under this Agreement; and
iv) to issue a written notice to the breaching party to terminate this Agreement promptly.
16.3  
The rights and remedies specified in this Agreement are accumulative without prejudice to a Party’s rights to claim for other rights or remedies according to relevant laws.
17.  
Term, Modification and Termination of this Agreement
17.1  
The Agreement shall remain valid and effective unless and until terminated according to relevant laws or by the Parties according to section 17.2 hereof.
17.2  
Modification and Termination of this Agreement
17.2.1  
Any modification or termination of this Agreement shall be made by written agreements among the Parties, unless a Party terminates this Agreement unilaterally according to the provisions of this Agreement.
17.2.2  
The modification or termination of this Agreement shall not affect each Party’s rights to claim for damages under this Agreement. In the event that any modification or termination of the Agreement causes losses to a Party, the breaching party shall liable to compensate for such losses, unless it is exempted from such liabilities by law.
17.2.3  
A Party may issue a notice to terminate this Agreement (hereafter referred to as the “Notice of Termination”) and this Agreement may be terminated unilaterally if:
i) either of the other Parties fails to make its contribution to the registered capital of the joint venture company within six (6) months after the deadline for it to make such contribution;
ii) either of the other Parties fails to perform any of its substantive obligations under this Agreement and thus causes material and adverse impact on the joint venture company’s business operations under this Agreement;

 

 


 

iii) either of the other Parties (a) is insolvent; (b) cannot repay its matured debts; (c) causes a receiver, trustee, or executor of all or part of its property, income, or itself to be appointed; (d) adopts a resolution on its dissolution; or (e) has filed an application to the competent court for bankruptcy liquidation or will be or have been dissolved according to the order of competent administrative authorities;
iv) the license or authorization that is necessary for the performance of this Agreement and required by the laws or regulations of the PRC fails to be obtained, has been withdrawn or modified, or fails to be renewed within the joint venture company’s operating term under this Agreement;
v) major assets or property of either of the other Parties or the joint venture company in the PRC has been confiscated or expropriated; or
vi) the party is affected by force majeure (as defined in section 18 hereof).
18.  
Force Majeure
18.1  
The force majeure means any unforeseeable, uncontrollable or unavoidable event that occurs after this Agreement is executed, causes total or part failure to perform this Agreement and leads to a failure to achieve the joint venture company’s purposes of operation under this Agreement. The force majeure events include strike, fires not attributable to any Party, flood, earthquake, typhoon and other natural disasters, diseases, war (whether declared or not), turmoil, exercise of govermental power or declaration of such exercise, actions of legislature, court or government, blockade, embargo and shortage or disruption of energy, raw materials or transportation.
18.2  
In the event of force majeure, a Party or the Parities affected may suspend its/ their performance of this Agreement within the scope and period affected by the force majeure, and may postpone the performance of this Agreement to the length of period equal to that affected by the force majeure provided that it will assume no liability for its postponement. A Party that declares that it has been affected by the force majeure shall notify the other Parties and the joint venture company of the same promptly in an appropriate manner and present reasonably substantial evidences verifying the existence and the duration of the adverse effect of the force majeure to the other Parties and the joint venture company and shall try its best to reduce or eliminate the influence of the force majeure on its performance of its obligations under this Agreement.
18.3  
In the event of the force majeure, the Parties shall cooperate with each other to reach an appropriate resolution and make reasonable efforts to reduce the consequences of the force majeure. In the event that the Parties fail to reach a resolution within six (6) months after the force majeure occurs, a Party that is affected by the adverse consequences of the force majeure is entitled to issue a Notice of Termination in accordance with section 17.2.3 (vi). A meeting of the board of directors of the joint venture company shall be convened within twenty (20) days after the other Parties receive the Notice of Termination.

 

 


 

19.  
Validity of this Agreement
19.1  
This Agreement constitutes a true and complete declaration of intention among the Parties to establish the joint venture company and shall supersede any and all agreements (oral or written), memorandums and arrangements on the incorporation of the joint venture company. No party enters into the Agreement merely depending on any declaration, representation or warranty not specified or mentioned herein.
19.2  
This Agreement and the articles of association of the joint venture company constitute a set of legal documents. In the event of any discrepancy between this Agreement and the articles of association of the joint venture company, the articles of association shall prevail.
20.  
Confidentiality
20.1  
Each Party shall keep confidential any information relating to the following (the “Confidential Information”):
i) businesses or assets of the joint venture company, each Party or their associates;
ii) existence or contents of the Agreement; or
iii) all the information provided by a Party to the other Parties according to the provisions of this Agreement.
Unless under the circumstances specified in section 20.2 hereof, without the prior written consent of the other Parties, a Party shall not use or disclose any Confidential Information to any third party for the purposes of, among others, its own business.
20.2  
The obligations of confidentiality specified in section 20.1 hereof shall not apply to any of the following circumstances:
i) A Party discloses any information to its own associates or professional advisors for fulfilling this Agreement;
ii) A Party discloses the information independently developed by itself, the information it obtained third parties that are entitled to disclose the same, or the information that is publicly known by the means not in violation of any provision of the above section 20.1 hereof;
iii) A Party discloses any information in accordance with relevant laws, rules of the related stock exchange or binding judgements, orders or requirements of any competent court, regulatory authority, or any other government department, or the requirements of the procedures of any regulatory authority or any other government department; or
iv) A Party discloses any information to any tax authority for the taxation matters of it or its associates.
20.3  
The provisions of section 20.1 hereof shall survive during the two (2) years immediately following the termination of this Agreement.

 

 


 

21.  
Notice
Any notice, claim, request, or requirement (collectively referred to as “Notice”) relating to this Agreement or to the matters under this Agreement shall be made in Chinese and shall be deemed to having been served upon the recipient after it is delivered to the following address:
In the event of a Notice to Party A:
Name: Techfaith Wireless Communication Technology (Hangzhou) Ltd.
Address: Techfaith Software Park, Wangshang Road, Binjiang District, Hangzhou
Fax: +86(571)-86698819
Attn: Zheng Guoliang
In the event of a Notice to Party B:
Name: Techfaith Intelligent Handset Technology (Beijing) Ltd.
Address: Building 1, No. 13, Yong Chang North Road, Beijing Economic-Technological
Development Area (Yi Zhuang), Beijing
Fax: +86(10)-58228606
Attn: Ge Ziyu
In the event of a Notice to Party C:
Name: Beijing E-Town International Investment & Development Co., Ltd.
Address: 6/F, Building 61, BDA International Enterprise Avenue, No.2 Jingyuan North Road,
Beijing Economic-Technological Development Area, Beijing
Fax: +86(10)-67862607
Attn: Yang Gang
The Notice may also be sent to any other address, email or fax number to be notified by a Party according to section 21 hereof. A Notice may be sent by hand, by fax, bu email or overnight express delivery. Without prejudice to the aforementioned provisions, a Notice shall be deemed as having been served upon the recipient on the next working day if it is sent by fax, when it is delivered to the above address if sent by overnight express delivery, or when the successful sending of the Notice is acknowledged by the sender’s email system if sent by Email.
22.  
Governing Law
This Agreement shall be governed by and construed in accordance with the laws of the PRC.
23.  
Dispute Resolution
Any disputes arising from or in connection with this Agreement (the “Disputes”) shall be resolved first by the Parties through friendly negotiation. If the Disputes fail to be resolved through friendly negotiation within thirty (30) days after a Party issues a written notice of the Disputes to the other Parities, each Party is entitled to file a lawsuit to the competent court to resolve the Disputes.
During the period of resolving the Disputes, each Party shall continue performing its obligations under this Agreement.

 

 


 

24.  
Effect
This Agreement shall become effective as of the date when the Parties’ respective duly authorized representatives sign and affix their respective official seals on this Agreement.
25.  
Language and Counterparts
The Agreement shall be made in Chinese in sextuplicate with equal legal force. Two (2) copies of the Agreement shall be held by each Party.
[The Remainder of This Page Intentionally Left Blank]

 

 


 

[For Signatures Only]
The Agreement has been signed by the Parties on the date specified on the first page of the Agreement.
Party A: Techfaith Wireless Communication Technology (Hangzhou) Ltd.
Signatory: /s/ Wang Zhongbao
Name: Wang Zhongbao
Title:
Party B: Techfaith Intelligent Handset Technology (Beijing) Ltd.
Signatory: /s/ Dong Deyou
Name: Dong Deyou
Title:
Party C: Beijing E-Town International Investment & Development Co., Ltd.
Signatory: /s/ Li Xiaoping
Name: Li Xiaoping
Title:

 

 

Exhibit 4.17
Agreement
Administration Committee of Shenyang PuHe New Town

 

 


 

Agreement
This Agreement is made by and between the following parties:
Party A: Administration Committee of Shenyang Puhe New Town
Party B: Techfaith Wireless Technology Group Limited
Through amicable negotiation, both parties conclude the following Agreement for the Party B’s use of the land and development of the construction project in Shenyang Puhe New Town on the principle of equality, mutual benefits and bona fides.
Article 1 Introduction of the Project
Party B proposes to invest for the Tecface Communication Industrial Park Project in Shenyang Puhe New Town, which particularly locates at Dao Yi Economic Development Zone, Shen Bei New District, Shenyang, China , and the major content of construction includes the R&D and sales centre, manufacturing plants, dorm buildings and etc . Under the premise that the conditions are ready for commencing the construction of the Project, the Project is planned to be commenced in April, 2011 , and completed and put into operation in April, 2013 , the construction period of which is 2 years.
Article 2 Amount of Investment
This Project company’s registered capital is RMB 240 million , its investment density is RMB 3.1 million /mu, the scale of construction of this Project is 60000 square meters, and its plot ratio is 1.0 , and after the Project is put into operation, the estimated total amount of taxes is RMB 50 million . The figure progress in the commencement year shall be 30000 square meters, (the figure progress in the second year shall be 30000 square meters).

 

2


 

Article 3 Site Selection and Land Used
Party A agrees to grant 80 mu of land to Party B, the price of the land shall be the delisting price, and the particular price shall subject to the state-owned land use right grant contract entered by Shenyang Planning and Land Resources Bureau and Party B, whereupon the total sum of the land shall be calculated.
Article 4 Payment of Project Security Money and Land Grant Fee
  1.  
Project security money: Party B shall pay the Project security money in the amount of RMB 5 million within two week after the execution of the Agreement.
  2.  
Land grant fee. Party B shall pay the land grant fee in accordance with the provisions of the “Confirmation of Transaction” after the land is delisted.
Article 5 Rights and Obligations of both Parties
  1.  
Party A’s rights and obligations
  (1)  
To examine the documents, certificates and relevant information submitted by Party B for handling the examination and approval formalities, and if the submitted documents comply with the approval conditions, Party A shall promptly approve them; if the submitted documents fails to comply with the conditions, Party A shall guide Party B to re-submit the documents for approval.
  (2)  
To be responsible for planning, designing and the constructing the support facilities in the districts surround the land used for Party B’s Project.

 

3


 

  (3)  
To assist Party B to handle the relevant formalities for the supply of water, electricity, stream (heating), gas and etc., upon Party B’s request
  2.  
Party B’s rights and obligations
  (1)  
To provide Party A with complete and lawful documents, certificates and other relevant information required for the examination and approval; to handle various examination and approval formalities actively and promptly; to ensure to register with the industrial & commercial and taxation departments of Puhe New Town (if the registered branch company is required to have the financially independent accounting status, the enterprise moved from other place shall complete the moving formalities in respect of industry & commerce and taxation prior to the project is put into operation).
  (2)  
To ensure that the Project will only be commenced after all examination and approval formalities are approved, and the Project will be constructed in strict accordance with the contents specified in Article 2 and the contents of the examination and approval formalities in respect of planning and construction.
  (3)  
To handle the relevant formalities for the supply of water, electricity, stream (heating), gas and etc. with relevant departments by its own and at its own expenses.

 

4


 

  (4)  
The levels of the site, and the construction roads and the openings of the used land plot shall subject to Party A’s approval, and the costs related to paving the site, road and making the openings shall be borne by Party B.
  (5)  
Party B shall be supervised by the relevant departments in accordance with the requirements of Interim Measures for Supervising and Managing the Payment of the Rural Migrant Workers’ Salary in the Filed of Construction , so as to avoid the arrears of the rural migrant workers’ salaries due to failing of settlement of the Construction Cost, and at the same time Party B shall supervise and urge the construction enterprises to pay the security money for salaries, pay the rural migrant workers’ salaries fully and promptly and Party B shall bear the joint and several liabilities.
Article 6 Liabilities for Defaults
If Party B fails to timely pay the Project security money and the land grant fee in accordance with the provisions in this Agreement, this Agreement will automatically become invalid.
If the following event occurs, Party A has the right to terminate this Agreement, take back the land, forfeit the security money and rescind all the preferential policies, and Party B shall solely bear all losses arising herefrom, and the land grant fee will be refunded as per the proportion of the original price:
  1.  
Party B fails to obtain the legal formalities and illegally commences the construction.
  2.  
Party B fails to commence the construction in accordance with the agreed schedule, or the figure progress fails to meet the requirements of this Agreement due to Party B’s own reasons.

 

5


 

  3.  
The total actual investment amount, fixed asset investment amount, investment density, plot ratio, total taxation amount and figure progress fails to meet the standards specified in this Agreement or the foreign capital fails to be in place as scheduled.
  4.  
Party B fails to register with the industry and commerce bureau of Puhe New Town.
Article 7 Force Majeure
After this Agreement becomes effective, if either party wholly or partly fails to perform this Agreement due to the force majeure reason, the party affected by the force majeure shall not bear relevant liabilities, but shall take all reasonable measures to minimize the loss caused by the force majeure event, and give the other party written notice of the event and provide relevant evidence information within seven working days from the occurrence of such event.
Article 8 Resolution of Disputes
  1.  
Any dispute arising out of the execution and performance of this Agreement shall be firstly resolved through amicable negotiation between both parties; if no agreement is reached, either party may file a lawsuit with the people’s court at the place where Party A locates at.
  2.  
Any dispute between Party B and a third party arising out of the use of land, development and construction of the Project and any other matter under this Agreement shall not involve Party A, and Party B shall be solely responsible for the civil liabilities and other legal liabilities, and resolve such dispute by its own. Party B and the third party shall not, in any way, obstruct or prevent Party A from exercising rights towards such land plot, otherwise Party A shall have the right to clear out Party B and such third party in accordance with the provisions of this Agreement.

 

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Article 9 Matters not Covered by this Agreement
Both parties shall resolve the matters not covered by this Agreement through mutual negotiation and execute a written agreement. Both this Agreement and the appendices attached hereto shall form the valid parts of this Agreement and the appendices shall have the same legal force and effect with this Agreement.
Article 10 Supplementary Provision
This Agreement becomes effective upon it is signed and affixed with the common seals by the legal representatives or authorized representatives of both parties. This Agreement is made in quadruplicate, and either party holds two copies for mutual compliance and performance.
     
Part A: Administration Committee of Shenyang Puhe New Town
Legal representative (or authorized representative): /s/ Wang Zhongbao
Signature Date: 05/10/2011
  (mm/dd/yy)
 
   
Part B: Techfaith Wireless Technology Group Limited
Legal representative (or authorized representative): /s/ Wang Zhongbao
Signature Date: 05/10/2011
  (mm/dd/yy)

 

7


 

Supplementary Agreement
This Supplementary Agreement is made by and between the following parties:
Party A: Administration Committee of Shenyang Puhe New Town
Party B: Techfaith Wireless Technology Group Limited
Through the amicable negotiation between both parties, as to the matter that Party B invests to construct Tecface Communication Industrial Park Project in Party A’s district, Party A undertakes to conclude the following Supplementary Agreement.
1. This Project is developed in the manner of joint venture, Techfaith Group invests RMB 200 million (foreign capital investment), and the district government invests RMB 40 million (which accounts for 16.7% of the shares, including the RMB 20 million invested by the district government and RMB 100 million invested by Techfaith in the form of foreign capital in 2011, as well as the RMB 20 million invested by the district government and RMB 100 million invested by Techfaith in the form of foreign capital in 2012).
2. Whereas the development of this Project has enormous potential, Party A agrees to support Party B with the technical support funds, among which the Project support amount is the difference between the delisting price of the land and RMB 50,000 /mu, and the support funds will be paid within one month after the land grant fee is fully paid. The relevant taxes shall be borne by Party B.

 

8


 

3. In order to support the fast development of this Project, Party A provides the fundamental construction fixed asset investment allowance and infrastructure allowance in the amount of RMB 10 million.
4. If Party B’s total actual investment amount of the Project, fixed asset investment amount, investment density, plot ratio, total taxation amount and figure progress fails to meet the standards specified in this Agreement or the foreign capital fails to be in place as scheduled, Party A will rescind all above preferential policies, and Party A has the right to take back the land and the buildings and facilities on land free of charges, and all the resulting losses shall be solely borne by Party B.
5. This Supplementary Agreement is made in quadruplicate, and either party holds two copies, which shall become effective upon it is signed by the authorized representatives of both parties and used in conjunction with the master Agreement.
     
Part A: Administration Committee of Shenyang Puhe New Town
Legal representative (or authorized representative): /s/ Wang Zhongbao
Signature Date: 05/10/2011
  (mm/dd/yy)
 
   
Part B: Techfaith Wireless Technology Group Limited
Legal representative (or authorized representative): /s/ Wang Zhongbao
Signature Date: 05/10/2011
  (mm/dd/yy)

 

9

Exhibit 8.1
EXHIBIT 8.1
SUBSIDIARIES* OF THE REGISTRANT
1.  
Techfaith Wireless Communication Technology (Beijing) Limited, a PRC company
 
2.  
One Net Entertainment Limited, a PRC company
 
3.  
Techfaith Wireless Communication Technology (Shanghai) Limited, a PRC company
 
4.  
STEP Technologies (Beijing) Co., Ltd., a PRC company
 
5.  
Techfaith Intelligent Handset Technology (Beijing) Limited, a PRC company
 
6.  
Techfaith Software (China) Limited, a PRC company
 
7.  
Techfaith Wireless Communication Technology (Hangzhou) Limited, a PRC company
 
8.  
Techfaith Wireless Communication Technology (Shenyang) Limited, a PRC company
 
9.  
Techfaith Wireless Communication Technology (Shenzhen) Limited, a PRC company
 
10.  
Techfaith Intelligent Handset Technology (Hong Kong) Limited, registered in Hong Kong
 
11.  
Techfaith Wireless Technology Group Limited, a BVI company
 
12.  
798 Entertainment Limited, a BVI company
 
13.  
QIGI&BODEE Technology Limited, a Hong Kong company
 
14.  
QIGI&BODEE International Technology (Beijing) Co. Ltd.
 
15.  
QIGI&BODEE Technology (Beijing) Co., Ltd.
 
16.  
Glomate Mobile (Beijing) Co., Ltd.
     
*  
Insignificant subsidiaries are omitted.

 

EXHIBIT 12.1
Certification by the Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Defu Dong, certify that:
1. I have reviewed this annual report on Form 20-F of China Techfaith Wireless Communication Technology Limited (the “Company”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;
4. The Company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
(c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and
5. The Company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.
Date: May 24, 2011
         
By:   /s/ Defu Dong     
  Name:   Defu Dong     
  Title:   Chief Executive Officer     
 

 

EXHIBIT 12.2
Certification by the Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Yuping Ouyang, certify that:
1. I have reviewed this annual report on Form 20-F of China Techfaith Wireless Communication Technology Limited (the “Company”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;
4. The Company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
(c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and
5. The Company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.
Date: May 24, 2011
         
By:   /s/ Yuping Ouyang     
  Name:   Yuping Ouyang     
  Title:   Chief Financial Officer     
 

 

EXHIBIT 13.1
CERTIFICATION BY THE CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of China Techfaith Wireless Communication Technology Limited (the “Company”) on Form 20-F for the year ended December 31, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Defu Dong, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
         
  Date: May 24, 2011
 
 
  By:   /s/ Defu Dong   
    Name:   Defu Dong   
    Title:   Chief Executive Officer   
 

 

EXHIBIT 13.2
CERTIFICATION BY THE CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of China Techfaith Wireless Communication Technology Limited (the “Company”) on Form 20-F for the year ended December 31, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Yuping Ouyang, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
         
  Date: May 24, 2011
 
 
  By:   /s/ Yuping Ouyang   
    Name:   Yuping Ouyang   
    Title:   Chief Financial Officer   
 

 

EXHIBIT 15.1
[Letterhead of Maples and Calder]
China Techfaith Wireless Communication Technology Limited
Tower C, No.5, Tongchang East Street
Beijing Economic-Technological Development Area (Yi Zhuang), Beijing 100176
People’s Republic of China
May 23, 2011
Dear Sirs,
RE: CHINA TECHFAITH WIRELESS COMMUNICATION TECHNOLOGY LIMITED (THE “COMPANY”)
We consent to the reference to our firm under the heading “Cayman Islands Taxation” in the Company’s Annual Report on Form 20-F for the year ended December 31, 2010, which will be filed with the Securities and Exchange Commission in the month of May 2011.
         
  Yours faithfully,
/s/ Maples and Calder
Maples and Calder
 
 
     
     
     
 

 

Exhibit 15.2

[Letterhead of Beijing Guan Teng Law Firm]

China Techfaith Wireless Communication Technology Limited
Building 1, No. 13, Yong Chang North Road
Beijing Economic-Technological Development Area (Yi Zhuang), Beijing 100176
People’s Republic of China

Dear Sirs,

Re: China Techfaith Wireless Communication Technology Limited (the “Company”)

We consent to the reference to our firm under the headings “Risk Factors” and “Regulation” insofar as they purport to describe the provisions of PRC laws and regulations, in the Company’s Annual Report on Form 20-F for the year ended December 31, 2010 (the “Annual Report”) filed with the Securities and Exchange Commission (the “SEC”). We also consent to the filing with the SEC of this consent letter as an exhibit to the Annual Report.

Yours Faithfully,

/s/ Beijing Guan Teng Law Firm     
Beijing Guan Teng Law Firm