Registration No. 333-123921
AMENDMENT NO. 1
China Techfaith Wireless Communication Technology Limited
Not Applicable
Cayman Islands | 7389 | Not Applicable | ||
(State or other jurisdiction of
incorporation or organization) |
(Primary Standard Industrial
Classification Code Number) |
(I.R.S. Employer
Identification Number) |
3/F M8 West, No. 1 Jiu Xian Qiao East Road
CT Corporation System
Copies to:
David T. Zhang, Esq.
Latham & Watkins LLP 41st Floor, One Exchange Square 8 Connaught Road Central, Hong Kong (852) 2522-7886 |
Chris K. H. Lin, Esq.
Simpson Thacher & Bartlett LLP 7th Floor, ICBC Tower 3 Garden Road Central, Hong Kong (852) 2514-7600 |
Approximate date of commencement of proposed sale to the public:
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. o
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. o
CALCULATION OF REGISTRATION FEE
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Proposed Maximum | ||||
Title of Each Class of | Aggregate | Amount of | ||
Securities to be Registered | Offering Price(1)(2) | Registration Fee | ||
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Ordinary Shares, par value US$0.00002 per share(3)
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$168,000,000 | $19,774 | ||
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(1) | Estimated solely for the purpose of determining the amount of registration fee in accordance with Rule 457(o) under the Securities Act of 1933. |
(2) | Includes ordinary shares initially offered and sold outside the United States that may be resold from time to time in the United States either as part of their distribution or within 40 days after the later of the effective date of this registration statement and the date the shares are first bona fide offered to the public, and also includes ordinary shares that may be purchased by the underwriters pursuant to an over-allotment option. These ordinary shares are not being registered for the purpose of sales outside the United States. |
(3) | American depositary shares issuable upon deposit of the ordinary shares registered hereby have been registered under a separate registration statement on Form F-6 (Registration No. 333-123939) filed with the Securities and Exchange Commission. Each American depositary share will represent 15 ordinary shares. |
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to such Section 8(a), may determine.
The information in this
preliminary prospectus is not complete and may be changed.
Neither we nor the selling shareholders may sell these
securities until the registration statement filed with the
Securities and Exchange Commission is effective. This
preliminary prospectus is not an offer to sell these securities
and it is not soliciting an offer to buy these securities in any
jurisdiction where the offer or sale is not
permitted.
|
Subject to Completion
PROSPECTUS
8,726,957 American Depositary Shares
China Techfaith Wireless
Representing 130,904,355 Ordinary Shares
This is TechFaiths initial public offering. TechFaith is offering 6,143,045 American Depositary Shares and the selling shareholders identified in this prospectus are offering an additional 2,583,912 ADSs. Each ADS represents 15 ordinary shares.
We expect the public offering price to be between US$15.00 and US$17.00 per ADS. Currently, no public market exists for the ADSs. After pricing of the offering, we expect that the ADSs will be quoted on the Nasdaq National Market under the symbol CNTF.
Investing in the ADSs and ordinary shares involves risks that are described in the Risk Factors section beginning on page 6 of this prospectus.
Per ADS | Total | |||
|
|
|||
Public offering price
|
US$ | US$ | ||
Underwriting discount
|
US$ | US$ | ||
Proceeds, before expenses, to TechFaith
|
US$ | US$ | ||
Proceeds, before expenses, to the selling
shareholders
|
US$ | US$ |
The underwriters may also purchase up to an additional 1,154,714 ADSs from the selling shareholders at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover over-allotments.
Neither the Securities and Exchange Commission nor any state securities regulator has approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The ADSs will be ready for delivery on or about , 2005.
Merrill Lynch & Co.
Merrill Lynch & Co. | Lehman Brothers |
CIBC World Markets
The date of this prospectus is , 2005
TABLE OF CONTENTS
You should rely only on the information contained in this prospectus. Neither we nor the underwriters have authorized anyone, including the selling shareholders, to provide you with information that is different from that contained in this prospectus. This prospectus may only be used where it is legal to offer and sell these securities. The information in this prospectus is only accurate as of the date of this prospectus.
i
Conventions That Apply to This Prospectus
Unless the context otherwise requires, in this prospectus,
| we, us, our company, our, and TechFaith refer to China Techfaith Wireless Communication Technology Limited and its subsidiaries; | |
| shares or ordinary shares refers to our ordinary shares, ADSs refers to our American depositary shares, each of which represents 15 ordinary shares, and ADRs refers to the American depositary receipts that evidence our ADSs; | |
| China or PRC refers to the Peoples Republic of China, excluding Taiwan, Hong Kong and Macau; and | |
| 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. |
Unless otherwise indicated, information in this prospectus assumes that all of our outstanding convertible notes are converted into our ordinary shares pursuant to the terms of the notes, and all share numbers reflect the 1:50,000 share split that became effective on March 18, 2005. This prospectus contains translations of certain RMB amounts into U.S. dollar amounts at specified rates. All translations from RMB to U.S. dollars were made at the noon buying rate in The City of New York for cable transfers of RMB as certified for customs purposes by the Federal Reserve Bank of New York. Unless otherwise stated, the translations of RMB into U.S. dollars have been made at the noon buying rate in effect on December 31, 2004, which was RMB8.2765 to US$1.00. We make no representation that the RMB or U.S. dollar amounts referred to in this prospectus could have been or could be converted into U.S. dollars or RMB, as the case may be, at any particular rate or at all. See Risk Factors Risks Related to Doing Business in China Fluctuations in exchange rates could result in foreign currency exchange losses for discussions on the effects of fluctuating exchange rates on the value of our ADSs. On April 20, 2005, the noon buying rate was RMB8.2765 to US$1.00.
ii
PROSPECTUS SUMMARY
You should read this summary together with the
more detailed information regarding our company, the ADSs and
the ordinary shares being sold in this offering and our
financial statements and related notes appearing elsewhere in
this prospectus.
CHINA TECHFAITH WIRELESS
Overview
We are one of the largest independent mobile
handset design houses in China. We provide complete design
services spanning the entire handset design cycle, which
involves industrial design, mechanical design, software design,
hardware design, component selection and sourcing, prototype
testing, pilot production and production support. We design
GSM-based mobile handsets using major baseband technology
platforms, such as those developed by Philips, Texas Instruments
and Skyworks Solutions. We have recently begun developing mobile
handsets for use on WCDMA and CDMA networks through cooperation
with NEC and QUALCOMM. GSM, WCDMA and CDMA are different types
of technical standards used in wireless communications. We have
also begun to develop smart phones, which provide significant
data capabilities in addition to the normal functions of a
mobile handset. Our customers include leading Chinese mobile
handset brand owners, such as Bird, Haier, Konka and Lenovo, and
international mobile handset brand owners, such as Alcatel,
Kyocera, Mitsubishi, NEC and UTStarcom.
We conduct substantially all of our operations in
China. Our strong technological capabilities, high-quality
design services, strong customer relationships, strategic
relationships with leading technology providers and ample
skilled, low-cost engineering resources enable us to design a
broad portfolio of mobile handsets at a competitive cost and
with relatively short design cycles. From our inception in July
2002 to December 31, 2004, we had successfully designed
58 mobile handset models. We recorded net revenues of
US$46.6 million and net income of US$18.2 million in
2004.
We believe that we are well-positioned to
capitalize on the opportunities presented by the growing trend
among Chinese and international mobile handset brand owners to
outsource the design function to independent design houses.
Although business from Chinese mobile handset brand owners
fueled our initial growth, international brand owners have
contributed to an increasing portion of our net revenues. We
intend to focus on winning more contracts from international
customers and the leading Chinese customers.
Industry Background
The global mobile handset market has expanded
rapidly in recent years. According to International Data
Corporation, or IDC, worldwide mobile handset shipments
increased from 400 million units in 2000 to
514 million units in 2003 at a compounded annual growth
rate, or CAGR, of 8.7%. IDC projects the annual shipment of
mobile handsets to increase to 890 million units by 2008,
or a CAGR of 8.2% from 2004.
The global mobile handset market is characterized
by the increasing demand for a wide variety of products with
personalized features, shortened product life cycles, increasing
competition and an accelerating rate of decline of selling
prices of new mobile handsets.
To remain competitive, mobile handset brand
owners must aggressively seek ways to reduce their development
and production costs and risks in order to maintain
profitability, including outsourcing the design and
manufacturing functions to independent service providers and
introducing new products at a faster time-to-market. As a
result, three major groups of independent handset service
providers have emerged to serve mobile handset brand owners,
namely, electronic manufacturing services providers, or EMS
providers, original design manufacturers, or ODMs, and
independent mobile handset design houses. EMS providers perform
only manufacturing services. ODMs design products and
manufacture in large volume those products selected by their
customers.
1
However, EMS providers and ODMs may not be able
to address certain new and fundamental challenges that mobile
handset brand owners face. Independent mobile handset design
houses have emerged to enable mobile handset brand owners to
meet these challenges, including the following:
China has been a global center for the
manufacturing of mobile handsets. An increasing number of
participants in the mobile handset value chain, including mobile
handset brand owners, EMS providers and ODMs, have established
manufacturing facilities in China. As the worlds largest
mobile handset market with approximately 269 million
subscribers in 2003, China is also rapidly emerging as a global
center for mobile handset design. Leading global mobile handset
companies, such as Nokia, Motorola and Siemens, have
substantially increased their research and development efforts
in China in recent years and many independent mobile handset
design houses have emerged in China.
Our Competitive Strengths and
Challenges
We are one of the largest independent mobile
handset design houses in China. We have achieved our current
leading position, in part, because of our following competitive
strengths:
Our ability to realize our business objectives is
subject to risks and uncertainties, including:
Our Strategy
Our goal is to create long-term shareholder value
by enhancing our position as a leader in the mobile handset
design industry. We believe that the growing outsourcing trend
in the mobile handset industry
2
Corporate Information
We commenced operations in July 2002 through
Techfaith Wireless Communication Technology (Beijing) Limited,
or TechFaith China, 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 Communication Technology
Limited, or TechFaith BVI, in July 2003. We incorporated
TechFaith in June 2004. As part of a restructuring in
anticipation of our initial public offering, TechFaith became
our ultimate holding company when it issued shares in November
2004 in exchange for all the shares that our shareholders
previously held in TechFaith BVI. TechFaith also issued
convertible notes to its note holders on substantially the same
terms as notes previously issued by TechFaith BVI to these note
holders. The TechFaith BVI convertible notes were cancelled in
connection with the restructuring. We conduct substantially all
of our operations through the following subsidiaries in China:
Except for STEP Technologies, all of our
subsidiaries in China are wholly owned. STEP Technologies is a
joint venture between us and NEC. We and NEC own 70% and 30%,
respectively, of the equity interest in STEP Technologies. We
plan to establish a new wholly-owned subsidiary in Shenzhen,
China in the near future.
Our principal executive offices are located at
3/F M8 West, No. 1 Jiu Xian Qiao East Road, Chao Yang
District, Beijing 100016, Peoples Republic of China. Our
telephone number at this address is +(8610) 5822-8288. Our
registered office in the Cayman Islands is located at M&C
Corporate Services Limited, P.O. Box 309 GT, Ugland
House, South Church Street, George Town, Grand Cayman, Cayman
Islands. Our telephone number at this address is
+1 (345) 949-8066.
Investor inquiries should be directed to us at
the address and telephone number of our principal executive
offices set forth above. Our website is
www.techfaithwireless.com.
The information contained on
our website is not part of this prospectus. Our agent for
service of process in the U.S. is CT Corporation System
located at 111 Eighth Avenue, New York, New York
10011.
3
Table of Contents
increasingly complex product design and
development process due to rapid, evolving technological changes
and higher level of system integration requirements, especially
for high-end mobile handsets;
need for accelerated product design and
development cycles as a result of increasingly shortened product
life cycles;
strong demand for more distinctive and innovative
products to serve an increasingly segmented market; and
need to respond promptly to a discerning mobile
handset market, where major retail outlets may carry many
different mobile handset models.
strong technological capabilities;
high-quality design services;
cost competitiveness;
strong customer relationships;
strategic relationships with leading technology
providers; and
ample engineering resources.
our limited operating history as a mobile handset
design company;
our ability to effectively manage our growth;
possible decrease in demand for design services
by mobile handset brand owners;
our ability to acquire and retain additional
mobile handset brand owners as our customers; and
our ability to design new mobile handset models
in a timely and cost-efficient manner to meet our
customers demands.
Table of Contents
continue to strengthen our design capabilities;
target international and leading Chinese mobile
handset customers;
broaden our strategic relationships in the mobile
handset value chain;
continue to enhance our engineering
resources; and
pursue selective strategic acquisitions.
TechFaith China, which designs primarily
GSM-based mobile handsets based on a baseband platform licensed
from Skyworks Solutions;
Techfaith Wireless Communication Technology
(Beijing) Limited II, or TechFaith Beijing, formerly known as
Beijing Centel Technology R&D Co., Ltd., which
primarily designs GSM-based mobile handsets based on a baseband
platform licensed from Philips;
Techfaith Wireless Communication Technology
(Shanghai) Limited, or TechFaith Shanghai, formerly known as
Leadtech Communication Technology (Shanghai) Limited, which
primarily designs CDMA mobile handsets based on technology
licensed from QUALCOMM; and
STEP Technologies (Beijing) Co., Ltd., or STEP
Technologies, which primarily designs GSM-based mobile handsets
based on a baseband platform licensed from Texas Instruments and
WCDMA mobile handsets using technology licensed from QUALCOMM.
Table of Contents
The Offering
The number of ADSs and ordinary shares
outstanding immediately after this offering:
4
is based upon 566,037,734 ordinary shares
outstanding as of the date of this prospectus, assuming the
conversion of all our outstanding convertible notes into
66,037,734 ordinary shares immediately prior to the
completion of this offering; and
excludes 40,000,000 ordinary shares reserved
for future issuance under our 2005 share incentive plan.
Table of Contents
SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary consolidated statement of
operations data for the period from July 26, 2002, our date
of inception, to December 31, 2002 and the years ended
December 31, 2003 and 2004 and summary consolidated balance
sheet data as of December 31, 2002, 2003 and 2004 are
derived from our audited consolidated financial statements
included elsewhere in this prospectus and should be read in
conjunction with, and are qualified in their entirety by
reference to, those financial statements and related notes. Our
audited financial statements have been audited by Deloitte
Touche Tohmatsu and were prepared in accordance with accounting
principles generally accepted in the United States of America,
or U.S. GAAP. The following summary consolidated financial
data should also be read in conjunction with the section
entitled Managements Discussion and Analysis of
Financial Condition and Results of Operations.
5
For the Period From
July 26, 2002 to
For the Year Ended December 31,
December 31,
2002
2003
2004
(In thousands, except share, per share and per ADS data)
$
$
9,677
$
46,560
7,046
26,676
(6
)
(2,130
)
(7,971
)
(Loss) income from operations
(6
)
4,916
18,705
$
1
$
4,956
$
18,244
$
$
0.02
$
0.04
$
$
0.02
$
0.03
$
$
0.31
$
0.55
$
$
0.31
$
0.52
242,465,753
500,000,000
243,074,581
551,823,942
As of December 31,
2002
2003
2004
(In thousands)
$
11
$
7,699
$
35,086
5,230
7,760
732
5,030
$
3,618
$
23,911
$
67,542
$
1,201
$
8,324
$
23,869
$
$
4,000
$
11,887
$
$
$
1,956
$
$
1,763
$
1,740
$
2,417
$
9,824
$
28,090
$
3,618
$
23,911
$
67,542
Table of Contents
RISK FACTORS
Investing in our ADSs involves a high degree of risk. You should carefully consider the risks described below together with the other information contained in this prospectus before making an investment decision. The trading price of our ADSs could decline due to any of these risks and you may lose all or part of your investment.
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. As a result, we have a limited operating history, which may not provide a meaningful basis for evaluating our business and prospects. We may not have sufficient experience to address the risks frequently encountered by early stage companies, including our potential inability to:
| manage our growth effectively; | |
| maintain our profitability or margin; | |
| acquire and retain customers; | |
| attract, train and retain qualified personnel; | |
| maintain adequate control of our costs and expenses; | |
| keep up with evolving industry standards and market developments; or | |
| respond to competitive market conditions. |
If we are unsuccessful in addressing any of these risks, our business may be materially and adversely affected.
If we fail to effectively manage our growth and transition into a public company, our business may be adversely affected.
We are a new company that has experienced rapid growth and expansion, which has strained, and continues to strain, our resources. Our staff increased from 311 as of December 31, 2003 to 890 as of December 31, 2004. We expect to expand our engineering team significantly in the near future in anticipation of the potential growth of our business. To accommodate our growth, we will need to implement a variety of new and upgraded operational and financial systems, procedures and controls, including improvements to our accounting and other internal management systems by dedicating additional resources to our reporting and accounting function, and improvements to our record keeping and contract tracking system. Further, as we become a public company, we will need to augment our support infrastructure because our information and control systems must enable us to prepare accurate and timely financial information and other required disclosure.
All of these measures will require substantial management efforts. We cannot assure you that we will be able to implement the measures successfully or to effectively manage our growth and transition into a public company; any failure to do so may adversely and materially affect our business.
If mobile handset brand owners discontinue or reduce the use of independent mobile handset design houses, our business will be materially and adversely affected.
The growth of our independent mobile handset design business depends substantially on the extent to which mobile handset brand owners outsource the mobile handset design function to independent mobile handset design houses like us, as opposed to designing mobile handsets themselves or through other third parties such as ODMs and EMS providers. Currently, some leading international mobile handset brand owners still design most of their mobile handsets in-house. If mobile handset brand owners discontinue or
6
If we fail to retain existing or attract additional international mobile handset brand owners as customers, our business will be materially affected and the growth of our business impaired.
As international mobile handset brand owners offer high growth potential to our business, we believe that our future growth and success will depend substantially on the extent to which leading international mobile handset brand owners engage us to design their mobile handsets. Although international mobile handset brand owners such as Alcatel, Kyocera, Mitsubishi, NEC and UTStarcom have engaged us to design mobile handsets for them, we cannot assure you that any of them will continue to use us to design their new mobile handset models, nor can we assure you that we will be able to attract new international customers through our marketing efforts. If we fail to retain existing or attract additional international mobile handset brand owners as customers, our business would be materially affected and the growth of our business will be impaired.
If our customers fail to achieve success in their business, our mobile handset design business could be adversely affected.
If any of our 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 design business. Accordingly, our success depends on our customers success in their business. Chinese mobile handset brand owners have historically accounted for most of our revenues. We are not certain whether these Chinese mobile handset brand owners will be able to achieve success in their business and how long they will remain competitive in their business even if initially successful. For example, the Chinese mobile handset brand owners are reportedly experiencing declining profitability due to intense competition from international brand owners and decrease in consumer demand. This could cause some of our Chinese customers to cut back on new model introductions or exit the market. Recently, there has been a rise in anti-Japanese sentiments in China with some calls to boycott Japanese products and businesses. If prolonged and intensified, this may adversely affect our Japanese customers sales in China and, in turn, adversely affect our business.
Defects in our designs could result in a 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 has reliability, quality or compatibility problems, we may not be able to correct these problems on a timely basis. Consequently, our reputation may be damaged, and customers may be reluctant to continue to contract with us, which could harm our ability to retain existing customers and attract new customers. Because we cannot test for all possible scenarios, our designs may contain errors that are not discovered until mass production of mobile handsets. These problems may result in a loss of our customers as well as claims against us. For example, NEC once sought compensation from us due partly to defects in some third-party components we sourced and incorporated in a mobile handset model for NEC. NEC later acknowledged that the design defects were attributable to the third-party components and cancelled its claim against us in light of the new mobile handset models successfully designed by us. We cannot assure you that we will not be subject to new claims by NEC or other 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.
We may experience earnings or margin declines or even net losses in the future.
Although we have recorded net income since the end of 2002, we cannot assure you that we will sustain our level of profitability in the future. We expect to increase our operating expenses in anticipation of expected growth. As a result, any decrease or delay in generating additional revenues could materially and adversely affect our results of operations and result in substantial operating losses. In addition, competition
7
If we cannot keep up with industry standards and design new mobile handset models in a timely and cost-efficient manner to meet our customers demand, the growth and success of 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 new mobile handset models in a timely and cost-efficient manner to meet our customers demand, the growth and success of our business will be materially and adversely affected.
To date, we have derived most of our net revenues from the design and development of 2.5G mobile handsets based on the GSM/ GPRS technology. As the market for 2.75G and 3G mobile handsets develops, our existing and potential customers may increasingly demand 2.75G and 3G mobile handset designs. We have only recently begun to design 2.75G and 3G mobile handsets, and we do not have a proven track record in this market. We cannot assure you that our existing and potential customers will engage us to design 2.75G and 3G mobile handsets for them. Even if we receive orders for 2.75G and 3G mobile handset designs, 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.
We rely on a limited number of customers for a significant portion of our net revenues, and if a large customer fails to place additional orders with us, or if we fail to attract additional major customers, our results of operations and financial condition could be materially and adversely affected.
We have been dependent on a small number of customers to generate a significant portion of our net revenues. In 2003, our top three customers collectively accounted for approximately 88.2% of our net revenues, and each of Beijing Sunrise, Lenovo and NEC contributed more than 10% of our net revenues. In 2004, our top four customers collectively accounted for approximately 56.8% of our net revenues, and each of Lenovo and NEC contributed more than 10% of our net revenues. We do not have long-term contracts with any of our customers. Sales to our largest customers have varied from period to period due primarily to our relatively short period of operation and the relatively fast expansion of our customer base. Our largest customers are expected to vary significantly in the future as we aim to attract more international mobile handset brand owners as our customers.
We expect that we will continue to rely on a small number of customers for a significant portion of our revenues in the foreseeable future. Our ability to maintain close relationships with these customers is essential to the growth and profitability of our business. If a major customer fails to place additional orders with us, or if we fail to develop additional major customers, our revenues could decline, and our results of operations and financial condition could be materially and adversely affected.
The mobile handset design 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 design market in China is intensely competitive and highly fragmented. We face competition from other independent mobile handset design houses in China, including Cellon, Shenzhen Jingwei, Shanghai Yiren and Shanghai Yuhua. We also face competition from independent mobile handset design houses based in other countries, to the extent we try to enter the markets that they are serving or they try to enter the mobile handset design market in China. In addition, we face current and potential future competition from established suppliers of wireless communications solutions to mobile device manufacturers, which may be in a position to design mobile handsets on their own. These suppliers include ODMs such as BenQ, Compal Communications and Arima Communications. Further, partly due to the low barriers of entry
8
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.
If we lose our license for CDMA technology, we may not be able to obtain alternative licenses in a timely manner.
We are dependent on QUALCOMM for CDMA-related technology we use in designing CDMA-based mobile handsets. Suspension or termination of our CDMA license agreement by QUALCOMM could adversely affect our business and prospects, because we may not be able to obtain alternative licenses in a timely manner to meet our customers demands.
We are subject to risks from customers claims for refund and liquidated damages.
Our agreements with many customers contain refund and liquidated damages provisions, which entitle the customer to demand a refund and liquidated damages if we cannot complete a mobile handset design by the deadline or if the requisite certifications cannot be obtained. We cannot assure you that we will be able to successfully perform every customer contract, or that costs associated with refunds and liquidated damages will not be material.
We have not registered copyrights for our product designs and other intellectual property.
We have not registered copyrights in China for any of our inventions, original works of authorship, developments and improvements relating to mobile handset designs. Under applicable PRC law, owners of copyrights may choose not to register copyrights and the non-registration does not constitute abandonment or deletion of the copyrights. However, under PRC law, if a third party infringes on our unregistered copyrights, we bear the burden of proving that we are the legitimate owner of these copyrights. We cannot assure you that we will prevail on our ownership claims if we encounter any infringements of our designs.
We may not be able to prevent others from unauthorized use of our intellectual property, which could harm our business and competitive position.
We rely on a combination of patent, trademark and trade secret laws, 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. The steps we have taken 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 for doing so, 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 managements attention from our business. If there is a successful claim of infringement, we may be required to pay substantial damages to the party claiming
9
In addition, our competitors may initiate litigation proceedings against us or our employees that may strain our resources, divert our management attention or damage our reputation. For example, CEC Wireless R&D Ltd., or CECW, brought an unfair competition proceeding against our former affiliate, Beijing Qidi Century Communication Technology Co., Ltd., or Beijing Qidi, and 18 of its employees who subsequently joined us in connection with our divestment from Beijing Qidi. We settled the litigation on behalf of Beijing Qidi and these 18 individuals in order to facilitate our divestment and the transfer of these employees to our company. See Business Legal Proceedings for more details. We cannot assure you that similar proceedings will not occur in the future.
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 Chief Executive Officer, Mr. Defu Dong. We rely on their experience in mobile handset design, business operations and selling and marketing and on their relationships with our shareholders and 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 our Chairman and Chief Executive Officer, Mr. Defu Dong, were involved in litigation, arbitration or administrative proceedings in the past. See Business Legal Proceedings. 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 to 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. Each of our executive officers has entered into an employment agreement with us, which contains confidentiality and non-competition provisions. If any disputes arise between our executive officers and us, we cannot assure you the extent to which any of these agreements 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.
If we are unable to attract, train and retain skilled engineers, our business may be materially and adversely affected.
Our future success depends on our ability to attract, train and retain additional skilled engineers. Our industry is characterized by high demand and intense competition for talent. We have experienced an approximately 20% annual attrition rate to date. We cannot assure you that we will be able to retain existing or attract and retain new skilled engineers whom we will need to achieve our strategic objectives. In addition, as we are still a young company and our business has grown rapidly, our ability to train and integrate new employees into our operations may not meet the growing demands of our business.
We experience fluctuations in quarterly operating results.
Our quarterly operating results have fluctuated in the past and will likely fluctuate in the future. These fluctuations in operating results depend on a variety of factors, including the demand for our design services, the amount of design fees and royalties our customers agree to pay us, the number of milestones we have achieved, the revenues recognized from completion of the design contracts with completion fees, the
10
Future acquisitions may have an adverse effect on our ability to manage our business.
If we are presented with appropriate opportunities, we may acquire complementary technologies or companies. Future acquisitions would expose us to potential risks, including risks associated with the assimilation of new technologies and personnel, unforeseen or hidden liabilities, the diversion of management attention and resources from our existing business and the inability to generate sufficient revenues to offset the costs and expenses of acquisitions. Any difficulties encountered in the acquisition and integration process may have an adverse effect on our ability to manage our business.
We have limited business insurance coverage in China.
The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited business insurance products. As a result, we do not have any business liability or disruption insurance for our operations in China. Any business disruption, litigation or natural disaster may result in substantial costs and diversion of our resources.
If we grant employee stock options and other share-based compensation in the future, our net income could be adversely affected.
On December 16, 2004, the Financial Accounting Standards Board, or FASB, issued SFAS No. 123 (revised 2004), Share-Based Payment , which requires a public company to recognize, as an expense, the fair value of stock options and other share-based compensation to employees at the beginning of the first annual or interim period after December 31, 2005. We have recently adopted a 2005 share incentive plan that allows us to grant options, restricted shares and other equity incentives to our employees. If such plan is adopted by our board of directors and approved by our shareholders, we could have significant compensation charges for the periods after June 15, 2005 for options, restricted shares and other share-based compensation granted under the plan, and our net income could be adversely affected.
Risks Related To Doing Business in China
Adverse changes in political and economic policies of the Chinese 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.
Substantially all of our business operations are conducted in China. We also 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 Chinese 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 Chinese 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.
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Our business benefits from certain tax incentives, and changes to these tax incentives could adversely affect our operating results.
The Chinese government has provided various tax incentives to domestic high technology companies, including our Chinese subsidiaries, in order to encourage the development of technology companies. For example, as high technology companies operating in an approved technology development zone, our subsidiaries TechFaith China, Techfaith Beijing and STEP Technologies are each entitled to an enterprise income tax, or EIT, rate of 15%, compared to a standard EIT rate of 33%. This classification also had the effect of exempting TechFaith China, TechFaith Beijing and STEP Technologies from paying EIT for the first three years from the commencement of operation and reducing their EIT rates to 7.5% for the following three years. 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 which has been registered with the relevant government authority. There have been various tax reform proposals in China, and 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.
Our subsidiaries in China are subject to restrictions on dividend payments, making other payments to us or any other affiliated company and borrowing or allocating tax losses among our subsidiaries.
We are a holding company incorporated in the Cayman Islands. We conduct substantially all of our operations through our four 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, current PRC regulations prohibit inter-company borrowings or allocation of tax losses among our subsidiaries in China. Further, if any of our subsidiaries in China incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments to us.
Fluctuations in exchange rates could result in foreign currency exchange losses.
Substantially all of our revenues are denominated in RMB, while 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 RMB terms. Furthermore, as we rely entirely on dividends paid to us by our subsidiaries in China, any significant revaluation of the RMB 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 RMB 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 RMB would have a negative effect on the U.S. dollar amount available to us. Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions to reduce our exposure to foreign currency exchange risk. In addition, our currency exchange losses may be magnified by Chinas exchange control regulations that restrict our ability to convert RMB into U.S. dollars.
Restrictions on currency exchange may limit our ability to receive and use our revenues effectively.
Because substantially all of our revenues are denominated in RMB, any restrictions on currency exchange may limit our ability to use revenues generated in RMB to fund any business activities we may have outside China or to make dividend payments in U.S. dollars. The principal regulation governing foreign currency exchange in China is the Foreign Currency Administration Rules (1996), 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 is obtained. Although the PRC government regulations now allow greater
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Recent PRC regulations relating to acquisitions of PRC companies by foreign entities may limit our ability to acquire PRC companies and adversely affect the implementation of our strategy as well as our business and prospects.
The PRC State Administration of Foreign Exchange recently issued a public notice concerning foreign exchange regulations on mergers and acquisitions in China. The public notice states that if an offshore company controlled by PRC residents intends to acquire a PRC company, such acquisition will be subject to strict examination by the relevant foreign exchange authorities. The public notice also states that the approval of the relevant foreign exchange authorities is required for any sale or transfer by the PRC residents of a PRC companys assets or equity interests to foreign entities, such as us, for equity interests or assets of the foreign entities. Pending the promulgation of detailed implementation rules, the relevant government authorities are not likely to process any application for such approval. We cannot assure you when, if at all, such detailed implementation rules will be promulgated. As it is uncertain how this public notice will be interpreted or implemented, we cannot predict how this public notice will affect our business operations or future strategy. For example, in the event that we decide to acquire a PRC company for consideration other than cash, we cannot assure you that we or the owners of such company, as the case may be, will be able to obtain the necessary approval for the acquisition. This may restrict our ability to implement our acquisition strategy and adversely affect our business and prospects. In addition, we may be subject to more stringent review and approval process with respect to our foreign exchange activities, such as remittance of dividends and foreign-currency-denominated borrowings, which may adversely affect our results of operation and financial condition.
Uncertainties with respect to the Chinese 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, 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 these laws and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involve uncertainties, which may limit legal protections available to us. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.
Any prolonged recurrence of SARS or other adverse public health developments in China may have a material adverse effect on our business operations, financial condition and results of operations.
In the first half of 2003, China and certain other countries experienced an outbreak of a new and highly contagious form of atypical pneumonia known as SARS. The SARS outbreak damaged the economy of China as a whole. On July 5, 2003, the World Health Organization declared that SARS had been contained. Any recurrence of SARS or other adverse public health developments in China may have an adverse effect on our business operations, financial condition and results of operations. For instance, health or other government regulations may require temporary closure of our offices, which will severely disrupt our business operations. We have not adopted any written preventive measures or contingency plans to combat any future outbreak of SARS or any other epidemic.
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Risks Related to this Offering
There has been no public market for our ordinary shares or ADSs prior to this offering, and you may not be able to resell our ADSs at or above the price you paid, or at all.
Prior to this initial public offering, there has been no public market for our ordinary shares or ADSs. We have applied for our ADSs to be quoted on the Nasdaq National Market. Our ordinary shares will not be listed on any exchange. If an active trading market for our ADSs does not develop after this offering, the market price and liquidity of our ADSs will be materially and adversely affected.
The initial public offering price for our ADSs will be determined by negotiations between us and the underwriters and may bear no relationship to the market price for our ADSs after the initial public offering. We cannot assure you that an active trading market for our ADSs will develop or that the market price of our ADSs will not decline below the initial public offering price.
The market price for our ADSs may be volatile.
The market price for our ADSs is likely 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; | |
| conditions in the mobile handset market; | |
| changes in the economic performance or market valuations of other mobile handset design houses; | |
| performance of other China-based companies that are quoted 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; | |
| fluctuations of exchange rates between RMB and U.S. dollar; | |
| litigation related to our intellectual property or key employees; and | |
| release of lock-up or other transfer restrictions on our outstanding ADSs or sales of additional ADSs. |
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. These market fluctuations may also materially and adversely affect the market price of our ADSs.
You will experience immediate and substantial dilution in the net tangible book value of ADSs purchased.
The initial public offering price per ADSs will be substantially higher than the net tangible book value per ADS prior to the offering. Consequently, when you purchase ADSs in the offering at the initial public offering price, you will therefore incur an immediate dilution of US$13.05 per ADS. See Dilution.
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
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Substantial future sales of our ADSs in the public market could cause the price of our ADSs to decline.
Additional sales of our ordinary shares in the public market after this offering, or the perception that these sales could occur, could cause the market price of our ADSs to decline. Upon completion of this offering, we will have 658,183,409 ordinary shares outstanding. All shares sold in this offering will be freely transferable without restriction or additional registration under the Securities Act of 1933. The remaining 527,279,054 ordinary shares outstanding after this offering will be available for sale, upon the expiration of the 180-day lockup period beginning from the closing of this offering, subject to volume and other restrictions as applicable under Rule 144 and 701 under the Securities Act. Any or all of these shares may be released prior to expiration of the lockup period at the discretion of Merrill Lynch & Co. To the extent shares are released before the expiration of the lockup period and these shares are sold into the market, the market price of our ADSs could decline.
In addition, certain holders of our ordinary shares after the completion of this offering will have the right to cause us to register the sale of approximately 47.6 million shares under the Securities Act. Registration of these shares under the Securities Act would result in these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration. Sales of these registered shares in the public market could cause the price of our ADSs to decline.
You may not have the same voting rights as the holders of our ordinary shares and may not receive voting materials in time to be able to exercise your right to vote.
Except as described in this prospectus and in the deposit agreement, holders of our ADSs will not be able to exercise voting rights attaching to the shares evidenced by our ADSs on an individual basis. Holders of our ADSs will have the right to instruct the depositary as their representative to exercise the voting rights attaching to the shares represented by the ADSs. You may not receive voting materials in time to instruct the depositary to vote, and it is possible that you, or persons who hold their ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise a right to vote.
You may not be able to participate in rights offerings and may experience dilution of your holdings as a result.
We may from time to time distribute rights to our shareholders, including rights to acquire our securities. Under the deposit agreement for the ADSs, the depositary will not offer those rights to ADS holders unless both the rights and the underlying securities to be distributed to ADS holders are either registered under the Securities Act of 1933, as amended, or exempt from registration under the Securities Act with respect to all holders of ADSs. We are under no obligation to file a registration statement with respect to any such rights or underlying securities or to endeavor to cause such a registration statement to be declared effective. In addition, we may not be able to take advantage of any exemptions from registration under the Securities Act. Accordingly, holders of our ADSs may be unable to participate in our rights offerings and may experience dilution in their holdings as a result.
You may be subject to limitations on transfer of your ADSs.
Your ADSs represented by the ADRs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deem it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.
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Your ability to protect your rights through the U.S. federal courts may be limited, because we are incorporated under Cayman Islands law, conduct substantially all of our operations in China and the majority of our directors and officers reside outside the United States.
We are incorporated in the Cayman Islands, and conduct substantially all of our operations in China through our subsidiaries in China. Most of our directors and officers reside outside the United States and some or all of the assets of those persons are located outside of the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the Cayman Islands or in China to enforce or protect your rights under the securities laws or otherwise. Even if you are successful in bringing an action of this kind, you may be unable to enforce a judgment against our assets or the assets of our directors and officers under the laws of the Cayman Islands and of China. There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the courts of the Cayman Islands will generally recognize and enforce a non-penal monetary judgment of a foreign court of competent jurisdiction without retrial on the merits. For more information regarding the relevant laws of the Cayman Islands and China, see Enforceability of Civil Liabilities.
Our corporate affairs are governed by our memorandum and articles of association and by the Companies Law (2004 Revision) and common law of the Cayman Islands. The rights of shareholders to take legal action against our directors and us, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents in the United States. In particular, the Cayman Islands has a less developed body of securities laws as compared to the United States, and provides significantly less protection to investors. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action before the federal courts of the United States.
As a result of all of the above, our public shareholders may have more difficulty in protecting their interests through actions against our management, directors or major shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States.
We have considerable discretion in the application of the net proceeds of this offering, and we may use the proceeds in ways with which you may not agree.
Our management will have considerable discretion in the application of the net proceeds received by us. You will not have the opportunity, as part of your investment decision, to assess whether proceeds are being used appropriately. You must rely on the judgment of our management regarding the application of the net proceeds of this offering. The net proceeds may be used for corporate purposes that do not improve our efforts to maintain profitability or increase our share price. The net proceeds from this offering may be placed in investments that do not produce income or that lose value.
We are controlled by a small group of our existing shareholders, whose interests may differ from other shareholders.
The family trusts of our four senior officers beneficially own approximately 61.8% of the outstanding ordinary shares of our company, assuming the conversion of the outstanding convertible notes into ordinary shares, and will beneficially own approximately 53.0% of our outstanding ordinary shares immediately following this offering. Mr. Defu Dong, our Chairman and Chief Executive Officer, has sole power to vote on behalf of these trusts 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, including those who purchase shares in this offering.
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We will incur increased costs as a result of being a public company.
As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, as well as new rules subsequently implemented by the Securities and Exchange Commission and Nasdaq, have required changes in corporate governance practices of public companies. We expect these new rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. We are currently evaluating and monitoring developments with respect to these new rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.
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.
We do not expect to be considered a passive foreign investment company, or PFIC, for United States federal income tax purposes for our taxable year ending December 31, 2005. Such characterization could result in adverse U.S. tax consequences to you if you are an U.S. investor. For example, if we are a passive foreign investment company, our U.S. investors will become subject to increased tax liabilities under U.S. tax laws and regulations and will be subject to burdensome reporting requirements. However, we must make a separate determination each year as to whether we are a PFIC and we cannot assure you that we will not be a PFIC for our taxable year ending December 31, 2005 or any future taxable year. 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 market value of our assets may be determined in large part by the market price of our ADSs and ordinary shares, which is likely to fluctuate after the offering (and may fluctuate considerably given that market prices of technology companies have been especially volatile). In addition, the composition of our income and assets will be affected by how, and how quickly, we spend the cash we raise in this offering. 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 Taxation United States Federal Income Taxation Passive Foreign Investment Company.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains many forward-looking statements that reflect our current expectations and views of future events. The forward-looking statements are contained principally in the sections entitled Prospectus Summary, Risk Factors, Managements Discussion and Analysis of Financial Condition and Results of Operations and Business.
Known and unknown risks, uncertainties and other factors may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. See Risk Factors for a discussion of some risk factors that may affect our business and results of operations. These risks are not exhaustive. Other sections of this prospectus may include additional factors that could adversely impact our business and financial performance. Moreover, we operate in an emerging and evolving industry. New risk factors emerge from time to time, and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
These forward-looking statements can be identified by words or phrases such as may, will, expect, anticipate, aim, estimate, intend, plan, believe, is/are likely to or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements relate to, among other things:
| our anticipated growth strategies; | |
| our future business development, results of operations and financial condition; | |
| our ability to design new models of mobile handsets; and | |
| the expected growth of the mobile handset design market. |
You should not rely upon forward-looking statements as predictions of future events. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.
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USE OF PROCEEDS
We estimate that the net proceeds to us from this offering, after deducting underwriting discounts and the estimated offering expenses payable by us, will be approximately US$87.7 million, assuming an initial public offering price of US$16.00 per ADS, the midpoint of the estimated range of the initial public offering price. We will not receive any of the proceeds from the sale of ADSs by the selling shareholders.
The principal purposes of this offering are to create a public market for our ordinary shares for the benefit of all shareholders, retain talented employees by providing them with equity incentives, fund proposed capital expenditures, raise capital and for other business purposes. We intend to use the net proceeds from this offering as follows:
| approximately $45.0 million to expand our research and development efforts, such as building a state-of-the-art research laboratory for developing mobile handsets using emerging technical standards, particularly CDMA 2000, CDMA-EVDO and WCDMA, and smart phones, and an advanced testing laboratory; | |
| approximately $15.0 million to acquire new premises in Beijing to build a dedicated research and development center and a mobile handset pilot production facility; | |
| approximately $5.0 million to expand our selling and marketing activities and establish overseas offices in Asia, Europe and the United States; and | |
| the balance to fund working capital and for other general corporate purposes, including funding further strategic alliances with wireless technology providers and key component suppliers as well as possible strategic acquisitions of quality mobile handset design houses that could complement our existing capabilities and business, although we are not currently negotiating any such transactions. |
We have not yet determined all of our anticipated expenditures and therefore cannot estimate the amounts to be used for each of the purposes discussed above. The amounts and timing of any expenditures will vary depending on the amount of cash generated by our operations, competitive and technological developments and the rate of growth, if any, of our business. Accordingly, our management will have significant flexibility in applying the net proceeds of the offering.
Pending use of the net proceeds, we intend to place our net proceeds in short-term bank deposits.
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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.
Our board of directors has complete discretion as to whether we will distribute dividends in the future, subject to the approval of our shareholders. 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. See Description of American Depositary Shares.
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CAPITALIZATION
The following table sets forth our capitalization as of December 31, 2004:
| on an actual basis; | |
| on a pro forma basis to reflect the automatic conversion of our convertible notes into 66,037,734 ordinary shares immediately prior to the closing of this offering; and | |
| on a pro forma as adjusted basis to reflect the automatic conversion of all of our convertible notes, which will occur immediately upon the closing of this offering, and the issuance and sale of the 92,145,675 ordinary shares or 6,143,045 ADSs offered hereby, after deducting underwriting discounts, commissions and estimated offering expenses. | |
You should read this table together with our consolidated financial statements and the related notes included elsewhere in this prospectus and the information under Managements Discussion and Analysis of Financial Condition and Results of Operations.
As of December 31, 2004 | ||||||||||||||
|
||||||||||||||
Pro Forma | ||||||||||||||
Actual | Pro Forma | As Adjusted | ||||||||||||
|
|
|
||||||||||||
(In thousands, except share data) | ||||||||||||||
Long-term debt
(1)
|
$ | 13,843 | $ | | $ | | ||||||||
Shareholders equity
|
||||||||||||||
Ordinary shares,
|
||||||||||||||
US$0.00002 par value,
50,000,000,000,000 shares authorized:
|
||||||||||||||
500,000,000 shares issued and outstanding
(566,037,734 shares issued and outstanding on a pro forma
basis) (658,183,409 shares issued and outstanding on a pro
forma as adjusted basis)
|
$ | 10 | $ | 11 | $ | 13 | ||||||||
Additional paid-in capital
|
4,832 | 18,831 | 106,548 | |||||||||||
Accumulated other comprehensive income
|
47 | 47 | 47 | |||||||||||
Retained earnings
|
23,201 | 24,041 | 24,041 | |||||||||||
|
|
|
||||||||||||
Total shareholders equity
|
28,090 | 42,930 | 130,649 | |||||||||||
|
|
|
||||||||||||
Total capitalization
|
$ | 41,933 | $ | 42,930 | $ | 130,649 | ||||||||
|
|
|
(1) | Includes derivative liability of $1.96 million. |
As of the date of this prospectus, there has been no material change to our capitalization, as set forth above, without taking into account any change in the derivative liability component of long-term debt, which will be discharged upon the conversion of our convertible notes upon the closing of this offering.
21
DILUTION
Our net tangible book value as of December 31, 2004 was approximately US$0.05 per ordinary share, or US$0.81 per ADS. Net tangible book value per ordinary share represents the amount of total tangible assets, minus the amount of total liabilities, divided by the total number of ordinary shares outstanding. Dilution is determined by subtracting net tangible book value per ordinary share from the assumed public offering price per ordinary share.
Without taking into account any other changes in such net tangible book value after December 31, 2004, other than to give effect to (i) the conversion of all of our convertible notes into ordinary shares, which will occur immediately prior to the closing of this offering, and (ii) our sale of the 6,143,045 ADSs offered in this offering, at the initial public offering price of US$16.00 per ADS and after deduction of underwriting discounts and commissions and estimated offering expenses, our adjusted net tangible book value at December 31, 2004 would have been US$0.20 per outstanding ordinary share, including ordinary shares underlying our outstanding ADSs, or US$2.95 per ADS. This represents an immediate increase in net tangible book value of US$0.12 per ordinary share, or US$1.84 per ADS, to existing shareholders and an immediate dilution in net tangible book value of US$0.87 per ordinary share, or US$13.05 per ADS, to purchasers of ADSs in this offering.
The following table illustrates the dilution on a per ordinary share basis assuming that the initial public offering price per ordinary share is US$1.07 and all ADSs are exchanged for ordinary shares:
Assumed initial public offering price per
ordinary share
|
$ | 1.07 | ||
Underwriting discounts and commissions and
estimated offering expenses per ordinary share
|
$ | 0.12 | ||
Pro forma net tangible book value per ordinary
share
|
$ | 0.08 | ||
|
||||
Amount of dilution in net tangible book value per
ordinary share to new investors in the offering
|
$ | 0.87 | ||
|
||||
Amount of dilution in net tangible book value per
ADS to new investors in the offering
|
$ | 13.05 | ||
|
The following table summarizes, on a pro forma basis as of December 31, 2004, the differences between the shareholders at our most recent fiscal year end and the new investors with respect to the number of ordinary shares purchased from us, the total consideration paid and the average price per ordinary share paid before deducting estimated underwriting discounts and commissions and estimated offering expenses.
Ordinary Shares | |||||||||||||||||||||||||
Purchased | Total Consideration | Average | |||||||||||||||||||||||
|
|
Price Per | Average | ||||||||||||||||||||||
Number | Amount | Ordinary | Price Per | ||||||||||||||||||||||
(in thousands) | Percent | (in thousands) | Percent | Share | ADS | ||||||||||||||||||||
|
|
|
|
|
|
||||||||||||||||||||
Existing shareholders
|
566,038 | 86 | % | $ | 18,842 | 16.1 | % | $ | 0.03 | $ | 0.50 | ||||||||||||||
New investors
|
92,145 | 14 | 98,288 | 83.9 | 1.07 | 16 | |||||||||||||||||||
|
|
|
|
|
|
||||||||||||||||||||
Total
|
658,183 | 100 | % | $ | 117,130 | 100 | % | ||||||||||||||||||
|
|
|
|
As of the date of this prospectus, there are 40,000,000 ordinary shares available for future issuance under our 2005 share incentive plan. To the extent that any of these shares are issued, there will be further dilution to new investors.
22
ENFORCEABILITY OF CIVIL LIABILITIES
We were incorporated in the Cayman Islands in order to enjoy the following benefits:
| political and economic stability; | |
| an effective judicial system; | |
| a favorable tax system; | |
| the absence of exchange control or currency restrictions; and | |
| the availability of professional and support services. |
However, certain disadvantages accompany incorporation in the Cayman Islands. These disadvantages include:
| the Cayman Islands has a less developed body of securities laws as compared to the United States and these securities laws provide significantly less protection to investors; and | |
| Cayman Islands companies may not have standing to sue before the federal courts of the United States. |
Our constituent documents do not contain provisions requiring that disputes, including those arising under the securities laws of the United States, between us, our officers, directors and shareholders, be arbitrated.
Almost all of our current operations are conducted in China, and substantially all of our assets are located in China. We have appointed CT Corporation System, 111 Eighth Avenue, New York, NY 10011, as our agent upon whom process may be served in any action brought against us under the securities laws of the United States. A majority of our directors and officers are nationals or residents of jurisdictions other than the United States and a substantial portion of their assets are located outside the United States. As a result, it may be difficult for a shareholder to effect service of process within the United States upon these persons, or to enforce against us or them judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States.
Conyers Dill & Pearman, our counsel as to Cayman Islands law, and Guantao Law Firm, our counsel as to PRC law, have advised us, respectively, that there is uncertainty as to whether the courts of the Cayman Islands and China, respectively, would:
| recognize or enforce judgments of United States courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States; or | |
| entertain original actions brought in each respective jurisdiction against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States. |
Conyers Dill & Pearman has further advised us that a final and conclusive judgment in the federal or state courts of the United States under which a sum of money is payable, other than a sum payable in respect of taxes, fines, penalties or similar charges, may be subject to enforcement proceedings as debt in the courts of the Cayman Islands under the common law doctrine of obligation. Civil liability provisions of the U.S. federal and state securities law permit punitive damages against us; however, according to Conyers Dill & Pearman, the Cayman Island courts would not recognize or enforce judgments against us to the extent the judgment is punitive or penal. It is uncertain as to whether a judgment obtained from the U.S. courts under civil liability provisions of the securities law would be determined by the Cayman Islands courts as penal or punitive in nature. Such a determination has yet to be made by any Cayman Islands court.
Guantao Law Firm has advised us further that the recognition and enforcement of foreign judgments are provided for under PRC Civil Procedures Law. Courts in China may recognize and enforce foreign judgments in accordance with the requirements of PRC Civil Procedures Law based on treaties between
23
24
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for the period from July 26, 2002 (date of inception) to December 31, 2002 and the years ended December 31, 2003 and 2004 and selected consolidated balance sheet data as of December 31, 2002, 2003 and 2004 are derived from our audited consolidated financial statements included elsewhere in this prospectus and should be read in conjunction with, and are qualified in their entirety by reference to, those financial statements and related notes. Our audited financial statements have been audited by Deloitte Touche Tohmatsu and were prepared in accordance with U.S. GAAP. The following selected consolidated financial data should be read in conjunction with our audited consolidated financial statements and related notes and Managements Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this prospectus.
For the Period | |||||||||||||
From July 26, 2002 | Year Ended December 31, | ||||||||||||
to December 31, |
|
||||||||||||
2002 | 2003 | 2004 | |||||||||||
|
|
|
|||||||||||
(In thousands, except share, per share and per ADS data) | |||||||||||||
Consolidated Statement of Operations
Data
|
|||||||||||||
Revenues:
|
|||||||||||||
Design fees
|
$ | | $ | 7,947 | $ | 29,495 | |||||||
Royalty income
|
| 1,259 | 6,961 | ||||||||||
Component products
|
| 471 | 10,104 | ||||||||||
|
|
|
|||||||||||
Total net revenues
|
| 9,677 | 46,560 | ||||||||||
|
|
|
|||||||||||
Cost of revenues:
|
|||||||||||||
Design fees
|
| 2,260 | 10,951 | ||||||||||
Royalty income
|
| | 725 | ||||||||||
Component products
|
| 371 | 8,208 | ||||||||||
|
|
|
|||||||||||
Total cost of revenues
|
| 2,631 | 19,884 | ||||||||||
|
|
|
|||||||||||
Gross profit
|
| 7,046 | 26,676 | ||||||||||
|
|
|
|||||||||||
Operating expenses:
|
|||||||||||||
General and administrative
|
(6 | ) | (968 | ) | (4,771 | ) | |||||||
Research and development
|
| (700 | ) | (2,506 | ) | ||||||||
Selling and marketing
|
| (39 | ) | (694 | ) | ||||||||
Impairment of acquired intangible assets
|
| (423 | ) | | |||||||||
|
|
|
|||||||||||
Total operating expenses
|
(6 | ) | (2,130 | ) | (7,971 | ) | |||||||
|
|
|
|||||||||||
(Loss) income from operations
|
(6 | ) | 4,916 | 18,705 | |||||||||
Total other income (loss), net
|
7 | 40 | (461 | ) | |||||||||
Income taxes
|
| | | ||||||||||
|
|
|
|||||||||||
Net income
|
$ | 1 | $ | 4,956 | $ | 18,244 | |||||||
|
|
|
|||||||||||
Net income per ordinary share
|
|||||||||||||
Basic
|
$ | | $ | 0.02 | $ | 0.04 | |||||||
|
|
|
|||||||||||
Diluted
|
$ | | $ | 0.02 | $ | 0.03 | |||||||
|
|
|
|||||||||||
Net income per ADS
|
|||||||||||||
Basic
|
$ | | $ | 0.31 | $ | 0.55 | |||||||
|
|
|
|||||||||||
Diluted
|
$ | | $ | 0.31 | $ | 0.52 | |||||||
|
|
|
|||||||||||
Shares used in per share computation
|
|||||||||||||
Basic
|
| 242,456,753 | 500,000,000 | ||||||||||
|
|
|
|||||||||||
Diluted
|
| 243,074,581 | 551,823,942 | ||||||||||
|
|
|
25
As of December 31,
2002
2003
2004
(In thousands)
$
11
$
7,699
$
35,086
5,230
7,760
732
5,030
$
3,618
$
23,911
$
67,542
5,952
16,418
$
1,201
$
8,324
$
23,869
$
$
4,000
$
11,887
$
$
$
1,956
$
$
1,763
$
1,740
2,417
9,824
28,090
$
3,618
$
23,911
$
67,542
26
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. This discussion may contain forward-looking statements based upon current expectations, the fulfillment of which is uncertain and subject to risks. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under Risk Factors or in other parts of this prospectus.
We are one of the largest independent mobile handset design houses in China. We provide complete design services spanning the entire handset design cycle, which involves industrial design, mechanical design, software design, hardware design, component selection and sourcing, prototype testing, pilot production and production support. We achieved profitability in 2003 and in 2004. Our results have been driven by the growing trend among mobile handset brand owners to outsource the design function to independent design houses. From our inception in July 2002 to December 31, 2004, we successfully designed 58 mobile handset models. For the year ended December 31, 2004, we generated net revenues of US$46.6 million and net income of US$18.2 million.
We commenced operations in July 2002 through TechFaith China. We signed our first mobile handset design contract in March 2003 and began to recognize revenues from our design services in June 2003. We created our current holding company structure through a series of transactions that resulted in TechFaith becoming the ultimate holding company in November 2004 when it issued shares in exchange for all the shares that our shareholders held in TechFaith BVI. We conduct substantially all of our operations through our subsidiaries in China.
The mobile handset industry is characterized by shortened product life cycles, increasing competition, margin pressure for wireless handset brand owners and a growing trend toward outsourcing. We expect our business to be primarily driven by the growing mobile handset markets and the industry trend to outsource the handset design function. We also expect our future revenue growth to be driven by our design contracts from new international customers and top Chinese customers and the expansion of our service offerings to cover handsets for sale internationally.
Our gross margins have varied since our inception and are expected to continue to vary as a result of a variety of factors. These factors include changes in the relative mix of our services and products and the terms at which we offer them. In order to maintain or improve our gross margin for our design services, we must reduce our unit cost through achieving greater economies of scale, particularly in the face of price pressures in a competitive market. We offer printed circuit boards, or PCBs, wireless modules and other component products principally at cost, plus a margin. We also assist customers in procuring handset testing equipment. We offer these products and services principally for strategic purposes at a margin lower than that for our design services. For example, we sell PCBs as a means of determining our customers handset sales for calculating royalty payments under arrangements discussed in Net Revenues below. Accordingly, to the extent the contribution of component sales to our net revenues increases, our blended gross margin will correspondingly decrease, in the absence of any other change.
We provide mobile handset design services to mobile handset brand owners. Our customers include leading Chinese mobile handset brand owners, such as Bird, Haier, Konka and Lenovo, and international mobile handset brand owners, such as Alcatel, Kyocera, Mitsubishi, NEC and UTStarcom. Although Chinese mobile handset customers accounted for most of our net revenues and fueled our initial growth, international brand owners have contributed to an increasing portion of our net revenues. We expect the revenue contribution from international mobile handset customers to increase rapidly as we focus our sales and marketing efforts to target international brand owners while retaining the top Chinese brand owners. A small number of customers have historically accounted for a substantial portion of our net revenues. In 2003, our top three customers collectively accounted for approximately 88.2% of our net revenues. In 2004, our top four customers collectively accounted for approximately 56.8% of our net revenues. Sales to our largest customers have varied from period to period due primarily to our relatively short period of operation and the
27
Net Revenues. We derive our revenues primarily from mobile handset design services, and to a lesser extent, sales of wireless modules, PCBs and other component products for mobile handsets. Revenues from design services comprise of design fees and royalty income.
We recognize design fees as revenues only when a pre-agreed milestone has been reached. In general, three milestones are identified in our design contracts with customers. When the mobile handset design receives the approval verifying its conformity with applicable industry standards, in the case of GSM-based handsets, the full type approval, or FTA, for its conformity with GSM standards, we achieve the first milestone with respect to the design. When the mobile handset design receives regulatory approval for its use in the intended country, in the case of China, a China type approval, or CTA, we achieve the second milestone. When the customer accepts the mobile handset design and is ready to begin mass production of mobile handsets based on our design, we achieve the last milestone, which we refer to as shipping acceptance, or SA. We generally charge a fixed price for our projects and recognize revenues based on percentage of completion of the project upon attaining pre-agreed milestones set forth in the agreement with the customer. We measure progress toward completion by reference to the total labor costs and direct project expenses incurred as of the time we reach a pre-agreed milestone, as compared to the total labor costs and direct project expenses we expect to incur for completing a design project through SA, the last milestone. We believe this measure of percentage of completion best reflects the value of the work completed as of the milestone. If actual labor costs and direct project expenses change after a milestone is reached, we adjust the cost of revenues for the period during which we know the facts that give rise to the change. If a milestone has not been reached, the associated cost is deferred and revenues are not recognized until the milestone has been achieved.
Historically, we have entered into royalty arrangements with Chinese mobile handset brand owners, pursuant to which we charge a royalty in addition to the design fees described above as we retain the schematic design and PCB layout of the mobile handset we design. The royalty is calculated at a variable rate based on the volume of mobile handsets manufactured by a customer. Recently, we also entered into a royalty arrangement with one of our international customers, NEC, whereby NEC would pay us royalties at a variable rate based on the volume of mobile handsets manufactured by NEC in addition to the design fees paid to us. In addition, beginning from the fourth quarter of 2004, some of our component suppliers and technology providers agreed to provide commissions to us for the use of their components and technology in our designs, and we recognize such commissions as part of our royalty income when these component suppliers and technology providers confirm the amount of commissions.
We recognize revenues from sales of wireless modules, PCBs and other electronic component products for mobile handsets upon delivery of these products to the customer. The customer orders component products it requires to manufacture mobile handsets from us. We then source the production of the component products from an outside supplier. We recognize revenues when the component products are delivered to the customer. We record the gross amounts billed to our customers as we are the primary obligor in these transactions. This is because we have latitude in establishing prices, are involved in the determination of the service specifications, bear credit risk and inventory risk and have the right to select the suppliers. We also assist certain customers in installing mobile handset testing lines and recognize revenues when these lines are installed.
Our net revenues from design fees and royalty income reflect deductions from our gross revenues for local business taxes incurred by our subsidiaries in China. Each of our subsidiaries in China is subject to a local business tax at an effective rate of 5% on revenues generated from services provided in China. We may,
28
Cost of Revenues. Cost of revenues for our design fees primarily consists of part of our engineers compensation and benefits for the period during which they are involved in any mobile handset design project, and to a lesser extent, product warranty expenses, costs of materials used in making handset prototypes and depreciation and amortization of intangible assets including technology licenses and royalty rights used in connection with our design services. Cost of revenues for our royalty income normally are minimal. However, we incurred cost of revenues for our royalty income in 2004 in connection with the royalty rights under the three mobile handset design contracts that Beijing Qidi assigned to us in connection with a litigation settlement. The royalty rights are fully amortized within 12 months. We owned a 49% equity interest in Beijing Qidi until our divestment in September 2003. Cost of revenues from our sales of wireless modules consists primarily of cost of materials used in making wireless modules, and to a lesser extent, compensation and benefits to our staff associated with the wireless module business. Cost of revenues from sales of PCBs and other component products consists of the cost of acquiring PCBs and other component products from third parties, and cost incurred in connection with our assisting customers in installing testing equipment and lines for the testing of handsets before shipment.
Operating Expenses. Our operating expenses consist of general and administrative, research and development and selling and marketing expenses and expenses related to impairment of acquired intangible assets.
General and Administrative. General and administrative expenses consist primarily of compensation and benefits of administrative personnel, lease expenses for occupancy associated with administration, travel and other expenses for general and administrative purposes, as well as costs for professional services, including legal and accounting services.
Research and Development. Research and development expenses consist primarily of the portion of our engineers compensation and benefits not attributable to any mobile handset design project pursuant to a design contract, 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 Europe and North America to promote and sell our mobile handset design services.
Impairment of Acquired Intangible Assets. Expenses related to impairment of acquired intangible assets represent the expenses we incurred in acquiring a technology for monochrome screen interface of mobile handsets in early 2003. We outsourced the development of this technology at the end of 2002 but ceased to use it in 2003 because advanced mobile handset-related technologies were adopted at a much faster pace in 2003 than what we had expected in 2002, which caused the technology for monochrome screen interface to become outdated in 2003.
Income Taxes. Under the current laws of the Cayman Islands and 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.
Under the current laws of China, our subsidiaries in China are subject to state enterprise income tax, or EIT, at a rate of 33% on taxable income in China. TechFaith China, TechFaith Beijing and STEP
29
Critical Accounting Policies
We prepare our financial statements in conformity with U.S. GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities on the date of the financial statements and the reported amounts of revenue and expenses during the financial reporting period. 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 primarily derived from designing mobile handsets and we generate our revenues principally through design fees and royalty income.
We recognize design fees in accordance with Statement of Position, or SOP, 97-2 because the software element of the handset has been deemed more than incidental for the handset design process taken as a whole. Accordingly, as prescribed by SOP 97-2, we recognize design fees revenues in accordance with SOP 81-1 Accounting for Performance of Construction-Type and Certain Production-Type Contracts as the handset design process requires significant production, development or customization of software. SOP 81-1 provides that the percentage-of-completion method of revenue recognition is preferable in instances where reasonably dependable estimates exist. We believe that we are able to produce such estimates and to appropriately measure the amount of revenues to be recognized at the date each contractual milestone FTA, CTA or SA is achieved using the percentage-of-completion method of accounting. Consistent with SOP 81-1, we believe that an output measure, such as contract milestones, is most reflective of the manner in which we earn revenues under our design contracts. Accordingly, we recognize design fee revenues as each contractual milestone is met, based on the percentage of completion at each milestone by using input measures labor hours and other relevant costs incurred through the date of milestone compared to the total labor hours and other relevant costs estimated to be incurred to complete the design project through the last milestone. We believe that these contractual milestones are significant and specific tasks that are outlined in the design contracts and provide our customers with the ability to review the project status. We also believe that this is more reflective of the design progress completed through the date of the milestone, as opposed to designating percentage of completion based on the amounts that become billable at the milestone.
The customized mobile handset design process involves industrial design, mechanical design, software design, hardware design, component selection and sourcing, prototype testing and pilot production. It typically takes six to nine months to complete a mobile handset design project. We generally enter into a design contract with each customer with respect to a design project prior to the commencement of the project. On a periodic basis, management estimates the percentage of completion of each project to calculate the amount of revenues to be recognized when each project reaches a contractual milestone. Recognized revenues are subject to revisions as the contract progresses to completion. Revisions in profit estimates are charged to income in the period in which the facts that give rise to the revision become known. Accordingly, any changes in our estimates would impact our future operating results.
30
Our project and department managers have significant experience in the design and development of mobile handsets. The estimates deployed are based on their experience designing handsets. These are estimates and therefore contain a risk of change. In our experience, we have not experienced material adverse changes from period to period in calculating the percentage of completion.
Selected Quarterly Results of Operations
The following table presents our unaudited
consolidated selected quarterly results of operations for the
eight quarters ended December 31, 2004. You should read the
following table in conjunction with our audited consolidated
financial statements and related notes contained elsewhere in
this prospectus. We have prepared the unaudited consolidated
financial information on the same basis as our audited
consolidated financial statements. The unaudited consolidated
financial information includes all adjustments, consisting only
of normal recurring adjustments, that we consider necessary for
a fair presentation of our financial position and operating
results for the quarters presented.
Three Months Ended
(unaudited)
March 31,
June 30,
September 30,
December 31,
March 31,
June 30,
September 30,
December 31,
2003
2003
2003
2003
2004
2004
2004
2004
(in thousands, except operating data)
$
$
379
$
1,230
$
6,338
$
4,099
$
6,281
$
9,123
$
9,992
1,259
2,512
1,792
840
1,817
471
2,416
2,771
2,070
2,847
$
$
379
$
1,230
$
8,068
$
9,027
$
10,844
$
12,033
$
14,656
$
$
282
$
865
$
1,113
$
1,694
$
2,540
$
3,083
$
3,634
181
181
182
181
371
1,997
2,217
1,914
2,080
$
$
282
$
865
$
1,484
$
3,872
$
4,938
$
5,179
$
5,895
97
365
6,584
5,155
5,906
6,854
8,761
$
(95
)
$
(42
)
$
(65
)
$
(766
)
$
(673
)
$
(1,304
)
$
(1,568
)
$
(1,226
)
(40
)
(205
)
(97
)
(358
)
(542
)
(666
)
(1,023
)
(275
)
(2
)
(5
)
(9
)
(23
)
(139
)
(165
)
(197
)
(193
)
(423
)
$
(560
)
$
(252
)
$
(171
)
$
(1,147
)
$
(1,354
)
$
(2,135
)
$
(2,788
)
$
(1,694
)
(560
)
(155
)
194
5,437
3,801
3,771
4,066
7,067
(51
)
(109
)
155
45
35
310
(375
)
(431
)
$
(611
)
$
(264
)
$
349
$
5,482
$
3,836
$
4,081
$
3,691
$
6,636
1
3
8
13
28
29
33
(1) | Represents the number of handset designs which contributed to the design fee revenues during the relevant quarterly period. |
Our net income (loss) fluctuated during the eight quarters ended December 31, 2004. Our total net revenues increased sequentially in each of these quarters, principally as a result of increases in design fee revenues during the period. Design fee revenues increased during each of the eight quarters except the quarter ended March 31, 2004. The decrease in design fee revenues in that quarter is principally attributable to the exceptionally high design fee revenues in the prior quarter, including a substantial amount of completion fee related to design contracts with two major customers. The decrease is also attributable to the higher amount of average design fee per project in 2003 as compared to 2004. Although average design fee per project decreased in 2004 primarily due to competition among independent wireless handset design houses in China,
31
Design fee revenues were our primary source of revenues in each of the quarterly periods since we began operations. Design fee revenues for each quarterly period reflected the number of projects achieving design milestones and the relevant proportion of the value of the entire contract, based on a percentage of completion taking into account the amount of labor cost and expenses incurred for reaching the milestone during the quarterly period. The value per contract and the amount of time it takes to achieve the pre-agreed milestones vary, subject to the complexity of the design specified by the handset brand owners. We were in our development stage during the first and second quarters of 2003 and thus our operating expenses as a percentage of total net revenues for these two quarters were significantly higher than subsequent quarters. Since the third quarter of 2003, our operating expenses increased in amount sequentially in each of the quarters primarily due to our expanded business operations. We experienced some notable fluctuations in our result of operations for the quarter ended September 30, 2004. Our design fee revenues increased significantly to $9.1 million in the quarter ended September 30, 2004, and to $10.0 million in the quarter ended December 31, 2004, from $6.3 million in the quarter ended June 30, 2004 principally due to the substantial amount of design fee revenues, including completion fees that we generated from the design contracts with a major international brand owner. The decrease in our revenues from royalty income to $0.8 million in the quarter ended September 30, 2004 from $1.8 million in the prior quarter, is due to the timing difference in the recognition of royalty income related to several Chinese customers. Our revenues from royalty income increased to $1.8 million in the fourth quarter of 2004 primarily due to the commissions from some component suppliers. Our revenues from component products decreased to $2.0 million in the quarter ended September 30, 2004 from $2.8 million in the prior quarter as we decided to limit the growth of sales of our component products and focus more resources on the wireless handset design business. Our revenues from component products increased to $2.8 million in the fourth quarter of 2004 due to an increase of component products purchased by customers for use in the pilot production of mobile handsets that we designed for them. In the quarter ended September 30, 2004, our research and development expenses increased to $1.0 million from $0.7 million primarily as we invested more engineering resources in preparing for the design of CDMA-based wireless handsets after we entered into license agreements in March 2004 to develop CDMA-based handsets. Our general and administrative expenses increased substantially in the two quarters ended September 30, 2004 primarily because of the expenses incurred in connection with our preparation for a proposed listing of our ordinary shares on the Stock Exchange of Hong Kong which we subsequently abandoned.
As most of our growth has occurred during the most recent quarters and because our quarterly results have fluctuated as describe above, our operating results for any quarter are not necessarily indicative of results that may be expected for any future period. In particular, our operating results in any quarterly period may be affected by a number of factors, including those noted in Risk Factors Risks Related to Our Business We experience fluctuations in quarterly operating results.
32
Results of Operations
The following table sets forth a summary of our
consolidated statements of operations. Our business has evolved
rapidly and significantly since we commenced operations in July
2002. Our limited operating history makes the prediction of
future operating results very difficult. We believe that
period-to-period comparisons of operating results should not be
relied upon as being indicative of future performance.
For the Period from
For the Year Ended
July 26, 2002 to
December 31,
December 31,
2002
2003
2004
(In thousands)
$
$
7,947
$
29,495
1,259
6,961
471
10,104
$
$
9,677
$
46,560
$
$
2,260
$
10,951
725
371
8,208
$
$
2,631
$
19,884
7,046
26,676
$
(6
)
$
(968
)
$
(4,771
)
(700
)
(2,506
)
(39
)
(694
)
(423
)
$
(6
)
$
(2,130
)
$
(7,971
)
$
(6
)
$
4,916
$
18,705
7
(9
)
(484
)
49
23
$
1
$
4,956
$
18,244
Period from July 26, 2002 to December 31, 2002
We were founded in July 2002. For the period from our inception to December 31, 2002, we were a development stage company and did not sell any services or products. During this period, we were in the process of establishing our management structure and formulating our strategy and vision, and accordingly, did not generate any revenue.
33
Design fees contributed to most of our revenues for all the periods presented in our consolidated financial statements. The following table sets forth the number of mobile handsets which contributed to our design fee revenues and the number of milestones we achieved in 2003 and 2004, respectively.
2003 | 2004 | |||||||
|
|
|||||||
Number of Handset Designs
|
9 | 58 | ||||||
Milestone
|
||||||||
|
||||||||
FTA
|
11 | 69 | ||||||
CTA
|
4 | 62 | ||||||
SA
|
3 | 55 |
Comparison of the Year Ended December 31, 2003 and the Year Ended December 31, 2004
Net Revenues. Our net revenues increased substantially to US$46.6 million in 2004 from US$9.7 million in 2003. The increase was primarily attributable to a substantial increase in net revenues from design fees and, to a lesser extent, substantial increases in net revenues from component products and royalty income.
Design Fees. Our net revenues from design fees increased substantially to US$29.5 million in 2004 from US$7.9 million in 2003 because of a significant growth of our wireless handset design service business. In 2003, a total of 9 handset designs contributed to our design fee revenues, 11 mobile handsets designed by us reached the FTA milestone, four mobile handsets designed by us achieved the CTA milestone and three mobile handsets designed by us achieved the SA milestone. In contrast, in 2004, a total of 58 designs contributed to our design fee revenues, 69 of our mobile handset designs achieved the FTA milestone, 62 of our mobile handset designs achieved the CTA milestone, and 55 of our mobile handset designs achieved the SA milestone. Our customer base expanded substantially in 2004. International customers such as Alcatel, Kyocera, Mitsubishi, NEC and UTStarcom engaged us to design mobile handsets, while eight of the top 10 Chinese mobile handset brand owners were our customers in 2004.
Royalty Income. Our royalty income increased substantially to US$7.0 million in 2004 from US$1.3 million in 2003. The increase was primarily attributable to the continuous completion of handset design projects throughout 2004, whereas we only began generating royalty income in the fourth quarter of 2003, after completing our first design project in September 2003.
Component Products. Revenues from sales of our component products increased substantially to US$10.1 million in 2004 from US$0.5 million in 2003. The increase was primarily due to substantial increases in sales of PCBs to US$6.0 million in 2004 from US$0.4 million in 2003 and sales of other components for mobile handsets to US$4.1 million in 2004 from US$0.1 million in 2003.
Cost of Revenues. Cost of revenues increased substantially to US$19.9 million in 2004 from US$2.6 million in 2003. The increase was primarily attributable to a substantial increase in cost of revenues for design fees and, to a lesser extent, substantial increases in cost of revenues for component products and royalty income.
Design Fees. Cost of revenues for design fees increased substantially to US$11.0 million in 2004 from US$2.3 million in 2003, primarily as a result of increased compensation and benefits allocated to engineers who worked on design projects in 2004.
Royalty Income. Our cost of revenues for royalty income was US$0.7 million in 2004. This cost related to amortization charges associated with our acquisition of certain intangible assets from Beijing Qidi in January 2004. We did not incur any cost of revenues for royalty income in 2003.
Component Products. Cost of revenues for component products increased substantially to US$8.2 million in 2004 from US$0.4 million in 2003. The increase was due primarily to increases in cost of
34
Gross Profit. Our gross profit was US$26.7 million in 2004, compared to US$7.0 million in 2003, representing gross margins of 57.3% and 72.8%, respectively. The decrease in gross margin was primarily as a result of an increase in cost of revenues across all three categories of our revenues.
Design Fees. Our gross profit for design fees was US$18.5 million in 2004, compared to US$5.7 million in 2003, representing gross margins of 62.9% and 71.6%, respectively. The decrease in gross margin was primarily the result of a decrease in the average design fee per project in 2004 as compared to 2003.
Royalty Income. Our gross profit for royalty income was US$6.2 million in 2004, compared to US$1.3 million in 2003, representing gross margins of 89.6% and 100%, respectively. The decrease in gross margin was because we incurred cost of revenues for royalty income in 2004.
Component Products. Our gross profit from the sale of component products was US$1.9 million in 2004, compared to US$0.1 million in 2003, representing gross margins of 18.8% and 21.2%, respectively. The decrease in gross margin was primarily the result of the increases in cost of revenues from PCBs.
Operating Expenses. Operating expenses increased to US$8.0 million in 2004 from US$2.1 million in 2003. The increase was due to substantial increases in general and administrative expenses and research and development and, to a lesser extent, an increase in selling and marketing expenses.
General and Administrative. General and administrative expenses increased to US$4.8 million in 2004 from US$1.0 million in 2003. The increase was due primarily to a substantial increase in our administrative personnel as we continued to grow our business, and to a lesser extent, an increase in rental costs as we leased new premises to accommodate our growth. The increase was also attributable to additional staff and rent expenses related to TechFaith Shanghai, which we formed in early 2004 to focus on developing mobile handsets based on the CDMA platform licensed from QUALCOMM.
Research and Development. Research and development expenses increased to US$2.5 million in 2004 from US$0.7 million in 2003. The increase was due primarily to the hiring of additional engineers in anticipation of the growth of our wireless design service business, including 2.5G and 3G mobile handset designs based on the CDMA platform licensed from QUALCOMM.
Selling and Marketing. Selling and marketing expenses increased to US$0.7 million in 2004 from US$39,000 in 2003. The increase was due primarily to the increase in our selling and marketing staff and activities as we expanded our efforts to market and sell our services.
Impairment of Acquired Intangible Assets. In 2003, we recorded an impairment charge related to impairment of acquired intangible assets in the amount of US$0.4 million, or 19.9% of the total amount of operating expenses in 2003. This expense reflected the one-time write-off of the then carrying value of the monochrome screen interface technology we acquired and then discontinued to use in 2003. We did not incur any such expense in 2004.
Total Other Income (Loss) Net. We incurred total other net income of US$0.5 million in 2004 as compared to total other net loss of US$9,000 in 2003, primarily due to the accrued interest expense and amortized discount related to the convertible notes issued in April 2004.
Net Income. Our net income increased to US$18.2 million in 2004 from US$5.0 million in 2003 as a result of the cumulative effect of the foregoing factors.
35
Liquidity and Capital Resources
The following table sets forth a summary of our
cash flows for the periods indicated:
We have financed our operations through cash
generated from our operating activities and private securities
issuances. Prior to December 2003, we received capital
contributions from former shareholders of TechFaith China. In
December 2003, we received US$4.0 million from the issuance
by TechFaith BVI of convertible notes to SeaBright, a strategic
investor. The notes issued to SeaBright were canceled in
connection with TechFaith BVIs issuance of a total of
US$14.0 million of convertible notes to four strategic
investors, namely Intel, QUALCOMM, HTF 7 and SeaBright in April
2004. As of December 31, 2004, we had US$35.1 million
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. 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 twelve months. We may, however, require additional cash
resources beyond the next twelve 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, would 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 RMB into U.S. dollars and make payments to us is
subject to PRC foreign exchange regulations. Under these
regulations, RMB is convertible for current account items,
including the distribution of dividends, interest payments,
trade and service-related foreign exchange transactions.
Conversion of RMB 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 Dividend
Policy. Nor does TechFaith have any loans or any other
outstanding debts. Each of our operating subsidiaries in China
fulfils its own cash obligations. Accordingly, we believe that
the impact of PRC foreign exchange regulations on
TechFaiths ability to meet its cash obligations is minimal.
Operating
Activities.
Net cash provided from
operating activities increased substantially to
US$25.8 million in 2004 from US$8.7 million in 2003.
The increase was due primarily to the increased operating income
resulting from the significant increase in our wireless handset
design service contracts and, to a lesser extent, to the
significant increases in our component product sales and our
royalty income.
In connection with our design services, our
customers typically pay us a portion of design fees immediately
after the design contract is executed. We account such fees as
advances from customers only until a pre-agreed milestone has
been reached. Due to the increasing competition among mobile
handset
36
Our accounts receivable amounted to
US$5.2 million and US$7.8 million as of
December 31, 2003 and 2004, respectively. Our inventories
amounted to US$0.7 million and US$5.0 million as of
December 31, 2003 and 2004, respectively.
Investing
Activities.
Net cash used in investing
activities decreased slightly to US$8.1 million in 2004
from US$8.4 million in 2003. Our investing activities in
2003 primarily consist of capital expenditures in connection
with the purchase of software, machinery and equipment, offset
by the US$1.2 million received from sale of our equity
interest in Beijing Qidi. Our investing activities in 2004
primarily consist of the purchase of plant, machinery and
equipment and the purchase of intangible assets for our mobile
handset design business.
Financing
Activities.
Net cash provided by
financing activities increased by 32.1% to US$9.7 million
in 2004 from US$7.3 million in 2003. Net cash provided by
financing activities in 2004 primarily consisted of
US$10.0 million from net issuance of interest-free
convertible notes to three strategic investors in April 2004.
Net cash provided by financing activities in 2003 primarily
consisted of US$4.0 million from issuance of interest-free
convertible notes to SeaBright and US$4.2 million from our
shareholders as capital contribution to our subsidiaries in
China, offset by our repayment of a short term loan in the
amount of US$1.8 million to an unrelated party. In December
2003, we received US$4.0 million from issuance of
convertible notes to SeaBright, a strategic investor. The notes
issued to SeaBright were canceled and replaced with the new
notes to SeaBright in connection with the issuance of a total of
US$10.0 million of interest-free convertible notes to three
additional strategic investors, namely, Intel, QUALCOMM and HTF
in April 2004. Upon the completion of this offering, all
convertible notes will be automatically converted into our
ordinary shares.
Our capital expenditures amounted to
US$1.2 million, US$5.6 million and US$6.2 million
in the period from our inception to December 31, 2002, 2003
and 2004, respectively. Our historical capital expenditure
consisted principally of purchases of software, machinery,
equipment and other items related to our mobile handset design
services. We expect to incur capital expenditures totaling
approximately US$38.0 million in 2005. We expect our
capital expenditures in 2005 to primarily consist of the
following:
Contractual Obligations
The following table sets forth our contractual
obligations as of December 31, 2004:
37
Other than the contractual obligations set forth
above, we do not have any long-term commitments.
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. Our convertible notes
are convertible into ordinary shares at the request of the
holders thereof at any time. In addition, the outstanding
convertible notes are redeemable by the note holders after
April 16, 2007. Accordingly, we consider our convertible
notes to be derivative financial instruments.
Inflation
Inflation in China has not had a material impact
on our results of operations in recent years. According to CEIC,
the change of Consumer Price Index in China was (0.8)% and 1.2%
in 2002 and 2003, respectively.
For the Period from
Year Ended
July 26, 2002 to
December 31,
December 31,
2002
2003
2004
(In thousands of U.S. dollars)
(1,233
)
8,716
25,809
(2,368
)
(8,395
)
(8,112
)
3,612
7,342
9,700
25
(10
)
11
7,688
27,387
11
7,699
11
7,699
35,086
Table of Contents
approximately US$22.0 million to build a
laboratory for developing mobile handsets using emerging
technical standards, particularly CDMA 2000, CDMA-EVDO and
WCDMA, and smart phones, as well as an advanced testing
laboratory;
approximately US$11.0 million to acquire new
premises to build a dedicated research and development center
and a mobile handset pilot production facility in Beijing; and
approximately US$5.0 million to purchase
additional software, machinery, equipment and other items
necessary for our growing mobile handset design business.
Payment Due by Period
Less Than
1-3
3-5
More Than
Contractual Obligations
Total
1 Year
Years
Years
5 Years
(In thousands of U.S. dollars)
$
14,000
$
$
14,000
$
$
1,628
694
849
85
655
655
$16,283
$
1,349
$
14,849
$
85
$
(1)
Purchase obligations relating to the purchase of
plant, machinery and equipment.
Table of Contents
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk. Our risk exposure from changes in interest rates relates primarily to the interest income generated by excess cash invested in short term bank deposits. Interest-earning instruments carry a degree of interest rate risk. We have not been nor do we anticipate being exposed to material risks due to changes in interest rates.
Foreign Exchange Risk. Substantially all of our revenues and substantially all our cost of revenues are denominated in RMB, with an immaterial portion of our cost of revenues denominated in the U.S. dollar. We have not had any material foreign exchange gains or losses. Although in general, our exposure to foreign exchange risks is limited and immaterial, fluctuations in exchange rates, primarily those involving the U.S. dollar, may affect our cost of revenues and profit margins. Furthermore, a decline in the value of US dollar could reduce the U.S. dollar equivalent of the value of the earnings from, and our investments in, our subsidiaries in China. To date, we have not used any forward contracts or currency borrowings to hedge our exposure to foreign currency exchange risk.
Recent Accounting Pronouncements
In May 2003, the Financial Accounting Standard Board, or FASB, issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This statement establishes standards for how an issuer classifies and measures certain financial instruments. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The statement requires that certain financial instruments that, under previous guidance, issuers could account for as equity be classified as liabilities (or assets in some circumstances) in statements of positions or consolidated balance sheets, as appropriate. The financial instruments within the scope of this statement are: (i) mandatorily redeemable shares that an issuer is obligated to buy back in exchange for cash or other assets; (ii) financial instruments that do or may require the issuer to buy back some of its shares in exchange for cash or other assets; and (iii) financial instruments that embody an obligation that can be settled with shares, the monetary value of which is fixed, tied solely or predominantly to a variable such as a market index, or varies inversely with the value of the issuers shares (excluding certain financial instruments indexed partly to the issuers equity shares and partly, but not predominantly, to something else). This statement does not apply to features embedded in a financial instrument that is not a derivative in its entirety. The statement also requires disclosures about alternative ways of settling the instruments and about the capital structure of entities all of whose shares are mandatorily redeemable. The adoption of SFAS No. 150 did not have a material impact on our financial position, cash flows or results of operations.
In January 2003, FASB issued Interpretation Number, or FIN, No. 46, Consolidation of Variable Interest Entities. FIN 46 clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements and provides guidance on the identification of entities for which control is achieved through means other than voting rights (variable interest entities or VIEs) and how to determine when and which business enterprise should consolidate the VIEs. This new model for consolidation applies to an
38
In December 2002, the Emerging Issue Task Force, or EITF, reached a consensus on EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. This issue addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. In some arrangements, the different revenue-generating activities (deliverables) are sufficiently separable and there exists sufficient evidence of their fair values to separately account for some or all of the deliveries (that is, there are separate units of accounting). In other arrangements, some or all of the deliveries are not independently functional, or there is not sufficient evidence of their fair values to account for them separately. This issue addresses when, and if so, how an arrangement involving multiple deliverables should be divided into separate units of accounting. This issue does not change otherwise applicable revenue recognition criteria. The guidance in this issue is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of EITF 00-21 did not have a material effect on our consolidated financial statements.
In December 2003, the SEC issued Staff Accounting Bulletin No. 104, or SAB 104, Revenue Recognition. SAB 104 updates portions of existing interpretative guidance in order to make this guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The adoption of SAB 104 did not have a material effect on our consolidated financial statements.
In 2004, the EITF reached a consensus in EITF 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. The consensus was that certain quantitative and qualitative disclosures should be required for debt and marketable equity securities classified as available-for-sale or held-to-maturity under SFAS Nos. 115 and 124, that are impaired at the balance sheet date but for which an other-than-temporary impairment has not been recognized. This EITF consensus is effective for fiscal years ending after December 15, 2003. Adoption of the EITF consensus did not result in an impact on the consolidated statement of financial position or results of operations.
39
BUSINESS
Overview
We are one of the largest independent mobile handset design houses in China. We provide complete design services spanning the entire handset design cycle, which involves industrial design, mechanical design, software design, hardware design, component selection and sourcing, prototype testing, pilot production and production support. We design GSM-based mobile handsets using major baseband technology platforms, such as those developed by Philips AG, Texas Instruments, Inc. and Skyworks Solutions, Inc. We have recently begun developing mobile handsets for use on WCDMA and CDMA networks through cooperation with Wuhan NEC Mobile Communication Co., Ltd. and QUALCOMM Inc. We have also begun to develop smart phones, which provide significant data capabilities in addition to the normal functions of a mobile handset. Our customers include leading Chinese mobile handset brand owners, such as Ningbo Bird Co., Ltd., Haier Group, Shenzhen Konka Telecommunications Technology Co., Ltd., and Legend Mobile Communication Technology Ltd., or Lenovo, and international mobile handset brand owners, such as Alcatel SA, Kyocera Corp., Mitsubishi Corp., NEC and UTStarcom, Inc. From our inception in July 2002 to December 31, 2004, we had successfully designed 58 mobile handset models. In 2004, we generated net revenues of US$46.6 million and net income of US$18.2 million.
We conduct substantially all of our operations in China. Our strong technological capabilities, high-quality design services, strong customer relationships, strategic relationships with leading technology providers and ample skilled, low-cost engineering resources enable us to design a broad portfolio of mobile handsets at a competitive cost and with relatively shorter design cycles.
We believe that we are well-positioned to capitalize on the opportunities presented by the growing trend among Chinese and international mobile handset brand owners to outsource the design function to independent design houses. Although business from Chinese mobile handset brand owners fueled our initial growth, international brand owners have contributed to an increasing portion of our net revenues. We intend to focus on winning more contracts from international customers and the leading Chinese customers.
Industry Background and Trends
Large and Rapidly Growing Mobile Handset Market. The global mobile handset market has expanded rapidly in recent years. According to IDC, worldwide mobile handset shipments increased from 400 million units in 2000 to 514 million units in 2003 at a CAGR of 8.7%. Mobile handset shipments increased by 28.5% to 660 million units in 2004, driven mostly by increased demand for handsets with color displays and camera functions. IDC projects the annual shipment of mobile handsets to increase to 890 million units by 2008, or a CAGR of 8.2% from 2004, driven by the growth in both new subscription and replacement markets.
The number of new subscribers in developing markets, such as the Asia Pacific and Eastern Europe, continues to grow. IDC projects the number of wireless subscribers in the Asia Pacific to grow from 563 million in 2004 to 896 million in 2008 at a CAGR of 12.3%. IDC also expects the mature markets, such as the U.S., to continue to grow, but at a slower pace. IDC estimates the number of subscribers in the U.S. and Western Europe will grow to 260 million and 308 million in 2008, or at CAGRs of 5.5% and 1.9% from 2004, respectively. Japan and South Korea are also expected to experience limited growth of new subscribers because of their high mobile phone penetration rates.
In mature markets where the growth of the number of new subscribers is slower, demand for mobile handsets is primarily driven by existing subscribers upgrading and replacing their current handsets. According to IDC, mobile handset users are expected to replace their current handsets every 18 to 30 months in 2005 and beyond. The upgrade and replacement trend partly results from the introduction of handsets with advanced features, such as video communication, data services, mega-pixel cameras, high quality color display, music players, games and other consumer-oriented multimedia features, as hardware and software technologies continually evolve.
40
China is the worlds largest mobile handset market. According to IDC, annual mobile handset shipments in China increased at a CAGR of 181.9% from four million units in 2000 to 99 million units in 2003 and are expected to increase to 103 million units by 2008. This growth is attributable to the rapid increase of subscribers of wireless services. From 2000 to 2003, the number of subscribers grew at a CAGR of 44.7%. According to the International Telecommunications Union, the number of mobile handset users in China reached 269 million in 2003, surpassing the number of fixed-line subscribers of 263 million. However, in 2003, Chinas mobile handset penetration rate is still relatively low at 21%, compared to 54% in the U.S., 68% in Japan and 69% in South Korea. Therefore, there is a greater potential for growth in China than in the mature markets. Based on IDCs forecast, the annual net addition of the number of mobile handset subscribers in China will range from 37 million to 56 million during the period from 2005 to 2008, driving the total subscribers in China to 506 million in 2008.
Mobile Handset Design and Manufacturing Value Chain. The following chart illustrates the typical mobile handset design and manufacturing value chain:
It typically takes nine to eighteen months to complete the entire mobile handset value chain for each new mobile handset model developed. The value chain starts from product definition whereby the desired functions, basic technical specifications and key component selection and sourcing for a mobile handset are determined. Based on the product specifications, a comprehensive design solution, both for hardware and software, will be developed to achieve all the desired functions and features with satisfactory quality and the lowest possible cost. The design process also includes industrial design of the handsets look and feel. The hardware design typically includes schematic design and PCB layout. The software design consists of the design of operating systems, middleware, man-machine interface, or MMI, surface user interface, or SUI, and wireless applications. Meanwhile, the industrial design will be implemented for the look and feel of the handset. After the design is completed, suppliers of mobile handset components, which mainly include PCBs, integrated circuits, or ICs, passive components, liquid crystal displays, or LCDs, batteries, receivers and microphones, plastic enclosures, antenna and keyboards, will ship these components to the manufacturing facilities of ODMs, EMS providers or in-house manufacturing sites of mobile handset brand owners for production.
The manufacturing process consists of assembly, customer specific software configuration, testing and retail packaging. Depending upon the different manufacturing approaches adopted, the entire manufacturing process can be broken down into several steps and performed by different parties. For example, sometimes a mobile handset brand owner would ask an EMS provider to perform sub-assembly which is to assemble the PCB and the key components. The EMS provider will then ship the sub-assembled product back to the brand owners facilities for final assembly, software configuration, specific packaging, and various types of testing. The finished product will usually be delivered from the mobile handset brand owners place or from the ODMs/ EMS providers to telecommunications service operators or different types of distribution channels for sale to end users. Typically distributors will perform after-sale services with the support from mobile handset brand owners.
Key Trends and Characteristics of Current Mobile Handset Industry. We have observed the following three key industry trends and characteristics:
Shortened Product Life Cycle of Mobile Handsets. The product life cycle of mobile handsets has been significantly shortened compared to the recent past. To succeed in the fast evolving market, mobile handset brand owners have to constantly and rapidly introduce new handsets with enhanced look and feel and
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| Increasing Demand for Variety of Products with Personalized Features. More consumers, particularly the younger generation, view mobile handsets as fashion accessories and accordingly, prefer customized and distinctive mobile handset products. On the other hand, wireless telecommunications operators begin to offer more data and other value-added services. As a result, more functions and features need to be built into a mobile handset with better look and feel across different markets and product segments, making product development more technologically challenging. In addition, given the intensifying competition among mobile handset brands, mobile handset brand owners have to offer consumers a choice of many models to maintain or increase their market shares. | |
| Continual Evolution of Wireless Technologies. Wireless technologies have been continually evolving at a rapid pace. Most mobile handsets are currently based on 2G wireless technology, using three common standards GSM, CDMA and TDMA. 2G networks use a relatively low bandwidth and only permit voice communications. 2.5G technology enables wireless data communication based on the common standards including GPRS (GSM) and CDMA 1X (CDMA). 2.5G technology enables mobile handsets to offer more features, such as Internet access through mobile phone (WAP) and multimedia messaging (MMS). Bridging between 2.5G and 3G, 2.75G technology allows data transmission speed of up to 384Kbps through EDGE (GSM) and the upgrade of 2.5G CDMA 1X networks (CDMA). This enhanced data speed extended the service scope of current wireless infrastructure before the new 3G networks are deployed. 3G has been introduced in parts of Asia and Europe. 3G allows a significantly higher data transmission speed at a maximum of 2 to 2.5 Mbps, which enables users to access more features or applications, such as online mobile gaming and video communication or downloading. The current standards for 3G are WCDMA/ UMTS, CDMA 2000, TDS-CDMA and CDMA-EVDO. |
Increasing Competition. Competition in the global mobile handset market has become increasingly intense as more players enter the market. According to IDC, the collective worldwide market share of the top three mobile handset brand owners, namely Nokia, Motorola and Samsung, was 60.2% and 60.4% in 2003 and 2004, respectively. If these top players fail to keep up with technology developments and introduce new, competitive products with fast time-to-market, they may not be able to maintain their leading position.
In the past, the global markets were dominated by mobile handset players based in Europe, the U.S. or South Korea. However, Japanese players have become increasingly aggressive in expanding their mobile handset businesses beyond Japan. Such players include Kyocera, Mitsubishi, NEC, Panasonic and Sanyo.
The competition in the mobile handset market in China is also intense. While international mobile handset brand owners have been striving to gain market share, new Chinese mobile handsets are continually being introduced to the market. According to IDC, the number of Chinese mobile handset brand owners increased from 27 in 2000 to 39 in 2003 and their collective market share in China increased from 6.4% in 2000 to 55.0% in 2003.
Greater Margin Pressure for Mobile Handset Vendors. The rate of decline of the selling prices of new mobile handsets after their launch has accelerated as new handsets with advanced features and different look and feel are continually being launched in the market. To stay competitive, mobile handset brand owners must constantly introduce new handsets with new or advanced features but expect to sell them in lower volumes for each model. The increases in selling and marketing expenses as well as in product development and manufacturing costs have resulted in greater pressure on the profit margins of mobile handset brand owners. Mobile handset brand owners are therefore aggressively seeking ways to reduce their overall cost structure to maintain profitability.
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Growing Trend toward Outsourcing. Mobile handset brand owners traditionally perform all the functions across the entire mobile handset value chain from handset design and manufacturing to marketing and distribution. In response to developments in the mobile handset industry, mobile handset brand owners increasingly outsource the design and manufacturing functions to independent service providers to reduce development and production costs and risks, and to introduce more new handsets at a faster time-to-market. As a result, three major groups of independent handset service providers have emerged to serve mobile handset brand owners, namely, ODMs, EMS providers and independent mobile handset design houses.
Mobile handset brand owners generally engage EMS providers to perform only manufacturing services and typically do not expect them to bear product development and inventory risks. ODMs typically design products based on their own perceptions of the market trend and end users demands and/or preferences and expect that some of their designs will be selected by mobile handset brand owners for large volume production. Therefore, in most cases, ODMs have to bear both product development and inventory risks.
Emergence of Independent Mobile Handset Design Houses. Mobile handset ODMs and EMS providers help brand owners reduce overall cost of production and offload capital and fixed assets investment requirements. In addition, ODMs also help brand owners reduce product development costs and risks. However, mobile handset brand owners face new and fundamental challenges that traditional ODMs and EMS providers may not be able to address effectively, such as:
| increasingly complex product design and development process due to rapid, evolving technological changes and higher systems integration requirements; | |
| need for accelerated product design and development cycles as a result of increasingly shortened product life cycles; | |
| strong demand for more distinctive and innovative products to serve an increasingly segmented market; and | |
| need to respond promptly to a discerning mobile handset market, where major retail outlets may carry many different mobile handset models. |
It requires significant design and development resources to address the above challenges. However, it is costly for mobile handset brand owners to maintain sizeable in-house design and development teams especially in an increasingly price-sensitive market. They need to rely on third-party service providers to resolve the issues facing them. EMS providers cannot address these challenges due to their manufacturing focus. Traditional mobile handset ODMs that concentrate on and generate revenues mainly from large volume production of fewer models are not well suited to address these challenges, either. With limited design and development resources, a typical ODM generally develops products based on a very limited number of baseband platforms to serve a small number of brand owners. The limited design resources and the manufacturing-focus business model also make it difficult for a typical ODM to keep up with the rapid, evolving technological changes and the increasing demand for product variety. As a result, independent handset design houses have emerged to assist mobile handset brand owners in meeting these challenges, which cannot otherwise be effectively addressed by ODMs, EMS providers or by mobile handset brand owners themselves.
China has been a global center for the manufacturing of mobile handsets. An increasing number of participants in the mobile handset value chain, including mobile handset brand owners, ODMs and EMS providers, have established manufacturing facilities in China. As the worlds largest mobile handset market with approximately 269 million subscribers in 2003, China is also rapidly emerging as a global center for mobile handset design, as evidenced by the fact that global leading mobile handset companies, such as Nokia, Motorola and Siemens, have substantially increased their research and development efforts in China in recent years, as well as the emergence of many independent mobile handset design houses in China.
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Our Competitive Strengths
We are one of the largest independent mobile handset design houses in China. We have achieved our current leading position, in part, because of our competitive strengths described below.
Strong Technological Capabilities. We are capable of designing mobile handsets based on a broad range of wireless communication standards and baseband platforms. Our design services include mainly industrial and mechanical design, hardware design and software design. We also provide testing and production support services to our customers. Based on our knowledge of the mobile handset industry in China, we believe that we are currently the only independent mobile handset design house in China capable of designing GSM-based and CDMA-based handsets across 2G, 2.5G, 2.75G and 3G standards. In addition, most of our senior design engineers have substantial experience and know-how in handset manufacturing, which in turn allows us to ensure the manufacturability of the products we design.
Our technological strength is evidenced by our extensive customer base, which includes international mobile handset brand owners, such as Alcatel, Kyocera, Mitsubishi, NEC and UTStarcom. Partly because of our technological strength, NEC has established a joint venture with us for the joint development of 3G mobile handsets for the global market. Our strong technological capabilities have enabled us to reduce our product design and development cycle time from an average of eight to twelve months in 2003 to an average of five to eight months in 2004. We believe that our strong technological competency is a considerable competitive advantage, because customers, especially international brand owners, generally only engage design houses with strong track records and superior technological strengths.
High-Quality Design Services. One of the most critical factors for our success is our commitment to offering high-quality design services to our customers. We have developed a systematic and modularized design process that incorporates a rigorous quality control mechanism. We have also trained our engineers to specialize in defined, concrete steps of the design process in order to improve efficiency and productivity, achieve high quality standards in every aspect of the design process, and minimize potential disruption from staff turnover.
We base our software design process on CMM2, which provides a framework for software development process improvement and overall project management. We are in the process of obtaining CMM3 certification, a more advanced software process management certification. In addition, we have obtained ISO9000 certification for our design process and quality control mechanism. We are building a new, state-of-the-art testing center in Beijing that would enable us to perform advanced and comprehensive tests widely adopted in Asia, Europe and the U.S., and further ensure that the quality of our designs meets global standards.
Cost Competitiveness. We provide cost-competitive design services through leveraging our location in China and the economies of scale we have achieved. Substantially all of our design engineers are recruited and based in China and the cost of skilled engineers in China is still lower than those of more developed countries. The average monthly salary and compensation of a new engineering graduate hired by us is US$500. In addition, China has become the global center for the manufacture and testing of electronics products, such as mobile handsets. Substantially all of our current customers are located in China and most of our existing and targeted international mobile handset customers have established manufacturing facilities in China. Our geographic proximity to most of our customers and to the manufacturing facilities enables us to maintain our service cost structure at a competitive level.
Having successfully designed a large number of handset models, we have achieved significant economies of scale compared to the in-house design resources of mobile handset brand owners and ODMs, as well as to smaller independent mobile handset design houses. We have leveraged our large scale to source components at a lower price for our customers. We have also reduced the unit product development cost through applying the common designs we developed and own, as well as the design experience we accumulated, to as many new design projects as possible.
Strong Customer Relationships. We are an early entrant to Chinas independent mobile handset design industry with a proven track record in designing a broad portfolio of mobile handsets that support
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Strategic Relationships with Leading Technology Providers. As the mobile handset industry is characterized by rapid technological changes, it is essential for us to keep abreast of and have access to the latest technologies by working closely with the worlds leading technology and platform providers, which we believe also want to work closely with us to promote their respective solutions, especially for the China market. Partly because of our successful track record and our leading position, we are the first independent mobile handset design house in China to obtain a license from QUALCOMM to use its CDMA technology and patent to develop CDMA mobile handsets across all generations of wireless communications standards. Currently, we are also the only independent mobile handset design house in China to have received QUALCOMMs equity investment. In addition, we have established a joint venture with NEC to jointly develop 2.5G mobile products for the China market and 3G mobile products for the global market based on the WCDMA technology. We also have a strong relationship with Philips, which has established a dedicated support team to serve our design service needs.
Ample Engineering Resources. Our business depends significantly on our ability to maintain sufficient and qualified engineering resources. We had 690 engineers as of December 31, 2004 and plan to hire an additional 700 engineers in 2005. We have access to Chinas large pool of engineering talent with more than 644,000 new college graduates with engineering degrees in 2003, according to the Statistical Yearbook of China. We have in place formal and standardized training programs for our new and existing employees to ensure the continuance of our high quality services. We believe that the increasing importance of the independent mobile handset design industry, our current leading position and strong growth potential will allow us to attract and retain additional talented engineering resources necessary for our continued success.
Our Strategy
Our goal is to create long-term shareholder value by enhancing our position as a leader in the mobile handset design industry. We believe the growing outsourcing trend in the mobile handset industry represents a unique growth opportunity for us both in China and the rest of the world. We intend to pursue the following growth strategies to achieve our goal:
Continue to Strengthen Our Design Capabilities. Our continued success depends significantly upon our ability to provide leading-edge, high-quality and cost-competitive mobile handset design services to our customers. While capitalizing on our design capabilities in the current mainstream wireless communication technologies such as 2G and 2.5G, we intend to continue to focus on developing technological competencies in the latest and next generation wireless communication technologies and platforms, such as 3G and beyond, to stay ahead of the technology curve. We plan to further strengthen our capabilities particularly in the areas of software design, hardware design, mechanical design and industrial design as such capabilities will become important differentiating factors among mobile handset design service providers. Furthermore, we are establishing a core team to provide software application support across mobile platforms. We believe that the establishment of the new team could facilitate knowledge transfer among design teams and enhance the productivity of software development, the largest component of mobile handset design cost. We also believe this core team will position us to exploit opportunities from an increasing trend to outsource the mobile handset software design function.
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In addition, we intend to further enhance the quality control aspect of our design process, which includes establishing a new, state-of-the-art testing center that would enable us to perform advanced and comprehensive tests necessary for selling mobile handsets in Asia, Europe and the U.S. Our new testing center, which we believe will be one of the largest independent mobile handset testing facilities in Asia by the time it is established, will not only further enhance our service and product quality but also accelerate our customers time-to-market for their new product introductions. Moreover, we are streamlining our testing functions by establishing a centralized testing team to ensure quality control at the corporate level. Finally, we plan to continue to invest in relevant personnel, technology and processes to further enhance our management depth and operational discipline as well as to improve our productivity and efficiencies.
Target International and Leading Chinese Mobile Handset Customers. Although Chinese mobile handset brand owners have fueled our initial growth, we believe that international mobile handset brand owners offer higher and more sustainable growth and profit potential to our business given their larger business size and the global markets they serve. In addition, by working with the international mobile handset brand owners, which typically have higher technological requirements and adopt more stringent quality standards, we will be able to continually upgrade our own design service capabilities as demanded by these customers. Accordingly, we intend to focus our selling and marketing efforts on winning additional international mobile handset brand owners as our customers.
Although most of our existing international customers initially contracted us to design mobile handsets for sale in China, several of them have engaged us to design mobile handsets, including 3G handsets, for the global markets. We intend to deepen our relationship with existing customers by working with brand owners and mobile service operators to ensure that our designs will meet the increasingly sophisticated need of mobile service operators. We intend to continue to broaden our international customer base for both the China market and the global market, by leveraging our position as a leading mobile handset design house in China, our strategic relationships with leading wireless technology companies and platform providers, our proven cost-competitive solutions and services, and our successful track record of serving our existing international customers. As to our Chinese customers, we intend to focus only on those with high market share and good credit quality.
Broaden Strategic Relationships in the Mobile Handset Value Chain. Our current strategic relationships with several leading wireless technology and platform providers have provided us with access to advanced technologies and have helped us build our reputation as a premium mobile handset design house. These relationships have also allowed us to secure for our customers competitive pricing and shorter supply lead time for component procurement. We have contributed to our strategic relationships by incorporating the mobile handset technologies or platforms developed by these companies into our designs to promote their wider acceptance and adoption. Some of our key baseband technology providers have recently agreed to effectively reduce our technology cost. In return, we would help them market their technologies to mobile handset brand owners. We intend to establish more such mutually beneficial relationships with additional players in the mobile handset value chain, especially the upstream suppliers of mobile handset components such as LCD, chipset, camera module and memory chips. We expect to achieve through these relationships more extensive technological cooperation, more stable supply sources for key components and easier access to prospective customers. We also intend to establish and strengthen the strategic relationships with our top customers to further secure our position as their preferred provider of mobile handset design services and become an integral part of their overall mobile handset strategic and product roadmap.
Continue to Enhance Engineering Resources. As of December 31, 2004, our research and development staff consisted of 690 engineers, representing over 75% of our total staff. We believe that our success in the future will depend significantly upon our ability to recruit, train and retain highly skilled engineers. We intend to continue to strengthen and rapidly expand our engineering resources by recruiting top graduates from leading universities in China as well as experienced engineers in the mobile handset industry. We also intend to continually improve our training programs for newly recruited and existing engineers to ensure the constant upgrading of their technical skill level, a strong adherence to our corporate culture and work ethic, and their consistent service quality and efficiency. We intend to periodically review our level of compensation to ensure that our key employees are paid competitively. In addition, we plan to implement a
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Pursue Selective Strategic Acquisitions. We believe that pursuing very selective acquisitions of quality mobile handset design houses could potentially further strengthen our design capabilities and help maintain our leading position. Although no acquisitions are currently being contemplated, we intend to seek opportunities for strategic acquisitions of independent mobile handset design houses that have well-developed design processes and resources, quality customer base or proprietary technical expertise that would complement our existing capabilities and business.
Services and Products
Since our inception, we have focused our resources primarily on providing mobile handset design services to meet our customers demand. We have strong design capabilities to design mobile handsets to support a broad range of wireless communications standards, baseband platforms and components. We also provide production support to facilitate our customers manufacturing and supply chain management processes. In addition, we have also begun to work with our customers in providing customized handset solutions to mobile service operators.
Mobile Handset Design Services. We provide the following three types of mobile handset design services to our customers:
| Mobile Handset Design Services Based on Existing Platforms We design a new model of mobile handset based on our existing design platform. | |
| Successor Model Design Services We design a successor model of an existing customers mobile handset previously designed by us to incorporate additional functions and/or industrial design. | |
| Mobile Handset Design Services Based on New Platforms We design a new model of mobile handset based on a new design platform specified by the customer. |
Mobile handset design services based on existing platforms historically contributed more to our revenue than either of the other two types of design services. We expect that mobile handset design services based on new platforms will contribute to an increasing portion of our revenue in the future as we obtain more international mobile handset brand owners as customers.
All three types of 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. As of December 31, 2004, we had completed 58 new handset designs with different features and/or based on different baseband platforms.
Other Products. Our other products include wireless modules, PCBs and other electronic components. We have begun to develop wireless solutions leveraging our knowledge and experience in designing mobile handsets. Our wireless product lines include wireless modules and PCMCIA cards for wireless connections. Wireless modules are devices that enable data communication through a cellular network to be used in various applications, such as global positioning systems, logistics management, wireless point-of-sale systems, traffic navigation systems and wireless security systems. We began to sell wireless modules in June 2004. Our wireless modules consist of baseband and RF, the two important hardware building blocks of a generic mobile handset, which we believe represent a natural extension of our handset design business.
We have historically sold to our Chinese customers PCBs that others produced for us at our request as a means to track the royalty payments to which we are entitled. The sale of PCBs is not our core business; we do not intend to generate significant profit from it.
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Design Process
Every design project involves the following four major steps: product definition, system design, evaluation and certification and manufacturing support. Product definition includes the selection of baseband platform, determination of appropriate functions and features of the mobile handset based on the customers input and our industry knowledge and research, as well as sourcing key components. System design includes software feature analysis and software system design, hardware schematic design and PCB layout design, as well as industrial design, mechanical architecture design, mechanical parts and components design. Evaluation and certification involves tests such as the unit test, or UT, function user test, or FUT, product reliability test, or PRT, hardware test and field test, and certifications such as FTA, CTA, GCF and FCC certifications as required by the regions in which the handsets are to be sold. Manufacturing support involves customer training, pilot production support, designing and assisting the customer in setting up mobile handset assembly and testing lines and providing technical support in connection with mass production.
Responsibilities of Engineering Teams. Our engineers are divided into design and support teams, both of which are involved in our design process. Our design team is subdivided into four teams: industrial design, mechanical design, software design and hardware design teams. Our support team is also subdivided into four teams: project management, quality assurance, sourcing and production support teams. Each teams responsibilities are described in the following paragraphs.
Industrial Design. Our industrial design team is responsible for the exterior design of a mobile handset based on the customers basic specifications and comments. The team also ensures that the finished product will conform to the exterior design requested by the customer. In addition, the industrial design team keeps abreast of the latest mobile handset market developments, trends, consumer preferences and other current information that may be useful for us to develop a new design for recommendation to our customers.
Mechanical Design. Our mechanical design team is responsible for designing the mechanical systems of a mobile handset. It also designs two-dimensional and three-dimensional mechanics to ensure that the mechanical parts and tools used on the mobile handset conform to the exterior design requested by the customer. In addition, the mechanical team designs and modifies the tooling equipment necessary for mass production. Further, the team makes prototypes of the mobile handset for testing purposes.
Hardware Design. Our hardware design team is responsible for schematics design and PCB layout and design. The team also evaluates the quality and compatibility of hardware components of a mobile handset, such as LCDs, keypads, batteries, vibrators, CPUs, SIM cards, speakers, receivers and microphones with respective connectors and semiconductors.
Software Design. Our software design team is primarily responsible for software system design, software function module design, software testing and release of successive versions of software system for the mobile handset throughout the design process. The team also designs software for integrating multiple applications on the mobile handset and connecting the software system to a chosen baseband platform.
Project Management. Our project management team is responsible for setting up a detailed project timetable pursuant to the design contract. The team closely monitors the progress of each project by coordinating among different teams in order to ensure strict adherence to the overall timetable, and reports any issue that may cause a delay directly to senior management for prompt resolution.
Quality Assurance. Our quality assurance team monitors hardware, software and mechanical design teams performance to ensure strict adherence to the quality standards required by the customer. The team conducts product reliability tests, including accelerated life tests, climatic stress tests and mechanical endurance tests. The team is also responsible for components qualification, prototype quality assurance, and submission of prototypes for FTA and CTA certifications. In addition, the team collects and organizes all relevant written documents produced and used throughout the design process.
Sourcing. Our sourcing team sources all hardware components available in the market for a particular model of handset and creates a bill of materials, or BOM. A typical BOM contains a complete preferred hardware components list, an alternative components list, component specifications, approved
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Production Support. Our production support team designs the manufacturing process for the customer. It also designs and assists the customer in setting up testing and assembly lines. In addition, the team provides technical support to customers during both the pilot production phase and the mass production phase.
Customers
We provide mobile handset design services to mobile handset brand owners. Our customers include all but two of the top ten Chinese mobile handset brand owners, ranked by their respective handset shipment volume in 2003 according to IDC. Although Chinese mobile handset customers accounted for most of our revenue and fueled our initial growth, international brand owners have contributed to an increasing portion of our net revenues. We expect the revenue contribution from international mobile handset customers to increase rapidly as we focus our sales and marketing efforts on targeting international players and the leading Chinese players.
We assign an account manager for each design project and the account manager directly interacts with the customer throughout the design process to report the design progress and receive the customers input and comments. We also provide technical support and production support to our customers to assist them in designing the manufacturing process.
The following are lists of our customers as of
the dates indicated. Except for the list of our customers as of
December 31, 2004, which presents our representative
customers, other lists below set forth all of our customers as
of the dates indicated.
As of December 31,
As of December 31,
2003
2004
Beijing Sunrise
Bird
China Kejian
Capitel
Eastcom
CEC Telecom
Lenovo
Eastcom
Soutec
Haier
Huawei
Konka
Lenovo
Soutec
NEC
Alcatel
Kyocera
Mitsubishi
NEC
UTStarcom
A small number of customers have historically accounted for a substantial portion of our net revenue. In 2003, our top three customers collectively accounted for approximately 88.2% of our net revenue for the year, and each of Beijing Sunrise, Lenovo and NEC contributed over 10% of our net revenue for the year. In 2004, our top four customers collectively accounted for approximately 56.8% of our net revenue, and each of Lenovo and NEC contributed over 10% of our net revenue for the period.
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We normally have multiple on-going contracts with the same customer, and each contract may correspond to more than one mobile handset models. While our contracts vary by customer and by mobile handset model, each of our 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.
We typically charge two types of payment for our design services: design fee and royalty. The design fee is a fixed amount paid in installments according to pre-agreed milestones. For example, a customer may make an initial payment to us upon signing of the contract, followed by installment payments of a specified amount upon achieving the FTA, CTA and SA milestones, respectively. FTA and CTA certifications are the two standard quality certifications for GSM-based mobile handsets in China, corresponding to GCF/CDG and CTA for WCDMA-based and CDMA1X-based mobile handsets in China, respectively. SA stands for shipping acceptance of the mobile handset by the customer, at which time mass production normally begins. All of our GSM-based mobile handset designs are required to obtain FTA certification from an independent testing house to ensure compliance with the required quality standards. We then assist customers in obtaining CTA certification prior to commercial launch. In addition to design fees, some of our contracts provide for the payment of royalty by our customers for each unit of mobile handset they produce at variable rates based on the volume of production.
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, or the requisite certifications cannot be obtained.
Sales and Marketing
We sell and market our mobile handset design services through a direct marketing and sales force in China. We maintain sales and marketing staff in Beijing, Shanghai and Shenzhen, covering the major regions where most of our customers are located. We intend to expand our sales and marketing network to cover Europe and the U.S. as we focus on attracting customers from these markets.
We engage in marketing activities to promote our design services. We frequently attend conferences, exhibitions and trade fairs to promote our products and services. 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 introduce additional baseband platforms to our existing customers to attract new design contracts from them.
Technology
We have extensive experience in designing 2G and 2.5G GSM/ GPRS mobile handsets based on major baseband platforms. To expand our design capabilities, we have recently acquired the technologies necessary for the design and development of 2.75G and 3G mobile handsets based on GSM/ GPRS/ EDGE and WCDMA/ UMTS standards.
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 other 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 a license from QUALCOMM to use its CDMA technology and patent to develop CDMA handsets. In addition, we have formed a joint venture with NEC to develop 3G mobile handsets for the global market based on the WCDMA technology.
We have a high degree of technological expertise in major areas of mobile handset design and development. Our engineers are skilled at designing mobile handsets that integrate many different functions
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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.
Research and Development
We believe that our future success depends on our ability to efficiently design new models of mobile handsets that meet our customers demand for cost-competitive, high quality and technologically advanced mobile handsets. As of December 31, 2004, we had completed 58 mobile handset designs with different functions and features and based on different technology platforms. 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 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 on design and production modifications; and | |
| to make effective use of the technologies licensed from leading global technology companies. |
We maintain a large team of experienced engineers. As of December 31, 2004, our research and development staff consisted of 690 engineers, representing more than 75% 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. We plan to continue to recruit our engineers in China from both the industry and from leading universities.
Intellectual Property
We rely primarily on a combination of patent, trademark and trade secret protection, employee and third party confidentiality agreements to protect our intellectual property. As of December 31, 2004, we held a total of seven patents issued in China. Our issued patents and pending patent applications relate primarily to our mobile handset designs. Our policy is to seek patents that have broad applications in the mobile handset design industry and that we believe will provide a competitive advantage for us. We have registered five domain names including www.techfaithwireless.com with The Internet Corporation for Assigned Names and Numbers.
We also rely on third-party licensors for key GSM, GPRS, WCDMA and CDMA technologies and other technologies embedded in our designs. These licenses are typically non-exclusive and royalty-accruing. If we are unable to continue to have access to these licensed technologies, our success could be adversely affected. In addition, we rely on commercially available third-party software applications in carrying on our business operations. We generally obtain these software applications from retail outlets or through third-party vendors who bundle them together with PCs and servers purchased by us. We make efforts to ensure that we have proper licenses for software applications used by us, including those provided by third-party vendors.
Competition
The mobile handset design market is intensely competitive and highly fragmented. We face competition from other independent mobile handset design houses in China, including Cellon, Shanghai Yuhua, Shenzhen Jingwei and Shanghai Yiren. We also face competition from independent mobile handset design houses based in other countries, to the extent we try to enter the markets which they are serving or
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We compete to various degrees on the basis of the following factors:
| 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. |
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.
In addition, our competitors may bring litigation proceedings against us or our employees that may strain our resources, divert our management attention or damage our reputation. For example, CECW brought an unfair competition proceeding against our former affiliate, Beijing Qidi, and 18 of its employees who subsequently joined us in connection with our divestment from Beijing Qidi. We settled the litigation on behalf of Beijing Qidi and these 18 individuals in order to facilitate our divestment and the transfer of these employees to our company. See Legal Proceedings for more details. We cannot assure you that similar proceedings will not occur in the future.
Regulation
This section sets forth a summary of the most significant regulations or requirements that affect our business activities in China or our shareholders right to receive dividends and other distributions from us.
FTA Certification
In the early 1990s, the Global Certification Forum, or GCF, established a series of quality standards for mobile handsets used on GSM networks. GCF requires all GSM mobile handsets to obtain a certification commonly known as FTA, or Full Type Approval, from testing centers qualified by GCF before mass production. FTA certifies that a mobile handset submitted for testing has passed tests for its reliability and conformance with global standards. Our customers generally require us to obtain FTA certification for the GSM-based mobile handsets we design for them.
CTA Certification
On May 19, 1994, the Ministry of Posts and Telecommunications, the predecessor of the Ministry of Information Industry, or the MII, promulgated the Notice Regarding the Implementation of Network Entry License System for Mobile Communications Termination Products. According to this notice, a nationwide uniform network entry approval and certification system shall be established and applied to all telecommunication terminal equipment, including mobile handsets, beginning from June 1, 1994. On May 5, 2001, the MII promulgated the Administration Measures of the Network Entry of Telecommunication Equipment. According to these measures, all telecommunication terminal equipment subject to the network
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Tax
The PRC Income Tax Law for Enterprises with Foreign Investment and Foreign Enterprises and the Implementation Rules for the Income Tax Law exempt or reduce EIT on foreign-invested enterprises engaged in high and new technology industry. The preferential tax policies are confirmed and explained in the Circular on Questions Concerning How Preferential Tax Policies are Applicable to High and New Technology Enterprise as well as the Temporary Provisions for the New Technology Development Enterprise Experimental Zone in Beijing. In addition, the Beijing State Administration of Taxation implemented rules which granted additional tax incentives to high and new technology enterprises located in the new technology development zone in Beijing. As a result of the foregoing, enterprises that are classified as high and new technology enterprises and located in the new technology development zone in Beijing are entitled to a preferential EIT rate of 15% and a three-year exemption from EIT, followed by a 50% reduction in the EIT rate for the succeeding three years.
As high technology companies operating in an approved technology development zone, our subsidiaries TechFaith China, TechFaith Beijing and STEP Technologies are entitled to an EIT rate of 15%, compared to a standard EIT rate of 33%. This classification also had the effect of exempting TechFaith China and TechFaith Beijing from paying the EIT for three years until December 31, 2005, and has reduced the EIT rates for TechFaith China and TechFaith Beijing to 7.5% during each of the three years ending December 31, 2006, 2007 and 2008. The EIT rates for TechFaith China and TechFaith Beijing will become 15% after December 31, 2008. Similarly, STEP Technologies is exempted from paying the EIT for three years until December 31, 2006, and its EIT rate is reduced to 7.5% during each of the three years ending December 31, 2007, 2008 and 2009. The EIT rate for STEP Technologies will become 15% after December 31, 2009.
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, technology companies in China may apply for a refund of business tax arising from the revenue generated under a technology development agreement or a technical marketing agreement.
Our subsidiaries in China are also entitled to a business tax exemption relating to the their income derived from any technology development agreement and technical transfer agreement that has been registered with relevant government authorities.
Pursuant to the Provisional Regulation of China on Value Added Tax and their implementing rules, all entities and individuals that are engaged in the sale of goods, the provision of repairs and replacement services and the importation of goods in China are generally required to pay value added tax, or VAT, at a rate of 17% of the gross sales proceeds received.
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 the State Administration for Foreign Exchange of China is obtained.
Pursuant to the Administration of the Settlement, Sale and Payment of Foreign Exchange Provisions, promulgated by the Peoples Bank of China on June 20, 1996 and effective July 1, 1996, foreign investment enterprises in China may purchase foreign exchange without the approval of the State Administration for Foreign Exchange of the Peoples Republic of China for trade and service-related foreign exchange (subject
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Dividend Distribution
The principal regulations governing distribution of dividends by wholly foreign-owned enterprises and the Chinese-foreign equity joint ventures include the Wholly Foreign-owned Enterprise Law (1986), as amended by the Decision on Amending the Law of the Peoples Republic of China on Foreign-funded Enterprises (2000), and the Implementing Rules of the Wholly Foreign-owned Enterprise Law (1990), as amended by the Decision on of the State Council on amending of the Rules for the Implementation of the Law of the Peoples Republic of China on Foreign-funded Enterprises (2001).
Under these regulations, foreign invested enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, foreign invested enterprises in China are required to set aside at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds, until the accumulative amount of such fund reaches 50% of its registered capital. These funds are not distributable as cash dividends.
Employees
We had three and 310 employees as of December 31, 2002 and 2003, respectively. As of December 31, 2004, we had 890 employees, including 814 in research and development and supportive function, 25 in selling and marketing and 51 in management and administration. We consider our relations with our employees to be good.
Facilities
Our principal executive offices are located on premises comprising approximately 10,900 square meters in Beijing, China. We have regional offices in Shanghai and Shenzhen. We lease part of our premises in Beijing from a related party. See Related Party Transactions Transactions with SEF. We plan to acquire new premises and establish our dedicated mobile handset pilot production facilities in Beijing. We believe that we will be able to obtain adequate facilities to accommodate our future expansion plans.
Legal Proceedings
We are not involved in any litigation or other legal matters that would have a material adverse impact on our business or operations.
In September 2003, CECW, one of our competitors, filed a lawsuit against Beijing Qidi, a former affiliate, and 18 individuals, including our director Baozhuang Huo, a former hardware design manager at CECW, in the Beijing First Intermediate Peoples Court, claiming that Beijing Qidi and these individuals had engaged in unfair competition. In December 2003, CECW also initiated arbitration proceedings against four individuals, including Mr. Huo, claiming that these individuals had violated the non-competition restrictions set forth in their respective employment agreements with CECW. In January 2004, we settled these claims with CECW on behalf of Beijing Qidi, Mr. Huo and the other individuals involved. In connection with the settlement, Beijing Qidi assigned three mobile handset project cooperation agreements to us. CECW subsequently withdrew all of its claims, and the litigation and arbitration were dismissed. Mr. Huo and several other individuals involved in the litigation joined our company in January 2004.
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In May 2004, the Beijing Bureau of Administration of Industry and Commerce assessed a fine in the aggregate amount of RMB1.4 million against 12 of our employees including our Chairman and Executive Officer, Mr. Defu Dong and some other officers, for failing to properly pay up their interest in the registered capital of Beijing TechFaith. While these individuals had made the requisite payment before being assessed the fine, they paid this fine in full.
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MANAGEMENT
Directors and Executive Officers
The following table sets forth information
regarding our directors and executive officers as of the date of
this prospectus.
Directors and Executive Officers
Age
Position/Title
33
Chairman and Chief Executive Officer
33
Director and Chief Operating Officer, President
of TechFaith Beijing
42
Director and Chief Technology Officer
32
Director, President of TechFaith China
54
Director Nominee
49
Director Nominee
33
Chief Financial Officer
41
Chief Accounting Officer
31
President of TechFaith Shanghai
35
President of STEP Technologies
34
Vice President
33
Vice President
36
Vice 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., or SEF, a mobile handset design house, in February 2001. He was a director, shareholder and the Chief Executive Officer of SEF 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 a bachelors degree in mechanical engineering from Chongqing University in China in 1994.
Mr. Baozhuang Huo is a director and the Chief Operating Officer of our company. He is also the President of TechFaith Beijing since January 1, 2004. From March 2003 to December 2003, Mr. Huo was the Chief Executive Officer of Beijing Qidi, a mobile handset design house of which we used to own 49% until September 2003. From January 2003 to March 2003, Mr. Huo worked at Foxconn as an R&D manager. For January 2001 to December 2002, Mr. Huo was a hardware design manager of CECW, a mobile handset design house. Prior to that, Mr. Huo had worked at Motorola (China) as an RF manager for seven years. Mr. Huo received a masters degree in electro magnetic field and microwave engineering from the University of Electronic Science and Technology of China in 1998.
Mr. Changke He is a director and the Chief Technology Officer of our company. He previously served as the President of STEP Technologies from May 2004 to February 2005. Prior to joining us in September 2002, Mr. He worked at SEF for three months. From 1995 to May 2002, Mr. He worked at Motorola (China) as an RF engineer. Mr. He will resign from our board of directors upon the closing of this offering. Mr. He received a bachelors degree in automatic control and computer engineering from China Central Polytechnic College in 1982 and a masters degree in electronics and automatic engineering from Tianjin University in China in 1990.
Mr. Jun Liu is a director of our company and the President of TechFaith China. Before joining our company in August 2002, Mr. Liu worked at SEF for five months as a software director of SEF. From August 2001 to January 2002, Mr. Liu worked at ZT Telecom as a software engineer. From 1995 to July 2001, Mr. Liu worked at Motorola (China) as a software engineer. Mr. Liu received a bachelors degree in
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Independent Directors |
Mr. Peter Clarke has agreed to serve as a director of our company immediately upon the completion of this offering. Mr. Clarke was the Chairman of Merrill Lynch, Asia Pacific Region from 1992 1999. Mr. Clarke currently serves as a non-executive director of Pictet Asia Limited, an institutional fund manager headquartered in Geneva, and the Chairman of the audit committee of the English Schools Foundation in Hong Kong. Mr. Clarke graduated from the City of London College.
Dr. Jy-Ber Gilbert Lee has agreed to serve as a director of our company immediately upon the completion of this offering. Dr. Lee is 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 a bachelors degree in mechanical engineering from National Taiwan University in 1977, a masters degree in energy engineering and a Ph.D. degree in mechanical engineering from the University of Illinois.
Executive Officers |
Ms. Yin Wah (Eva) Hon has been our Chief Financial Officer since August 2003. Before joining us in August 2003, Ms. Hon was the financial controller of Angels Technology Company Limited, a company formerly listed on the Growth Enterprise Market in Hong Kong, for three years. From 1994 to 2000, Ms. Hon worked at PricewaterhouseCoopers for six years, including her last position as an audit manager. Ms. Hon received a bachelors degree in business administration from the Hong Kong University of Science and Technology in 1994. She is a fellow of the Association of Chartered Certified Accountants and an associate member of the Hong Kong Institute of Certified Public Accountants.
Mr. Guoyi Wei has been our Chief Accounting Officer since March 2005. Prior to joining us, Mr. Wei was the finance director of Hurray Solutions! for three years. Mr. Wei also worked as senior financial manager of Compaq Computer Corporation in China for two years. From 1992 to 1997, he served in various financial positions, including corporate auditor, finance manager and accounting and information system manager, with Motorola Inc. and Motorola China Electronics Ltd. Mr. Wei also has over four years work experience at the Ministry of Finance in China. Mr. Wei received a Bachelors degree in computer software from the Central-South University of Technology in China in 1984, an Masters degree in accounting from the Fiscal Science Research Institute in China in 1987 and an MBA degree from the University of Tennessee in 1999.
Mr. Junhou Huang is the President of TechFaith Shanghai. Prior to joining us in August 2002, Mr. Huang worked at Motorola (China) in Beijing as a senior engineer from 2000 to 2002. Prior to that, he worked at ARCA Technology Corporation as a software engineer for nine months. Mr. Huang received a bachelors degree and a masters degree in electronic engineering from Tianjin University in China in 1994 and 1997, respectively.
Mr. Yibo Fang is the President of STEP Technologies. 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 SEF for five months as a hardware director of SEF. 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 a bachelors degree in electrical engineering and applied electronic technology from Tsinghua University in China in 1991.
Mr. Xiaonong Cai is a Vice President of our company. Mr. Cai is primarily responsible for marketing, sales and customer relationships. Before joining our company in August 2003, Mr. Cai worked as a selling and marketing manager at Motorola (China). He received a bachelors degree in economics from Tsinghua University in China in 1992 and an MBA degree from Peking University in China in 2002.
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Mr. Cangsong Liu is a Vice President of our company. Mr. Liu is primarily responsible for marketing, sales and customer relationships. Before joining our company in January 2004, Mr. Liu worked as a Vice President Sales at Beijing Qidi for nine months. From January 2002 to January 2003, Mr. Liu worked as a marketing director of CECW. Prior to that, he worked at Texas Instruments (China) as a sales manager for one year and Intel (China) as a technical marketing engineer for another year. From 1994 to 1999, Mr. Liu worked at Motorola (China) as a hardware engineer. Mr. Liu received a bachelors degree in electrical engineering and applied electronic technology from Tsinghua University in China in 1994.
Mr. Shugang Li is a Vice President of our company. Mr. Li is primarily responsible for production support and quality support. He previously served as the Chief Operating Officer of STEP Technologies since its inception in September 2003 to March 2005. Prior to that, Mr. Li served as a Vice President of TechFaith China for three months. From August 2002 to May 2003, Mr. Li worked at SEF as a manufacturing director. From 1995 to July 2002, Mr. Li was a product manager at Motorola (China). Mr. Li received a bachelors degree in electrical 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, 3/F M8 West No. 1 Jiu Xian Qiao East Road, Chao Yang District, Beijing 100016, Peoples Republic of China.
Board of Directors
Our board of directors will consist of five directors upon the completion of this offering. In addition, holders of our convertible notes have the right to appoint one additional director, but this right will terminate upon the closing of this offering. A director is not required to hold any shares in the company by way of qualification. A director may vote with respect to any contract, proposed contract or arrangement in which he has a material interest. A director may exercise all the powers of our company to borrow money, mortgage its undertaking, property and uncalled capital, and issue debentures or other securities whenever money is borrowed or as security for any obligation of our company or of any third party. We intend to establish three committees of the board of directors upon the completion of this offering: the audit committee, the compensation committee and the corporate governance and nominating committee. We intend to adopt a charter for each committee to comply with the Sarbanes-Oxley Act of 2002 and NASDAQ corporate governance rules. Each committees members and functions are described below.
Audit Committee. Upon the completion of this offering, our audit committee will consist of Messrs. Peter Clarke, Defu Dong and Gilbert Lee. Messrs. Clarke and Lee satisfy the independence requirements of the Nasdaq Marketplace Rules. The audit committee will oversee our accounting and financial reporting processes and the audits of the financial statements of our company. The audit committee will be responsible for, among other things:
| selecting the independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by the independent auditors; | |
| reviewing and approving all proposed related-party transactions; | |
| discussing the annual audited financial statements with management and the independent auditors; | |
| annually reviewing and reassessing the adequacy of our audit committee charter; | |
| meeting separately and periodically with management and the independent auditors; | |
| such other matters that are specifically delegated to our audit committee by our board of directors from time to time; and | |
| reporting regularly to the full board of directors. |
Compensation Committee. Upon the completion of this offering, our compensation committee will consist of Messrs. Peter Clarke, Defu Dong and Gilbert Lee. Messrs. Clarke and Lee satisfy the independence requirements of the Nasdaq Marketplace Rules. Our compensation committee assists the board in reviewing and approving the compensation structure of our directors and executive officers, including
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| reviewing and determining the compensation package for our senior executives; | |
| reviewing and making recommendations to the board with respect to the compensation of our directors; | |
| reviewing and approving officer and director indemnification and insurance matters; | |
| reviewing and approving any employee loan in an amount equal to or greater than $60,000; and | |
| reviewing periodically and approving any long-term incentive compensation or equity plans, programs or similar arrangements, annual bonuses, employee pension and welfare benefit plans. |
Corporate Governance and Nominating Committee. Upon the completion of this offering, our corporate governance and nominating committee will consist of Messrs. Peter Clarke, Defu Dong and Gilbert Lee. Messrs. Clarke and Lee satisfy the independence requirements of the Nasdaq Marketplace Rules. The corporate governance and nominating committee will assist the board of directors in identifying individuals qualified to become our directors and in determining the composition of the board and its committees. The corporate governance and nominating committee will be responsible for, among other things:
| identifying and recommending to the board nominees for election or re-election to the board, or for appointment to fill any vacancy; | |
| reviewing annually with the board the current composition of the board in light of the characteristics of independence, age, skills, experience and availability of service to us; | |
| identifying and recommending to the board the directors to serve as members of the boards committees; | |
| advising the board periodically with respect to significant developments in the law and practice of corporate governance as well as our compliance with applicable laws and regulations, and making recommendations to the board on all matters of corporate governance and on any corrective action to be taken; and | |
| monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures to ensure proper compliance. |
Duties of Directors
Under Cayman Islands laws, our directors have a statutory duty of loyalty 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. A shareholder has the right to seek damages if a duty owed by our directors is breached.
Terms of Directors and Officers
All directors hold office until their successors have been duly elected and qualified. A director may only be removed by our shareholders. Officers are elected by and serve at the discretion of the board of directors.
Employment Agreements
We have entered into employment agreements with each of our executive officers. Under these agreements, each of our executive officers is employed for a specified time period. We may terminate the employment for cause, at any time, without notice or remuneration, for certain acts of the employee,
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Each executive officer has agreed to hold, both during and after the employment agreement expires or is earlier terminated, in strict confidence and not to use, except as required in the performance of his duties in connection with the employment, any confidential information, technical data, trade secrets and know-how of our company or the confidential information of any third party, including our affiliated entities and our subsidiaries, received by us. The executive officers have also agreed to disclose in confidence to us all inventions, designs and trade secrets which they conceive, develop or reduce to practice and to assign all right, title and interest in them to us.
Compensation of Directors and Executive Officers
In 2004, the aggregate cash compensation and benefits that we paid to our executive officers, including all the directors, were approximately $675,000. No executive officer is entitled to any severance benefits upon termination of his or her employment with our company.
Share Incentives
Our board of directors and our shareholders recently 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. Our future grants of share incentives will be made pursuant to the 2005 plan.
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; | |
| restricted shares, which are non-transferable ordinary shares, subject to forfeiture upon termination of a grantees employment or service; | |
| restricted share units, which represent the right to receive our ordinary shares at a specified date in the future, subject to forfeiture upon termination of a grantees employment or service; | |
| share appreciation rights, which provide for the payment to the grantee based upon increases in the price of our ordinary shares over a set base price; and | |
| dividend equivalent rights, which represent the value of the dividends per share that we pay. | |
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
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Eligibility. We may grant awards to employees, directors and consultants of our company or any of our related entities, which include our subsidiaries or any entities in which we hold a substantial ownership interest. However, we may grant options that are intended to qualify as ISOs only to our employees.
Acceleration of Awards upon Corporate Transactions. The outstanding awards will accelerate upon occurrence of a change-of-control corporate transaction where the successor entity does not assume our outstanding awards under the 2005 plan. In such event, each outstanding award will become fully vested and immediately exercisable, and the transfer restrictions on the awards will be released and the repurchase or forfeiture rights will terminate immediately before the date of the change-of-control transaction. If the successor entity assumes our outstanding awards and later terminates the grantees service without cause within 12 months of the change-of-control transaction, the outstanding awards will automatically become fully vested and exercisable.
Terms of Awards. In general, the plan administrator determines the exercise price of an option or the purchase price of the restricted 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.
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PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth information with respect to the beneficial ownership of our ordinary shares, on a fully diluted basis assuming conversion of all of our convertible notes, as of the date of this prospectus, by:
(1) each of our directors and executive officers;
(2) each of our principal shareholders; and
(3) each of selling shareholders.
Ordinary Shares | Ordinary Shares | Shares Beneficially | ||||||||||||||||||||||
Beneficially Owned Prior | Being Sold in This | Owned After | ||||||||||||||||||||||
to This Offering (1) | Offering | This Offering (2) | ||||||||||||||||||||||
|
|
|
||||||||||||||||||||||
Number | % (3) | Number | % | Number | % | |||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Directors and Executive Officers:
|
||||||||||||||||||||||||
Defu Dong
(4)
|
165,750,000 | 29.3% | | | 165,750,000 | 25.2 | % | |||||||||||||||||
Baozhuang Huo
(5)
|
83,500,000 | 14.8% | | | 83,500,000 | 12.7 | % | |||||||||||||||||
Cangsong Liu
(6)
|
83,250,000 | 14.7% | | | 83,250,000 | 12.6 | % | |||||||||||||||||
Changke He
(7)
|
16,750,000 | 3.0% | | | 16,750,000 | 2.5 | % | |||||||||||||||||
All directors and executive officers as a
group
(8)
|
349,250,000 | 61.8% | | | 349,250,000 | 53.0 | % | |||||||||||||||||
Principal Shareholders:
|
||||||||||||||||||||||||
Stone Column Assets Limited
(9)
|
40,750,000 | 7.2% | 6,112,500 | 1.1% | 34,637,500 | 5.3 | % | |||||||||||||||||
Crossvine Assets Limited
(10)
|
40,000,000 | 7.1% | | | 40,000,000 | 6.1 | % | |||||||||||||||||
Selling Shareholders:
|
||||||||||||||||||||||||
HTF 7 Limited
(11)
|
18,867,924 | 3.3% | 5,660,370 | 1.0% | 13,207,554 | 2.0 | % | |||||||||||||||||
Intel Capital Corporation
(12)
|
18,867,924 | 3.3% | 5,660,370 | 1.0% | 13,207,554 | 2.0 | % | |||||||||||||||||
Kebo Wu
(13)
|
15,000,000 | 2.7% | 4,500,000 | 0.8% | 10,500,000 | 1.6 | % | |||||||||||||||||
Capital Group Resources
(14)
|
12,700,000 | 2.2% | 1,905,000 | 0.3% | 10,795,000 | 1.6 | % | |||||||||||||||||
Siu Hong Chow
(15)
|
10,000,000 | 1.8% | 3,000,000 | 0.5% | 7,000,000 | 1.1 | % | |||||||||||||||||
QUALCOMM Incorporated
(16)
|
9,433,962 | 1.7% | 1,415,085 | 0.2% | 8,018,877 | 1.2 | % | |||||||||||||||||
SeaBright China Special
Opportunities (I) Limited (17) |
9,433,962 | 1.7% | 2,830,185 | 0.5% | 6,603,777 | 1.0 | % | |||||||||||||||||
Chong Keung So
(18)
|
8,500,000 | 1.5% | 1,275,000 | 0.2% | 7,225,000 | 1.1 | % | |||||||||||||||||
Fortune Ideal Capital Inc.
(19)
|
7,547,170 | 1.3% | 2,264,145 | 0.1% | 5,283,025 | 0.8 | % | |||||||||||||||||
Financiere Natexis Singapore 2 Pte
Ltd.
(20)
|
7,500,000 | 1.3% | 1,125,000 | 0.2% | 6,375,000 | 1.0 | % | |||||||||||||||||
Iek Ngan
(21)
|
6,300,000 | 1.1% | 945,000 | 0.2% | 5,355,000 | 0.8 | % | |||||||||||||||||
Modern Ray Limited
(22)
|
5,000,000 | 0.9% | 1,500,000 | 0.3% | 3,500,000 | 0.5 | % | |||||||||||||||||
Global Strategic Investment Inc.
(23)
|
1,886,792 | 0.3% | 566,025 | | 1,320,767 | 0.2 | % |
(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) | Assumes that the underwriters do not exercise the over-allotment option. |
(3) | The calculation of this number assumes the conversion of all of our convertible notes into ordinary shares upon the closing of this offering. Percentage of beneficial ownership is based on 566,037,734 shares outstanding as of April 20, 2005, including our ordinary shares into which our convertible notes are convertible. |
(4) | Includes 165,750,000 ordinary shares held by Oasis Land Limited, which is ultimately owned by Dongs Family Trust. Mr. Defu Dong is the sole director of Oasis Land Limited with the sole power to vote on |
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behalf of Oasis Land Limited on all matters of TechFaith requiring shareholder approval. The business address for Defu Dong is 3/F M8 West No. 1 Jiu Xian Qiao East Road, Chao Yang District, Beijing 10016, Peoples Republic of China. |
(5) | Includes 83,500,000 ordinary shares held by Helio Glaze Limited, which is ultimately owned by Huos Offshore Trust. Mr. Defu Dong is the sole director of Helio Glaze Limited with the sole power to vote on behalf of Helio Glaze Limited on all matters of TechFaith requiring shareholder approval. The business address for Baozhuang Huo is 3/F M8 West No. 1 Jiu Xian Qiao East Road, Chao Yang District, Beijing 10016, Peoples Republic of China. |
(6) | Includes 83,250,000 ordinary shares held by Bright Garnet Limited, which is ultimately owned by Lius Offshore Trust. Mr. Defu Dong is the sole director of Bright Garnet Limited with the sole power to vote on behalf of Bright Garnet Limited on all matters of TechFaith requiring shareholder approval. The business address for Cangsong Liu is 3/F M8 West No. 1 Jiu Xian Qiao East Road, Chao Yang District, Beijing 10016, Peoples Republic of China. |
(7) | Includes 16,750,000 ordinary shares held by Geranium Joy Limited, which is ultimately owned by Hes Offshore Trust. Mr. Defu Dong is the sole director of Geranium Joy Limited with the sole power to vote on behalf of Geranium Joy Limited on all matters of TechFaith requiring shareholder approval. The business address for Changke He is 3/F M8 West No. 1 Jiu Xian Qiao East Road, Chao Yang District, Beijing 10016, Peoples Republic of China. |
(8) | Shares owned by all of our directors and executive officers as a group include shares beneficially owned by Defu Dong, Baozhuang Huo, Cangsong Liu and Changke He. |
(9) | Stone Column Assets Limited is ultimately owned by Tans Family Trust. Wensheng Tan is the sole director of Stone Column Assets Limited with the sole power to vote on behalf of Stone Column Assets Limited on all matters of TechFaith requiring shareholder approval. The business address for Stone Column Assets Limited is 5/F M7 East No. 1 Jiu Xian Qiao Dong Road, Chaoyang District, Beijing, Peoples Republic of China. |
(10) | Crossvine Assets Limited is ultimately owned by Dongs 2 Family Trust. Mr. Lin Dong is the sole director of Crossvine Assets Limited with the sole power to vote on behalf of Crossvine Assets Limited on all matters of TechFaith requiring shareholder approval. The business address for Lin Dong is Room 1106, No. 103, Wang Jing, Li Zhe Xi Yuan, Chao Yang District, Beijing, Peoples Republic of China. |
(11) | Represents ordinary shares into which the convertible notes issued by our company to HTF are convertible as of the date of this prospectus. HTF, a Cayman Islands exempted company, is a wholly-owned subsidiary of The HSBC Technology Fund Limited. HSBC Technology (BVI) Limited, the investment manager of The HSBC Technology Fund Limited, is a directly-held subsidiary of HSBC Holding plc, the holding company of the HSBC Group, which is a public company listed on the Hong Kong Stock Exchange. The address for HTF is Strathvale House, North Church Street, P.O. Box 1109, George Town, Grand Cayman, Cayman Islands. |
(12) | Represents ordinary shares into which the convertible notes issued by our company to Intel Capital Corporation are convertible as of the date of this prospectus. Intel Capital Corporation is a limited liability company incorporated on January 12, 2001 in the Cayman Islands and is wholly owned by Intel Corporation. The shares of Intel Corporation are listed on NASDAQ. The address for Intel Capital Corporation is 2200 Mission College Blvd, Santa Clara, CA 95052, USA. |
(13) | The address for Kebo Wu is Room 1909, 19/F, Hutchison House, 10 Harcourt Road, Central, Hong Kong |
(14) | Capital Group Resources, a British Virgin Islands international business company, is wholly owned by Jacqui Tan. The address for Capital Group Resources is 39/F Two International Finance Centre, 8 Finance Street, Hong Kong. |
(15) | The address for Siu Hong Chow is Room 1909, 19/F, Hutchison House, 10 Harcourt Road, Central Hong Kong. |
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(16) | Represents ordinary shares into which the convertible notes issued by our company to QUALCOMM are convertible as of the date of this prospectus. QUALCOMM, a Delaware corporation, is listed on the Nasdaq National Market. The address for QUALCOMM is S775 Morehouse Drive, San Diego, California, USA 92121. |
(17) | Represents ordinary shares into which the convertible notes issued by our company to SeaBright are convertible as of the date of this prospectus. SeaBright is a British Virgin Islands international business company in which China Everbright Limited holds an approximately 79% interest. China Everbright Limited is an integrated financial holding company listed on the Hong Kong Stock Exchange. The registered address for SeaBright is 125 Main Street, P.O. Box 144, Road Tonoy, Tortola, British Virgin Islands. |
(18) | The address for Chong Keung So is Room 4903, 49/F, Office Tower, Hong Kong Convention and Exhibition Plaza, 1 Harbour Road, Wanchai, Hong Kong. |
(19) | Represents ordinary shares into which the convertible notes issued by our company to Fortune Ideal Capital Inc. are convertible as of the date of this prospectus. Fortune Ideal Capital Inc., a British Virgin Islands international business company, is wholly owned by Mei Jian and Bai Yi. The address for Fortune Ideal Capital Inc. is offices of TTC, Trident Chambers, P.O. Box 146, Road Town, Tortola, British Virgin Islands. |
(20) | Financiere Natexis, a Singapore company, is an affiliate of Natexis Banques Populaires, which is listed on the Paris Stock Exchange and is a subsidiary of the Banques Populaires Group. The address for Financiere Natexis is 1 Temasek Avenue, #27-01 Millenia Tower, Singapore 039192. |
(21) | The address for Iek Ngan is Rua de Foshan, No. 51, Edif. San Kin Yip Centro Commercial, 17 andar, Macau. |
(22) | Modern Ray, a British Virgin Islands international business company, is wholly owned by Shen Demin. The address for Modern Ray Limited is Sea Meadow House, Blackburne Highway, P.O. Box 116, Road Town, Tortola, British Virgin Islands. |
(23) | Represents ordinary shares into which the convertible notes issued by our company to Global Strategic Investment Inc. are convertible as of the date of this prospectus. Global Strategic Investment Inc. is controlled by its board of directors, which consists of Shih-Chien Yang, Kou-I Yeh and a representative from each of Hon Hai Precision Industrial Co., Ltd., President (BVI) International Holdings Investment Ltd., Kinpo Electronics, Inc. and Global Strategic Investment Management Inc. The address for Global Strategic Investment Inc. is 4th Floor, No. 65, Tun Hwa South Road, Sec. 2, Taipei 106, Taiwan, R.O.C. |
As of the date of this prospectus, 42.86% of our outstanding convertible notes are held by two record holders in the United States, and none of our outstanding ordinary shares are held by any record holders in the United States.
None of our existing shareholders has different voting rights from other shareholders after the closing of this offering. We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company.
Two of the selling shareholders, HTF 7 Limited and Financiere Natexis Singapore 2 Pte Ltd., have represented to us that they are affiliates of registered broker-dealers. Based on their representations, we believe that at the time of the purchase of our shares, each of them purchased our shares in the ordinary course of business, and had no agreements or understandings, directly or indirectly, with any person to distribute the shares.
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RELATED PARTY TRANSACTIONS
Transactions with Certain Directors and Officer
On October 20, 2003, TechFaith China, and our directors Mr. Defu Dong and Mr. Jun Liu and our officer Mr. Yibo Fang entered into a patent application transfer agreement pursuant to which Mr. Defu Dong, Mr. Jun Liu and Mr. Yibo Fang agreed to transfer to Techfaith China without payment a patent application dated July 17, 2003 related to a new mobile handset design named Baby Handset.
Issuance and Sale of Convertible Notes
In April 2004, TechFaith BVI issued interest-free notes in the aggregate principal amount of US$14 million to HTF 7 Limited, QUALCOMM Incorporated, SeaBright China Special Opportunities (I) Limited and Intel Capital Corporation, pursuant to a Note Subscription and Rights Agreement, or Subscription Agreement. Pursuant to a transfer and assumption agreement entered into in November 2004, we assumed TechFaith BVIs obligations under the Subscription Agreement and the notes. The notes are repayable upon demand (i) on April 16, 2007 or at any time thereafter, or (ii) at any time after the occurrence of an event of default. The notes are convertible into our ordinary shares at any time. The initial conversion price is US$10,600 per share, subject to adjustment pursuant to the terms of the Subscription Agreement. Upon the completion of this offering, the notes shall be automatically converted into our ordinary shares without any further action of any party, into that number of ordinary shares pursuant to the then effective conversion price.
The Subscription Agreement provides that our board of directors will consist of five directors, including one director nominated by HTF. In addition, QUALCOMM, SeaBright and Intel are each entitled to have one board observer. The note holders have been granted certain rights with respect to any proposed share transfers by any of our shareholders, including the right of first refusal to purchase such shares and the right of co-sale to sell their shares alongside the proposed share transfer. In addition, they have preemptive rights with respect to any issuance of securities by us. These rights do not apply to this offering. We have also granted these investors customary registration rights, including demand and piggyback registration rights and Form F-3 registration rights. For a detailed description of the registration rights, see Description of Share Capital Registration Rights.
The registration rights and certain information rights of the note holders will remain in effect after the completion of this offering. However, all other rights set forth in the Subscription Agreement will terminate automatically upon the completion of this offering.
Transactions with QUALCOMM
In December 2003, we entered into a memorandum of understanding with QUALCOMM to confirm mutual intentions and understandings regarding the establishment of a wholly-owned subsidiary of our company to engage solely in CDMA-related business. Pursuant to this memorandum of understanding, we established TechFaith Shanghai in March 2004 and entered into several license agreements with QUALCOMM for the development of CDMA 1X mobile phones. Under these license agreements, we have obtained a non-exclusive license to manufacture, use and sell CDMA cards and components using certain intellectual property of QUALCOMM. In addition, we have obtained QUALCOMMs technical support for certain particular process technologies and design platforms.
Transactions with NEC
On September 26, 2003, we entered into a joint venture agreement with NEC for the establishment of STEP Technologies, which was formed in November 2003. We contributed US$4.2 million and NEC contributed US$1.8 million as the registered capital of STEP Technologies, in return for a 70% and 30%, respectively, equity interest in STEP Technologies. Pursuant to the joint venture agreement, NECs consent is required for certain matters of STEP Technologies, including amendment of the articles of association, profit distribution or loss treatment, sale or transfer of intangible assets, and investment in any other entity.
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Since March 2003, we have entered into several business contracts with Wuhan NEC, a Chinese subsidiary of NEC, pursuant to which we have provided mobile handset design services to Wuhan NEC. In 2003 and 2004, we derived net revenue of approximately US$4.1 million and US$14.9 million, respectively, from these business contracts. We expect to enter into additional business contracts with NEC and its subsidiaries after completion of this offering.
In June 2004, we entered into a written agreement with Wuhan NEC, with respect to a mobile handset model we designed for and accepted by Wuhan NEC in December 2003. Under the agreement, we were required to pay Wuhan NEC US$1.5 million by October 29, 2004 to compensate its losses allegedly arising from the delay in the design schedule, certain software quality problems and changes of the initial design in the design process. At the time of execution of the agreement, it was the mutual understanding of both parties that Wuhan NEC would terminate the agreement and all of our obligations thereunder if the sales of the two new models of mobile handsets designed by us were satisfactory to Wuhan NEC. The sales of the two new models in September and October 2004 were satisfactory to Wuhan NEC and accordingly, Wuhan NEC orally agreed to terminate the agreement and all of our obligations thereunder in October 2004. We and Wuhan NEC entered into a new written agreement in December 2004 to affirm our previous oral agreements, clarify that the design quality issues were attributable to the components supplied by a third party and declare the June 2004 agreement to be void and ineffective from the date thereof.
Transactions with SEF
Our Chairman and Chief Executive Officer, Mr. Defu Dong, co-founded Beijing Sino-Electronics Future Telecommunication R&D, Ltd., or SEF, a mobile handset design house, in February 2001. He was a director, shareholder and the Chief Executive Officer of SEF from its inception until July 2002. Mr. Wensheng Tan is, and was at all relevant times, a shareholder of both our company and SEF.
On September 18, 2003, Lenovo, SEF and TechFaith China entered into an agreement pursuant to which SEF assigned to TechFaith China and TechFaith China assumed without payment all the rights and obligations under three product technology development cooperation agreements entered into between Lenovo and SEF. Under the assignment and novation agreement, SEF agreed to act as a guarantor of the obligations of TechFaith China and continue to observe certain restrictions.
On October 20, 2003, TechFaith China and SEF entered into five transfer agreements pursuant to which SEF agreed to transfer to TechFaith China without consideration three patents and two patent applications that were principally developed by some employees of SEF who subsequently joined TechFaith China.
On January 18, 2004, SEF, TechFaith China and Skyworks Solutions entered into an agreement pursuant to which SEF assigned to TechFaith China all the rights under an April 2002 development and license agreement between SEF and Skyworks Solutions in return for TechFaith Chinas payment of US$0.3 million to SEF. The consideration was determined based on the remaining pro rata share of the total license fee previously paid by SEF to Skyworks Solutions for the five year license period.
We entered into a lease agreement dated July 31, 2003 with SEF with respect to part of our premises in Beijing. Our lease expires in July 2008. During the term of our lease, we are required to pay SEF a quarterly rent of US$34,177.
In 2003 and 2004, we reimbursed SEF an aggregate amount of US$0.55 million and US$nil, respectively, for certain staff remuneration that SEF paid on behalf of our company before we established our statutory employee welfare reserve system under PRC law.
Transactions with Beijing Qidi
Transfer of Mobile Handset Design Contracts. We previously owned a 49% interest in Beijing Qidi, a company formed in September 2002 to provide wireless solutions to wireless manufacturers and brand owners in China. We sold our equity interest in Beijing Qidi to another shareholder of Beijing Qidi unrelated to us for US$1.2 million in September 2003.
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On December 5, 2003, Guangzhou Rowa Communication Company Limited, or Rowa, Beijing Qidi and TechFaith Beijing entered into an agreement pursuant to which Beijing Qidi assigned and novated to TechFaith Beijing, effective from January 1, 2004, all the rights and obligations under a mobile handset project cooperation agreement dated June 20, 2003 entered into between Rowa and Beijing Qidi, whereby Rowa engaged Beijing Qidi to design mobile handsets and agreed to pay Beijing Qidi design fees and royalties for its design services. TechFaith Beijing did not make any payment to Beijing Qidi in connection with this assignment.
On December 31, 2003, Guangzhou Southern High-Tech Co., Ltd., or Soutec, Beijing Qidi and TechFaith Beijing entered into an agreement pursuant to which Beijing Qidi assigned and novated to TechFaith Beijing, effective from January 1, 2004, all the rights and obligations under a product technology development cooperation agreement dated May 13, 2003 entered into between Soutec and Beijing Qidi, whereby Soutec engaged Beijing Qidi to design mobile handsets and agreed to pay Beijing Qidi design fees and royalties for its design services. TechFaith Beijing did not make any payment to Beijing Qidi in connection with this assignment.
On December 31, 2003, Guangzhou Jingpeng Digital Communication Company Limited, or Jingpeng, Beijing Qidi and TechFaith Beijing entered into an agreement pursuant to which Beijing Qidi assigned and novated to TechFaith Beijing, effective from January 1, 2004 all the rights and obligations under a mobile handset project cooperation agreement dated June 12, 2003 entered into between Jingpeng and Beijing Qidi, as supplemented, whereby Jingpeng engaged Beijing Qidi to design mobile handsets and agreed to pay Beijing Qidi design fees and royalties for its design services. TechFaith Beijing did not make any payment to Beijing Qidi in connection with this assignment.
Settlement with CECW. In September 2003, CECW, one of our competitors, sued Beijing Qidi, a former affiliate, and 18 individuals, including our director Baozhuang Huo, a former hardware design manager at CECW, in the Beijing First Intermediate Peoples Court, claiming that Beijing Qidi and the individuals had engaged in unfair competition. In December 2003, CECW also initiated arbitration proceedings against four individuals, including Mr. Huo, claiming that these individuals had violated the non-competition restrictions set forth in their respective employment agreements with CECW. In January 2004, we settled these claims with CECW on behalf of Beijing Qidi, Mr. Huo and the other individuals involved. In connection with the settlement, Beijing Qidi assigned three mobile handset project cooperation agreements to us. CECW subsequently withdrew all of its claims, and the litigation and arbitration were dismissed. Mr. Huo and several other individuals involved in the litigation joined our company in January 2004. The settlement was recorded as cost for the acquisition of intangible assets in our financial statements in 2004 at its cost, which estimated the fair market value of the intangible assets acquired in exchange for the settlement of this claim.
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DESCRIPTION OF SHARE CAPITAL
We are a Cayman Islands exempted company and our affairs are governed by our memorandum and articles of association and the Companies Law (2004 Revision) of the Cayman Islands, which is referred to as the Companies Law below.
As of the date of this prospectus, our authorized share capital consists of 50,000,000,000,000 ordinary shares, with a par value of US$0.00002 each. As of the date of this prospectus, there are 566,037,734 ordinary shares issued and outstanding, assuming the conversion of all of our convertible notes.
Upon the closing of this offering, we will adopt an amended and restated memorandum and articles of association. The following are summaries of material provisions of our proposed amended and restated memorandum and articles of association and the Companies Law insofar as they relate to the material terms of our ordinary shares that we expect will become effective upon the closing of this offering.
Ordinary Shares
General. All of our outstanding ordinary shares are fully paid and non-assessable. Certificates representing the ordinary shares are issued in registered form. Our shareholders who are nonresidents of the Cayman Islands may freely hold and vote their shares.
Dividends. The holders of our ordinary shares are entitled to such dividends as may be declared by our board of directors subject to the Companies Law and our amended and restated memorandum and articles of association.
Voting Rights. Each ordinary share is entitled to one vote on all matters upon which the ordinary shares are entitled to vote. Voting at any meeting of shareholders is by show of hands unless a poll is demanded. A poll may be demanded by the chairman of our board of directors or any other shareholder holding at least ten percent of the shares given a right to vote at the meeting, present in person or by proxy.
A quorum required for a meeting of shareholders consists of at least two shareholders present in person or by proxy or, if a corporation or other non-natural person, by its duly authorized representative. Shareholders meetings are held annually and may be convened by our board of directors on its own initiative or upon a request to the directors by shareholders holding in aggregate at least ten percent of our voting share capital. Advance notice of at least seven days is required for the convening of our annual general meeting and other shareholders meetings.
An ordinary resolution to be passed by the shareholders requires the affirmative vote of a simple majority of the votes attaching to the ordinary shares cast in a general meeting, while a special resolution requires the affirmative vote of no less than two-thirds of the votes cast attaching to the ordinary shares. A special resolution is required for important matters such as a change of name. Holders of the ordinary shares may effect certain changes by ordinary resolution, including alter the amount of our authorized share capital, consolidate and divide all or any of our share capital into shares of larger amount than our existing share capital, and cancel any shares.
Transfer of Shares. Subject to the restrictions of our articles of association, as applicable, any of our shareholders may transfer all or any of his or her ordinary shares by an instrument of transfer in the usual or common form or any other form approved by our board.
Our board of directors may, in its absolute discretion, decline to register any transfer of any ordinary share which is not fully paid up or on which we have a lien. Our directors may also decline to register any transfer of any ordinary share unless (a) the instrument of transfer is lodged with us, accompanied by the certificate for the ordinary shares to which it relates and such other evidence as our board of directors may reasonably require to show the right of the transferor to make the transfer; (b) the instrument of transfer is in respect of only one class of ordinary shares; (c) the instrument of transfer is properly stamped, if required; (d) in the case of a transfer to joint holders, the number of joint holders to whom the ordinary share is to be transferred does not exceed four; (e) the shares conceded are free of any lien in favor of us; or (f) a fee of
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If our directors refuse to register a transfer they shall, within two months after the date on which the instrument of transfer was lodged, send to each of the transferor and the transferee notice of such refusal. The registration of transfers may, on 14 days notice being given by advertisement in such one or more newspapers or by electronic means, be suspended and the register closed at such times and for such periods as our board of directors may from time to time determine, provided, however, that the registration of transfers shall not be suspended nor the register closed for more than 30 days in any year.
Liquidation. On a return of capital on winding up or otherwise (other than on conversion, redemption or purchase of shares), assets available for distribution among the holders of ordinary shares shall be distributed among the holders of the ordinary shares on a pro rata basis. If our assets available for distribution are insufficient to repay all of the paid-up capital, the assets will be distributed so that the losses are borne by our shareholders proportionately.
Calls on Shares and Forfeiture of Shares. Our board of directors may from time to time make calls upon shareholders for any amounts unpaid on their shares in a notice served to such shareholders at least 14 days prior to the specified time and place of payment. The shares that have been called upon and remain unpaid on the specified time are subject to forfeiture.
Redemption of Shares. Subject to the provisions of the Companies Law, we may issue shares on terms that are subject to redemption, at our option or at the option of the holders, on such terms and in such manner as may be determined by special resolution.
Variations of Rights of Shares. All or any of the special rights attached to any class of shares may, subject to the provisions of the Companies Law, be varied either with the written consent of the holders of three-fourths of the issued shares of that class or with the sanction of a special resolution passed at a general meeting of the holders of the shares of that class.
Inspection of Books and Records. Holders of our ordinary shares will have no general right under Cayman Islands law to inspect or obtain copies of our list of shareholders or our corporate records. However, we will provide our shareholders with annual audited financial statements. See Where You Can Find Additional Information.
History of Securities Issuances
The following is a summary of our securities issuances since our inception in July 2002.
Ordinary Shares. In September 2003, TechFaith BVI issued a total of 50,000,000 ordinary shares at par value to six individuals, including our founders, through a private placement.
Convertible Notes. In April 2004, TechFaith BVI issued interest-free notes in the aggregate principal amount of US$14 million to HTF, QUALCOMM, SeaBright and Intel pursuant to a note subscription and rights agreement. Pursuant to a transfer and assumption agreement entered into in November 2004, we assumed TechFaith BVIs obligations under the note subscription and rights agreement and the notes. The notes will be repayable upon demand (1) on April 16, 2007 or at any time thereafter, or (2) at any time after the occurrence of an event of default. The notes are convertible into our ordinary shares. Immediately prior to the closing of this offering, the notes will be automatically converted into our ordinary shares without any further action of any party at the then effective conversion price.
Differences in Corporate Law
The Companies Law is modeled after that of the United Kingdom but does not follow recent United Kingdom statutory enactments. In addition, the Companies Law differs from laws applicable to United States corporations and their shareholders. Set forth below is a summary of the significant differences between the provisions of the Companies Law applicable to us and the laws applicable to companies incorporated in the United States and their shareholders.
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Mergers and Similar Arrangements. Cayman Islands law does not provide for mergers as that expression is understood under United States corporate law. However, there are statutory provisions that facilitate the reconstruction and amalgamation of companies, provided that the arrangement is approved by a majority in number of each class of shareholders and creditors with whom the arrangement is to be made, and who must in addition represent three-fourths in value of each such class of shareholders or creditors, as the case may be, that are present and voting either in person or by proxy at a meeting, or meetings, convened for that purpose. The convening of the meetings and subsequently the arrangement must be sanctioned by the Grand Court of the Cayman Islands. While a dissenting shareholder has the right to express to the court the view that the transaction ought not to be approved, the court can be expected to approve the arrangement if it determines that:
| the statutory provisions as to majority vote have been met; | |
| the shareholders have been fairly represented at the meeting in question; | |
| the arrangement is such that a businessman would reasonably approve; and | |
| the arrangement is not one that would more properly be sanctioned under some other provision of the Companies Law. |
When a take-over offer is made and accepted by holders of 90.0% of the shares within four months, the offerer may, within a two month period, require the holders of the remaining shares to transfer such shares on the terms of the offer. An objection can be made to the Grand Court of the Cayman Islands but this is unlikely to succeed unless there is evidence of fraud, bad faith or collusion.
If the arrangement and reconstruction is thus approved, the dissenting shareholder would have no rights comparable to appraisal rights, which would otherwise ordinarily be available to dissenting shareholders of United States corporations, providing rights to receive payment in cash for the judicially determined value of the shares.
Shareholders Suits. We are not aware of any reported class action or derivative action having been brought in a Cayman Islands court. In principle, we will normally be the proper plaintiff and a derivative action may not be brought by a minority shareholder. However, based on English authorities, which would in all likelihood be of persuasive authority in the Cayman Islands, exceptions to the foregoing principle apply in circumstances in which:
| a company is acting or proposing to act illegally or ultra vires; | |
| the act complained of, although not ultra vires, could be effected duly if authorized by more than a simple majority vote which has not been obtained; and | |
| those who control the company are perpetrating a fraud on the minority. |
Registration Rights
We have granted registration rights to the holders of our convertible notes in connection with their subscription for the notes in April 2004. Set forth below is a description of the registration rights granted to the note holders.
Demand Registration Rights. At any time commencing six months after this offering, holders of a majority of the registrable securities have the right to demand that we file a registration statement covering the offer and sale of their securities, except other than pursuant to a registration statement on Form F-4, S-4 or S-8, so long as the aggregate amount of securities to be sold under the registration statement exceeds $5.0 million. However, we are not obligated to effect any such demand registration if we have within the six month period preceding the demand already effected a registration or if such holders had an opportunity to be included in a registration pursuant to their piggyback registration rights. We have the ability to delay or withdraw the filing of a registration statement for up to ninety days if our board of directors determines there is a valid business reason to delay such filing. We are not obligated to effect such demand registrations on more than two occasions.
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Form F-3 Registration Rights. Upon our company becoming eligible for use of Form F-3 or S-3, holders of a majority of the registrable securities have the right to request we file a registration statement under Form F-3 or S-3. Such requests for registrations are not counted as demand registrations.
Piggyback Registration Rights. If, at any time after this offering, we propose to file a registration statement with respect to an offering for our own account, then we must offer each holder of the registrable securities the opportunity to include their shares in the registration statement, other than pursuant to a registration statement on Form F-4, S-4 or S-8. We must use our reasonable best efforts to cause the underwriters in any underwritten offering to permit any such shareholder who so requests to include their shares on the same terms and conditions as the securities of our company.
Expenses of Registration. We will pay all expenses relating to any demand or piggyback registration, whether or not such registrations become effective; except, shareholders shall bear the expense of any brokers commission or underwriters discount or commission relating to registration and sale of their securities, and shall bear the fees and expenses of their own counsel.
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DESCRIPTION OF AMERICAN DEPOSITARY SHARES
American Depositary Receipts
The Bank of New York, as depositary, will execute and deliver ADRs. ADRs are American Depositary Receipts. Each ADR is a certificate evidencing a specific number of American Depositary Shares, also referred to as ADSs. Each ADS will represent 15 shares (or a right to receive 15 shares) deposited with the principal Hong Kong office of The Hong Kong and Shanghai Banking Corporation Limited, as custodian for the depositary in Hong Kong. Each ADS will also represent any other securities, cash or other property which may be held by the depositary under the deposit agreement referred to below. The depositarys office at which the ADRs will be administered is located at 101 Barclay Street, New York, New York 10286.
You may hold ADSs either directly (by having an ADR registered in your name) or indirectly through your broker or other financial institution. If you hold ADSs directly, you are an ADR holder. This description assumes you hold your ADSs directly. If you hold the ADSs indirectly, you must rely on the procedures of your broker or other financial institution to assert the rights of ADR holders described in this section. You should consult with your broker or financial institution to find out what those procedures are.
As an ADR holder, we will not treat you as one of our shareholders and you will not have shareholder rights. Cayman Islands law governs shareholder rights. The depositary will be the holder of the shares underlying your ADSs. As a holder of ADRs, you will have ADR holder rights. A deposit agreement among us, the depositary and you, as an ADR holder, and the beneficial owners of ADRs set out ADR holder rights as well as the rights and obligations of the depositary. New York law governs the deposit agreement and the ADRs.
The following is a summary of the material provisions of the deposit agreement. For more complete information, you should read the entire deposit agreement and the form of ADR, which are filed as exhibits to the registration statement that includes this prospectus.
Dividends and Other Distributions
How will you receive dividends and other distributions on the shares? |
The depositary has agreed to pay to you the cash dividends or other distributions it or the custodian receives on shares or other deposited securities, after deducting its fees and expenses. You will receive these distributions in proportion to the number of shares your ADSs represent.
| Cash. The depositary will convert any cash dividend or other cash distribution we pay on the shares into U.S. dollars, if it can do so on a reasonable basis and can transfer the U.S. dollars to the United States. The exchange rate the depositary uses will be the market rate prevailing on the date on which the depositary enters into the currency exchange contract. If that is not possible or if any government approval is needed and can not be obtained, the deposit agreement allows the depositary to distribute the foreign currency only to those ADR holders to whom it is possible to do so. It will hold the foreign currency it cannot convert for the account of the ADR holders who have not been paid. It will not invest the foreign currency and it will not be liable for any interest. |
Before making a distribution, the depositary will deduct any withholding taxes that must be paid. See Taxation United States Federal Income Taxation. It will distribute only whole U.S. dollars and cents and will round fractional cents to the nearest whole cent. If the exchange rates fluctuate during a time when the depositary cannot convert the foreign currency, you may lose some or all of the value of the distribution. |
| Shares. The depositary may distribute additional ADSs representing any shares we distribute as a dividend or free distribution. The depositary will only distribute whole ADSs. It will try to sell shares which would require it to deliver a fractional ADS and distribute the net |
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proceeds in the same way as it does with cash. If the depositary does not distribute additional ADRs, the outstanding ADSs will also represent the new shares. | ||
| Rights to purchase additional shares. If we offer holders of our securities any rights to subscribe for additional shares or any other rights, the depositary may make these rights available to you. If the depositary decides it is not legal and practical to make the rights available but that it is practical to sell the rights, the depositary may sell the rights and distribute the proceeds in the same way as it does with cash. The depositary will allow rights that are not distributed or sold to lapse. In that case, you will receive no value for them. |
If the depositary makes rights available to you, it will exercise the rights and purchase the shares on your behalf. The depositary will then deposit the shares and deliver ADSs to you. It will only exercise rights if you pay it the exercise price and any other charges the rights require you to pay. | ||
U.S. securities laws may restrict transfers and cancellation of the ADSs represented by shares purchased upon exercise of rights. For example, you may not be able to trade these ADSs freely in the United States. In this case, the depositary may deliver restricted depositary shares that have the same terms as the ADRs described in this section except for changes needed to put the necessary restrictions in place. |
| Other Distributions. The depositary will send to you anything else we distribute on deposited securities by any means it thinks is legal, fair and practical. If it cannot make the distribution in that way, the depositary has a choice. It may decide to sell what we distributed and distribute the net proceeds, in the same way as it does with cash. Or, it may decide to hold what we distributed, in which case ADSs will also represent the newly distributed property. However, the depositary is not required to distribute any securities (other than ADSs) to you unless it receives satisfactory evidence from us that it is legal to make that distribution. |
The depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any ADR holders. We have no obligation to register ADSs, shares, rights or other securities under the Securities Act. We also have no obligation to take any other action to permit the distribution of ADSs, shares, rights or anything else to ADR holders. This means that you may not receive the distributions we make on our shares or any value for them if it is illegal or impractical for us to make them available to you.
Deposit and Withdrawal
How are ADSs issued? |
The depositary will deliver ADSs if you or your broker deposits shares or evidence of rights to receive shares with the custodian. Upon payment of its fees and expenses and of any taxes or charges, such as stamp taxes or stock transfer taxes or fees, the depositary will register the appropriate number of ADSs in the names you request and will deliver the ADRs at its office to the persons you request.
How do ADS holders cancel an ADR and obtain shares? |
You may surrender your ADRs at the depositarys office. Upon payment of its fees and expenses and of any taxes or charges, such as stamp taxes or stock transfer taxes or fees, the depositary will deliver the shares and any other deposited securities underlying the ADR to you or a person you designate at the office of the custodian. Or, at your request, risk and expense, the depositary will deliver the deposited securities at its office, if feasible.
Voting Rights
How do you vote? |
You may instruct the depositary to vote the number of shares your ADSs represent. The depositary will notify you of shareholders meetings and arrange to deliver our voting materials to you if we ask it to.
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The depositary will try, in so far as practical, subject to the Cayman Islands law and the provisions of our constitutive documents, to vote the number of shares or other deposited securities represented by your ADSs as you instruct. The depositary will only vote or attempt to vote as you instruct.
We cannot ensure that you will receive voting
materials or otherwise learn of an upcoming shareholders
meeting 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 vote and there may be nothing
you can do if your shares are not voted as you requested.
Fees and Expenses
Persons depositing shares or
ADR holders must pay:
For:
$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
$.02
(or less) per ADS
Any
cash distribution to you
A
fee equivalent to the fee that would be payable if securities
distributed to you 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 ADR holders
$.02
(or less) per ADSs per calendar year (to the extent the
depositary has not collected a cash distribution fee of $.02 per
ADS during that year)
Depositary
services
Expenses
of the depositary
Cable,
telex and facsimile transmissions (when expressly provided in
the deposit agreement)
Registration
or transfer fees
Transfer
and registration of shares on our share register to or from the
name of the depositary or its agent when you deposit or withdraw
shares
Expenses
of the depositary in converting foreign currency to
U.S. dollars
As
necessary
Taxes
and other governmental charges the depositary or the custodian
have to pay on any ADR or share underlying an ADR, for example,
stock transfer taxes, stamp duty or withholding taxes
As
necessary
Any
charges incurred by the depositary or its agents for servicing
the deposited securities
No
charges of this type are currently made in the Hong Kong market.
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Payment of Taxes
The depositary may deduct the amount of any taxes
owed from any payments to you. It may also sell deposited
securities, by public or private sale, to pay any taxes owed.
You will remain liable if the proceeds of the sale are not
enough to pay the taxes. If the depositary sells deposited
securities, it will, if appropriate, reduce the number of ADSs
to reflect the sale and pay to you any proceeds, or send to you
any property, remaining after it has paid the taxes.
Reclassifications, Recapitalizations and
Mergers
Amendment and Termination
If we:
Then:
Change the
nominal or par value of our shares
Reclassify, split up or
consolidate any of the deposited securities
Distribute securities on the
shares that are not distributed to you
The cash,
Recapitalize, reorganize,
merge, liquidate, sell all or substantially all of our assets,
or take any similar action
shares or other securities received by the
depositary will become deposited securities. Each ADS will
automatically represent its equal share of the new deposited
securities.
The depositary may distribute some or all of the cash, shares or
other securities it received. It may also deliver new ADRs or
ask you to surrender your outstanding ADRs in exchange for new
ADRs identifying the new deposited securities.
How may the deposit agreement be amended? |
We may agree with the depositary to amend the deposit agreement and the ADRs without your consent for any reason. If an amendment adds or increases fees or charges, except for taxes and other governmental charges or expenses of the depositary for registration fees, facsimile costs, delivery charges or similar items, or prejudices a substantial right of ADR holders, it will not become effective for outstanding ADRs until 30 days after the depositary notifies ADR holders of the amendment. At the time an amendment becomes effective, you are considered, by continuing to hold your ADR, to agree to the amendment and to be bound by the ADRs and the deposit agreement as amended.
How may the deposit agreement be terminated? |
The depositary will terminate the deposit agreement if we ask it to do so. The depositary may also terminate the deposit agreement if the depositary has told us that it would like to resign and we have not appointed a new depositary bank within 60 days. In either case, the depositary must notify you at least 30 days before termination.
After termination, the depositary and its agents will do the following under the deposit agreement but nothing else: (1) advise you that the deposit agreement is terminated, (2) collect distributions on the deposited securities, (3) sell rights and other property, and (4) deliver shares and other deposited securities upon cancellation of ADRs. Six months or more after termination, the depositary may sell any remaining deposited securities by public or private sale. After that, the depositary will hold the money it received on the sale, as well as any other cash it is holding under the deposit agreement for the pro rata benefit of the ADR holders that have not surrendered their ADRs. It will not invest the money and has no liability for interest. The depositarys only obligations will be to account for the money and other cash. After termination our only obligations will be to indemnify the depositary and to pay fees and expenses of the depositary that we agreed to pay.
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Limitations on Obligations and Liability
Limits on our Obligations and the Obligations of the Depositary; Limits on Liability to Holders of ADRs |
The deposit agreement expressly limits our obligations and the obligations of the depositary. It also limits our liability and the liability of the depositary. We and the depositary:
| are only obligated to take the actions specifically set forth in the deposit agreement without negligence or bad faith; | |
| are not liable if either of us is prevented or delayed by law or circumstances beyond our control from performing our obligations under the deposit agreement; | |
| are not liable if either of us exercises discretion permitted under the deposit agreement; | |
| have no obligation to become involved in a lawsuit or other proceeding related to the ADRs or the deposit agreement on your behalf or on behalf of any other person; and | |
| may rely upon any documents we believe in good faith to be genuine and to have been signed or presented by the proper party. |
In the deposit agreement, we agree to indemnify the depositary for acting as depositary, except for losses caused by the depositarys own negligence or bad faith, and the depositary agrees to indemnify us for losses resulting from its negligence or bad faith.
Requirements for Depositary Actions
Before the depositary will deliver or register a transfer of an ADR, make a distribution on an ADR, or permit withdrawal of shares or other property, the depositary may require:
| payment of stock transfer or other taxes or other governmental charges and transfer or registration fees charged by third parties for the transfer of any shares or other deposited securities; | |
| satisfactory proof of the identity and genuineness of any signature or other information it deems necessary; and | |
| compliance with regulations it may establish, from time to time, consistent with the deposit agreement, including presentation of transfer documents. |
The depositary may refuse to deliver ADRs or register transfers of ADRs generally when the transfer books of the depositary or our transfer books are closed or at any time if the depositary or we think it advisable to do so.
Your Right to Receive the Shares Underlying your ADRs
You have the right to cancel your ADRs and withdraw the underlying shares at any time except:
| When temporary delays arise because: (i) the depositary has closed its transfer books or we have closed our transfer books; (ii) the transfer of shares is blocked to permit voting at a shareholders meeting; or (iii) we are paying a dividend on our shares. | |
| When you or other ADR holders seeking to withdraw shares owe money to pay fees, taxes and similar charges. | |
| When it is necessary to prohibit withdrawals in order to comply with any laws or governmental regulations that apply to ADRs or to the withdrawal of shares or other deposited securities. |
This right of withdrawal may not be limited by any other provision of the deposit agreement.
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Pre-release of ADRs
The deposit agreement permits the depositary to deliver ADRs before deposit of the underlying shares. This is called a pre-release of the ADRs. The depositary may also deliver shares upon cancellation of pre-released ADRs (even if the ADRs are canceled before the pre-release transaction has been closed out). A pre-release is closed out as soon as the underlying shares are delivered to the depositary. The depositary may receive ADRs instead of shares to close out a pre-release. The depositary may pre-release ADRs only under the following conditions:
| before or at the time of the pre-release, the person to whom the pre-release is being made must represent to the depositary in writing that it or its customer |
| owns the shares or ADRs to he deposited, | |
| assigns all beneficial rights, title and interest in the shares or ADRs to the depositary, and | |
| will not take any action with respect to such shares or ADRs that is inconsistent with the transfer of beneficial ownership, other than in satisfaction of such pre-release; |
| the pre-release must be fully collateralized with cash or other collateral that the depositary considers appropriate; and | |
| the depositary must be able to close out the pre-release on not more than five business days notice. |
In addition, the depositary will limit the number of ADSs that may be outstanding at any time as a result of pre-release, although the depositary may disregard the limit from time to time, if it thinks it is appropriate to do so.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have outstanding 8,726,957 ADSs representing approximately 19.9% of our ordinary shares in issue. All of the ADSs sold in this offering will be freely transferable by persons other than our affiliates without restriction or further registration under the Securities Act. Sales of substantial amounts of our ADSs in the public market could adversely affect prevailing market prices of our ADSs. Prior to this offering, there has been no public market for our ordinary shares or the ADSs, and while application has been made for the ADSs to be quoted on the Nasdaq National Market, we cannot assure you that a regular trading market will develop in the ADSs. We do not expect that a trading market will develop for our ordinary shares not represented by the ADSs.
Lock-Up Agreements
Our directors, executive officers and principal shareholders have signed lock-up agreements under which they have agreed, subject to some exceptions, not to transfer or dispose of, directly or indirectly, any of our ordinary shares, in the form of ADSs or otherwise, or any securities convertible into or exchangeable or exercisable for our ordinary shares, in the form of ADSs or otherwise, for a period of 180 days after the date of this prospectus. The 180-day lock-up period may be extended under certain circumstances described in Underwriting No Sale of Similar Securities. After the expiration of the lock-up period, the ordinary shares or ADSs held by our directors, executive officers or principal shareholders may be sold subject to the restrictions under Rule 144 under the Securities Act or by means of registered public offerings.
Rule 144
In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated) who has beneficially owned our ordinary shares for at least one year, is entitled to sell within any three-month period a number of ordinary shares that does not exceed the greater of the following:
| 1% of the then outstanding ordinary shares, in the form of ADSs or otherwise, which will equal approximately 6,581,834 ordinary shares immediately after this offering; or | |
| the average weekly trading volume of our ordinary shares in the form of ADSs or otherwise, during the four calendar weeks preceding the date on which notice of the sale is filed with the Securities and Exchange Commission. |
Sales under Rule 144 must be made through unsolicited brokers transactions. They are also subject to manner of sale provisions, notice requirements and the availability of current public information about us.
Rule 144(k)
Under Rule 144(k), a person who is not our affiliate at any time during the three months preceding a sale, and who has beneficially owned the ordinary shares, in the form of ADSs or otherwise, proposed to be sold for at least two years, including the holding period of any prior owner other than an affiliate, is entitled to sell those ordinary shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Therefore, unless otherwise restricted, 144(k) shares may be sold at any time.
Rule 701
In general, under Rule 701 of the Securities Act as currently in effect, each of our employees, consultants or advisors who purchases our ordinary shares from us in connection with a compensatory stock plan or a written agreement executed prior to the completion of this offering is eligible to resell such ordinary shares in reliance on Rule 144, but without compliance with some of the restrictions, including the holding period, contained in Rule 144.
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Registration Rights
Upon completion of this offering, certain holders of our ordinary shares, in the form of ADSs or otherwise, or their transferees will be entitled to request that we register their shares under the Securities Act, following the expiration of the lockup agreements described above. See Description of Share Capital Registration Rights.
79
TAXATION
The following discussion 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 Registration Statement, all of which are subject to change. This discussion 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. To the extent that the discussion relates to matters of Cayman Islands tax law, it represents the opinion of Conyers Dill & Pearman, special Cayman Islands counsel to us. To the extent the discussion relates to matters of United States law or legal conclusions and subject to the qualifications herein, it represents the opinion of Latham & Watkins LLP, our special U.S. counsel.
Cayman Islands Taxation
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 the Company levied by the Government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or brought within the jurisdiction of the Cayman Islands. The Cayman Islands is not party to any double tax treaties. There are no exchange control regulations or currency restrictions in the Cayman Islands.
United States Federal Income Taxation
In the opinion of Latham & Watkins LLP, the following discussion describes the material U.S. federal income tax consequences under present law of an investment in the ADSs or ordinary shares. This discussion applies only to U.S. Holders (as defined below) that hold the ADSs or ordinary shares as capital assets and that have the U.S. dollar as their functional currency. This discussion is based on the tax laws of the United States as in effect on the date of this Registration Statement and on U.S. Treasury regulations in effect or, in some cases, proposed, as of the date of this Registration Statement, as well as judicial and administrative interpretations thereof available on or before such date. All of the foregoing authorities are subject to change, which change could apply retroactively and could affect the tax consequences described below.
The following discussion does not deal with the tax consequences to any particular investor or to persons in special tax situations such as:
| banks; | |
| financial institutions; | |
| insurance companies; | |
| broker dealers; | |
| traders that elect to mark to market; | |
| 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 stock; or | |
| persons holding ADSs or ordinary shares through partnerships or other pass-through entities. |
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PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR TAX ADVISORS ABOUT THE APPLICATION OF THE U.S. 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 U.S. 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 U.S. federal income tax purposes,
| a citizen or resident of the United States; | |
| a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) organized under the laws of the United States, any State or the District of Columbia; | |
| an estate whose income is subject to U.S. federal income taxation regardless of its source; or | |
| a trust that (1) is subject to the supervision of a court within the United States and the control of one or more U.S. persons or (2) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. 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 the terms. If you hold ADSs, you should be treated as the holder of the underlying ordinary shares represented by those ADSs for U.S. 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 U.S. federal income tax purposes. Such actions could 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.
Taxation of Dividends and Other Distributions on the ADSs or Ordinary Shares |
Subject to the passive foreign investment company rules discussed below, the gross amount of all our distributions to you with respect to the ADSs or ordinary shares will be included in your gross income as dividend income on the date of receipt by the depositary, in the case of ADSs, or by you, in the case of ordinary shares, but only to the extent that the distribution is paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). The dividends will not be eligible for the dividends-received deduction allowed to corporations in respect of dividends received from other U.S. corporations.
With respect to noncorporate U.S. Holders, including individual U.S. Holders, for taxable years beginning before January 1, 2009, 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, (2) we are not a passive foreign investment company (as discussed below) for either our taxable year in which the dividend was paid or the preceding taxable year, and (3) certain holding period requirements are met. Under recently published Internal Revenue Service authority, our ADSs (which we expect will be listed on the Nasdaq National Market), but not our ordinary shares, will be readily tradable on an established securities market in the United States. However, it is possible that our ADSs could cease to be listed on the Nasdaq National Market or that the requirements for what constitutes being readily tradable on an established securities market in the United States will change, and therefore there can be no assurance that our ADSs will be considered readily tradable on an established securities market in later years. If the requirements for any dividends paid by us to be qualified dividend income are not met, such dividends will be taxable to you as ordinary income. You should consult your tax advisors regarding the availability of the lower rate for dividends paid with respect to our ADSs or ordinary shares.
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Dividends will constitute foreign source income for foreign tax credit limitation purposes. If the dividends are qualified dividend income (as discussed above), the amount of the dividend taken into account for purposes of calculating the foreign tax credit limitation will be limited to the gross amount of the dividend, multiplied by the reduced rate divided by the highest rate of tax normally applicable to dividends. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, dividends distributed by us with respect to the ADSs or ordinary shares will be passive income or, in the case of certain U.S. Holders, financial services income. Recently enacted legislation will modify the foreign tax credit limitation by reducing the number of classes of foreign source income to two for taxable years beginning after December 31, 2006. Under this recently enacted legislation, dividends distributed by us with respect to ADSs or ordinary shares would constitute passive category income but could, in the case of certain U.S. Holders, constitute general category income.
To the extent that the amount of the distribution exceeds our current and accumulated earnings and profits, it will be treated first as a tax-free return of your tax basis in your ADSs or ordinary shares, and to the extent the amount of the distribution exceeds your tax basis, the excess will be taxed as capital gain. We do not intend to calculate our earnings and profits under U.S. federal income tax principles. Therefore, a U.S. Holder should expect that a distribution will be treated as a dividend even if that distribution would otherwise be treated as a non-taxable return of capital or as capital gain under the rules described above.
Taxation of Disposition of Shares |
Subject to the passive foreign investment company rules discussed below, you will recognize taxable gain or loss on any sale, exchange or other taxable disposition of an ADS or ordinary share equal to the difference between the amount realized (in U.S. dollars) for the ADS or ordinary share and your tax basis (in U.S. dollars) in the ADS or ordinary share. The gain or loss will be capital gain or loss. If you are a non-corporate U.S. holder, including an individual who has held the ADS or ordinary share for more than one year, you will be eligible for reduced tax rates. The deductibility of capital losses is subject to limitations. Any such gain or loss that you recognize will be treated as U.S. source income or loss for foreign tax credit limitation purposes.
Passive Foreign Investment Company |
We do not expect to be a passive foreign investment company (PFIC) for U.S. federal income tax purposes for our current taxable year. Our expectation for our current taxable year is based in part on our estimates of the value of our assets, as determined by estimates of the price of our ordinary shares as of May 3, 2005 (prior to our listing of our ADSs on Nasdaq National Market), and the expected price of the ADSs and our ordinary shares following the offering. Our actual PFIC status for 2005 will not be determinable until the close of the 2005 taxable year. We cannot make any determinations as to our PFIC status for future taxable years and accordingly there can be no assurance that we will not be a PFIC in any future taxable year. As a result, Latham & Watkins LLP is not opining on our PFIC status for our current or future taxable years. 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, 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. |
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 stock.
We must make a separate determination each year as to whether we are a PFIC. As a result, our PFIC status may change. In particular, our PFIC status may be determined in large part based on the market price of our ADSs and ordinary shares which is likely to fluctuate after the offering (and may fluctuate considerably given that market prices of technology companies have been especially volatile). Accordingly,
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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 these special tax rules:
| the excess distribution or gain will be allocated ratably over your holding period for the ADSs or ordinary shares, | |
| the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we were a PFIC, will be treated as ordinary income, and | |
| the amount allocated to each other year will be subject to the highest tax rate in effect for that year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such 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 in a PFIC may make a mark-to-market election for stock of a PFIC to elect out of the tax treatment discussed in the two preceding paragraphs. If you make a 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. The tax rules that apply to distributions by corporations which are not PFICs would apply to distributions by us.
The mark-to-market election is available only for stock which is regularly traded on a qualified exchange or other market, as defined in applicable U.S. Treasury Regulations. We expect that the ADSs will be listed on Nasdaq National Market and, consequently, if you are a holder of ADSs the mark-to-market election would be available to you were we to be or become a PFIC. The mark-to-market election will not be available for holders of our ordinary shares.
If a non-U.S. corporation is a PFIC, a holder of shares in that corporation may avoid taxation under the rules described above by making a qualified electing fund election to include its share of the corporations income on a current basis, or a deemed sale election once the corporation no longer qualifies as a PFIC. However, you may make a qualified electing fund election with respect to your ADSs or ordinary shares only if we agree to furnish you annually with certain tax information, and we do not presently intend to prepare or provide such information.
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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.
You are urged to consult your tax advisor regarding the application of the PFIC rules to your investment in ADSs or ordinary shares.
Information Reporting and Backup Withholding |
Dividend payments with respect to ADSs or ordinary shares and proceeds from the sale, exchange or redemption of ADSs or ordinary shares may be subject to information reporting to the Internal Revenue Service and possible U.S. backup withholding at a current rate of 28%. Backup withholding will not apply, however, to a U.S. Holder who furnishes a correct taxpayer identification number and makes any other required certification or who is otherwise exempt from backup withholding. U.S. Holders who are required to establish their exempt status must provide such certification on Internal Revenue Service Form W-9. U.S. Holders should consult their tax advisors regarding the application of the U.S. information reporting and backup withholding rules.
Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against the U.S. Holders United States federal income tax liability provided the required information is furnished to the Internal Revenue Service.
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UNDERWRITING
We, together with the selling shareholders, intend to offer the ADSs through the underwriters. Merrill Lynch, Pierce Fenner & Smith Incorporated is acting as representative of the underwriters named below and as the bookrunner of this offering. Subject to the terms and conditions contained in the underwriting agreement among us, the selling shareholders and the underwriters, we and the selling shareholders have agreed to sell to the underwriters, and the underwriters severally have agreed to purchase from us and the selling shareholders, the number of ADSs listed opposite their names below.
Number | ||||
Underwriter | of ADSs | |||
|
|
|||
Merrill Lynch, Pierce Fenner & Smith
Incorporated |
6,108,871 | |||
Lehman Brothers Inc.
|
2,007,200 | |||
CIBC World Markets Corp.
|
610,886 | |||
|
||||
Total
|
8,726,957 | |||
|
The underwriters have agreed to purchase all of the ADSs sold under the underwriting agreement if any of these ADSs is purchased. If an underwriter defaults, the underwriting agreement provides that, in certain circumstances, the purchase commitments of the nondefaulting underwriters may be increased or the underwriting agreement may be terminated.
We and the selling shareholders have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the underwriters may be required to make in respect of those liabilities.
The underwriters are offering the ADSs, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of legal matters by their counsel, including the validity of the ADSs, and other conditions contained in the underwriting agreement, such as the receipt by the underwriters of officers certificates and legal opinions. The underwriters reserve the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part.
Commissions and Discounts
The representative has advised us and the selling shareholders that the underwriters propose initially to offer the ADSs to the public at the public offering price on the cover page of this prospectus, and to certain dealers at that price less a concession not in excess of US$ per ADS. The underwriters may allow, and the dealers may re-allow, a concession not in excess of US$ per ADS to other dealers. After the initial public offering, the public offering price, concession and discount may be changed.
The following table shows the public offering
price, underwriting discount and proceeds before expenses to
TechFaith and the selling shareholders. The information assumes
either no exercise or full exercise by the underwriters of their
over-allotment options.
Per ADS
Without Option
With Option
US$
US$
US$
US$
US$
US$
US$
US$
US$
US$
US$
US$
Over-allotment Options
The selling shareholders have granted options to the underwriters to purchase up to additional ADSs at the public offering price less the underwriting discount. The underwriters may exercise these options for 30 days from the date of this prospectus solely to cover any over-allotments. If the underwriters exercise these options, each will be obligated, subject to conditions contained in the underwriting
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Reserved ADSs
At our request, the underwriters have reserved for sale, at the initial public offering price, up to 95,000 ADSs offered by this prospectus for sale to some of our directors, officers, employees, business associates and related persons. If these persons purchase reserved ADSs, this will reduce the number of ADSs available for sale to the general public. Any reserved ADSs that are not orally confirmed for purchase within one day of the pricing of this offering will be offered by the underwriters to the general public on the same basis as the other ADSs offered by this prospectus. These reserved ADSs are not subject to any lock-up restrictions.
No Sale of Similar Securities
We and our executive officers, directors and shareholders have agreed, with exceptions, not to sell or transfer any of our ordinary shares or ADSs for 180 days after the date of this prospectus without first obtaining the written consent of Merrill Lynch. Specifically, we and these other individuals have agreed not to directly or indirectly:
| offer, pledge, sell or contract to sell any ordinary shares or ADSs, | |
| sell any option or contract to purchase any ordinary shares or ADSs, | |
| purchase any option or contract to sell any ordinary shares or ADSs, | |
| grant any option, right or warrant for the sale of any ordinary shares or ADSs, | |
| lend or otherwise dispose of or transfer any ordinary shares or ADSs, or | |
| enter into any swap or other agreement that transfers, in whole or in part, the economic consequence of ownership of any ordinary shares or ADS whether any such swap or transaction is to be settled by delivery of shares, ADS or other securities, in cash or otherwise. |
This lock-up provision applies to the ordinary shares and ADSs and to securities convertible into or exchangeable or exercisable for or repayable with the ordinary shares or ADSs. If (1) during the last 17 days of the 180-day lock-up period, we issue an earnings release or announce material news or a material event or (2) before the expiration of the lock-up period, we announce we will release earnings results or become aware that material news or a material event will occur during the 16-day period beginning on the last day of the lock-up period, the lock-up restrictions will continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event.
Quotation on the Nasdaq National Market
We expect the ADSs to be approved for quotation on the Nasdaq National Market, subject to notice of issuance, under the symbol CNTF.
Before this offering, there has been no public market for our ordinary shares or ADSs. The initial public offering price will be determined through negotiations among us, the representative, the bookrunner and the lead managers. In addition to prevailing market conditions, the factors to be considered in determining the initial public offering price are:
| the valuation multiples of publicly traded companies that the representative and the lead managers believe to be comparable to us, | |
| our financial information, | |
| the history of, and the prospects for, our company and the industry in which we compete, |
86
| an assessment of our management, its past and present operations, and the prospects for, and timing of, our future revenues, | |
| the present state of our development, and | |
| the above factors in relation to market values and various valuation measures of other companies engaged in activities similar to ours. |
An active trading market for the ADSs may not develop. It is also possible that after the offering the ADSs will not trade in the public market at or above the initial public offering price.
The underwriters do not expect to sell more than 5.0% of the ADSs in the aggregate to accounts over which they exercise discretionary authority.
Price Stabilization, Short Positions and Penalty Bids
Until the distribution of the ADSs is completed, SEC rules may limit underwriters and selling group members from bidding for and purchasing our ADSs. However, the representative may engage in transactions that stabilize the price of the ADSs.
These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Shorts sales involve the sale by the underwriters of a greater number of ADSs than they are required to purchase in the offering. Covered short sales are sales made in an amount not greater than the underwriters option to purchase additional ADSs from us. The representative may close out any covered short position by either exercising the over-allotment option described above or purchasing ADSs in the open market. In determining the source of ADSs to close out the covered short position, the underwriters will consider, among other things, the price of ADSs available for purchase in the open market as compared to the price at which they may purchase additional ADSs pursuant to the option granted them. Naked short sales are any sales in excess of such option. The underwriters must close out any naked short position by purchasing ADSs in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the ADSs in the open market after pricing that could adversely affect investors who purchase in the offering. Stabilizing transactions consist of various bids for, or purchases of, ADSs made by the underwriters in the open market prior to the completion of the offering.
The representative may also impose a penalty bid on underwriters and selling group members. This means that if the representative purchases ADSs in the open market to reduce the underwriters short position or to stabilize the price of such ADSs, it may reclaim the amount of the selling concession from the underwriters and selling group members who sold those ADSs. The imposition of a penalty bid may also affect the price of the shares in that it discourages resales of those ADSs.
Purchases to cover a short position and stabilizing transactions may have the effect of preventing or retarding a decline in the market price of the ADS, and together with the imposition of the penalty bid, may stabilize, maintain or otherwise affect the market price of the ADSs. As a result, the price of the ADS may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they are required to be conducted in accordance with applicable laws and regulations, and they may be discontinued at any time. These transactions may be effected on the Nasdaq National Market, in the over-the-counter market or otherwise.
Neither we, the selling shareholders nor any of the underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the ADSs. In addition, neither we, the selling shareholders nor any of the underwriters makes any representation that the representative or the lead managers will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice.
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Other Relationships
Some of the underwriters and their affiliates have engaged in, and may in the future engage in, investment banking and other commercial dealings in the ordinary course of business with us. They have received customary fees and commissions for these transactions.
Selling Restrictions
General
This prospectus does not constitute an offer of, or an invitation by or on behalf of, us or by or on behalf of the selling shareholders or the underwriters, to subscribe for or purchase, any of the ADSs in any jurisdiction to any person to whom it is unlawful to make such an offer or solicitation in that jurisdiction. The distribution of this prospectus and the offering of the ADSs in certain jurisdictions may be restricted by law. We, the selling shareholders and the underwriters require persons into whose possession this prospectus comes to inform themselves about and to observe any such restrictions.
United Kingdom
Prior to the expiry of a period of six months from the closing date of this offering, no ADSs may be offered or sold, as the case may be, to persons in the United Kingdom, except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances that have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995, as amended, or the Regulations. Any invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000, or FSMA) received in connection with the issue or sale of any ADSs may only be communicated or caused to be communicated in circumstances in which section 21(1) of the FSMA, does not apply to us. All applicable provisions of the Regulations and of the FSMA with respect to anything done in relation to the ADSs in, from or otherwise involving the United Kingdom must be complied with.
France
Neither this prospectus nor any offering material relating to ADSs has been or will be submitted to the Commission des Opérations de Bourse for approval (Visa) in France, and the ADSs will not be offered or sold and copies of this prospectus or any offering material relating to the ADSs may not be distributed, directly or indirectly, in France, except to qualified investors (investisseurs qualifiés) and/or a restricted group of investors (cercle restreint dinvestisseurs) , in each case acting for their account, all as defined in, and in accordance with, Article L. 411-1 and L. 411-2 of the Monetary and Financial Code and Décret no. 98-880 dated October 1, 1998.
Germany
This prospectus is not a Securities Selling Prospectus (Verkaufsprospekt) within the meaning of the German Securities Prospectus Act (Verkaufsprospektgesetz) of September 9, 1998, as amended, and has not been filed with and approved by the German Federal Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht) or any other German governmental authority. The ADSs may not be offered or sold and copies of this prospectus or any document relating to the ADSs may not be distributed, directly or indirectly, in Germany except to persons falling within the scope of paragraph 2 numbers 1, 2 and 3 of the German Securities Prospectus Act. No steps will be taken that would constitute a public offering of the ADSs in Germany.
Italy
The offering of the ADSs has not been registered with the Commissione Nazionale per le Società e la Borsa or CONSOB, in accordance with Italian securities legislation. Accordingly, the ADSs may not be
88
Switzerland
The ADSs may not be offered or sold to any investors in Switzerland other than on a non-public basis. This prospectus does not constitute a prospectus within the meaning of Article 652a and Art. 1156 of the Swiss Code of Obligations (Schweizerisches Obligationenrecht). Neither this offering nor the ADSs have been or will be approved by any Swiss regulatory authority.
Singapore
This prospectus has not been registered as a prospectus with the Monetary Authority of Singapore under the Securities and Futures Act, Chapter 289 of Singapore, or the SFA. Accordingly, this prospectus and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the ADSs may not be circulated or distributed, nor may the ADSs be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to the public or any member of the public in Singapore other than (subject to certain filing requirements):
| to an institutional investor or other person specified in Section 274 of the SFA; | |
| to a sophisticated investor (as defined in Section 275 of the SFA), and in accordance with the conditions, specified in Section 275 of the SFA; or | |
| otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA, in each case subject to compliance with conditions set forth in the SFA. |
Hong Kong
The ADSs may not be offered or sold in Hong Kong by means of any document other than to (i) professional investors within the meaning of the Securities and Futures Ordinance (Cap. 571) of the laws of Hong Kong and any rules made thereunder, or (ii) in circumstances that do not result in the document being a prospectus as defined in the Companies Ordinance (Cap. 32) of the laws of Hong Kong or that do not constitute an offer to the public within the meaning of that Ordinance. No invitation, advertisement or document relating to the ADSs may be issued, whether in Hong Kong or elsewhere, that is directed at, or the
89
Japan
The ADSs have not been and will not be registered under the Securities and Exchange Law of Japan, and may not be offered or sold in Japan or to, or for the account or benefit of, any resident of Japan or to, or for the account or benefit of, any resident for reoffering or resale, directly or indirectly, in Japan or to, or for the account or benefit of, any resident of Japan except:
| pursuant to an exemption from the registration requirements of, or otherwise in compliance with, the Securities and Exchange Law of Japan; and | |
| in compliance with the other relevant laws and regulations of Japan. |
Cayman Islands
We will not offer or sell any ordinary shares or ADSs to any member of the public in the Cayman Islands.
Netherlands
The ADSs may not be, directly or indirectly, offered or sold in the Netherlands other than to persons who trade or invest in securities in the conduct of a profession or business (which includes banks, stockbrokers, insurance companies, pension funds, other institutional investors and treasury departments and finance companies of large enterprises).
90
EXPENSES RELATING TO THIS OFFERING
Set forth below is an itemization of the total expenses, excluding underwriting discounts and commissions, that are expected to be incurred in connection with the offer and sale of the ADSs by us and the selling shareholders. With the exception of the Securities and Exchange Commission registration fee, the National Association of Securities Dealers, Inc. filing fee and the Nasdaq National Market listing fee, all amounts are estimates.
Securities and Exchange Commission Registration
Fee
|
US$ | 19,774 | ||
Nasdaq National Market Listing Fee
|
US$ | 100,000 | ||
National Association of Securities Dealers, Inc.
Filing Fee
|
US$ | 17,300 | ||
Printing and Engraving Expenses
|
US$ | 350,000 | ||
Legal Fees and Expenses
|
US$ | 1,210,000 | ||
Accounting Fees and Expenses
|
US$ | 1,200,000 | ||
Miscellaneous
|
US$ | 793,000 | ||
|
||||
Total
|
US$ | 3,690,074 | ||
|
LEGAL MATTERS
The validity of the ADSs and certain other legal matters in connection with this offering will be passed upon for us by Latham & Watkins LLP. Certain legal matters in connection with this offering will be passed upon for the underwriters by Simpson Thacher & Bartlett LLP. The validity of the ordinary shares represented by the ADSs offered in this offering will be passed upon for us by Conyers Dill & Pearman. Legal matters as to PRC law will be passed upon for us by Guantao Law Firm and for the underwriters by Commerce & Finance Law Offices. Latham & Watkins LLP may rely upon Conyers Dill & Pearman with respect to matters governed by Cayman Islands law, and Guantao Law Firm with respect to matters governed by PRC law.
EXPERTS
Our consolidated financial statements as of December 31, 2002, 2003 and 2004 and for the period from July 26, 2002 to December 31, 2002 and the years ended December 31, 2003 and 2004 included in this prospectus have been audited by Deloitte Touche Tohmatsu, independent registered public accounting firm, as stated in their report appearing in this prospectus, and are included in reliance upon the report of such firm given on their authority as experts in accounting and auditing.
91
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission (SEC) a registration statement on Form F-1, including relevant exhibits and securities under the Securities Act with respect to underlying ordinary shares represented by the ADSs, to be sold in this offering. A related registration statement on F-6 will be filed with the SEC to register the ADSs. This prospectus, which constitutes a part of the registration statement, does not contain all of the information contained in the registration statement. You should read the registration statement and its exhibits and schedules for further information with respect to us and our ADSs.
Immediately upon completion of this offering we will become subject to periodic reporting and other informational requirements of the Exchange Act as applicable to foreign private issuers. Accordingly, we will be required to file reports, including annual reports on Form 20-F, and other information with the SEC. As a foreign private issuer, we are exempt from the rules of the Exchange Act prescribing the furnishing and content of proxy statements to shareholders. All information filed with the SEC can be inspected and copied at the public reference facilities maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. You can request copies of these documents upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference rooms. Additional information may also be obtained over the Internet at the SECs website at www.sec.gov.
92
CHINA TECHFAITH WIRELESS COMMUNICATION TECHNOLOGY LIMITED
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Board of Directors and Shareholders of
We have audited the accompanying consolidated
balance sheets of China Techfaith Wireless Communication
Technology Limited and its subsidiaries (the
Company) as of December 31, 2002, 2003 and
2004, and the related consolidated statements of operations,
shareholders equity and comprehensive income, and cash
flows for the period from July 26, 2002 (date of inception)
to December 31, 2002, and the years ended December 31,
2003 and 2004. These financial statements are the responsibility
of the Companys management. Our responsibility is to
express an opinion on these consolidated financial statements
based on our audits.
We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform,
an audit of its internal control over financial reporting. Our
audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are
appropriate in the circumstances but not for the purpose of
expressing an opinion on the effectiveness of the Companys
internal control over financial reporting. Accordingly, we
express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial
statements present fairly, in all material respects, the
financial position of China Techfaith Wireless Communication
Technology Limited and its subsidiaries as of December 31,
2002, 2003 and 2004 and the results of their operations and
their cash flows for each of the periods referred to above in
conformity with accounting principles generally accepted in the
United States of America.
/s/ DELOITTE TOUCHE
TOHMATSU
F-2
CHINA TECHFAITH WIRELESS COMMUNICATION
TECHNOLOGY LIMITED
The accompanying notes are an integral part of
these consolidated financial statements.
F-3
CHINA TECHFAITH WIRELESS COMMUNICATION
TECHNOLOGY LIMITED
The accompanying notes are an integral part of
these consolidated financial statements.
F-4
CHINA TECHFAITH WIRELESS COMMUNICATION
TECHNOLOGY LIMITED
The accompanying notes are an integral part of
these consolidated financial statements.
F-5
CHINA TECHFAITH WIRELESS COMMUNICATION
TECHNOLOGY LIMITED
The accompanying notes are an integral part of
these consolidated financial statements.
F-6
CHINA TECHFAITH WIRELESS COMMUNICATION
TECHNOLOGY LIMITED
China Techfaith Wireless Communication Technology
Limited (TechFaith or the Company) was
incorporated under the laws of the Cayman Islands on
June 25, 2004 and its subsidiaries include the following:
These companies have been entities under common
control which has established the basis to consolidate them from
their inception. Accordingly, the accompanying financial
statements include the financial statements of TechFaith, its
wholly owned subsidiaries, which consist of Techfaith China,
TechFaith BVI, Great Earnest, Techfaith Beijing, Leo
Technology, First Achieve, Finest Technology, Techfaith Shanghai
and its joint venture interest in STEP Technologies. TechFaith
and all of its subsidiaries, including STEP Technologies, are
collectively referred to as the Group.
The Group is principally engaged in the provision
of customized handset design solutions, which span the entire
handset development cycle, from market and industry research,
through detailed design and prototype testing, to pilot
production and production support. The Group designs handsets
for use on Global System for Mobile Communications (GSM)/
General Packet Radio Services (GPRS), Code Division Multiple
Access (CDMA) and Wideband CDMA (WCDMA) networks based
on major baseband technology platforms, including those
developed by QUALCOMM, Inc., Philips AG, Texas Instruments,
Inc., and Skyworks Solutions, Inc. (Skyworks).
F-7
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
From inception through December 31, 2002,
the Group was in the development stage and its efforts were
devoted to start-up activities. In March 2003, the Group
commenced its planned principal operations.
On November 9, 2004 all issued shares of
TechFaith BVI were converted into ordinary shares of the
Company, who then became the holding company of the Group.
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).
The consolidated financial statements include the
financial statements of the Company and its majority-owned
subsidiaries. All significant intercompany transactions and
balances are eliminated on consolidation. An affiliated company
where the Company owns 49% of the company is accounted for using
the equity method. The Companys share of earnings of the
affiliate is included in the accompanying consolidated
statements of operations.
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.
Notes receivable represent bank and commercial
acceptance drafts that are non-interest bearing and due within
one year.
Marketable securities primarily consist of debt
securities and are classified as available for sale marketable
securities. Investments with maturities beyond one year may be
classified as short-term based on their liquid nature and
because such securities are available for current operations.
Marketable securities are carried at fair market value with
unrealized gains (losses) reported as a component of accumulated
other comprehensive income in shareholders equity. The
specific identification method is used to determine the cost of
securities. Realized gains and losses are reflected in other
income.
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 and liabilities and revenues and expenses in the
financial statements and accompanying notes. Significant
accounting estimates reflected in the Groups financial
statements include revenue recognition, allowance for doubtful
accounts, useful lives and impairment for plant, machinery and
equipment.
F-8
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Group participates in a dynamic high
technology industry and believes that changes in any of the
following areas could have a material adverse effect on the
Groups future financial position, results of operations,
or cash flows: changes in the overall demand for customized
handset design solutions; competition from other competitors;
advances and trends in new technologies and industry standards;
changes in certain strategic relationship or customer
relationships; regulatory or other factors; risks associated
with the Groups ability to attract and retain employees
necessary to support its growth; pressures in the form of new
products or price reductions on current products; and changes in
third party manufacturers.
Plant, machinery and equipment, net are carried
at cost less accumulated depreciation and amortization.
Depreciation and amortization are calculated on a straight-line
basis over the following estimated useful lives:
Acquired intangible assets, net have definite
lives and are capitalized and amortized on a straight-line basis
over their expected useful economic lives as summarized in
Note 9.
Inventories are stated at the lower of cost or
market. Cost is determined using the weighted average method.
The Group reviews its long-lived assets for
impairment whenever events or changes 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 value 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 flow
is less than the carrying amount of the assets, the Group would
recognize an impairment loss based on the fair value of the
assets.
Research and development costs are expensed as
incurred.
The Groups revenues are primarily derived
from design and development of handset solutions, and to a
lesser extent, sales of component products which include the
sale of printed circuit board (PCB), wireless
modules and other electronic components. The Group earns its
revenue mainly through design fee,
F-9
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
royalties, and sales of component products. The
Group recognizes revenue 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.
Design fee is generated from design and
development of handset solutions for customers. The handset
design process normally includes industry, hardware, software,
mechanical engineering design, testing and quality assurance,
pilot production, production support and other incidental
support requested by customers. Because the software element of
the handset has been deemed more than incidental for the handset
design process taken as a whole, the Company recognizes revenues
in accordance with Statement of Position
(SOP) 97-2. The handset design process requires
significant production, development and customization of
software, accordingly, as prescribed by SOP 97-2 revenue is
recognized using the percentage of completion method in
accordance with SOP 81-1, Accounting for Performance
of Construction Type and Certain Performance Type
Contracts. In general, three milestones are identified in
the Groups design contracts with customers. When the
mobile handset design receives the approval verifying its
conformity with applicable industry standards, in the case of
GSM-based handsets, the full type approval, or FTA, for its
conformity with GSM standards, the Group achieves the first
milestone with respect to the design. When the mobile handset
design receives regulatory approval for its use in the intended
country, in the case of China, a China type approval, or CTA,
the Group achieves the second milestone. When the customer
accepts the mobile handset design and is ready to begin mass
production of mobile handsets based on the Groups design,
the Group achieves the last milestone, which the Group refers to
as shipping acceptance, or SA. The Group recognizes revenue only
upon achievement of each milestone (i.e. FTA, CTA and SA),
which is consistent with the use of an output measure. The
percentage of completion designated for each milestone, however,
is the percentage that would be obtained by using an input
measure (i.e. labor hours and other relevant costs
incurred). The Group believes that designating the percentage of
completion for each milestone based on labor hours and other
relevant costs incurred, as opposed to by reference to the
amounts that become billable at the milestone, is more
reflective of the progress completed through the date of the
milestone. In the event that a milestone has not been reached,
the associated cost is deferred and revenue is not recognized
until the milestone has been achieved and/or accepted by the
customer.
Recognized revenues and profit are subject to
revisions as the contract progresses to completion. Revisions in
profit estimates are charged to income in the period in which
the facts that give rise to the revision become known. When
current cost estimates indicate a loss is expected to be
incurred, the entire loss is recorded in the period in which it
is identified.
Amounts billed in excess of revenue recognized
are recorded as advance from customers.
Royalty income is derived from a variable
prescribed rate for each unit of handset manufactured by the
customer as the Group retains the design of schematic and layout
of the PCB of the handset.
Revenue from sales of component products,
including PCBs, wireless modules and other electronics
components is recognized upon delivery of the component
products. The customer orders the component products it requires
to manufacture mobile handsets from the Group. The Group then
outsources the production of the component products to outside
manufacturers. The Group records the gross amounts billed to its
customers as the Group is the primary obligor in these
transactions as the Group has latitude in establishing prices,
the Group is involved in the determination of the service
specifications, the Group bears the credit risk, the Group bears
the inventory risk and the Group has the right to select the
suppliers.
F-10
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Group presents sales net of business tax
incurred, which amounts to Nil, $523 and Nil for the period from
July 26, 2002 to December 31, 2002, and the years
ended December 31, 2003 and 2004, respectively.
Deferred income taxes are recognized for
temporary differences between the tax basis of assets and
liabilities and their reported amounts in the financial
statements, net operating loss carryforwards and credits by
applying 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
some portion or all of the deferred tax assets will not be
realized. Current income taxes are provided for in accordance
with the laws of the relevant taxing authorities.
Comprehensive income included unrealized gains
and losses on investments and foreign currency translation
adjustments and is reported in the consolidated statement of
shareholders equity.
The functional currency of the Companys
subsidiaries established in the PRC is Renminbi
(RMB). Transactions denominated in currencies other
than RMB are translated into RMB at the exchange rates quoted by
the Peoples Bank of China (the PBOC)
prevailing at the dates of the transactions. Monetary assets and
liabilities denominated in foreign currencies are translated
into RMB using the applicable exchange rates quoted by the PBOC
at the balance sheet dates. The resulting exchange differences
are included in the statement of operations.
The Company has determined that the
U.S. dollar is its functional and reporting currency.
Accordingly, assets and liabilities are translated using
exchange rates in effect at each year end and average exchange
rates are used for the consolidated statements of operations.
Translation adjustments resulting from translation of these
consolidated financial statements are reflected as accumulated
other comprehensive income included in the shareholders
equity.
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.
The carrying amounts of cash and cash
equivalents, marketable securities and short-term loan
approximate their fair values due to the short-term maturity of
these instruments. The fair value of convertible notes as of
December 31, 2004 was estimated at $13,470. The Company
utilizes American Appraisal China
F-11
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Limited, a third party valuation firm, to
determine the fair value of the debt component and conversion
option of the convertible notes. The valuation analysis utilized
generally accepted valuation methodologies such as the
conversion ratio method, straight bond value plus option value
and redemption value method.
The Group expenses advertising costs as incurred
and such expenses were minimal for the periods presented.
Advertising costs have been included as part of selling and
marketing expenses.
Basic net income per share is computed by
dividing net income by the weighted average number of ordinary
shares outstanding during the period. Diluted net income 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. 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 Group operates and manages its business as a
single segment. The Group primarily generates its revenues from
customers in the PRC, and accordingly, no geographical
information is presented.
In May 2003, the FASB issued
SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity. The Statement establishes standards for how an
issuer classifies and measures certain financial instruments.
This Statement is effective for financial instruments entered
into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning
after June 15, 2003. The Statement requires that certain
financial instruments that, under previous guidance, issuers
could account for as equity be classified as liabilities (or
assets in some circumstances) in statements of positions or
consolidated balance sheets, as appropriate. The financial
instruments within the scope of this Statement are:
(i) mandatorily redeemable shares that an issuer is
obligated to buy back in exchange for cash or other assets;
(ii) financial instruments that do or may require the
issuer to buy back some of its shares in exchange for cash or
other assets; and (iii) financial instruments that embody
an obligation that can be settled with shares, the monetary
value of which is fixed, tied solely or predominantly to a
variable such as a market index, or varies inversely with the
value of the issuers shares (excluding certain financial
instruments indexed partly to the issuers equity shares
and partly, but not predominantly, to something else). This
Statement does not apply to features embedded in a financial
instrument that is not a derivative in its entirety. The
Statement also requires disclosures about alternative ways of
settling the instruments and about the capital structure of
entities all of whose shares are mandatorily redeemable. The
adoption of SFAS No. 150 did not have a material
impact on the Groups financial position, cash flows or
results of operations.
In January 2003, the FASB issued Interpretation
Number (FIN) No. 46, Consolidation of
Variable Interest Entities. FIN 46 clarifies the
application of Accounting Research Bulletin No. 51,
Consolidated Financial Statements and provides
guidance on the identification of entities for which control is
achieved through means other than voting rights (variable
interest entities or VIEs) and how to
determine when and which business enterprise should consolidate
the VIEs. This new model for consolidation applies to an entity
in which either: (1) the equity investors (if any) lack one
or more characteristics deemed
F-12
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
essential to a controlling financial interest or
(2) the equity investment at risk is insufficient to
finance that entitys activities without receiving
additional subordinated financial support from other parties.
Certain disclosure requirements of FIN 46 were effective
for financial statements issued after January 31, 2003. In
December 2003, the FASB issued FIN 46 (revised December
2003), Consolidation of Variable Interest Entities
(FIN 46-R) to address certain FIN 46
implementation issues. The effective dates and impact of
FIN 46 and FIN 46-R are as follows:
(i) special-purpose entities (SPEs) created
prior to February 1, 2003. The Group must apply either the
provisions of FIN 46 or early adopt the provisions of
FIN 46-R at the end of the first interim or annual
reporting period ending after December 15, 2003,
(ii) non-SPEs created prior to February 1, 2003. The
Group is required to adopt FIN 46-R at the end of the first
interim or annual reporting period ending after March 15,
2004, and (iii) all entities, regardless of whether an SPE,
that were created subsequent to January 31, 2003. The
provisions of FIN 46 were applicable for variable interests
in entities obtained after January 31, 2003. Adoption of
FIN 46-R did not result in an impact on the consolidated
statement of financial position or results of operations.
In December 2002, the Emerging Issue Task Force
(EITF) reached a consensus on EITF Issue
No. 00-21, Revenue Arrangements with Multiple
Deliverables. This issue addresses certain aspects of the
accounting by a vendor for arrangements under which it will
perform multiple revenue-generating activities. In some
arrangements, the different revenue-generating activities
(deliverables) are sufficiently separable and there exists
sufficient evidence of their fair values to separately account
for some or all of the deliveries (that is, there are separate
units of accounting). In other arrangements, some or all of the
deliveries are not independently functional, or there is not
sufficient evidence of their fair values to account for them
separately. This issue addresses when, and if so, how an
arrangement involving multiple deliverables should be divided
into separate units of accounting. This issue does not change
otherwise applicable revenue recognition criteria. The guidance
in this issue is effective for revenue arrangements entered into
in fiscal periods beginning after June 15, 2003. The
adoption of EITF 00-21 did not have a material effect on
the Groups consolidated financial statements.
In December 2003, the SEC issued Staff Accounting
Bulletin No. 104 (SAB 104), Revenue
Recognition. SAB 104 updates portions of existing
interpretative guidance in order to make this guidance
consistent with current authoritative accounting and auditing
guidance and SEC rules and regulations. The adoption of
SAB 104 did not have a material effect on the Groups
consolidated financial statements.
The EITF reached a consensus in EITF 03-1,
The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments. The consensus was that
certain quantitative and qualitative disclosures should be
required for debt and marketable equity securities classified as
available-for-sale or held-to-maturity under
SFAS Nos. 115 and 124, that are impaired at the
balance sheet date but for which an other-than-temporary
impairment has not been recognized. This EITF consensus is
effective for fiscal years ending after December 15, 2003.
Adoption of the EITF consensus did not result in an impact on
the consolidated statement of financial position or results of
operations.
The pro forma balance sheet information as
of December 31, 2004 assumes the conversion upon completion
of the initial public offering of the outstanding convertible
notes as of December 31, 2004 into ordinary shares.
F-13
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Pro forma basic and diluted income per share is
computed by dividing net income by the weighted average number
of ordinary shares outstanding for the period plus the number of
ordinary shares resulting from the assumed conversion upon the
closing of the planned initial public offering of the
outstanding convertible notes.
Accounts receivable consists of the following:
Unbilled receivables represent amounts earned
under 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.
Marketable securities, carried in the
accompanying balance sheets at estimated market value, consist
of the following:
No marketable securities were held by the Group
as of December 31, 2002 and 2003.
As of December 31, 2003 and 2004, the Group
placed deposit amounting to $3,987 and $3,740, respectively,
with a securities house pending investment opportunities in the
PRC capital market. The deposit is unsecured and bears interest
at prevailing commercial rates.
F-14
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Inventories consist of the following:
Prepaid expenses and other current assets consist
of the following:
Plant, machinery and equipment, net consist of
the following:
F-15
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Acquired intangible assets, net consist of the
following:
In 2003, the Group acquired a technology for
monochrome screen interface of cellular phone from a third party
for $483. Due to technological advancement and market changes,
the Group ceased the design and development of monochrome screen
cellular phone in the same year and recognized a non-cash
impairment charge of this acquired technology. The Group
evaluated the recoverability of the acquired intangible asset
and fully wrote off its then carrying value of $423 as the asset
was no longer expected to recover its net book value through
future cash flows.
In 2004, the Group acquired licenses for
technology platform from third parties for $1,216 which are
amortized over the shorter of the useful economic life of the
relevant technology platform or license period, which is usually
3 to 5 years.
In 2004, the Group also acquired royalty rights
for cellular phone project co-operation agreements from Qidi
Century, a then former equity affiliate, through a litigation
settlement on behalf of Qidi Century and certain management
members of the Group. The royalty rights were recorded at their
estimated fair market value of $725 and are amortized over their
estimated economic life of 1 year.
The Group has recorded amortization expense of
Nil, $60, and $996 for the years ended December 31, 2002,
2003 and 2004, respectively. The Group will record $264, $264,
$199, $150 and $42 for 2005, 2006, 2007, 2008 and 2009,
respectively.
In September 2002, the Group established Beijing
Qidi Century Communication Technology Limited (Qidi
Century), a domestic enterprise with limited liability in
the PRC with a registered capital of RMB20,000,000, with two
independent parties pursuant to which the Group made cash
contributions and owned 49% of this affiliate. Qidi Century was
established to provide customized cellular phone solutions to
cellular phone manufacturers and vendors in the PRC. The Group
accounted for its ownership in Qidi Century using the equity
method of accounting.
F-16
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In July and September 2003, the Group entered
into equity transfer agreements with another shareholder of Qidi
Century to sell its entire 49% interest in Qidi Century for an
aggregate consideration of $1,184, resulting in a gain on the
disposition of $218.
Accrued expenses and other current liabilities
consist of the following:
The advance from third parties was unsecured,
interest free and was repaid as of December 31, 2003.
The Company is a tax exempted company
incorporated in the Cayman Islands.
Under the current BVI law,
TechFaith BVIs income is not object to taxation.
No provision for Hong Kong Profits Tax has been
made as First Achieve had no assessable profits earned during
the years ended December 31, 2003 and 2004.
The subsidiaries incorporated in the PRC are
governed by the Income Tax Law of the PRC Concerning Foreign
Investment and Foreign Enterprises and various local income tax
laws (Income Tax Laws). Pursuant to the PRC Income
Tax Laws, the foreign investment enterprises are subject to
income tax at a statutory rate of 33% (30% of state income tax
plus 3% local income tax) on PRC taxable income. However,
preferential tax treatment as new and high
technology companies has been agreed for Techfaith China,
Techfaith Beijing and STEP Technologies with the relevant tax
authorities and effective in 2002, 2003 and 2004, respectively.
All new and high technology companies are entitled to a
preferential tax rate of 15% and are entitled to a three-year
exemption from income tax, followed by a 50% reduction in tax
rates for the succeeding three years, in accordance with the
Income Tax Laws of the PRC. As of December 31, 2004,
Techfaith Shanghai is still in the process of making an
application to the relevant tax authorities for the new
and high technology status; however, no assessable profit
has been made by Techfaith Shanghai for the year ended
December 31, 2004.
F-17
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The principal components of the timing
differences are as follows:
No deferred tax assets related to revenue
recognition and net operating loss carry forwards for the period
from July 26, 2002 to December 31, 2002, and the years
ended December 31, 2003 and 2004, have been recorded, as
they are expected to reverse during the tax exemption period. As
of December 31, 2003 and 2004, the Group has not recognized
deferred tax assets on its accelerated accounting depreciation
and amortization since it is more likely than not that the
deferred tax assets will not be realized.
The Group did not have any timing differences
relating to deferred tax liabilities as of December 31,
2002, 2003, and 2004.
In December 2003, the Group borrowed $300 from a
third party. The amount was unsecured, bore interest at
8% per annum and was repaid as of December 31, 2004.
Interest expense for the years ended
December 31, 2003 and 2004 was $1 and $12, respectively.
On December 19, 2003, TechFaith BVI
issued eight convertible notes in an aggregate principal amount
of $4,000 to a strategic investor (the
1st Notes). The 1st Notes were
interest-free; however, should any dividend be declared and
distributed by TechFaith BVI, a special interest payment
calculated based on an as converted basis as if the
notes had been converted into ordinary shares of
TechFaith BVI, was payable to the noteholder. The
conversion price for the notes was subject to certain
adjustments and was $0.234 per ordinary share of
TechFaith BVI initially. The holder of the 1st Notes
could convert the notes into such shares at any time during the
period from the date of issuance to December 19, 2005 or
the date of listing of the shares of the Company on The Stock
Exchange of Hong Kong Limited, whichever was earlier.
On April 16, 2004, the 1st Notes were,
at the election of the noteholder, cancelled and replaced with
new notes with the same principal amount, which was issued by
TechFaith BVI concurrently with the issuance of additional
convertible notes in an aggregate principal amount of $10,000 to
other strategic investors (hereinafter collectively referred to
as 2nd Notes) pursuant to a note subscription
and rights agreement dated April 9, 2004 (the
Agreement) with the same interest terms as the 1st
Notes. The conversion price for the 2nd Notes is
$0.212 per ordinary share of TechFaith BVI, subject to
certain adjustments and can be converted into such shares at any
time from the date of issuance to April 16, 2007. The notes
not previously converted or repaid, shall be automatically
converted into ordinary shares of TechFaith BVI or its
parent company without any further action of any party, into
that number of ordinary shares pursuant to the then effective
conversion price, upon the closing of TechFaith BVIs
or its parent companys initial public offering or a
substantial sale of the shares in TechFaith BVI pursuant to
the relevant
F-18
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
terms as stipulated in the Agreement. After
April 16, 2007, the holders of the then outstanding notes
may require TechFaith BVI to redeem all or part of the
notes upon occurrence of certain events, including an event of
default or TechFaith BVIs merger or consolidation
with another entity. The redemption price is the greater of
(a) the principal amount plus accrued and unpaid interest
or (b) the fair value of the ordinary shares into which
such notes are convertible.
The embedded conversion option of the convertible
notes has been recorded at its fair value of $2,818 at the
issuance and accounted for separately as a derivative liability.
The Group will account for the derivative liability relating to
the conversion option by adjusting the liability to its
estimated fair value at each subsequent balance sheet date, with
adjustments recorded as other non-operating income or expense.
In October 2003, TechFaith China, and
Mr. Dong Defu, a director of TechFaith BVI, and
Mr. Fang Yibo and Mr. Liu Jun, management members of
Techfaith China, entered into a patent application transfer
agreement pursuant to which Mr. Dong Defu, Mr. Fang
Yibo and Mr. Liu Jun agreed to transfer a patent
application to Techfaith China for nil consideration.
A principal shareholder of the Company was during
the relevant time periods below, a principal shareholder in SEF.
On January 18, 2004, SEF, Techfaith China and Skyworks
entered into an agreement pursuant to which SEF assigned to
Techfaith China all the rights under an April 2002 development
and license agreement between SEF and Skyworks in return for
Techfaith Chinas payment of $338 to SEF. The consideration
was determined based on the remaining pro rata share of the
total license fee previously paid by SEF to Skyworks for the
five-year license period.
On September 18, 2003, an external customer,
SEF and Techfaith China entered into an agreement pursuant to
which SEF assigned and novated to Techfaith China without
consideration all the rights and obligations under three product
technology development cooperation agreements entered into
between the outside customer and SEF. Under the assignment and
novation agreement, SEF agreed to act as guarantor of the
obligations of Techfaith China and continue to observe certain
restrictions.
On October 20, 2003, Techfaith China and SEF
entered into five transfer agreements pursuant to which SEF
agreed to transfer to Techfaith China without consideration
three patents and two patent applications that were principally
developed by certain key members of SEF who subsequently joined
Techfaith China.
For the years ended December 31, 2003 and
2004, the Group reimbursed SEF an aggregate amount of $550 and
Nil, respectively, for certain staff remuneration that SEF paid
on behalf of the Group.
The Group also entered into a lease agreement
dated July 31, 2003 with SEF with respect to office
premises in Beijing which expires in July 2008. During the term
of the lease, the Group is required to pay SEF a quarterly rent
of $34.
The Groups chief operating decision maker
has been identified as the Chief Executive Officer, who reviews
consolidated results when making decisions about allocating
resources and assessing performance of
F-19
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the Group. The Company believes it operates in
one segment, and all financial segment information can be found
in the consolidated financial statements.
The Group operates in the PRC and all of the
Groups long lived assets are located in the PRC.
The Group leases certain office premises under
non-cancelable leases which expire in 2008. The Group also
leased certain plant and machinery during the year ended
December 31, 2003. Rental expense under operating leases
for the period from July 26, 2002 to December 31,
2002, and the years ended December 31, 2003 and 2004 were
$3, $457, and $509, respectively,
Future minimum lease payments under
non-cancelable operating lease agreements as of
December 31, 2004 were as follows:
Capital commitments for purchase of plant,
machinery and equipment as of December 31, 2002, 2003 and
2004 was Nil, $299, and $655, respectively.
The Groups product warranty relates to the
warranties to the Groups customers on the hardware and
software design component of the mobile handset for a period of
one to three years commencing upon the mass production of the
mobile handset. Accordingly, the Groups product warranty
accrual reflects managements best estimate of probable
liability under its product warranties. Management determines
the warranty based on historical experience and other currently
available evidence.
F-20
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes net revenues and
accounts receivable for customers which accounted for 10% or
more of the Groups net revenues and accounts receivable:
Full time employees of the Group in the PRC
participate in a government-mandated multi-employer defined
contribution plan pursuant to which certain pension benefits,
medical care, unemployment insurance, employee housing fund and
other welfare benefits are provided to employees. Chinese labor
regulations require the Group to accrue for these benefits based
on certain percentages of the employees salaries. The
total provisions for such employee benefits were Nil, $8 and
$493 for the period from July 26, 2002 to December 31,
2002, and the years ended December 31, 2003 and 2004,
respectively.
The Group is required to make contributions to
the plan out of the amounts accrued for medical and pension
benefits to relevant local labor bureaus. The contributions for
the period from July 26, 2002 to December 31, 2002,
and the years ended December 31, 2003 and 2004 amounted to
Nil, $4, and $352, respectively. The local labor bureaus are
responsible for the medical benefits and pension liability to be
paid to these employees. The Group has no further commitments
beyond its monthly contribution.
Pursuant to the laws applicable to the PRCs
Foreign Investment Enterprises, the Companys subsidiaries
in the PRC registered as foreign-owned enterprise must make
appropriations from after-tax profit to non-distributable
reserve funds as determined by the Board of Directors of the
relevant PRC subsidiaries. These reserves include a
(1) general reserve, (2) enterprise expansion fund and
(3) staff bonus and welfare fund. Subject to certain
cumulative limits, the general reserve fund requires annual
appropriations of not less than 10% of after-tax profit (as
determined under accounting principles and financial regulations
applicable to PRC enterprises at each year-end); the other fund
appropriations are at the Groups discretion. These reserve
funds can only be used for specific purposes and are not
distributable as cash dividends. Prior to the
F-21
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
conversion into wholly foreign-owned enterprises,
TechFaith China and Centel, as domestic enterprises established
in the PRC, were also subject to similar statutory reserve funds
requirements. The Company has made appropriation to these
statutory reserve funds of $Nil, $1,103 and $3,454 for the
period from July 26, 2002 to December 31, 2002, and the
years ended December 31, 2003 and 2004, respectively.
On March 18, 2005, the Companys
shareholders approved a 50,000-for-1 share split. All share and
per share data have been restated to give retroactive effect to
this share split.
* * * * * * * *
F-22
Through
and
including ,
2005 (the 25
th
day after the date of this
prospectus), all dealers effecting transactions in these
securities, whether or not participating in this offering, may
be required to deliver a prospectus. This is in addition to the
dealers obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or
subscriptions.
8,726,957 American Depositary Shares
China Techfaith Wireless
Communication
Representing 130,904,355 Ordinary
Shares
Merrill Lynch & Co.
CIBC World Markets
,
2005
F-2
F-3
F-4
F-5
F-6
F-7
Table of Contents
Table of Contents
December 31,
December 31,
2002
2003
2004
2004
Pro Forma
(Unaudited)
(Note 2)
$
11
$
7,699
$
35,086
$
35,086
5,230
7,760
7,760
2,296
2,296
346
346
3,987
3,740
3,740
732
5,030
5,030
1,232
386
2,254
2,254
$
1,243
$
18,034
$
56,512
$
56,512
483
1,061
529
529
701
4,816
9,556
9,556
945
945
1,191
$
3,618
$
23,911
$
67,542
$
67,542
$
$
300
$
$
730
2,834
2,834
1,201
1,342
4,617
3,620
5,952
16,418
16,418
$
1,201
$
8,324
$
23,869
$
22,872
$
$
4,000
$
11,887
$
$
$
$
1,956
$
$
$
1,763
$
1,740
$
1,740
$
$
10
$
10
$
11
2,416
4,832
4,832
18,831
25
47
47
1
4,957
23,201
24,041
2,417
9,824
28,090
42,930
$
3,618
$
23,911
$
67,542
$
67,542
Table of Contents
For the
Period from
July 26, 2002
(date of
For the
For the
inception) to
Year Ended
Year Ended
December 31,
December 31,
December 31,
2002
2003
2004
$
$
7,947
$
29,495
1,259
6,961
471
10,104
9,677
46,560
2,260
10,951
725
371
8,208
2,631
19,884
7,046
26,676
(6
)
(968
)
(4,771
)
(700
)
(2,506
)
(39
)
(694
)
(423
)
(6
)
(2,130
)
(7,971
)
(6
)
4,916
18,705
(12
)
(1,756
)
10
108
302
862
(6
)
4,914
18,221
(6
)
4,914
18,221
49
23
7
(225
)
218
$
1
$
4,956
$
18,244
$
$
0.02
$
0.04
$
$
0.02
$
0.03
242,465,753
500,000,000
243,074,581
551,823,942
$
$
0.02
$
0.03
$
$
0.02
$
0.03
243,074,581
551,823,942
243,074,581
551,823,942
Table of Contents
Accumulated
Ordinary Shares
Additional
Other
Total
Registered
Paid-In
Comprehensive
Retained
Shareholders
Comprehensive
Number
Amount
Capital
Capital
Income
Earnings
Equity
Income
$
$
2,416
$
$
$
$
2,416
$
1
1
1
2,416
1
2,417
$
1
500,000,000
10
10
$
2,416
2,416
(4,832
)
4,832
25
25
25
4,956
4,956
4,956
500,000,000
10
4,832
25
4,957
9,824
$
4,981
(10
)
(10
)
$
(10
)
32
32
32
18,244
18,244
18,244
500,000,000
$
10
$
$
4,832
$
47
$
23,201
$
28,090
$
18,266
Table of Contents
For the
Period from
July 26, 2002
(date of
For the
For the
inception) to
Year Ended
Year Ended
December 31,
December 31,
December 31,
2002
2003
2004
$
1
$
4,956
$
18,244
574
2,355
60
996
705
423
(67
)
(218
)
215
(49
)
(23
)
(7
)
225
(862
)
(5,230
)
(2,530
)
(2,296
)
(732
)
(4,298
)
(1,232
)
846
(1,868
)
730
2,104
5
1,179
2,668
5,952
10,466
(1,233
)
8,716
25,809
(3,987
)
(3,740
)
(483
)
(1,061
)
(529
)
(701
)
(4,531
)
(5,643
)
(4,289
)
(1,941
)
(1,184
)
1,184
8,029
1
(2,368
)
(8,395
)
(8,112
)
4,000
10,000
10
2,416
4,228
300
(300
)
1,196
635
(1,831
)
3,612
7,342
9,700
25
(10
)
11
7,688
27,387
11
7,699
$
11
$
7,699
$
35,086
$
$
1
$
12
$
$
$
Table of Contents
1.
Organization and Principal
Activities
Date of
Place of
Percentage
Subsidiary
Incorporation
Incorporation
Ownership
July 26, 2002
Peoples Republic of China (the
PRC)
100%
July 8, 2003
British Virgin Islands
(the BVI)
100%
(Great Earnest)
August 8, 2003
BVI
100%
September 5, 2003
PRC
100%
October 15, 2003
BVI
100%
(STEP Technologies)
November 20, 2003
PRC
70%
(First Achieve)
December 29, 2003
Hong Kong
100%
January 8, 2004
BVI
100%
March 22, 2004
PRC
100%
Table of Contents
2.
Summary of Significant Accounting
Policies
(a)
Basis of Presentation
(b)
Basis of Consolidation
(c)
Cash and Cash Equivalents
(d)
Notes receivable
(e)
Marketable Securities
(f)
Use of Estimates
Table of Contents
(g)
Certain Significant Risks and
Uncertainties
(h)
Plant, Machinery and Equipment,
Net
Shorter of the lease terms or 4 years
4 years
4 years
4 years
3 years
(i)
Acquired Intangible Assets,
Net
(j)
Inventories
(k)
Impairment of Long-Lived
Assets
(l)
Research and Development
Costs
(m)
Revenue Recognition
Table of Contents
Table of Contents
(n)
Income Taxes
(o)
Comprehensive Income
(p)
Foreign Currency Translation
(q)
Concentration of Credit Risk
(r)
Fair Value of Financial
Instruments
Table of Contents
(s)
Advertising Costs
(t)
Net Income Per Share
(u)
Segment Reporting
(v)
Recently Issued Accounting
Pronouncements
Table of Contents
(w)
Pro Forma Information
Table of Contents
(x)
Unaudited Pro Forma Net Income Per
Share
3.
Accounts Receivable
December 31,
2002
2003
2004
$
$
2,729
$
6,183
2,501
1,577
$
$
5,230
$
7,760
4.
Marketable Securities
December 31, 2004
Gross
Estimated
Cost
Unrealized Gains
Market Value
$
314
$
32
$
346
5.
Deposit
Table of Contents
6.
Inventories
December 31,
2002
2003
2004
$
$
315
$
3,445
417
1,585
$
$
732
$
5,030
7.
Prepaid Expenses and Other Current
Assets
December 31,
2002
2003
2004
$
1,232
$
184
$
40
1,552
143
176
19
77
449
$
1,232
$
386
$
2,254
8.
Plant, Machinery and Equipment, Net
December 31,
2002
2003
2004
$
$
418
$
1,817
88
2,434
5,697
1,244
2,418
701
1,294
2,313
701
5,390
12,333
(574
)
(2,777
)
$
701
$
4,816
$
9,556
Table of Contents
9.
Acquired Intangible Assets, Net
December 31,
2002
2003
2004
$
$
60
$
60
1,216
725
60
2,001
(60
)
(60
)
(271
)
(725
)
(60
)
(1,056
)
$
$
$
945
10.
Investment in an Affiliate
Table of Contents
11.
Accrued Expenses and Other Current
Liabilities
December 31,
2002
2003
2004
$
1,196
$
$
3
54
43
2
276
611
11
997
927
158
765
188
48
508
320
255
475
323
$
1,201
$
1,342
$
4,617
12.
Income Taxes
Table of Contents
December 31,
2002
2003
2004
$
$
1,809
$
16,083
456
241
264
369
$
$
2,529
$
16,693
13.
Short-Term Loan
14.
Convertible Notes
Table of Contents
15.
Related Party Transactions
Transactions with a Director and management
members
Transactions with Beijing Sino-Electronics
Future Telecommunication R&D, Ltd.
(SEF)
16.
Segment and Geographic Information
Table of Contents
Geographic Information
17.
Commitments
(a)
Operating Lease as Lessee
$
694
533
316
85
$
1,628
(b)
Capital Commitments
(c)
Product Warranty
Year Ended December 31,
2002
2003
2004
$
$
$
48
114
820
(66
)
(360
)
$
$
48
$
508
Table of Contents
18.
Major Customers
Net Revenues
Year Ended December 31,
2002
2003
2004
%
32.5%
5.8%
%
13.1%
10.2%
%
42.6%
32.0%
%
%
8.8%
%
88.2%
56.8%
Accounts Receivable
December 31,
2002
2003
2004
%
37.8%
0.7%
%
7.7%
9.2%
%
52.8%
46.1%
%
%
13.3%
%
98.3%
69.3%
19.
Mainland China Contribution and Profit
Appropriation
Table of Contents
20.
Subsequent event
Table of Contents
Table of Contents
Merrill Lynch & Co.
Lehman Brothers
Table of Contents
PART II
INFORMATION NOT REQUIRED IN
PROSPECTUS
Cayman Islands law does not limit the extent to
which a companys articles of association may provide for
indemnification of officers and directors, except to the extent
any such provision may be held by the Cayman Islands courts to
be contrary to public policy, such as to provide indemnification
against civil fraud or the consequences or committing a crime.
Our Articles of Association provide for indemnification of
officers and directors for losses, damages, costs and expenses
incurred in their capacities as such, except through their own
willful neglect or default.
Pursuant to the form of indemnification
agreements filed as Exhibit 10.2 to this Registration
Statement, we will agree to indemnify our directors and officers
against certain liabilities and expenses incurred by such
persons in connection with claims made by reason of their being
such a director or officer.
The form of Underwriting Agreement filed as
Exhibit 1.1 to this Registration Statement will also
provide for indemnification of us and our officers and directors.
Insofar as indemnification for liabilities
arising under the Securities Act of 1933, as amended (the
Securities Act) may be permitted to directors,
officers or persons controlling us pursuant to the foregoing
provisions, we have been informed that in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is
therefore unenforceable.
During the past three years, TechFaith BVI issued
the following securities. Each of the following issuances was
exempt from registration under the Securities Act in reliance on
Regulation S under the Securities Act or pursuant to
Section 4(2) of the Securities Act regarding transactions
not involving a public offering. All share numbers in the
following table do not reflect the 1:50,000 share split that
became effective on March 18, 2005.
II-1
On November 9, 2004, we issued ordinary
shares in a one-for-one exchange for all the issued shares in
TechFaith BVI. On November 9, 2004, we assumed all of
TechFaiths obligations under the notes, which became
convertible into our shares.
(a) Exhibits
II-2
(b) Financial Statement Schedules
Schedules have been omitted because the
information required to be set forth therein is not applicable
or is shown in the Consolidated Financial Statements or the
Notes thereto.
The undersigned registrant hereby undertakes to
provide to the underwriter at the closing specified in the
underwriting agreements, certificates in such denominations and
registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors,
officers and controlling persons of the registrant pursuant to
the provisions described in Item 6, or otherwise, the
registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is
therefore unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any
liability under the Securities Act, the information omitted from
the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant under
Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as
of the time it was declared effective.
(2) For the purpose of determining any
liability under the Securities Act, each post-effective
amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities
offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering
thereof.
II-3
Item 6.
Indemnification of Directors and
Officers
Item 7.
Recent Sales of Unregistered
Securities
Underwriting
Date of Sale or
Consideration
Discount and
Purchaser
Issuance
Number of Securities
(US$)
Commission (US$)
2003-09-01
4,115 ordinary shares
4,115
N/A
2003-09-01
1,670 ordinary shares
1,670
N/A
2003-09-01
335 ordinary shares
335
N/A
2003-09-01
1,665 ordinary shares
1,665
N/A
2003-09-01
1,615 ordinary shares
1,615
N/A
2003-09-01
600 ordinary shares
600
N/A
2004-04-16
Convertible note of US$4.0 million at conversion price of US$10,600
4,000,000
120,000 (finders fee)
2004-04-16
Convertible note of US$4.0 million at conversion price of US$10,600
4,000,000
120,000 (finders fee)
2004-04-16
Convertible note of US$2.0 million at conversion price of US$10,600
2,000,000
60,000 (finders fee)
Table of Contents
Underwriting
Date of Sale or
Consideration
Discount and
Purchaser
Issuance
Number of Securities
(US$)
Commission (US$)
2003-12-19
Convertible note of US$4.0 million at conversion price of US$11,685 (Cancelled)
4,000,000
120,000 (finders fee)
2004-04-16
Convertible note of US$4.0 million at conversion price of US$10,600, replacing the note issued on December 19, 2003
Cancelation of the note issued on December 19, 2003
N/A
Item 8.
Exhibits and Financial Statement
Schedules
Exhibit
Number
Description of Document
1
.1
Form of Underwriting Agreement.
3
.1*
Memorandum and Articles of Association of the
Registrant, as currently in effect.
3
.2
Amended and Restated Memorandum and Articles of
Association of the Registrant.
4
.1*
Registrants Specimen American Depositary
Receipt (included in Exhibit 4.3).
4
.2
Registrants Specimen Certificate for
Ordinary Shares.
4
.3*
Form of Deposit Agreement among the Registrant,
the depositary and holders of the American Depositary Receipts.
4
.4*
Note Subscription and Rights Agreement, dated as
of April 9, 2004, among the Registrant and other parties
therein.
4
.5*
Transfer and Assumption Agreement dated
November 9, 2004 among the Registrant and other parties
thereto.
4
.6*
Share Swap Agreement dated November 9, 2004
among the Registrant and other parties thereto.
5
.1*
Opinion of Conyers Dill & Pearman,
Cayman regarding the validity of the ordinary shares being
registered.
8
.1*
Form of opinion of Latham & Watkins LLP
regarding certain U.S. tax matters.
10
.1
2005 Share Incentive Plan.
10
.2*
Form of Indemnification Agreement with the
Registrants directors.
10
.3*
Form of Employment Agreement between the
Registrant and a Senior Executive Officer of the Registrant.
21
.1*
Subsidiaries of the Registrant.
23
.1
Consent of Deloitte Touche Tohmatsu, Independent
Registered Public Accounting Firm.
23
.2
Consent of Conyers Dill & Pearman.
23
.3
Consent of Latham & Watkins LLP.
23
.4
Consent of Guantao Law Firm.
23
.5*
Consent of American Appraisal.
Table of Contents
Exhibit
Number
Description of Document
24
.1*
Powers of Attorney (included on signature page).
99
.1*
Memorandum of Understanding dated
December 24, 2003 between a subsidiary of the Registrant
and QUALCOMM.
99
.2*
CDMA Modem Card License Agreement dated
March 9, 2004 between a subsidiary of the Registrant and
QUALCOMM.
99
.3*
Joint Venture Agreement dated September 26,
2003 between the Registrant and NEC.
99
.4*
Lease Agreement dated July 31, 2003 between
the Registrant and Beijing Sino-Electronics Future
Telecommunication R&D, Ltd.
99
.5*
Code of Business Conduct and Ethics of the
Registrant.
99
.6*
Agreement dated June 29, 2004 between the
Registrant and a Chinese subsidiary of NEC (translation).
99
.7*
Agreement dated December 20, 2004 between
the Registrant and a Chinese subsidiary of NEC (translation).
*
Filed previously.
Filed herewith.
Item 9.
Undertakings
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities
Act of 1933, as amended, the registrant certifies that it has
reasonable grounds to believe that it meets all of the
requirements for filing on Form F-1 and has duly caused
this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Beijing,
Peoples Republic of China, on April 20, 2005.
POWER OF ATTORNEY
Each person whose signature appears below
constitutes and appoints Defu Dong and Eva Hon as
attorneys-in-fact with full power of substitution, for him or
her in any and all capacities, to do any and all acts and all
things and to execute any and all instruments which said
attorney and agent may deem necessary or desirable to enable the
registrant to comply with the Securities Act of 1933, as amended
(the Act), and any rules, regulations and
requirements of the Securities and Exchange Commission
thereunder, in connection with the registration under the Act of
ordinary shares of the registrant (the Shares),
including, without limitation, the power and authority to sign
the name of each of the undersigned in the capacities indicated
below to the Registration Statement on Form F-1 to be filed
with the Securities and Exchange Commission with respect to
such Shares, to any and all amendments or supplements to such
Registration Statement, whether such amendments or supplements
are filed before or after the effective date of such
Registration Statement, to any related Registration Statement
filed pursuant to Rule 462(b) under the Act, and to any and
all instruments or documents filed as part of or in connection
with such Registration Statement or any and all amendments
thereto, whether such amendments are filed before or after the
effective date of such Registration Statement; and each of the
undersigned hereby ratifies and confirms all that such attorney
and agent shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities
Act of 1933, this registration statement has been signed by the
following persons in the capacities and on the dates indicated.
CHINA TECHFAITH WIRELESS COMMUNICATION
TECHNOLOGY LIMITED
EXHIBIT INDEX
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
By:
/s/ Defu Dong
Name: Defu Dong
Title: Chairman and Chief Executive Officer
Signature
Title
Date
/s/ Defu Dong
Defu Dong
Chairman of the Board/
Chief Executive Officer
April 20, 2005
*
Eva Hon
Chief Financial Officer
April 20, 2005
*
Guoyi Wei
Chief Accounting Officer
April 20, 2005
*
Changke He
Director
April 20, 2005
*
Baozhuang Huo
Director
April 20, 2005
Table of Contents
Signature
Title
Date
*
Jun Liu
Director
April 20, 2005
*
Donald J. Puglisi
Title: Managing Director,
Puglisi & Associates
Authorized Representative
in the United States
April 20, 2005
*By:
/s/ Defu Dong
Defu Dong
Attorney-in-Fact
Table of Contents
Exhibit
Number
Description of Document
1
.1
Form of Underwriting Agreement.
3
.1*
Memorandum and Articles of Association of the
Registrant, as currently in effect.
3
.2
Amended and Restated Memorandum and Articles of
Association of the Registrant.
4
.1*
Registrants Specimen American Depositary
Receipt (included in Exhibit 4.3).
4
.2
Registrants Specimen Certificate for
Ordinary Shares.
4
.3*
Form of Deposit Agreement among the Registrant,
the depositary and holders of the American Depositary Receipts.
4
.4*
Note Subscription and Rights Agreement, dated as
of April 9, 2004, among the Registrant and other parties
therein.
4
.5*
Transfer and Assumption Agreement dated
November 9, 2004 among the Registrant and other parties
thereto.
4
.6*
Share Swap Agreement dated November 9, 2004
among the Registrant and other parties thereto.
5
.1*
Opinion of Conyers Dill & Pearman,
Cayman regarding the validity of the ordinary shares being
registered.
8
.1*
Form of opinion of Latham & Watkins LLP
regarding certain U.S. tax matters.
10
.1
2005 Share Incentive Plan.
10
.2*
Form of Indemnification Agreement with the
Registrants directors.
10
.3*
Form of Employment Agreement between the
Registrant and a Senior Executive Officer of the Registrant.
21
.1*
Subsidiaries of the Registrant.
23
.1
Consent of Deloitte Touche Tohmatsu, Independent
Registered Public Accounting Firm.
23
.2
Consent of Conyers Dill & Pearman.
23
.3
Consent of Latham & Watkins LLP.
23
.4
Consent of Guantao Law Firm.
23
.5*
Consent of American Appraisal.
24
.1*
Powers of Attorney (included on signature page).
99
.1*
Memorandum of Understanding dated
December 24, 2003 between a subsidiary of the Registrant
and QUALCOMM.
99
.2*
CDMA Modem Card License Agreement dated
March 9, 2004 between a subsidiary of the Registrant and
QUALCOMM.
99
.3*
Joint Venture Agreement dated September 26,
2003 between the Registrant and NEC.
99
.4*
Lease Agreement dated July 31, 2003 between
the Registrant and Beijing Sino-Electronics Future
Telecommunication R&D, Ltd.
99
.5*
Code of Business Conduct and Ethics of the
Registrant.
99
.6*
Agreement dated June 29, 2004 between the
Registrant and a Chinese subsidiary of NEC (translation).
99
.7*
Agreement dated December 20, 2004 between
the Registrant and a Chinese subsidiary of NEC (translation).
*
Filed previously.
Filed herewith.
Exhibit 1.1
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
(an exempted company limited by shares
under the laws of the Cayman Islands)
o American Depositary Shares each representing 15 Ordinary Shares
UNDERWRITING AGREEMENT
Dated: May o, 2005
TABLE OF CONTENTS
PAGE SECTION 1. Representations and Warranties..............................................................3 (a) Representations and Warranties by the Company...............................................3 (b) Representations and Warranties by the Selling Shareholders.................................15 (c) Officer's Certificates.....................................................................18 SECTION 2. Sale and Delivery to the Underwriters; Closing.............................................18 (a) Initial Securities.........................................................................18 (b) Option Securities..........................................................................18 (c) Denominations; Registration; Delivery of ADRs..............................................19 (d) Time and Date of Deliveries and Payments...................................................19 SECTION 3. Covenants of the Company...................................................................19 (a) Compliance with Securities Regulations and Commission Requests.............................19 (b) Filing of Amendments.......................................................................20 (c) Delivery of Registration Statements........................................................20 (d) Delivery of Prospectus.....................................................................20 (e) Continued Compliance with Securities Laws..................................................20 (f) Blue Sky Qualifications....................................................................21 (g) Rule 158...................................................................................21 (h) Use of Proceeds............................................................................21 (i) Compliance with Rule 463...................................................................21 (j) Listing....................................................................................21 (k) Restriction on Sale of Securities..........................................................21 (l) Other Documents............................................................................22 (m) Reporting Requirements.....................................................................22 (n) Compliance with NASD Rules.................................................................22 (o) Submission of Documents....................................................................22 (p) Investment Company Act.....................................................................23 (q) Stabilization and Manipulation.............................................................23 (r) Deposit of Ordinary Shares.................................................................23 (s) Annual Reports.............................................................................23 (t) Liabilities and Agreements Prior to the Closing Time.......................................23 (u) Cayman Islands Matters.....................................................................23 (v) Deposit Agreement..........................................................................23 SECTION 4. Payment of Expenses........................................................................24 (a) Expenses...................................................................................24 (b) Expenses of the Selling Shareholders.......................................................24 (c) Termination of Agreement...................................................................24 SECTION 5. Conditions of the Underwriters' Obligations................................................24 (a) Effectiveness of Registration Statement....................................................25 (b) Opinion of Cayman Islands Counsel for Company..............................................25 (c) Opinion of Special U.S. Counsel for Company................................................25 (d) Opinion of Special PRC Counsel for Company.................................................25 (e) Opinion of BVI Counsel for Company.........................................................25 |
(f) Opinions of Counsel for certain Selling Shareholders.......................................25 (g) Opinion of U.S. Counsel for Underwriters...................................................26 (h) Opinion of Special PRC Counsel for Underwriters............................................26 (i) Opinion of Counsel for Depositary..........................................................26 (j) Officers' Certificate......................................................................26 (k) Certificate of Selling Shareholders........................................................26 (l) Accountant's Comfort Letter................................................................27 (m) Bring-down Comfort Letter..................................................................27 (n) Approval of Listing........................................................................27 (o) No Objection by NASD.......................................................................27 (p) Lock-up Agreement..........................................................................27 (q) Conditions to Purchase of Option Securities................................................27 (r) Additional Documents.......................................................................29 (s) Termination of Agreement...................................................................29 SECTION 6. Indemnification............................................................................29 (a) Indemnification of the Underwriters........................................................29 (b) Indemnification of the Company, Directors and Officers and Selling Shareholders............31 (c) Actions against Parties; Notification......................................................31 (d) Settlement without Consent if Failure to Reimburse.........................................32 (e) Indemnification for Reserved Securities....................................................32 (f) Other Agreements with Respect to Indemnification...........................................32 SECTION 7. Contribution...............................................................................32 SECTION 8. Representations, Warranties and Agreements to Survive Delivery.............................33 SECTION 9. Termination of Agreement...................................................................34 (a) Termination; General.......................................................................34 (b) Liabilities................................................................................34 SECTION 10. Default by One or More of the Underwriters.................................................34 SECTION 11. Default by one or more of the Selling Shareholders or the Company..........................35 (a) Default by Selling Shareholders............................................................35 (b) Default by Company.........................................................................36 SECTION 12. Waiver of Immunities.......................................................................36 SECTION 13. Consent to Jurisdiction; Appointment of Agent for Service of Process.......................36 (a) Consent to Jurisdiction....................................................................36 (b) Appointment of Agent for Service of Process................................................36 SECTION 14. Judgment Currency..........................................................................37 SECTION 15. Notices....................................................................................38 SECTION 16. Parties....................................................................................38 SECTION 17. Governing Law and Time.....................................................................38 SECTION 18. Effect of Headings.........................................................................38 SECTION 19. Definitions................................................................................38 |
SECTION 20. Counterparts...............................................................................38 |
SCHEDULES Schedule A List of Underwriters ............................................................Sch A-1 Schedule B List of Company and Selling Shareholders.........................................Sch B-1 Schedule C Offering Price...................................................................Sch C-1 Schedule D List of Persons and Entities Subject to Lock-up..................................Sch D-1 Schedule E List of Selling Shareholders Providing an Opinion of Counsel.....................Sch E-1 Schedule F Notice Addresses of Selling Shareholders.........................................Sch F-1 |
EXHIBITS Exhibit A Form of Opinion of Company's Cayman Islands Counsel to be Delivered Pursuant to Section 5(b).........................................................................A-1 Exhibit B Form of Opinion of Company's U.S. Counsel to be Delivered Pursuant to Section 5(c)...B-1 Exhibit C Form of Opinion of Company's People's Republic of China Counsel to be Delivered Pursuant to Section 5(d).............................................................C-1 Exhibit D Form of Opinion of Company's BVI Counsel to be Delivered Pursuant to Section 5(e)....D-1 Exhibit E Form of Opinion of Counsel to Selling Shareholders to be delivered Pursuant to Section 5(f).........................................................................E-1 Exhibit F Form of Opinion of U.S. Counsel to the Depositary to be Delivered Pursuant to Section 5(i).........................................................................F-1 Exhibit G Form of Lock-up Letter Pursuant to Section 5(p)......................................G-1 |
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
(an exempted company limited by shares
under the laws of the Cayman Islands)
o American Depositary Shares each representing 15 Ordinary Shares
UNDERWRITING AGREEMENT
May o, 2005
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
as Representative of the several Underwriters
Two World Financial Center
250 Vesey Street
New York, New York 10281
Ladies and Gentlemen:
China Techfaith Wireless Communication Technology Limited, an exempted company limited by shares under the laws of the Cayman Islands (the "Company"), and the persons listed in Schedule B hereto (the "Selling Shareholders") confirm their respective agreement with Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and each of the other underwriters named in Schedule A hereto (collectively, the "Underwriters," which term shall also include any underwriter substituted as hereinafter provided in Section 10 hereof) for whom Merrill Lynch is acting as representative (in such capacity, the "Representative"), with respect to the issue and sale by the Company and the sale by the Selling Shareholders, and the purchase by the Underwriters, acting severally and not jointly, of the respective numbers of American Depositary Shares ("ADSs"), each ADS representing 15 ordinary shares, par value $0.00002 per share, of the Company ("Ordinary Shares"), set forth in Schedules A and B hereto, and with respect to the grant by each Selling Shareholder, acting severally and not jointly, to the Underwriters, acting severally and not jointly, of the option described in Section 2(b) hereof for the Underwriters to purchase all or any part of o additional ADSs, to cover over-allotments, if any. The aforesaid o ADSs (the "Initial Securities") to be purchased by the Underwriters and all or any part of the o ADSs subject to the option described in Section 2(b) hereof (the "Option Securities") are hereinafter called, collectively, the "Securities." The offer of the Securities by the Underwriters is hereinafter called the "Offering."
The Ordinary Shares to be represented by ADSs are to be deposited pursuant to a deposit agreement (the "Deposit Agreement"), among the Company, The Bank of New York, as depositary (the "Depositary"), and the holders from time to time of the American Depositary Receipts ("ADRs") to be issued under the Deposit Agreement and evidencing the ADSs.
Unless the context otherwise requires, references to the "Securities" herein shall constitute references both to the Ordinary Shares and to the ADSs (and to the Ordinary Shares
represented by such ADSs). All references to "US dollars" or "$" herein are to United States dollars.
The Company and the Selling Shareholders understand that the Underwriters propose to make a public offering of the Securities as soon as the Representative deems advisable after this Agreement has been executed and delivered.
The Company, the Selling Shareholders and the Underwriters agree that up to
o shares of the Securities to be purchased by the Underwriters (the "Reserved
Securities") shall be reserved for sale by the Underwriters at the purchase
price set forth on the cover page of the Prospectus (as defined below) to
certain eligible directors, officers, employees and associates of the Company,
as part of the distribution of the Securities by the Underwriters, subject to
the terms of this Agreement, the applicable rules, regulations and
interpretations of the National Association of Securities Dealers, Inc. (the
"NASD") and all other applicable laws, rules and regulations. To the extent that
such Reserved Securities are not orally confirmed for purchase by such eligible
directors, officers, employees and associates of the Company by the end of the
first business day after the date of this Agreement, such Reserved Securities
may be offered to the public as part of the public offering contemplated hereby.
The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form F-1 (No. 333-123921) covering the registration of the Securities under the Securities Act of 1933, as amended (the "1933 Act"), including the related preliminary prospectus. Promptly after execution and delivery of this Agreement, the Company will either (i) prepare and file a prospectus in accordance with the provisions of Rule 430A ("Rule 430A") of the rules and regulations of the Commission under the 1933 Act (the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of the 1933 Act Regulations or (ii) if the Company has elected to rely upon Rule 434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a "Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b). The information included in such prospectus or in such Term Sheet, as the case may be, that was omitted from such registration statement at the time it became effective but that is deemed to be part of such registration statement at the time it became effective (A) pursuant to paragraph (b) of Rule 430A is referred to as "Rule 430A Information" or (B) pursuant to paragraph (d) of Rule 434 is referred to as "Rule 434 Information." Each prospectus used before such registration statement became effective, and any prospectus that omitted, as applicable, the Rule 430A Information or the Rule 434 Information, that was used after such effectiveness and prior to the execution and delivery of this Agreement is called a "preliminary prospectus." Such registration statement, including the exhibits thereto and schedules thereto, if any, at the time it became effective and including the Rule 430A Information and the Rule 434 Information, as applicable, is herein called the "Registration Statement." Any registration statement filed pursuant to Rule 462(b) of the 1933 Act Regulations is herein referred to as the "Rule 462(b) Registration Statement," and after such filing the term "Registration Statement" shall include the Rule 462(b) Registration Statement. The final form of the prospectus in the form first furnished to the Underwriters for use in connection with the Offering are herein called the "Prospectus." If Rule 434 is relied on, the term "Prospectus" shall refer to the preliminary prospectus dated April o, 2005 together with the Term Sheet and all references in this Agreement to the date of the Prospectus shall mean the date of the Term Sheet.
The Company and the Depositary have prepared and filed with the Commission a registration statement on Form F-6 (No. 333-123939) and a related prospectus, which may be in the form of the ADR certificate, for the registration under the 1933 Act of the ADSs evidenced by ADRs, have filed such amendments thereto and such amended preliminary prospectuses as may have been required to the date hereof, and will file such additional amendments thereto and such amended prospectuses as may hereafter be required. The registration statement on Form F-6 for the registration of the ADSs evidenced by ADRs, as amended at the time it becomes effective (including by the filing of any post-effective amendments thereto), is hereinafter called the "ADR Registration Statement."
The Company has prepared and filed with the Commission a registration statement on Form 8-A (No. 000-51242) for the registration under the United States Securities Exchange Act of 1934, as amended (the "1934 Act"), of the Ordinary Shares. The various parts of such registration statement on Form 8-A for the registration of the Ordinary Shares, including all exhibits thereto, each as amended at the time such part of the registration statement became effective, are hereinafter called the "Form 8-A Registration Statement."
SECTION 1 Representations and Warranties.
(a) Representations and Warranties by the Company. The Company represents and warrants to each Underwriter as of the date hereof, as of the Closing Time referred to in Section 2(d) hereof, and as of each Time of Delivery (if any) referred to in Section 2(d) hereof, and agrees with each Underwriter, as follows:
(i) Compliance with Registration Requirements. Each of the Registration Statement, any Rule 462(b) Registration Statement, the ADR Registration Statement and the Form 8-A Registration Statement has been declared effective by the Commission under the 1933 Act or 1934 Act, as applicable, and no stop order suspending the effectiveness of the Registration Statement, any Rule 462(b) Registration Statement, the ADR Registration Statement or the Form 8-A Registration Statement has been issued under the 1933 Act or 1934 Act, as applicable, and no proceedings for that purpose have been instituted or are pending or, to the knowledge of the Company, are contemplated by the Commission, and any request on the part of the Commission for additional information received by the Company has been complied with.
At the respective times the Registration Statement, any Rule 462(b) Registration Statement and any post-effective amendments thereto became effective and at the Closing Time (and, if any Option Securities are purchased, at the relevant Time of Delivery), the Registration Statement, the Rule 462(b) Registration Statement and any amendments and supplements thereto complied and will comply in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations and did not and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, and the Prospectus, any preliminary prospectus and any supplement thereto or prospectus wrapper prepared in connection therewith, at their respective times of issuance and at the Closing Time, complied and will comply in all material respects with any applicable laws or regulations
of foreign jurisdictions in which the Prospectus and such preliminary prospectus, as amended or supplemented, if applicable, are distributed in connection with the offer and sale of Reserved Securities. Neither the Prospectus nor any amendments or supplements thereto (including any prospectus wrapper), at the time the Prospectus or any amendments or supplements thereto were issued and at the Closing Time (and, if any Option Securities are purchased, at the relevant Time of Delivery), included or will include an untrue statement of a material fact or omitted or will omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. If Rule 434 is used, the Company will comply with the requirements of Rule 434 and the Prospectus shall not be "materially different," as such term is used in Rule 434, from the prospectus included in the Registration Statement at the time it became effective. The representations and warranties in this subsection shall not apply to statements in or omissions from the Registration Statement or the Prospectus made in reliance upon and in conformity with information furnished to the Company in writing by any Underwriter through the Representative expressly for use in the Registration Statement or the Prospectus (including any prospectus wrapper) or any amendments or supplements thereto,
Each preliminary prospectus and the Prospectus filed as part of the Registration Statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the 1933 Act, complied when such Registration Statement became effective in all material respects with the 1933 Act and the 1933 Act Regulations and each preliminary prospectus and the Prospectus delivered to the Underwriters for use in connection with the Offering was identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.
At the time the ADR Registration Statement became effective and at the Closing Time (and, if any Option Securities are purchased, at the relevant Time of Delivery), the ADR Registration Statement complied and will comply in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations and did not and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading.
At the time the Form 8-A Registration Statement became effective and at the Closing Time (and, if any Option Securities are purchased, at the relevant Time of Delivery), the Form 8-A Registration Statement complied and will comply in all material respects with the requirements of the 1934 Act and the rules and regulations of the Commission under the 1934 Act (the "1934 Act Regulations") and did not and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading.
Notwithstanding the foregoing, this representation and warranty shall not apply to statements in or omissions from the Registration Statement, any Rule 462(b) Registration Statement, the ADR Registration Statement or the Form 8-A Registration Statement
made in reliance upon and in conformity with information furnished to the Company in writing by any Underwriter through the Representative expressly for use in any such Registration Statement.
(ii) Independent Accountants. Deloitte Touche Tohmatsu, who certified the financial statements and supporting schedules included in the Registration Statement, are independent public accountants as required by the 1933 Act and the 1933 Act Regulations.
(iii) Financial Statements. The financial statements included in the Registration Statement and the Prospectus, together with the related schedules and notes, present fairly in all material respects the financial position of the Company and its consolidated subsidiaries at the dates indicated and the statement of operations, shareholders' equity and cash flows of the Company and its consolidated subsidiaries for the periods specified; said financial statements have been prepared in conformity with accounting principles generally accepted in the United States ("US GAAP") applied on a consistent basis throughout the periods involved. The supporting schedules, if any, included in the Registration Statement present fairly in all material respects in accordance with US GAAP the information required to be stated therein. The selected financial data and the summary financial information included in the Prospectus present fairly in all material respects the information shown therein and have been compiled on a basis consistent with that of the audited financial statements included in the Registration Statement.
(iv) No Material Adverse Change in Business. Since the respective dates as of which information is given in the Registration Statement and the Prospectus, except as otherwise stated therein, (A) there has been no material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business (a "Material Adverse Effect"), (B) there have been no transactions entered into by the Company or any of its subsidiaries, other than those in the ordinary course of business, that are material with respect to the Company and its subsidiaries considered as one enterprise, and (C) there has been no dividend or distribution of any kind declared, paid or made by the Company on any class of its capital stock.
(v) Organization of the Company. The Company has been duly organized and is validly existing under the laws of the Cayman Islands, and has the legal right, power and authority (corporate and other) to own, lease and operate its properties and to conduct its business as described in the Prospectus and to enter into and perform its obligations under this Agreement and the Deposit Agreement (together, the "Principal Agreements"), and is duly qualified to transact business in any jurisdiction in which it owns or leases any properties or conducts any business except where the failure to so qualify would not result in a Material Adverse Effect. The Amended and Restated Memorandum of Association and Articles of Association of the Company (the "Articles of Association") comply with the requirements of Cayman Islands law and are in full force and effect.
(vi) Organization of Subsidiaries. None of the Company's subsidiaries is a "significant subsidiary" (as such term is defined in Rule 1-02 of Regulation S-X) except Techfaith Wireless Communication Technology (Beijing) Limited ("TechFaith China"), Techfaith Wireless Communication Technology (Beijing) Limited II ("Techfaith Beijing"), Techfaith Wireless Communication Technology (Shanghai) Limited ("Techfaith Shanghai") ("Techfaith Shanghai"), STEP Technologies (Beijing) Co., Ltd. ("STEP Technologies"), Techfaith Wireless Communication Technology Limited ("TechFaith Wireless"), Great Earnest Technology Limited ("Great Earnest"), Leo Technology Limited ("Leo Technology") and Finest Technology Limited ("Finest Technology," and together with TechFaith China, Techfaith Beijing, Techfaith Shanghai, STEP Technologies, Techfaith Wireless, Great Earnest and Leo Technology, the "Significant Subsidiaries"). Each of the Company's subsidiaries has been duly organized and is validly existing under the laws of the jurisdiction of its incorporation or formation, and has legal right, power and authority to own, lease and operate its properties, if any, and to conduct its business as described in the Prospectus and is duly qualified to transact business and is in good standing in any jurisdiction in which it owns or leases any properties or conducts any business except where the failure to so qualify would not result in a Material Adverse Effect; except as otherwise disclosed in the Registration Statement, all of the issued and outstanding capital stock or equity interest of each subsidiary has been duly authorized and validly issued, is fully paid and non-assessable and is owned by the Company, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity; and none of the outstanding shares of capital stock or equity interest of any subsidiary was issued in violation of the preemptive or similar rights of any securityholder of such subsidiary. The only subsidiaries of the Company are (a) the subsidiaries listed on Exhibit 21 to the Registration Statement and (b) certain other subsidiaries which, considered in the aggregate as a single subsidiary, do not constitute a "significant subsidiary" as defined in Rule 1-02 of Regulation S-X.
(vii) Capitalization. The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus in the column entitled "Actual" under the caption "Capitalization" (except for subsequent issuances, if any, pursuant to this Agreement or pursuant to reservations, agreements or employee benefit plans referred to in the Prospectus and except for the conversion of all of the Company's redeemable convertible notes (the "Convertible Notes") immediately prior to the Closing Time). The shares of issued and outstanding capital stock of the Company have been duly authorized and validly issued and are fully paid and non-assessable; the holders of outstanding shares of the Company have irrecovably waived any entitlement to pre-emptive or other rights to acquire the Ordinary Shares in connection with the Offering; none of the outstanding shares of capital stock of the Company was issued in violation of the preemptive or other similar rights of any securityholder of the Company. Except as otherwise disclosed in the Prospectus, there are no outstanding securities convertible into or exchangeable for, or warrants or rights to purchase from the Company Ordinary Shares or any other shares of capital stock of the Company or any subsidiary nor are there any obligations of the Company to allot, issue or transfer, the Securities; the Securities are freely transferable by the Company to or for the account of the Underwriters and (to the extent described in the Prospectus) the initial purchasers thereof; and there are no
restrictions on subsequent transfers of the Securities under the laws of the Cayman Islands or the United States.
(viii) Authorization of Underwriting Agreement. This Agreement has been duly authorized, executed and delivered by the Company.
(ix) Authorization of Deposit Agreement. The Deposit Agreement has been duly authorized, executed and delivered by the Company and, assuming due authorization, execution and delivery by the Depositary, constitutes a valid and legally binding obligation of the Company, enforceable in accordance with its terms, subject as to enforcement to bankruptcy, insolvency, reorganization and other laws of general applicability relating to or affecting creditors' rights generally and to general equity principles.
(x) Validity of ADRs. Upon the due issuance by the Depositary of ADRs evidencing the ADSs against the deposit of the Ordinary Shares in accordance with the provisions of the Deposit Agreement, such ADRs will be duly and validly issued under the Deposit Agreement and persons in whose names such ADRs are registered will be entitled to the rights of registered holders of ADRs evidencing the ADSs specified therein and in the Deposit Agreement.
(xi) No Limitation on Vote, Transfer and Payment of Dividends. Except as set forth in the Articles of Association of the Company (the "Articles of Association"), the Deposit Agreement or the Prospectus and except for applicable securities law restrictions on the sale of securities, there are no limitations on the rights of holders of Ordinary Shares, ADSs or ADRs evidencing the ADSs to hold or vote or transfer their respective securities, and no approvals are currently required in the Cayman Islands in order for the Company to pay dividends declared by the Company to the holders of Ordinary Shares, including the Depositary and, except as disclosed in the Prospectus, no such dividends or other distributions will be subject to withholding or other taxes under the laws and regulations of the Cayman Islands and may be so paid without the necessity of obtaining any Governmental License (as defined in Section 1(a)(xxi)) in the Cayman Islands.
(xii) Authorization and Description of Securities. The Securities to be purchased by the Underwriters from the Company have been duly authorized for issuance and sale to the Underwriters pursuant to this Agreement and, when issued and delivered by the Company against payment therefor in accordance with this Agreement and, in the case of the ADSs, the Deposit Agreement, will be validly issued, fully paid and non-assessable and will be issued free and clear of all liens, encumbrances, equities or claims; the Ordinary Shares, the ADRs and the ADSs conform to all statements relating thereto contained in the Prospectus, including statements under the captions "Description of Share Capital" and "Description of American Depositary Shares" and such descriptions conform in all material respects to the rights set forth in the instruments defining the same; except as disclosed in the Prospectus or the Registration Statement, no holder of the Securities is or will be subject to personal liability by reason of being such a holder; and the issuance of the Securities is not subject to the preemptive or other similar rights of any securityholder of the Company.
(xiii) Arrangements with Directors, Executive Officers and Affiliates. Except as disclosed in the Prospectus or the Registration Statement or filed as exhibits thereto, no material indebtedness (actual or contingent) and no material contract or arrangement is outstanding between the Company and any director or executive officer of the Company or any person connected with such director or executive officer (including his/her spouse, infant children, any company or undertaking in which he/she holds a controlling interest). There are no relationships or transactions between the Company on the one hand and its affiliates, officers and directors or their shareholders, customers or suppliers on the other hand which, although required to be disclosed under the 1933 Act or the 1933 Act Regulations, are not disclosed in the Registration Statement.
(xiv) Absence of Labor Dispute. No labor dispute with the employees of the Company or any subsidiary exists or, to the knowledge of the Company, is imminent, and the Company is not aware of any existing or imminent labor disturbance by the employees of any of its or any subsidiary's principal suppliers, manufacturers, customers or contractors, which, in either case, may reasonably be expected to result in a Material Adverse Effect.
(xv) Absence of Further Requirements for the Offering. No filing with,
or authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or agency
or any stock exchange authority is necessary or required for the
performance by the Company or any subsidiary of its obligations under any
of the Principal Agreements in connection with the offering, issuance or
sale of the Securities under the Principal Agreements or the consummation
of the transactions contemplated by any of the Principal Agreements, except
(i) such as have been already filed, obtained or as may be required under
the 1933 Act or the 1933 Act Regulations and United States federal and
state, local or other securities or blue sky laws and (ii) such as have
been obtained under the laws and regulations of jurisdictions outside the
United States in which the Reserved Securities are offered.
(xvi) Absence of Proceedings. There is no action, suit, proceeding, inquiry or investigation before or brought by any court or governmental agency or body, domestic or foreign, now pending, or, to the knowledge of the Company, threatened, against or affecting the Company or any subsidiary, that is required to be disclosed in the Registration Statement (other than as disclosed therein), or that might reasonably be expected to result in a Material Adverse Effect, or that might reasonably be expected to materially and adversely affect the properties or assets thereof or the consummation of the transactions contemplated in the Principal Agreements or the performance by the Company of its obligations thereunder; the aggregate of all pending legal or governmental proceedings to which the Company or any subsidiary is a party or of which any of their respective property or assets is the subject that are not described in the Registration Statement, including ordinary routine litigation incidental to the business of the Company or any subsidiary, could not reasonably be expected to result in a Material Adverse Effect.
(xvii) Absence of Defaults and Conflicts. Neither the Company nor any of its subsidiaries is in violation of its respective charter or by-laws or other constituent or
organizational documents or in default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which it or any of them may be bound, or to which any of the property or assets of the Company or any subsidiary is subject (collectively, "Agreements and Instruments") except for such defaults that would not result in a Material Adverse Effect; and the execution, delivery and performance of each of the Principal Agreements and the consummation of the transactions contemplated in each of the Principal Agreements and the Registration Statement (including the issuance and sale of the Securities and the use of the proceeds from the sale of the Securities as described in the Prospectus under the caption "Use of Proceeds"), and compliance by the Company or any subsidiary with its obligations under each of the Principal Agreements have been duly authorized by all necessary corporate action and received all necessary approvals from any governmental or regulatory body and the necessary sanction or consent of its shareholders and do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default or Repayment Event (as defined below) under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any subsidiary pursuant to, the Agreements and Instruments (except for such conflicts, breaches or defaults or liens, charges or encumbrances that would not result in a Material Adverse Effect), nor will such action result in any violation of the provisions of the charter or by-laws or other constituent or organizational documents or business license or other organizational document of the Company or any subsidiary or any applicable treaty, law, statute, rule, regulation, judgment, order, writ or decree of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Company or any subsidiary or any of their assets, properties or operations. As used herein, a "Repayment Event" means any event or condition that gives the holder of any note, debenture or other evidence of indebtedness (or any person acting on such holder's behalf) the right to require the repurchase, redemption or repayment of all or a portion of such indebtedness by the Company or any subsidiary.
(xviii) Accuracy of Exhibits. There are no contracts or documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits thereto that have not been so described and filed as required.
(xix) Possession of Intellectual Property. Except as disclosed in the Prospectus, the Company and its subsidiaries own or possess or otherwise have the legal right to use, or can acquire on reasonable terms, adequate patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks, trade names or other intellectual property (collectively, "Intellectual Property") necessary to carry on the business now operated by them, and neither the Company nor any of its subsidiaries has received any notice or is otherwise aware of any infringement of or conflict with asserted rights of others with respect to any Intellectual Property or of any facts or circumstances which would render any Intellectual Property invalid or inadequate to protect the interest of the Company or any of its Subsidiaries therein, and which infringement or conflict (if the subject of an unfavorable decision, ruling or
finding) or invalidity or inadequacy, individually or in the aggregate, would result in a Material Adverse Effect.
(xx) Dividends. The Company's subsidiaries are not currently prohibited, directly or indirectly, from paying any dividends or other distributions to the Company or Techfaith Wireless, as applicable, from making any other distribution on their respective equity interests, or from transferring any of their respective property or assets to the Company or Techfaith Wireless, as applicable, except as described in or contemplated by the Prospectus; all dividends and other distributions declared and payable upon the equity interests in the Company's subsidiaries may be converted into foreign currency that may be freely transferred out of the People's Republic of China (the "PRC") and the British Virgin Islands ("BVI"), as applicable, except as disclosed in the Registration Statements and the Prospectus, and all such dividends and other distributions are not and, except as disclosed in the Registration Statements and the Prospectus, will not be subject to withholding or other taxes under the current laws and regulations of the PRC and BVI and, except as disclosed in the Registration Statements and the Prospectus, are otherwise free and clear of any other tax, withholding or deduction in the PRC and BVI, in each case without the necessity of obtaining any governmental or regulatory authorization in the PRC and BVI, except such as have been obtained;
(xxi) Possession of Licenses and Permits. The Company and its subsidiaries possess such permits, licenses, approvals, consents and other authorizations (collectively, "Governmental Licenses") issued by, and have made all declarations and filings with, the appropriate national, local or other regulatory agencies or bodies required for the authorization, execution and delivery by the Company or the relevant subsidiary, as the case may be, of any of the Principal Agreements or necessary to conduct the business now operated by them, with such exceptions as would not have a Material Adverse Effect; the Company and its subsidiaries are in compliance with the terms and conditions of all such Governmental Licenses, except where the failure to so comply would not, individually or in the aggregate, have a Material Adverse Effect; all of the Governmental Licenses are valid and in full force and effect, except where the invalidity or failure to be in full force and effect would not have a Marterial Adverse Effect; none of the Governmental Licenses contains any materially burdensome restrictions or conditions not described in the Prospectus; and neither the Company nor any of its subsidiaries has received any notice of proceedings relating to the revocation or modification (and which modification would reasonably be expected to have a Material Adverse Effect) of any such Governmental Licenses or has any reason to believe that any such Governmental License will be revoked, modified (and which modification would reasonably be expected to have a Material Adverse Effect) or suspended.
(xxii) Title to Property. The Company and its subsidiaries have good and marketable title to all real property owned by the Company and its subsidiaries and good title to all other properties owned by them, in each case, free and clear of all mortgages, pledges, liens, security interests, claims, restrictions or encumbrances of any kind except such as (a) are described in the Prospectus or (b) do not, individually or in the aggregate, materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company or any of its subsidiaries; and all
of the leases and subleases material to the business of the Company and its subsidiaries, considered as one enterprise, and under which the Company or any of its subsidiaries holds properties described in the Prospectus, are in full force and effect, and neither the Company nor any subsidiary has any notice of any material claim of any sort that has been asserted by anyone adverse to the rights of the Company or any subsidiary under any of the leases or subleases mentioned above, or affecting or questioning the rights of the Company or such subsidiary to the continued possession of the leased or subleased premises under any such lease or sublease.
(xxiii) Compliance with Cuba Act. The Company has complied with, and is and will be in compliance with, the provisions of that certain Florida act relating to disclosure of doing business with Cuba, codified as Section 517.075 of the Florida statutes, and the rules and regulations thereunder (collectively, the "Cuba Act") or is exempt therefrom.
(xxiv) Investment Company Act. The Company is not, and upon the issuance and sale of the Securities as herein contemplated and the application of the net proceeds therefrom as described in the Prospectus will not be, an "investment company" as such term is defined in the Investment Company Act of 1940, as amended (the "1940 Act") immediately after the Offering.
(xxv) Environmental Laws. Except as described in the Registration Statement and except as would not, singly or in the aggregate, result in a Material Adverse Effect, (A) neither the Company nor any of its subsidiaries is in violation of any national, local or foreign statute, law, rule, regulation, ordinance, code, policy or rule of common law or any judicial or administrative interpretation thereof, including any judicial or administrative order, consent, decree or judgment, relating to pollution or protection of human health, the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata) or wildlife, including, without limitation, laws and regulations relating to the release or threatened release of chemicals, pollutants, contaminants, wastes, toxic substances, hazardous substances, petroleum or petroleum products (collectively, "Hazardous Materials") or to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials (collectively, "Environmental Laws"), (B) the Company and its subsidiaries have all permits, authorizations and approvals required under any applicable Environmental Laws and are each in compliance with their requirements, (C) there are no pending or threatened administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, notices of noncompliance or violation, investigation or proceedings relating to any Environmental Law against the Company or any of its subsidiaries and (D) there are no events or circumstances that might reasonably be expected to form the basis of an order for clean-up or remediation, or an action, suit or proceeding by any private party or governmental body or agency, against or affecting the Company or any of its subsidiaries relating to Hazardous Materials or any Environmental Laws.
(xxvi) PFIC Status. Based on the projected composition of the Company's income and valuation of its assets, including goodwill, the Company does not expect to
become a passive foreign investment company, as defined in Section 1296(a) of the United States Internal Revenue Code of 1986, as amended (the "Code"), in 2005.
(xxvii) Registration Rights. Except as described in the Prospectus, there are no persons with registration rights or other similar rights to have any securities registered pursuant to the Registration Statement or otherwise registered by the Company under the 1933 Act.
(xxviii) Tax Returns. The Company and its subsidiaries have filed all material tax returns required to have been filed by them or have duly requested extensions thereof and all such returns are up to date, correct, and on a proper basis in all material respects and have paid all material taxes required to be paid by them and any related assessments, charges, levies, fines or penalties, except for any such taxes, assessments, charges, levies, fines or penalties that are being contested in good faith and by appropriate proceedings; and there is no known proposed tax deficiency, assessment, charge, levy, fine or penalty against it as to which a reserve would be required to be established under US GAAP which has not been so reserved or which is required to be disclosed in the Prospectus which has not been so disclosed and so far as the Company is aware, there are no facts or circumstances in existence which would reasonably be expected to give rise to any such deficiency, assessment, charge, levy, fine or penalty.
(xxix) Accounting Procedures. Each of the Company and its subsidiaries (A) makes, keeps and prepares books, records and accounts which fairly reflect transactions and dispositions of its assets and (B) has devised and maintained a system of internal and accounting controls which provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with US GAAP and to maintain asset accountability; (iii) accountability of assets is maintained, including regular reconciliations with existing assets and taking of appropriate action with respect to any differences; (iv) access to its assets is permitted only in accordance with management's general or specific authorizations; and (v) financial reports are prepared on a timely basis based on the transactions recorded pursuant to clause (ii) above under US GAAP. These reports provide the basis for the preparation of the Company's consolidated financial statements under US GAAP and have been maintained in compliance with applicable laws.
(xxx) MD&A Description. The section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Prospectus accurately and fully describes (A) accounting policies that the Company believes are the most important in the portrayal of the Company's financial condition and results of operations and that require management's most difficult, subjective or complex judgments ("critical accounting policies"); (B) judgments and uncertainties affecting the application of critical accounting policies; and (C) the likelihood that materially different amounts would be reported under different conditions or using different assumptions and an explanation thereof.
(xxxi) Management Review. The Company's management have reviewed and agreed with the selection, application and disclosure of critical accounting policies and have consulted with its legal advisers and independent accountants with regards to such disclosure.
(xxxii) Liquidity and Capital Resources. The section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" in the Prospectus accurately and fully describes: (A) all material trends, demands, commitments, events, uncertainties and risks, and the potential effects thereof, that the Company believes would materially affect liquidity and are reasonably likely to occur, and (B) neither the Company nor any subsidiary is engaged in any transactions with, or have any obligations to, its unconsolidated entities (if any) that are contractually limited to narrow activities that facilitate the transfer of or access to assets by the Company or such subsidiary, including, without limitation, structured finance entities and special purpose entities, or otherwise engage in, or have any obligations under, any off-balance sheet transactions or arrangements. As used herein in this Section 1(a)(xxxii), the phrase "reasonably likely" refers to a disclosure threshold lower than "more likely than not."
(xxxiii) Certain Trading Activities. The Company is not engaged in any trading activities involving commodity contracts or other trading contracts that are not currently traded on a securities or commodities exchange and for which the market value cannot be determined.
(xxxiv) Stamp Duty; Transfer Tax. Except as disclosed in the Prospectus, under the laws and regulations of the Cayman Islands, no transaction, stamp, capital or other issuance, registration or transfer taxes or duties are payable in the Cayman Islands by or on behalf of the Underwriters to any Cayman Islands taxing authority in connection with (A) the issuance, sale and delivery by the Company to or for the account of the Underwriters of the Securities or (B) the initial sale and delivery by the Underwriters of the Securities to purchasers thereof, (C) the holding or transfer of the Securities outside the Cayman Islands, (D) the deposit of the Ordinary Shares with the Custodian and the issuance and delivery of the ADRs, or (E) the execution and delivery of any Principal Agreement.
(xxxv) Accuracy of Information. There are no legal or governmental proceedings, statutes, contracts or documents that are required under the 1933 Act or the 1933 Act Regulations to be described in the Registration Statement or the Prospectus which have not been so described. The description in the Registration Statement and the Prospectus of statutes, legal and governmental proceedings and contracts and other documents is accurate and presents the information required to be shown in all material respects. The Prospectus will contain, when issued, all information and particulars required to comply with all statutory and other provisions (including, without limitation, the relevant laws and regulations of the Cayman Islands[, the British Virgin Islands] and the PRC) so far as applicable in each relevant Prospectus, which is or might reasonably be considered to be material for disclosure to a potential subscriber, investor, underwriter or sub-underwriter of the Securities or for the purpose of making an informed assessment of the assets and
liabilities, financial position, and profits and losses of the Company and its subsidiaries including, but without prejudice to the generality of the foregoing, any special trade factors or risks known to the Company and its subsidiaries or any of their directors and/or executive officers and which would reasonably be expected to have a Material Adverse Effect. All material information which ought to have been supplied or disclosed by the Company and its directors and/or executive officers to the Underwriters, the Representative, Deloitte Touche Tohmatsu or the legal or other professional advisers to the Underwriters or the Company for the purposes of or in the course of preparation of the Prospectus or the Registration Statement has been supplied or disclosed by the Company and its directors and executive officers and nothing has occurred since the date the same was supplied or disclosed which requires the same to be amended or updated in any material respect.
(xxxvi) Insurance. The business, undertakings, properties and assets of the Company's subsidiaries in China are adequately insured against all such risks as are normally insured by persons carrying on similar businesses in the same jurisdiction as those carried on by the Company's subsidiaries and such insurances include all the insurances that the Company's subsidiaries are required under terms of any lease or any contract in respect of any of their respective properties to undertake and such insurances are in full force and effect and, so far as the Company is aware, there are no circumstances which would reasonably be expected to render any of such insurances void or voidable and there is no material insurance claim made by or against the Company and its subsidiaries, pending, threatened or outstanding and so far as the Company is aware, no facts or circumstances exist which would reasonably be expected to give rise to any such claim and all due premiums in respect thereof have (if due) been paid.
(xxxvii) Choice of Law; Consent to Jurisdiction; Appointment of Agent
for Service of Process. The choice of the laws of the State of New York as
the governing law of this Agreement is a valid choice of law under the laws
of the Cayman Islands and will be honored by courts in the Cayman Islands.
The Company has the power to submit, and pursuant to Section 13 of this
Agreement, has legally, validly, effectively and irrevocably submitted, to
the personal jurisdiction of each United States federal court and New York
state court located in the Borough of Manhattan, in The City of New York,
New York, United States of America (each, a "New York Court"), and the
Company has the power to designate, appoint and empower, and pursuant to
Section 13 of this Agreement, has legally, validly, effectively and
irrevocably designated, appointed and empowered, the Authorized Agent (as
defined in Section 13 hereof) for service of process in any action arising
out of or relating to this Agreement or the Securities in any New York
Court, and service of process effected on such Authorized Agent will be
effective to confer valid personal jurisdiction over the Company as
provided in Section 13 hereof.
(xxxviii) Waiver of Immunity. Neither the Company, any of its subsidiaries nor any of its or their properties, assets or revenues has any right of immunity under Cayman Islands or New York law, from any legal action, suit or proceeding, from the giving of any relief in any such legal action, suit or proceeding, from set-off or counterclaim, from the jurisdiction of any Cayman Islands, New York or U.S. federal court, from service of process, attachment upon or prior to judgment, or attachment in aid
of execution of judgment, or from execution of a judgment, or other legal process or proceeding for the giving of any relief or for the enforcement of a judgment, in any such court, with respect to its obligations, liabilities or any other matter under or arising out of or in connection with this Agreement; and, to the extent that the Company, any of its subsidiaries or any of its or their properties, assets or revenues may have or may hereafter become entitled to any such right of immunity in any such court in which proceedings may at any time be commenced, each of the Company and the subsidiaries waives or will waive such right to the extent permitted by law and has consented to such relief and enforcement as provided in Section 12 of this Agreement.
(xxxix) Enforceability of New York Judgment. Except as described in
the Prospectus, any final judgment for a fixed or readily calculable sum of
money rendered by a New York Court having jurisdiction under its own
domestic laws in respect of any suit, action or proceeding against the
Company based upon this Agreement and the other Principal Agreements would
be declared enforceable against the Company by Cayman Islands courts
without re-examining the merits of the case under the common law doctrine
of obligation; provided that (i) adequate service of process has been
effected and the defendant has had a reasonable opportunity to be heard,
(ii) such judgments or the enforcement thereof are not contrary to the law,
public policy, security or sovereignty of the Cayman Islands, (iii) such
judgments were not obtained by fraudulent means and do not conflict with
any other valid judgment in the same matter between the same parties, and
(iv) an action between the same parties in the same matter is not pending
in any Cayman Islands court at the time the lawsuit is instituted in the
foreign court.
(xl) Listing. The Securities have been authorized for quotation, subject to official notice of issuance, on the Nasdaq National Market ("NASDAQ"), under the symbol "CNTF".
(xli) Stabilization and Manipulation. Neither the Company nor any of its affiliates has taken, directly or indirectly, any action that is designed to or that constitutes or that might reasonably be expected to cause or result in stabilization or manipulation of the price of any security of the Company.
(xlii) Foreign Corrupt Practices. Neither the Company nor, to the Company's knowledge, any director, officer, agent, employee or other person associated with or acting on behalf of the Company is using any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expenses; is making any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds; or is in violation of any provision of the United States Foreign Corrupt Practices Act of 1977; or is making any bribe, rebate, payoff, influence payment, kickback or other unlawful payment.
(b) Representations and Warranties by the Selling Shareholders. Each Selling Shareholder severally but not jointly represents and warrants to each Underwriter as of the date hereof, as of the Closing Time, and, if the Selling Shareholder is selling Option Securities on a Date of Delivery, as of each such Date of Delivery, and agrees with each Underwriter, as follows:
(i) Accurate Disclosure. Such Selling Shareholder has reviewed the Registration Statement and the Prospectus and neither the Prospectus nor any amendments or supplements thereto (including any prospectus wrapper) includes any untrue statement of a material fact relating to such Selling Shareholder or omits to state a material fact necessary in order to make the statements therein relating to such Selling Shareholder, in the light of the circumstances under which they were made, not misleading; such Selling Shareholder is not prompted to sell the Securities to be sold by such Selling Shareholder hereunder by any information concerning the Company or any subsidiary of the Company, which is not set forth in the Prospectus.
(ii) Authorization of Agreements. Such Selling Shareholder has the full right, power and authority to enter into this Agreement and a Power of Attorney and Custody Agreement (the "Power of Attorney and Custody Agreement") with [Mr. Defu Dong] and the [Company], respectively, and to sell, transfer and deliver the Securities to be sold by such Selling Shareholder hereunder. The execution and delivery of this Agreement and the Power of Attorney and Custody Agreement and the sale and delivery of the Securities to be sold by such Selling Shareholder and the consummation of the transactions contemplated herein and compliance by such Selling Shareholder with its obligations hereunder have been duly authorized by the Selling Shareholder and do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default under, or result in the creation or imposition of any tax, lien, charge or encumbrance upon the Securities to be sold by such Selling Shareholder or any property or assets of such Selling Shareholder pursuant to any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, license, lease or other agreement or instrument to which such Selling Shareholder is a party or by which such Selling Shareholder may be bound, or to which any of the property or assets of the Selling Shareholder is subject, nor will such action result in any violation of the provisions of the charter or by-laws or other organizational instrument of the Selling Shareholder, if applicable, or any applicable treaty, law, statute, rule, regulation, judgment, order, writ or decree of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Selling Shareholder or any of its properties.
(iii) Good and Marketable Title. Such Selling Shareholder has and will at the Closing Time and, if any Option Securities are purchased, on the Date of Delivery have good and marketable title to the Securities to be sold by such Selling Shareholder hereunder, free and clear of any security interest, mortgage, pledge, lien, charge, claim, equity or encumbrance of any kind, other than pursuant to this Agreement; and upon delivery of such Securities and payment of the purchase price therefor as herein contemplated, assuming each such Underwriter has no notice of any adverse claim, each of the Underwriters will receive good and marketable title to the Securities purchased by it from such Selling Shareholder, free and clear of any security interest, mortgage, pledge, lien, charge, claim, equity or encumbrance of any kind.
(iv) Absence of Defaults and Conflicts. The execution, delivery and performance of each of the Principal Agreements to which such Selling Shareholder is a party and the consummation of the transactions contemplated in each of the Principal Agreements and the Registration Statement have been duly authorized by all necessary
corporate action by such Selling Shareholder, to the extent applicable, and received all approvals from any governmental or regulatory body and the sanction or consent of its shareholders, to the extent applicable, and do not and will not, whether with or without the giving of notice or passage of time or both, result in any violation of the provisions of its charter or by-laws or business license or other organizational document of such Selling Shareholder, to the extent applicable, or any applicable treaty, law, statute, rule, regulation, judgment, order, writ or decree of any government, government instrumentality or court, domestic or foreign, having jurisdiction over such Selling Shareholder or any of its assets, properties or operations.
(v) Due Execution of Power of Attorney and Custody Agreement. Such Selling Shareholder has duly executed and delivered, in the form heretofore furnished to the Representative, the Power of Attorney and Custody Agreement with [Mr. Defu Dong] as attorney-in-fact (the "Attorney-in-Fact") and the [Company], as custodian (the "Custodian"); the Custodian is authorized to deliver the Securities to be sold by such Selling Shareholder hereunder and to accept payment therefor; and the Attorney-in-Fact is authorized to execute and deliver this Agreement and the certificate referred to in Section 5(k) or that may be required pursuant to Section(s) 5(r) and 5(s) on behalf of such Selling Shareholder, to sell, assign and transfer to the Underwriters the Securities to be sold by such Selling Shareholder hereunder, to determine the purchase price to be paid by the Underwriters to such Selling Shareholder, as provided in Section 2(a) hereof, to authorize the delivery of the Securities to be sold by such Selling Shareholder hereunder, to accept payment therefor, and otherwise to act on behalf of such Selling Shareholder in connection with this Agreement.
(vi) Absence of Manipulation. Such Selling Shareholder has not taken, and will not take, directly or indirectly, any action that is designed to or which has constituted or which might reasonably be expected to cause or result in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities.
(vii) Absence of Further Requirements. No filing with, or consent, approval, authorization, order, registration, qualification or decree of, any court or governmental authority or agency, domestic or foreign, is necessary or required for the performance by such Selling Shareholder of its obligations hereunder or in the Power of Attorney and Custody Agreement, or in connection with the sale and delivery of the Securities hereunder or the consummation of the transactions contemplated by this Agreement, except (i) such as may have previously been made or obtained or as may be required under the 1933 Act or the 1933 Act Regulations or state securities laws and (ii) such as have been obtained under the laws and regulations of jurisdictions outside the United States in which the Reserved Securities are offered.
(viii) Certificates Suitable for Transfer. Certificates for all of the Securities to be sold by such Selling Shareholder pursuant to this Agreement, in suitable form for transfer by delivery or accompanied by duly executed instruments of transfer or assignment in blank with signatures guaranteed, have been placed in custody with the
Custodian with irrevocable conditional instructions to deliver such Securities to the Underwriters pursuant to this Agreement.
(ix) No Association with NASD. Except as disclosed in the Registration Statement, neither such Selling Shareholder nor any of his, her or its affiliates directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, or has any other association with (within the meaning of Article I, Section 1(dd) of the By-laws of the NASD), any member firm of the NASD.
(c) Officer's Certificates. Any certificate signed by any officer of the Company or any subsidiaries delivered to the Representative or to counsel for the Underwriters shall be deemed a representation and warranty by the Company to the Underwriters as to the matters covered thereby; and any certificate signed by or on behalf of a Selling Shareholder as such and delivered to the Representative or to counsel for the Underwriters shall be deemed a representation and warranty by such Selling Shareholder to the Underwriters as to the matters covered thereby.
SECTION 2. Sale and Delivery to the Underwriters; Closing.
(a) Initial Securities. On the basis of the representations and warranties
herein contained and subject to the terms and conditions herein set forth, the
Company and each Selling Shareholder, severally and not jointly, agree to sell
to each Underwriter, severally and not jointly, and each Underwriter, severally
and not jointly, agrees to purchase from the Company and each Selling
Shareholder, at the price per ADS set forth in Schedule C, that proportion of
the number of Initial Securities set forth in Schedule B opposite the name of
the Company or each Selling Shareholder, as the case may be, that the number of
Initial Securities set forth in Schedule A opposite the name of such
Underwriter, plus any additional number of Initial Securities that such
Underwriter may become obligated to purchase pursuant to the provisions of
Section 10 hereof, bears to the total number of Initial Securities, subject, in
each case, to such adjustments among the Underwriters as the Representative in
its sole discretion shall make to eliminate any sales or purchases of fractional
securities.
(b) Option Securities. In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, each Selling Shareholder, acting severally and not jointly, hereby grants an option to the Underwriters, severally and not jointly, to purchase up to an additional o ADSs at the same price per ADS set forth in Schedule C less an amount per Ordinary Share represented by such ADSs equal to any dividends or distributions declared by the Company and payable on the Initial Securities but not payable on the Option Securities. The option hereby granted will expire 30 calendar days after the date of the Prospectus and may be exercised from time to time only for the purpose of covering over-allotments by written notice from the Representative to the Company and the Selling Shareholders, and setting forth the aggregate number of Option Securities to be purchased and the date on which such Option Securities are to be delivered, as determined by the Representative but in no event earlier than the Closing Time or, unless the Representative and the Company otherwise agree in writing, not earlier than two or later than ten business days after the date of such notice. If the option is exercised as to all or any portion of the Option Securities, each of the Underwriters, acting severally and not jointly, will purchase that proportion of the total number of Option Securities then being purchased that the number of Initial Securities set forth in Schedule A opposite the name of such Underwriter bears to the total
number of Initial Securities, subject in each case to such adjustments among the Underwriters as the Representative in its sole discretion shall make to eliminate any sales or purchases of fractional shares.
(c) Denominations; Registration; Delivery of ADRs. ADRs evidencing the Securities purchased by the Underwriters hereunder shall be delivered by the Company to the Representative through the facilities of The Depository Trust Company, New York, New York ("DTC"), for the respective accounts of the Underwriters, against payment for the Securities by or on behalf of such Underwriters to the Company and Selling Shareholders of the purchase price therefor by wire transfer through the Federal Wire System in New York in U.S. dollars in immediately available funds to an account designated by the Company.
(d) Time and Date of Deliveries and Payments. The time and date of delivery
of, and payment for, the Initial Securities shall be 9:30 a.m., New York City
time on May o, 2005 (unless postponed in accordance with the provisions of
Section 10), or such other time not later than ten business days after such date
as the Representative and the Company may agree upon in writing (such time and
date of payment and delivery being herein called the "Closing Time"). The time
and date of delivery and payment with respect to the Option Securities shall be
9:30 a.m., New York City time on the date specified by the Representative in a
written notice given by the Representative of an election by the Underwriters'
to purchase such Option Securities, or such other time and date as the
Representative and the Company may agree upon in writing. Any such time and date
for delivery of and payment for the Option Securities, if not the Closing Time,
is herein called a "Time of Delivery."
The documents to be delivered at the Closing Time by or on behalf of the parties hereto pursuant to Section 5 hereof, including any additional documents reasonably requested by the Underwriters pursuant to Section 5(r) hereof, will be delivered at the offices of Simpson Thacher & Bartlett LLP, 7th Floor, ICBC Tower, Three Garden Road, Central, Hong Kong at 8:00 a.m., Hong Kong time, on the day of the Closing Time.
SECTION 3. Covenants of the Company. The Company covenants with each Underwriter as follows:
(a) Compliance with Securities Regulations and Commission Requests. The Company, subject to Section 3(b), will comply with the requirements of Rule 430A or Rule 434, as applicable, and will notify the Representative immediately, and confirm the notice in writing, (i) when any post-effective amendment to the Registration Statement, to the ADR Registration Statement or to the Form 8-A Registration Statement shall become effective, or any supplement to the Prospectus or any amended Prospectus shall have been filed, (ii) of the receipt of any comments from the Commission, (iii) of any request by the Commission for any amendment to the Registration Statement, to the ADR Registration Statement or to the Form 8-A Registration Statement or any amendment or supplement to the Prospectus or for additional information, and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement, the ADR Registration Statement or the Form 8-A Registration Statement or of any order preventing or suspending the use of any preliminary prospectus, or of the suspension of the qualification of the Securities for offering or sale in any jurisdiction, or of the
initiation or threatening of any proceedings for any of such purposes of which the Company is aware. The Company will promptly effect the filings necessary pursuant to Rule 424(b) and will take such steps as it deems necessary to ascertain promptly whether the form of prospectus transmitted for filing under Rule 424(b) was received for filing by the Commission and, in the event that it was not, it will promptly file such prospectus. The Company will use its best efforts to prevent the issuance of any stop order and, if any stop order is issued, to obtain the lifting thereof at the earliest possible moment.
(b) Filing of Amendments. The Company will give the Representative notice of its intention to file or prepare any amendment to the Registration Statement (including any filing under Rule 462(b)), to the ADR Registration Statement or the Form 8-A Registration Statement, any Term Sheet or any amendment, supplement or revision to either the prospectus included in the Registration Statement at the time it became effective or to the Prospectus, whether pursuant to the 1933 Act, the 1934 Act or otherwise, will furnish the Representative with copies of any such documents a reasonable amount of time prior to such proposed filing or use, as the case may be, and will not file or use any such document to which the Representative or counsel for the Underwriters shall object.
(c) Delivery of Registration Statements. The Company has furnished or will deliver to the Representative and counsel for the Underwriters, without charge, signed copies of the Registration Statement, the ADR Registration Statement and the Form 8-A Registration Statement as originally filed and of each amendment thereto (including exhibits filed therewith or incorporated by reference therein) and signed copies of all consents and certificates of experts, and will also deliver to the Representative, without charge, a conformed copy of the Registration Statement, the ADR Registration Statement and the Form 8-A Registration Statement as originally filed and of each amendment thereto (without exhibits) for each of the Underwriters.
(d) Delivery of Prospectus. The Company has delivered to each Underwriter, without charge, as many copies of each preliminary prospectus as each Underwriter reasonably requested, and the Company hereby consents to the use of such copies for purposes permitted by the 1933 Act. The Company will furnish to each Underwriter, without charge, during the period when the Prospectus is required to be delivered under the 1933 Act or the 1934 Act, such number of copies of the Prospectus (as amended or supplemented) as each Underwriter may reasonably request.
(e) Continued Compliance with Securities Laws. The Company will comply with the 1933 Act and the 1933 Act Regulations, the 1934 Act and the 1934 Act Regulations, the rules and regulations of the NASD and the NASDAQ so as to permit the completion of the distribution of the Securities as contemplated in this Agreement and the other Principal Agreements and in the Prospectus. If at any time when a prospectus is required by the 1933 Act to be delivered in connection with sales of the Securities, any event shall occur or condition shall exist as a result of which it is necessary, in the opinion of counsel for the Underwriters or for the Company, to amend the Registration Statement, the ADR Registration Statement, the Form 8-A Registration Statement or amend or supplement the Prospectus in order that the Prospectus will not include any untrue statements of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances, existing at the time it is delivered to a purchaser, or if it shall be necessary, in the opinion of such counsel, at any such
time to amend the Registration Statement, the ADR Registration Statement, the Form 8-A Registration Statement or amend or supplement any Prospectus in order to comply with the requirements of the 1933 Act or the 1933 Act Regulations, or the 1934 Act or the 1934 Act Regulations, the Company will promptly prepare and file with the Commission, subject to Section 3(b), such amendment or supplement as may be necessary to correct such statement or omission or to make the Registration Statement, the ADR Registration Statement, the Form 8-A Registration Statement or the Prospectus comply with such requirements, and the Company will furnish to the Underwriters such number of copies of such amendment or supplement as the Underwriters may reasonably request.
(f) Blue Sky Qualifications. The Company will use its best efforts, in cooperation with the Underwriters, to qualify the Securities for offering and sale under the applicable securities laws of such states and other jurisdictions (within or outside the United States) as the Representative may reasonably designate and to maintain such qualifications in effect for as long as may be necessary to complete the distribution of the Securities, which period shall in no event extend for more than one year from the later of the effective date of the U.S. Registration Statement and any Rule 462(b) Registration Statement; provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not so qualified or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject. In each jurisdiction in which the Securities have been so qualified, the Company will file such statements and reports as may be required by the laws of such jurisdiction to continue such qualification in effect for as long as may be necessary to complete the distribution of the Securities, which period shall in no event extend for more than one year from the effective date of the U.S. Registration Statement and any Rule 462(b) Registration Statement.
(g) Rule 158. The Company will timely file such reports pursuant to the 1934 Act as are necessary in order to make generally available to its securityholders as soon as practicable an earnings statement for the purposes of, and to provide the benefits contemplated by, the last paragraph of Section 11(a) of the 1933 Act.
(h) Use of Proceeds. The Company will use the net proceeds received by it from the sale of the Securities in the manner specified in the Prospectus under "Use of Proceeds."
(i) Compliance with Rule 463. The Company will file with the Commission such reports on Form SR as may be required pursuant to Rule 463 of the 1933 Act Regulations.
(j) Listing. The Company will use its best efforts to effect and maintain the quotation of the ADSs on the NASDAQ and will file with the NASDAQ all documents and notices required by the NASDAQ of companies that are traded on the NASDAQ and quotations for which are reported by the NASDAQ.
(k) Restriction on Sale of Securities. During a period of 180 days from the date of this Agreement (the "Lock-Up Period"), the Company shall not, without the prior written consent of Merrill Lynch, (i) directly or indirectly, dispose of (including without limitation, issue, agree to issue, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly), any Ordinary Shares or ADSs or any security that constitutes the right to receive Ordinary Shares or ADSs or any securities convertible into or exercisable or exchangeable for or repayable with Ordinary Shares or ADSs or file any registration statement under the 1933 Act with respect to any of the foregoing or (ii) enter into any swap agreement or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequences of ownership of the Ordinary Shares or ADSs, whether any such swap agreement or other agreement or transaction described in clause (i) or (ii) above is to be settled by delivery of Ordinary Shares or ADSs or such other securities, in cash or otherwise. The foregoing shall not apply to (A) the Ordinary Shares or ADSs to be sold hereunder, (B) any issuance of Ordinary Shares or ADSs by the Company upon exercise of any options to purchase Ordinary Shares granted pursuant to a duly adopted stock option plan of the Company, provided that such options shall not be exercisable during such 180-day period, and (C) transactions by the Company with the prior written consent of the Representative, which consent shall not be unreasonably withheld. Notwithstanding the foregoing, if (1) during the last 17 days of the Lock-Up Period, the Company issues an earnings release or material news or a material event relating to the Company occurs or (2) prior to the expiration of the Lock-Up Period, the Company announces that it will release earnings results or becomes aware that material news or a material event will occur during the 16-day period beginning on the last day of the Lock-Up Period, the restrictions imposed by this Subsection (k) shall continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event, as applicable, unless the Representative waives, in writing, such extension.
(l) Other Documents. The Company will furnish to the Depositary and to holders of ADRs, directly or through the Depositary, such reports, documents and other information described in the Prospectus under the caption "Description of American Depositary Shares" in accordance with the procedures stated thereunder.
(m) Reporting Requirements. The Company, during the period when any Prospectus is required to be delivered under the 1933 Act or the 1934 Act, will file all documents required to be filed with the Commission pursuant to the 1934 Act within the time periods required by the 1934 Act and the 1934 Act Regulations.
(n) Compliance with NASD Rules. The Company hereby agrees that it will ensure that the Reserved Securities will be restricted as required by the NASD or the rules, regulations and interpretations of the NASD from sale, transfer, assignment, pledge or hypothecation for a period of three months following the date of this Agreement. The Underwriters will notify the Company as to which persons will need to be so restricted. At the request of the Underwriters, the Company will direct the transfer agent to place a stop transfer restriction upon such securities for such period of time. Should the Company release, or seek to release, from such restrictions any of the Reserved Securities, the Company agrees to reimburse the Underwriters for any reasonable expenses (including, without limitation, legal expenses) they incur in connection with such release.
(o) Submission of Documents. The Company agrees to file with the NASD, the NASDAQ, the Commission and any other governmental or regulatory agency, authority or
instrumentality in the Cayman Islands, the United States[, the British Virgin Islands] and the People's Republic of China, as may be required, such reports, documents, agreements and other information which the Company may from time to time be required to file, including those relating to the implementation and payment of dividends or other distributions on the Securities.
(p) Investment Company Act. The Company will not be or become, within one year of the Closing Time, an "investment company" as defined in the 1940 Act.
(q) Stabilization and Manipulation. The Company agrees not to (and to use its best efforts to cause its affiliates not to) take, directly or indirectly, any action which is designed to or which constitutes or that might reasonably be expected to cause or result in stabilization or manipulation of the price of any security of the Company.
(r) Deposit of Ordinary Shares. Prior to the Closing Time and each Time of Delivery, the Company will deposit or cause to be deposited Ordinary Shares with the Depositary in accordance with the provisions of the Deposit Agreement so that the ADRs evidencing the ADSs to be delivered by such party to the Underwriters at such Closing Time or Time of Delivery are executed, countersigned and issued by the Depositary against receipt of such Ordinary Shares and delivered to the Underwriters at such Closing Time or Time of Delivery.
(s) Annual Reports. The Company agrees to furnish to its shareholders as soon as practicable after the end of each fiscal year an annual report in English, including a review of operations and audited consolidated financial statements and a report thereon prepared by the Company's independent accountants in accordance with US GAAP of net income (loss), shareholders' equity and, as necessary, other selected balance sheet and statement of operations items in such financial statements.
(t) Liabilities and Agreements Prior to the Closing Time. The Company agrees that except as disclosed in the Prospectus and except for those which are not material to the Company, prior to the Closing Time, it will not incur any liabilities or enter into any material agreements (except in the ordinary course of its business) without the prior written consent of the Representative.
(u) Cayman Islands Matters. The Company agrees that (A) it will not attempt to avoid any judgment obtained by it or denied to it in a court of competent jurisdiction outside the Cayman Islands; (B) following the consummation of the Offering, it will use its best efforts to obtain and maintain all approvals required in the Cayman Islands to pay and remit outside the Cayman Islands all dividends declared by the Company and payable on the Ordinary Shares; and (C) it will use its best efforts to obtain and maintain all approvals required in the Cayman Islands for the Company to acquire sufficient foreign exchange for the payment of dividends and all other relevant purposes.
(v) Deposit Agreement. The Company agrees to abide by the covenants set forth in the Deposit Agreement.
SECTION 4. Payment of Expenses.
(a) Expenses. The Company will pay all expenses incident to the performance of its obligations under this Agreement, including (i) the preparation, printing and filing of the Registration Statement (including financial statements and exhibits) as originally filed and of each amendment thereto, of the ADR Registration Statement and of each amendment thereto and of the Form 8-A Registration Statement and of each amendment thereto, each preliminary prospectus, any Term Sheet and the Prospectus and any amendments or supplements thereto; (ii) the preparation and delivery to the Underwriters of this Agreement and such other documents as may be required in connection with the offering, purchase, sale, issuance or delivery of the Securities, (iii) the preparation, issuance and delivery of the certificates for the Securities to the Underwriters, including any stock or other transfer taxes and any stamp or other duties payable upon the sale, issuance or delivery of the Securities to the Underwriters, (iv) the delivery of the Ordinary Shares represented by the ADSs to the Depositary, (v) the fees and disbursements of the Company's counsel, accountants and other advisors, (vi) the filing fees in connection the qualification of the Securities under securities laws in accordance with the provisions of Section 3(f) hereof, (vii) the fees and expenses of the Depositary, any transfer agent or registrar, and each custodian, if any, for the Securities, (viii) the fees and the Company's own expenses incurred in connection with the roadshow, (ix) the fees and expenses incurred in connection with the quotation of the ADSs on NASDAQ, (x) the filing fees incident to the review by the NASD of the terms of the sale of the Securities, and (xi) the costs and expenses of the Underwriters, up to $15,000, in connection with matters related to the Reserved Securities that are designated by the Company for sale to directors, officers, employees and associates of the Company, including the fees and disbursements of counsel for the Underwriters.
(b) Expenses of the Selling Shareholders. The Selling Shareholders, severally and not jointly, will pay all expenses incident to the performance of their respective obligations under, and the consummation of the transactions contemplated by this Agreement, including (i) any stamp duties, capital duties and stock transfer taxes, if any, payable upon the sale of the Securities to the Underwriters, and (ii) the fees and disbursements of their respective counsel and accountants, except, as between the Company and the Selling Shareholders, to the extent the Company has agreed with the Selling Shareholders to bear such fees and disbursements.
(c) Termination of Agreement. If this Agreement is terminated by the Representative in accordance with the provisions of Section 5 or Section 9(a)(i) hereof, the Company shall reimburse the Underwriters for all out-of-pocket accountable expenses actually incurred, including the reasonable fees and disbursements of counsel for the Underwriters.
SECTION 5. Conditions of the Underwriters' Obligations. The obligations of the several Underwriters hereunder, as to the ADSs to be delivered at the Closing Time and each Time of Delivery, are subject to the accuracy of the representations and warranties of the Company and the Selling Shareholders contained in Section 1 hereof or in certificates of any officer of the Company or any subsidiary or on behalf of any Selling Shareholder delivered pursuant to the provisions hereof, to the performance by the Company of its covenants and other obligations hereunder, and to the following further conditions.
(a) Effectiveness of Registration Statement. The Registration Statement, including any Rule 462(b) Registration Statement, the ADR Registration Statement and the Form 8-A Registration Statement, has become effective and at such Time of Delivery no stop order suspending the effectiveness of the Registration Statement, the ADR Registration Statement or the Form 8-A Registration Statement shall have been issued under the 1933 Act or the 1934 Act or proceedings therefor initiated or threatened by the Commission, and any request on the part of the Commission for additional information shall have been complied with to the reasonable satisfaction of counsel to the Underwriters. A prospectus containing the Rule 430A Information shall have been filed with the Commission in accordance with Rule 424(b) (or a post-effective amendment providing such information shall have been filed and declared effective in accordance with the requirements of Rule 430A) or, if the Company has elected to rely upon Rule 434, a Term Sheet shall have been filed with the Commission in accordance with Rule 424(b).
(b) Opinion of Cayman Islands Counsel for Company. At Closing Time, the Representative shall have received the opinion, dated as of such Closing Time, of Conyers Dill & Pearman, Cayman Islands counsel for the Company, in form and substance satisfactory to counsel for the Underwriters, together with signed or reproduced copies of such letter for each of the other Underwriters, to the effect set forth in Exhibit A hereto and to such further effect as counsel for the Underwriters may reasonably request.
(c) Opinion of Special U.S. Counsel for Company. At Closing Time, the Representative shall have received the opinion, dated as of such Closing Time, of Latham & Watkins LLP, special U.S. counsel for the Company, in form and substance satisfactory to counsel for the Underwriters, together with signed or reproduced copies of such opinion for each of the other Underwriters, to the effect set forth in Exhibit B hereto and to such further effect as counsel for the Underwriters may reasonably request.
(d) Opinion of Special PRC Counsel for Company. At Closing Time, the Representative shall have received the opinion, dated as of such Closing Time, of Guantao Law Firm, special PRC counsel for the Company, in form and substance satisfactory to counsel for the Underwriters, together with signed or reproduced copies of such letter for each of the other Underwriters, to the effect set forth in Exhibit C hereto and to such further effect as counsel for the Underwriters may reasonably request.
(e) Opinion of BVI Counsel for Company. At Closing Time, the Representative shall have received the opinion, dated as of such Closing Time, of Conyers Dill & Pearman, BVI counsel for the Company, in form and substance satisfactory to counsel for the Underwriters, together with signed or reproduced copies of such letter for each of the other Underwriters, to the effect set forth in Exhibit D hereto and to such further effect as counsel for the Underwriters may reasonably request.
(f) Opinions of Counsel for certain Selling Shareholders. At Closing Time, the Representative shall have received the opinions, dated as of such Closing Time, of counsels for the Selling Shareholders whose names are listed on Schedule E hereto, respectively, in form and substance satisfactory to counsel for the Underwriters, together with signed or reproduced copies
of such letter for each of the other Underwriters to the effect set forth in Exhibit E hereto and to such further effect as counsel for the Underwriters may reasonably request.
(g) Opinion of U.S. Counsel for Underwriters. At Closing Time, the Representative shall have received the favorable opinion, dated as of such Closing Time, of Simpson Thacher & Bartlett LLP, U.S. counsel for the Underwriters, in form and substance satisfactory to the Representative, together with signed or reproduced copies of such letter for each of the other Underwriters.
(h) Opinion of Special PRC Counsel for Underwriters. At Closing Time, the Representative shall have received the favorable opinion, dated as of such Closing Time, of Commerce & Finance Law, special PRC counsel for the Underwriters, in form and substance satisfactory to the Representative, together with signed or reproduced copies of such letter for each of the other Underwriters.
(i) Opinion of Counsel for Depositary. At Closing Time, the Representative shall have received the favorable opinion, dated as of such Closing Time, of Emmet Marvin & Martin LLP, counsel for the Depositary, in form and substance satisfactory to counsel for the Underwriters, together with signed or reproduced copies of such letter for each of the other Underwriters to the effect set forth in Exhibit F hereto and to such further effect as counsel for the Underwriters may reasonably request.
(j) Officers' Certificate. At Closing Time, there shall not have been, since the date hereof or since the respective dates as of which information is given in the Prospectus, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, and the Representative shall have received a certificate of the chief executive officer and chief financial officer of the Company, dated as of the Closing Time, to the effect that (i) there has been no such material adverse change, (ii) the representations and warranties in Section 1(a) hereof are true and correct with the same force and effect as though expressly made at and as of such Closing Time, (iii) the Company has complied with all agreements and satisfied all conditions contained herein on its part to be performed or satisfied at or prior to the Closing Time, and (iv) no stop order suspending the effectiveness of the Registration Statement, the ADR Registration Statement or the Form 8-A Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or, to such officers' knowledge, are contemplated by the Commission.
(k) Certificate of Selling Shareholders. At Closing Time, the Representative shall have received a certificate of an Attorney-in-Fact on behalf of each Selling Shareholder, dated as of the Closing Time, to the effect that (i) the representations and warranties in Section 1(b) hereof are true and correct with the same force and effect as though expressly made at and as of such Closing Time, and (ii) each Selling Shareholder has complied with all agreements and satisfied all conditions contained herein on its part to be performed or satisfied at or prior to the Closing Time.
(l) Accountant's Comfort Letter. At the time of the execution of this Agreement, the Representative shall have received from Deloitte Touche Tohmatsu a letter dated such date, in form and substance satisfactory to the Representative and Deloitte Touche Tohmatsu, together with signed or reproduced copies of such letter for each of the other Underwriters containing statements and information of the type ordinarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectus.
(m) Bring-down Comfort Letter. At Closing Time, the Representative shall have received from Deloitte Touche Tohmatsu a letter, dated as of such Closing Time, to the effect that they reaffirm the statements made in the letter furnished pursuant to subsection (l) of this section, except that the specified date referred to shall be a date not more than five business days prior to such Closing Time.
(n) Approval of Listing. At Closing Time, the ADSs shall have been approved for inclusion in the NASDAQ, subject only to official notice of approval.
(o) No Objection by NASD. At or prior to Closing Time, the NASD shall have confirmed that it has not raised any objection with respect to the fairness and reasonableness of the underwriting terms and arrangements.
(p) Lock-up Agreement. At the date of this Agreement, the Representative shall have received a lock-up agreement substantially in the form of Exhibit G hereto duly signed by each of the persons and entities listed on Schedule D hereto.
(q) Conditions to Purchase of Option Securities. In the event that the Underwriters exercise their option provided in Section 2(b) hereof to purchase all or any portion of the Option Securities, the representations and warranties of the Company and the Selling Shareholders contained herein and the statements in any certificates furnished by the Company, any subsidiary of the Company and the Selling Shareholders hereunder shall be true and correct as of each Time of Delivery and, at the relevant Time of Delivery, the Representative shall have received:
(i) Officers' Certificate. A certificate, dated such Time of Delivery,
of the chief executive officer and chief financial officer of the Company
confirming that the certificate delivered at the Closing Time pursuant to
Section 5(j) hereof remains true and correct as of such Time of Delivery.
(ii) Certificate of Selling Shareholders. A certificate, dated such Time of Delivery, of an Attorney-in-Fact on behalf of each Selling Shareholder confirming that the certificate delivered at the Closing Time pursuant to Section 5(k) hereof remains true and correct as of such Time of Delivery.
(iii) Opinion of Cayman Islands Counsel for Company. The favorable opinion of Conyers Dill & Pearman, Cayman Islands counsel for the Company, in form and substance satisfactory to counsel for the Underwriters, dated such Time of Delivery, relating to the Option Securities to be purchased on such Time of Delivery and otherwise to the same effect as the opinion required by Section 5(b) hereof.
(iv) Opinion of Special U.S. Counsel for Company. The opinion of
Latham & Watkins LLP, special U.S. counsel for the Company, in form and
substance satisfactory to counsel for the Underwriters, dated such Time of
Delivery, relating to the Option Securities to be purchased on such Time of
Delivery and otherwise to the same effect as the opinion required by
Section 5(c) hereof.
(v) Opinion of Special PRC Counsel for Company. The favorable opinion
of Guantao Law Firm, special PRC counsel for the Company, in form and
substance satisfactory to counsel for the Underwriters, dated such Time of
Delivery, relating to the Option Securities to be purchased on such Time of
Delivery and otherwise to the same effect as the opinion required by
Section 5(d) hereof.
(vi) Opinion of Special BVI Counsel for Company(vii). The favorable
opinion of Conyers Dill & Pearman, BVI counsel for the Company, in form and
substance satisfactory to counsel for the Underwriters, dated such Time of
Delivery, relating to the Option Securities to be purchased on such Time of
Delivery and otherwise to the same effect as the opinion required by
Section 5(e) hereof.
(viii) Opinions of Counsels for certain Selling Shareholders. The favorable opinions of counsels for the Selling Shareholders whose names are listed on Schedule E hereto, respectively, in form and substance satisfactory to counsel for the Underwriters, dated such Time of Delivery, relating to the Option Securities to be purchased on such Time of Delivery and otherwise to the same effect as the opinion required by Section 5(f) hereof.
(ix) Opinion of U.S. Counsel for Underwriters. The favorable opinion
of Simpson Thacher & Bartlett LLP, U.S. counsel for the Underwriters, in
form and substance satisfactory to the Underwriters, dated such Time of
Delivery, relating to the Option Securities to be purchased on such Time of
Delivery and otherwise to the same effect as the opinion required by
Section 5(g) hereof.
(x) Opinion of Special PRC Counsel for Underwriters. The favorable opinion of Commerce & Finance Law, special PRC counsel for the Underwriters, in form and substance satisfactory to the Underwriters, dated such Time of Delivery, relating to the Option Securities to be purchased on such Time of Delivery and otherwise to the same effect as the opinion required by Section 5(h) hereof.
(xi) Opinion of Counsel for Depositary. The favorable opinion of Emmet Marvin & Martin LLP, counsel for the Depositary, in form and substance satisfactory to counsel for the Underwriters, dated such Time of Delivery, relating to the Option Securities to be purchased on such Time of Delivery and otherwise to the same effect as the opinion required by Section 5(i) hereof.
(xii) Bring-down Comfort Letter. A letter from Deloitte Touche Tohmatsu, in form and substance satisfactory to the Representative dated such Time of Delivery, substantially in the same form and substance as the letter furnished to the Underwriters pursuant to Section 5(m) hereof, except that the "specified date" in the letter furnished
pursuant to this paragraph shall be a date not more than five business days prior to such Time of Delivery.
(r) Additional Documents. At each Time of Delivery, counsel for the Underwriters shall have been furnished with such documents and opinions as they may reasonably require for the purpose of enabling them to pass upon the issuance and sale of the Securities as herein contemplated, or in order to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Company and the Selling Shareholders in connection with the issuance and sale of the Securities as herein contemplated shall be reasonably satisfactory in form and substance to the Representative and counsel for the Underwriters.
(s) Termination of Agreement. If any condition specified in this
Section shall not have been fulfilled when and as required to be fulfilled,
this Agreement, the Deposit Agreement, or, in the case of any condition to
the purchase of Option Securities at a Time of Delivery which is after the
Closing Time, the obligations of the Underwriters to purchase the relevant
Option Securities, may be terminated by the Representative by notice to the
Company at any time at or prior to the Closing Time or such Time of
Delivery, as the case may be, and such termination shall be without
liability of any party to any other party except as provided in Section 4
and except that Sections 1, 6, 7, 8, 12, 13 and 14 shall survive any such
termination and remain in full force and effect.
SECTION 6. Indemnification.
(a) Indemnification of the Underwriters. The Company agrees to indemnify and hold harmless, jointly and severally with the Selling Shareholders, and the Selling Shareholders agree to indemnify and hold harmless, severally but not jointly with each other or the Company, each Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, the ADR Registration Statement or the Form 8-A Registration Statement or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact included in any preliminary prospectus or the Prospectus (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of (A) the violation of any applicable laws or regulations of foreign jurisdictions where Reserved Securities have been offered and (B) any untrue statement or alleged untrue statement of a material fact included in the supplement or prospectus wrapper material distributed in jurisdictions outside the United States in
connection with the reservation and sale of the Reserved Securities to eligible directors, officers, employees and associates of the Company or the omission or alleged omission therefrom of a material fact necessary to make the statements therein, when considered in conjunction with the Prospectus or preliminary prospectus, not misleading;
(iii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission or in connection with any violation of the nature referred to in Section 6(a)(ii)(A) hereof; provided that (subject to Section 6(d) below) any such settlement is effected with the written consent of the Company; and
(iv) against any and all expense whatsoever, as incurred (including
the fees and disbursements of counsel chosen by Merrill Lynch), reasonably
incurred in investigating, preparing or defending against any litigation,
or any investigation or proceeding by any governmental agency or body,
commenced or threatened, or any claim whatsoever based upon any such untrue
statement or omission, or any such alleged untrue statement or omission or
in connection with any violation of the nature referred to in Section
6(a)(ii)(A) hereof, to the extent that any such expense is not paid under
(i) or (ii) above;
provided, however, that each Selling Shareholder's indemnification obligations under this Section 6 shall only apply to any and all loss, liability, claim, damage and expenses whatsoever, arising out of or are based upon any untrue statement or alleged untrue statement of a material fact relating to such Selling Shareholder contained in the Registration Statement or the Prospectuses or any amendment thereof or supplement thereto, or the omission or alleged omission therefrom of a material fact relating to such Selling Shareholder required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and provided, however, that this indemnity agreement shall not apply to any loss, liability, claim, damage or expense to the extent arising out of any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Company by any Underwriter through the Representative expressly for use in the Registration Statement, the ADR Registration Statement or the Form 8-A Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or any preliminary prospectus or the Prospectus (or any amendment or supplement thereto); provided, further, that this indemnity agreement shall not inure to the benefit of any U.S. Underwriter or any person who controls such U.S. Underwriter on account of any such loss, liability, claim, damage or expense arising out of any such defect or alleged defect in any preliminary prospectus if a copy of the U.S. Prospectus shall not have been given or sent by such U.S. Underwriter with or prior to the written confirmation of the sale involved to the extent that (i) the U.S. Prospectus would have cured such defect or alleged defect and (ii) sufficient quantities of the U.S. Prospectus were timely made available to such U.S. Underwriter; and provided, further, that notwithstanding the foregoing provisions, the aggregate amount of each Selling Shareholder's indemnity obligations under this
Section 6 shall not exceed an amount equal to the net cash proceeds (before deducting expenses) received by such Selling Shareholder from the sale of Securities pursuant to this Agreement.
(b) Indemnification of the Company, Directors and Officers and Selling Shareholders. Each Underwriter severally agrees to indemnify and hold harmless the Company, its directors, each of its officers who signed the Registration Statement, the ADR Registration Statement or the Form 8-A Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, and each Selling Shareholder against any and all loss, liability, claim, damage and expense described in the indemnity contained in subsection (a) of this Section, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement, the ADR Registration Statement or the Form 8-A Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or any preliminary prospectus or the Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Company by such Underwriter through the Representative expressly for use in the Registration Statement, the ADR Registration Statement and the Form 8-A Registration Statement (or any amendment thereto) or such preliminary prospectus or the Prospectus (or any amendment or supplement thereto).
(c) Actions against Parties; Notification. Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability hereunder to the extent it is not materially prejudiced as a result thereof and in any event shall not relieve it from any liability which it may have otherwise than on account of this indemnity agreement. In the case of parties indemnified pursuant to Section 6(a) above, counsel to the indemnified parties shall be selected by the Representative, and, in the case of parties indemnified pursuant to Section 6(b) above, counsel to the indemnified parties shall be selected by the Company. An indemnifying party may participate at its own expense in the defense of any such action; provided, however, that counsel to the indemnifying party shall not (except with the consent of the indemnified party) also be counsel to the indemnified party. In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. No indemnifying party shall, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification or contribution could be sought under this Section 6 or Section 7 hereof (whether or not the indemnified parties are actual or potential parties thereto), unless such settlement, compromise or consent (i) includes an unconditional release of each indemnified party from all liability arising out of such litigation, investigation, proceeding or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party.
(d) Settlement without Consent if Failure to Reimburse. If at any time an
indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 6(a)(iii) effected without its written consent if (i) such settlement is
entered into more than 45 days after receipt by such indemnifying party of the
aforesaid request, (ii) such indemnifying party shall have received notice of
the terms of such settlement at least 30 days prior to such settlement being
entered into and (iii) such indemnifying party shall not have reimbursed such
indemnified party in accordance with such request prior to the date of such
settlement.
(e) Indemnification for Reserved Securities. In connection with the offer and sale of the Reserved Securities, the Company agrees, promptly upon a request in writing, to indemnify and hold harmless the Underwriters from and against any and all losses, liabilities, claims, damages and expenses incurred by them as a result of the failure of eligible directors, officers, employees and associates of the Company to pay for and accept delivery of Reserved Securities which, by the end of the first business day following the date of this Agreement, were subject to a properly confirmed agreement to purchase.
(f) Other Agreements with Respect to Indemnification. The provisions of this Section shall not affect any agreement among the Company and the Selling Shareholders with respect to indemnification.
SECTION 7. Contribution. If the indemnification provided for in Section 6
hereof is for any reason unavailable to or insufficient to hold harmless an
indemnified party in respect of any losses, liabilities, claims, damages or
expenses referred to therein, then each indemnifying party shall contribute to
the aggregate amount of such losses, liabilities, claims, damages and expenses
incurred by such indemnified party, as incurred, (i) in such proportion as is
appropriate to reflect the relative benefits received respectively by the
Company and each of the Selling Shareholders on the one hand and the
Underwriters on the other hand from the offering of the Securities pursuant to
this Agreement or (ii) if the allocation provided by clause (i) is not permitted
by applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company and each of the Selling Shareholders on the one hand and the
Underwriters on the other hand, respectively, in connection with the statements
or omissions, or in connection with any violation of the nature referred to in
Section 6(a)(ii)(A) hereof, that resulted in such losses, liabilities, claims,
damages or expenses, as well as any other relevant equitable considerations.
The relative benefits received respectively by the Company and each of the Selling Shareholders on the one hand and the Underwriters on the other hand in connection with the offering of the Securities pursuant to this Agreement shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the Securities pursuant to this Agreement (before deducting expenses) received respectively by the Company and each of the Selling Shareholders and the total underwriting discount received by the Underwriters, in each case as set forth on the cover of the Prospectus, or, if Rule 434 is used, the corresponding location on the Term Sheet, bear to the aggregate initial public offering price of the Securities as set forth on such cover.
The relative fault of the Company and each of the Selling Shareholders on the one hand and the Underwriters on the other hand shall be determined by reference to, among other things, whether any such untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or each of the Selling Shareholders or by the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission or any violation of the nature referred in on Section 6(a)(ii)(A) hereof.
The Company, the Selling Shareholders and the Underwriters agree that it
would not be just and equitable if contribution pursuant to this Section 7 were
determined by pro rata allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above in this Section
7. The aggregate amount of losses, liabilities, claims, damages and expenses
incurred by an indemnified party and referred to above in this Section 7 shall
be deemed to include any legal or other expenses reasonably incurred by such
indemnified party in investigating, preparing or defending against any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever based upon any such
untrue or alleged untrue statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of any such untrue or alleged untrue statement or omission or alleged omission. Further, the aggregate amount of each Selling Shareholder's contribution obligations under this Section 7 shall not exceed the amount equal to the net proceeds (before deducting expenses) received by such Selling Shareholder from the sale of Securities pursuant to this Agreement.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls an Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as such Underwriter, and each director of the Company, each officer of the Company who signed the Registration Statement, the ADR Registration Statement and the Form 8-A Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as the Company. The Underwriters' respective obligations to contribute pursuant to this Section 7 are several in proportion to the number of Initial Securities set forth opposite their respective names in Schedule A hereto and not joint.
The provisions of this Section shall not affect any agreement among the Company and the Selling Shareholders with respect to contribution.
SECTION 8. Representations, Warranties and Agreements to Survive Delivery. All representations, warranties and agreements contained in this Agreement or in certificates of
officers of the Company or any of its subsidiaries or the Selling Shareholders submitted pursuant hereto shall remain operative and in full force and effect, regardless of any investigation made by or on behalf of any Underwriter or any controlling person, or by or on behalf of the Company or the Selling Shareholders, and shall survive delivery of the Securities to the Underwriters.
SECTION 9. Termination of Agreement.
(a) Termination; General. The Representative may terminate this Agreement, by notice to the Company and the Selling Shareholders, at any time at or prior to the Closing Time (i) if there has been, since the time of execution of this Agreement or since the respective dates as of which information is given in the Prospectus, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, or (ii) if there has occurred, after the date hereof and prior to the Closing Time, any material adverse change in the financial markets in the Cayman Islands, the United States, the People's Republic of China, Asian or international financial markets, any outbreak of hostilities or escalation thereof or other calamity or crisis or any change or development involving a prospective change in national or international political, financial or economic conditions or currency exchange rates or exchange controls, in each case the effect of which is such as to make it, in the judgment of the Representative, impracticable to market the Securities or to enforce contracts for the sale of the Securities, or (iii) if trading in any securities of the Company has been suspended or materially limited by the Commission, NASDAQ, or if trading generally on the American Stock Exchange or the New York Stock Exchange or in NASDAQ has been suspended or materially limited, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices have been required, by any of said exchanges or by such system or by order of the Commission, the NASD or any other governmental authority, or a material disruption has occurred in commercial banking or securities settlement or clearance services in the United States or with respect to Clearstream or Euroclear systems in Europe, or (iv) if a banking moratorium has been declared by the Cayman Islands, People's Republic of China, U.S. federal or New York authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this Section, such termination shall be without liability of any party to any other party except as provided in Section 4 hereof, and provided, further, that Sections 1, 6, 7, 8, 12, 13 and 14 shall survive such termination and remain in full force and effect.
SECTION 10. Default by One or More of the Underwriters. If one or more of the Underwriters shall fail at the Closing Time or a Time of Delivery to purchase the Securities which it or they are obligated to purchase under this Agreement (the "Defaulted Securities"), the Representative shall have the right, within 24 hours thereafter, to make arrangements for one or more of the non-defaulting Underwriters, or any other underwriters, to purchase all, but not less than all, of the Defaulted Securities in such amounts as may be agreed upon and upon the terms herein set forth; if, however, the Representative shall not have completed such arrangements within such 24-hour period, then:
(a) if the number of Defaulted Securities does not exceed 10% of the number of Securities to be purchased on such date, each of the non-defaulting Underwriters shall be
obligated, severally and not jointly, to purchase the full amount thereof in the proportions that their respective underwriting obligations hereunder bear to the underwriting obligations of all non-defaulting Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the number of Securities to be purchased on such date, this Agreement or, with respect to any Time of Delivery which occurs after the Closing Time, the obligation of the Underwriters to purchase and of the Company to sell the Option Securities to be purchased and sold on such Time of Delivery shall terminate without liability on the part of any non-defaulting Underwriter.
No action taken pursuant to this Section shall relieve any defaulting Underwriter from liability in respect of its default.
In the event of any such default that does not result in a termination of
this Agreement or, in the case of a Time of Delivery that is after the Closing
Time, that does not result in a termination of the obligation of the
Underwriters to purchase and the Company [and the Selling Shareholders] to sell
the relevant Option Securities, as the case may be, either the Representative or
the Company shall have the right to postpone the Closing Time or the relevant
Time of Delivery, as the case may be, for a period not exceeding seven days in
order to effect any required changes in the Registration Statement or Prospectus
or in any other documents or arrangements. As used herein, the term
"Underwriters" includes any person substituted for a Underwriter under this
Section 10.
SECTION 11. Default by one or more of the Selling Shareholders or the Company.
(a) Default by Selling Shareholders. If a Selling Shareholder shall fail at Closing Time or at a Date of Delivery to sell and deliver the number of Securities that such Selling Shareholder is obligated to sell hereunder, and the remaining Selling Shareholders do not exercise the right hereby granted to increase, pro rata or otherwise (subject to being exercised only by the applicable Selling Shareholders and not by the Attorney-in-Fact designated by the Selling Shareholders), the number of Securities to be sold by them hereunder to the total number to be sold by all Selling Shareholders as set forth in Schedule B hereto, then the Underwriters may, at option of the Representative, by notice from the Representative to the Company and the non-defaulting Selling Shareholders, either (a) terminate this Agreement without any liability on the fault of any non-defaulting party except that the provisions of Sections 1, 4, 6, 7, 8, 12, 13 and 14 shall remain in full force and effect or (b) elect to purchase the Securities that the non-defaulting Selling Shareholders and the Company have agreed to sell hereunder. No action taken pursuant to this Section 11 shall relieve any Selling Shareholder so defaulting from liability, if any, in respect of such default.
In the event of a default by any Selling Shareholder as referred to in this
Section 11, each of the Representative, the Company and the non-defaulting
Selling Shareholders shall have the right to postpone Closing Time or Date of
Delivery for a period not exceeding seven days in order to effect any required
change in the Registration Statement or Prospectus or in any other documents or
arrangements.
(b) Default by Company. If the Company shall fail at Closing Time to sell
the number of Securities that it is obligated to sell hereunder, then this
Agreement shall terminate without any liability on the part of any nondefaulting
party; provided, however, that the provisions of Sections 1, 4, 6, 7, 8, 12, 13
and 14 shall remain in full force and effect. No action taken pursuant to this
Section shall relieve the Company from liability, if any, in respect of such
default.
SECTION 12. Waiver of Immunities. To the extent that the Company, the Selling Shareholders or any of their respective properties, assets or revenues may have or may hereafter become entitled to, or have attributed to the Company or the Selling Shareholders, any right of immunity, on the grounds of sovereignty or otherwise, from any legal action, suit or proceeding, from the giving of any relief in any such legal action, suit or proceeding, from setoff or counterclaim, from the jurisdiction of any Cayman Islands, New York or U.S. federal court, from service of process, from attachment upon or prior to judgment, from attachment in aid of execution of judgment, or from execution of judgment, or other legal process or proceeding for the giving of any relief or for the enforcement of any judgment, in any such court in which proceedings may at any time be commenced, with respect to the obligations and liabilities of the Company or the Selling Shareholders, or any other matter under or arising out of or in connection with, the Principal Agreements or any of them, the Company and the Selling Shareholders hereby irrevocably and unconditionally waive or will waive such right to the extent permitted by law, and agree not to plead or claim, any such immunity and consents to such relief and enforcement.
SECTION 13. Consent to Jurisdiction; Appointment of Agent for Service of Process.
(a) Consent to Jurisdiction. The Company and the Selling Shareholders, by their execution and delivery of this Agreement, hereby irrevocably consent and submit to the nonexclusive jurisdiction of any New York Court in personam generally and unconditionally in respect of any such suit or proceeding.
(b) Appointment of Agent for Service of Process. The Company and the Selling Shareholders further, by their execution and delivery of this Agreement, irrevocably designate, appoint and empower CT Corporation System, 111 Eighth Avenue, New York, New York as their designee, appointee and authorized agent (the "Authorized Agent") to receive for and on their behalf service of any and all legal process, summons, notices and documents that may be served in any action, suit or proceeding brought against the Company or Selling Shareholders, respectively, with respect to their obligations, liabilities or any other matter arising out of or in connection with this Agreement and that may be made on the Authorized Agent in accordance with legal procedures prescribed for such courts, and it being understood that the designation and appointment of CT Corporation System as the Authorized Agent shall become effective immediately without any further action on the part of the Company or the Selling Shareholders. Each of the Company and the Selling Shareholders represents to each Underwriter that it has notified CT Corporation System of such designation and appointment and that CT Corporation System has accepted the same. The Company and Selling Shareholders further agree that, to the extent permitted by law, proper service of process upon CT Corporation System (or its successors as agent for service of
process) and written notice of said service to the Company or Selling Shareholders pursuant to Section 15, shall be deemed in every respect effective service of process upon the Company or Selling Shareholders, respectively, in any such suit or proceeding. If for any reason such designee, appointee and agent hereunder shall cease to be available to act as such, the Company and Selling Shareholders agree to designate a new designee, appointee and agent in The City of New York, New York on the terms and for the purposes of this Section 13 reasonably satisfactory to the Representative. The Company and Selling Shareholders further hereby irrevocably consent and agree to the service of any and all legal process, summons, notices and documents in any such action, suit or proceeding against the Company or Selling Shareholders, respectively, by serving a copy thereof upon the relevant agent for service of process referred to in this Section 13 (whether or not the appointment of such agent shall for any reason prove to be ineffective or such agent shall accept or acknowledge such service) and by mailing copies thereof by registered or certified air mail, postage prepaid, to the Company or Selling Shareholders, respectively, at the addresses specified in or designated pursuant to this Agreement. The Company and Selling Shareholders agree that the failure of any such designee, appointee and agent to give any notice of such service to them shall not impair or affect in any way the validity of such service or any judgment rendered in any action or proceeding based thereon. Nothing herein shall in any way be deemed to limit the ability of the Underwriters and the other persons referred to in Sections 6 and 7 to serve any such legal process, summons, notices and documents in any other manner permitted by applicable law or to obtain jurisdiction over the Company or the Selling Shareholders or bring actions, suits or proceedings against the Company or Selling Shareholders in such other jurisdictions, and in such manner, as may be permitted by applicable law. The Company and Selling Shareholders hereby irrevocably and unconditionally waive, to the fullest extent permitted by law, any objection that they may now or hereafter have to the laying of venue of any of the aforesaid actions, suits or proceedings arising out of or in connection with this Agreement brought in any New York Court and hereby further irrevocably and unconditionally waive and agree not to plead or claim in any such court that any such action, suit or proceeding brought in such court has been brought in an inconvenient forum.
SECTION 14. Judgment Currency. The Company and the Selling Shareholders agree to indemnify each Underwriter and each person, if any, who controls such Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, and each Underwriter severally agrees to indemnify the Company, its directors, each of its officers who signed the Registration Statement, the ADR Registration Statement and the Form 8-A Registration Statement, the Selling Shareholders and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, against any loss incurred, as incurred, as a result of any judgment being given in connection with this Agreement, the Prospectus, the Registration Statement, the ADR Registration Statement or the Form 8-A Registration Statement for which indemnification is provided by such person pursuant to Section 6 of this Agreement and any such judgment or order being paid in a currency (the "Judgment Currency") other than US dollars as a result of any variation as between (i) the spot rate of exchange in New York at which the Judgment Currency would have been convertible into US dollars as of the date such judgment or order is entered, and (ii) the spot rate of exchange at which the indemnified party is first able to purchase US dollars with the amount of the Judgment Currency actually received by the indemnified party. If, alternatively, the indemnified party receives a profit as a result of such currency conversion, it will return any such profits to the indemnifying party (after taking into account any taxes or other costs arising in connection with such conversion and repayment). The foregoing indemnity shall constitute a separate and independent, several and not joint, obligation of the Company, the Selling Shareholders and the
Underwriters and shall continue in full force and effect notwithstanding any such judgment or order as aforesaid. The term "spot rate of exchange" shall include any premiums and costs of exchange payable in connection with the purchase of, or conversion into, the relevant currency.
SECTION 15. Notices. All notices and other communications hereunder shall
be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
Underwriters shall be directed to the Representative care of Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Two World Financial Center, 250 Vesey
Street, New York, New York 10281, attention of Equity Capital Markets; notices
to the Company shall be directed to it at 3/F M8 West No. 1 Jiu Xian Qiao Dong
Road, Chao Yang District, Beijing 100016, People's Republic of China, attention:
Chief Financial Officer; and notices to the Selling Shareholders shall be
directed at the Selling Shareholders' respective addresses set forth on Schedule
F hereto.
SECTION 16. Parties. This Agreement shall each inure to the benefit of and be binding upon the Underwriters, the Company the Selling Shareholders and their respective successors. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person, firm or corporation, other than the Underwriters, the Company and the Selling Shareholders and their respective successors and the controlling persons and officers and directors referred to in Sections 6 and 7 and their heirs and legal representatives, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein contained. This Agreement and all conditions and provisions hereof are intended to be for the sole and exclusive benefit of the Underwriters, the Company and the Selling Shareholders and their respective successors, and said controlling persons and officers and directors and their heirs and legal representatives, and for the benefit of no other person, firm or corporation. No purchaser of Securities from any Underwriter shall be deemed to be a successor by reason merely of such purchase.
SECTION 17. Governing Law and Time. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. EXCEPT AS MAY BE OTHERWISE SET FORTH HEREIN, SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME.
SECTION 18. Effect of Headings. The Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof.
SECTION 19. Definitions. For purposes of this Agreement, (a) "business day" means any day other than Saturday or Sunday that is not a day on which banking institutions in New York are generally authorized or obligated by law or executive order to close and (b) "subsidiary" has the meaning set forth in Rule 405 under the 1933 Act Regulations.
SECTION 20. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all counterparts shall together constitute one and the same Agreement.
If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Company a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement among the Underwriters, the Company and the Selling Shareholders in accordance with its terms.
Very truly yours,
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
Title:
ATTORNEY-IN-FACT FOR SELLING
SHAREHOLDERS
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By: Merrill Lynch, Pierce, Fenner & Smith Incorporated
For themselves and as Representative of
the other Underwriters named in
Schedule A hereto
Schedule A
LIST OF UNDERWRITERS
Number of Initial Securities Name of Underwriter (in the form of ADSs) ------------------- ---------------------------- Merrill Lynch, Pierce, Fenner & Smith Incorporated...................................... o Lehman Brothers Inc............................................... o CIBC World Markets Corp........................................... o ------------- Total......................................................... o ============= |
Sch A-1
Schedule B
LIST OF COMPANY AND SELLING SHAREHOLDERS
Maximum Number of Number of Initial Option Securities Securities to be Sold to Be Sold --------------------- ------------------ China Techfaith Wireless Communication Technology Limited o -- Stone Column Assets Limited.......................... o o HTF 7 Limited........................................ o o Intel Capital Corporation............................ o o SeaBright China Special Opportunities (1) Limited.... o o Fortune Ideal Capital Inc............................ o o Global Strategic Investment Inc...................... o o Kebo Wu.............................................. o o Capital Group Resources.............................. o o Iek Ngan............................................. o o Siu Hong Chow........................................ o o QUALCOMM Incorporated................................ o o Chong Keung So....................................... o o Financiere Natexis Singapore 2 Pte Ltd............... o o Modern Ray Limited................................... o o Total................................................ o o |
Sch B-1
Schedule C
OFFERING PRICE
CHINA TECHFAITH WIRELESS COMMUNICATION TECHNOLOGY LIMITED
o American Depositary Shares, each representing 15 Ordinary Shares
(Par Value $0.00002 Per Ordinary Share)
1. The initial public offering price per share for the Securities, determined as provided in said Section 2, shall be $o.
2. The purchase price per share for the Securities to be paid by the several Underwriters shall be $o, being an amount equal to the initial public offering price set forth above less $o per share; provided that the purchase price per share for any Option Securities purchased upon the exercise of the over-allotment option described in Section 2(b) shall be reduced by an amount per share equal to any dividends or distributions declared by the Company and payable on the Initial Securities but not payable on the Option Securities.
Sch C-1
Schedule D
LIST OF PERSONS AND ENTITIES SUBJECT TO LOCK-UP
Defu Dong
Baozhunag Huo
Cangsong Liu
Changke He
Stone Column Assets Limited
Crossvine Assets Limited
HTF 7 Limited
Intel Capital Corporation
SeaBright China Special Opportunities (1) Limited
Fortune Ideal Capital Inc.
Global Strategic Investment Inc.
Kebo Wu
Capital Group Resources
Iek Ngan
Siu Hong Chow
QUALCOMM Incorporated
Chong Keung So
Financiere Natexis Singapore 2 Pte Ltd.
Modern Ray Limited
Investec Bank (UK) Limited
Sch D-1
Schedule E
LIST OF SELLING SHAREHOLDERS PROVIDING AN OPINION OF COUNSEL
Stone Column Assets Limited
HTF 7 Limited
Intel Capital Corporation
SeaBright China Special Opportunities (I) Limited
Fortune Ideal Capital Inc.
Global Strategic Investment Inc.
Capital Group Resources
QUALCOMM Incorporated
Financiere Natexis Singapore 2 Pte Ltd.
Modern Ray Limited
Sch E-1
Schedule F
NOTICE ADDRESSES OF SELLING SHAREHOLDERS
[PLEASE CONFIRM]
Stone Column Assets Limited
[Address]
Attention: _________________
HTF 7 Limited
Strathvale House
North Church Street
P.O. Box 1109
George Town, Grand Cayman
Cayman Islands
Attention: _____________________
Intel Capital Corporation
2200 Mission College Blvd
Santa Clara, CA 95052
U.S.A.
Attention: ___________________
SeaBright China Special Opportunities (1) Limited 125 Main Street P.O. Boax 144 Road Tonoy, Tortola British Virgin Islands
Attention: ___________________
Fortune Ideal Capital Inc. c/o TTC Trident Chambers P.O. Box 146 Road Town, Tortola British Virgin Islands
Attention: ___________________
Sch F-1
Global Strategic Investment Inc. 4th Floor No. 65 Tun Hwa South Road, Sec. 2 Taipei 106 Taiwan, Republic of China
Attention: ___________________
Kebo Wu Room 1909, 19/F Hutchinson House 10 Harcourt Road, Central Hong Kong
Capital Group Resources 39/F Two International Finance Centre 8 Finance Street Hong Kong
Attention: ___________________
Iek Ngan Rua de Foshan No. 51, Edif. San Kin Yip Centro Commercial 17 andar Macau
Siu Hong Chow Room 1909, 19/F Hutchinson House 10 Harcourt Road, Central Hong Kong
QUALCOMM Incorporated S775 Morehouse Drive San Diego, CA 92121 U.S.A
Attention: ___________________
Sch F-2
Chong Keung So Room 4903, 49/F Office Tower Hong Kong Convention and Exhibition Plaza 1 Harbour Road, Wanchai Hong Kong
Financiere Natexis Singapore 2 Pte Ltd.
1 Temasek Avenu #27-01
Millenia Tower
Singapore 039192
Attention: ___________________
Modern Ray Limited
Sea Meadow House
Blackburne Highway
P.O. Box 116
Road Town, Tortola
British Virgin Islands
Attention: ___________________
Sch F-3
Exhibit A
FORM OF OPINION OF COMPANY'S CAYMAN ISLANDS COUNSEL
TO BE DELIVERED PURSUANT TO SECTION 5(b)
(i) The Company has been duly incorporated and is validly existing under the laws of the Cayman Islands and is validly existing as an exempted company and in good standing (meaning that it has not failed to make any filing with any Cayman Islands government authority or to pay any Cayman Islands government fee or tax which might make it liable to be struck off the Register of Companies and thereby cease to exist under the laws of the Cayman Islands) and has the corporate power and authority required to carry on its business and to own, lease and operate its properties in accordance with its memorandum of association and as described in the Prospectus.
(ii) The Company has the authorized and issued share capital set forth in the Registration Statement and the Prospectus. All of the issued Ordinary Shares of the Company have been duly authorised and validly issued and are fully paid and non-assessable (meaning that no further sums are payable to the Company on such shares) and are not subject to any pre-emptive or similar rights under the articles of association of the Company.
(iii) The Ordinary Shares to be issued and sold by the Company under the Underwriting Agreement have been duly authorized, and when issued and delivered by the Company to the Underwriters pursuant to the Underwriting Agreement against payment in full of the consideration set forth in the Underwriting Agreement, will have been validly issued, fully paid and non-assessable (meaning that no further sums are payable to the Company on such Ordinary Shares) and such Ordinary Shares will not be subject to any pre-emptive or similar rights under the articles of association of the Company.
(iv) The Ordinary Shares to be issued and delivered by the Company pursuant to the Underwriting Agreement and Deposit Agreement (collectively, the "Transaction Documents") against payment in full of the consideration set forth therein will have been validly issued, fully paid and non-assessable (meaning that no further sums are payable to the Company on such shares) when issued and delivered in accordance with the Underwriting Agreement and Deposit Agreement.
(v) Based solely on such counsel's review of the certified register of members as at the date of its opinion, relevant board resolutions and share transfer forms, (1) the Selling Shareholders are the registered holders of such number of Ordinary Shares set out in the schedule to the opinion immediately prior to their transfer to the Depositary and (2) all Ordinary Shares to be deposited by the Selling Shareholders (the "Sale Shares") with the Depositary by way of share transfers pursuant to the terms of the Underwriting Agreement and the Deposit Agreement have been duly authorized, are validly issued, fully paid and non-assessable (meaning that no further sums are payable to the Company on the Sale Shares) and legal title to the Sale Shares has been duly transferred to the Depositary.
(vi) The Company has the necessary corporate power and authority to enter into and perform its obligations under the Transaction Documents. The issue and sale of the Ordinary Shares, the execution and delivery of the Transaction Documents by the Company and the performance by the Company of its obligations thereunder will not violate the Memorandum or Articles of Association of the Company nor any applicable law, regulation, order or decree in the Cayman Islands.
(vii) The Company has taken all corporate action required to authorise its execution,
delivery and performance of the Transaction Documents. The Transaction Documents have been duly executed and delivered by or on behalf of the Company, and constitute valid and binding obligations of the Company enforceable in accordance with the terms thereof.
(viii) No order, consent, approval, licence, authorisation or validation of or exemption by any government or public body or authority of the Cayman Islands or any sub-division thereof is required to authorize or is required in connection with the issue and sale of the shares and the ADSs, the deposit of the Ordinary Shares with the Depositary against issuance of the ADRs evidencing the ADSs and the execution, delivery, performance and enforcement of the Transaction Documents, issue and delivery of the Ordinary Shares and the payment of any amount under the Underwriting Agreement and the Deposit Agreement (other than court filings if legal proceedings are brought in the Cayman Islands).
(ix) It is not necessary or desirable to ensure the enforceability, legality, validity or admissibility in evidence in the Cayman Islands of the Transaction Documents that they be registered in any register kept by, or filed with, any governmental authority or regulatory body in the Cayman Islands (other than court filings in the ordinary course of proceedings).
(x) There is no stamp, registration or similar tax or duty to be paid on or in relation to any of the Transaction Documents provided that they are executed and remain outside the Cayman Islands. If it becomes necessary to bring any of the Transaction Documents into the Cayman Islands for enforcement or otherwise, nominal stamp duty will be payable on such Transaction Documents. Apart from the payment of stamp duty and court filing fees if the ordinary course of court proceedings, there are no acts, conditions or things required by the laws and regulations of the Cayman Islands to be done, fulfilled or performed in order to make any of the Transaction Documents admissible in evidence in the Cayman Islands.
(xi) The statements in the Prospectus under the captions "Description of Share Capital," "Dividend Policy" "Management," "Taxation," "Enforceability of Civil Liabilities," "Principal and Selling Shareholders" and "Capitalization" insofar and to the extent that they constitute a summary or description of the laws and regulations of the Cayman Islands, are true and correct in all respects and nothing has been omitted from such statements which would make them misleading in any material respect.
(xii) The Registration Statement, the Prospectus and the ADS Registration Statement and the filing of the Registration Statement and the ADS Registration Statement with the SEC have been duly authorised by and on behalf of the Company, and the Registration Statement and the ADSs Registration Statement have been duly executed pursuant to such authorisation by and on behalf of the Company.
(xiii) Except as described in the Prospectus, no taxes, imposts or duties
of any nature (including, without limitation, stamp or other issuance or
transfer taxes or duties and capital gains, income, withholding or other taxes)
are payable by or on behalf of the Underwriters to the Cayman Islands or any
political subdivision or taxing authority thereof or therein in connection with
(i) the allotment, issuance, and initial sale of the Ordinary Shares or the
ADSs; (ii) the initial sale of the Ordinary Shares and ADSs to the Underwriters
in the manner contemplated in the Transaction Documents; (iii) the resale and
delivery of the Ordinary Shares and ADSs by the
Underwriters in the manner contemplated in the Prospectus; (iv) the declaration and payment of dividends on the Ordinary Shares; (v) the entering of the Depositary as the registered holder of the Ordinary Shares; or (vi) the deposit with the Depositary of Ordinary Shares by the Company and the Selling Shareholders against the issuance of ADRs evidencing the ADSs.
(xiv) All dividends and other distributions declared and payable on the Ordinary Shares of the Company may under the current laws and regulations of the Cayman Islands be paid to the Depositary as the registered holder of the Ordinary Shares and where they are to be paid from the Cayman Islands are freely transferred out of the Cayman Islands.
(xv) The choice of New York law as the governing law of the Transaction Documents is a valid choice of law and would be recognised and given effect to in any action brought before a court of competent jurisdiction in the Cayman Islands, except for those laws (i) which such court considers to be procedural in nature, (ii) which are revenue or penal laws or (iii) the application of which would be inconsistent with public policy, as such term is interpreted under the laws of the Cayman Islands. The submission in the Transaction Documents to the non-exclusive jurisdiction of the New York courts is valid and binding upon the Company. The Company can sue and be sued in its own name under the laws of the Cayman Islands.
(xvi) The courts of the Cayman Islands would recognize as a valid judgment, a final and conclusive judgment in personam obtained in the New York courts against the Company based upon the Transaction Documents under which a sum of money is payable (other than a sum of money payable in respect of multiple damages, taxes or other charges of a like nature or in respect of a fine or other penalty) and would give a judgment based thereon provided that (a) such courts had proper jurisdiction over the parties subject to such judgment; (b) such courts did not contravene the rules of natural justice of the Cayman Islands; (c) such judgment was not obtained by fraud; (d) the enforcement of the judgment would not be contrary to the public policy of the Cayman Islands; (e) no new admissible evidence relevant to the action is submitted prior to the rendering of the judgment by the courts of the Cayman Islands; and (f) there is due compliance with the correct procedures under the laws of the Cayman Islands.
(xvii) Based solely upon a search of the Register of Writs and other
Originating Process of the Grand Court of the Cayman Islands conducted at [o]
[a.m./p.m.] on [o], 2005 (which would not reveal details of matters which have
been filed but not actually entered in the Register of Writs and other
Originating Process at the time of our search), no legal or governmental
proceedings were pending against the Company or any property of the Company and
no petitions to wind up the Company had been filed in the Grand Court of the
Cayman Islands as at the date and time of our search.
(xviii) The Transaction Documents are in an acceptable legal form under the laws of the Cayman Islands for enforcement thereof against the Company in the Cayman Islands in accordance with its terms.
(xix) There is no exchange control legislation under Cayman Islands law and accordingly there are no exchange control regulations imposed under Cayman Islands law.
(xx) The Company is not entitled to any immunity under the laws of the Cayman
Islands, whether characterised as sovereign immunity or otherwise, from any legal proceedings to enforce the Transaction Documents in respect of itself or its property.
(xxi) The Underwriters has standing to bring an action or proceedings before the appropriate courts in the Cayman Islands for the enforcement of the Transaction Documents. It is not necessary or advisable in order for the Underwriters to enforce its rights under the Transaction Documents, including the exercise of remedies thereunder, that it be licensed, qualified or otherwise entitled to carry on business in the Cayman Islands.
(xxii) The appointment of CT Corporation System to accept service of process in the New York courts and the waiver by the Company of any objection to the venue of a proceeding in the New York courts pursuant to the Deposit Agreement and Underwriting Agreement is legal, valid and binding on the Company.
(xxiii) The form of certificate used to evidence the Ordinary Shares complies with all applicable statutory requirements, with any applicable requirements of the Memorandum and Articles of Association of the Company.
Exhibit B
FORM OF OPINION OF COMPANY'S U.S. COUNSEL
TO BE DELIVERED PURSUANT TO SECTION 5(c)
(i) Assuming the Underwriting Agreement has been duly authorized, executed and delivered by the Company in accordance with the laws of the Cayman Islands, the Underwriting Agreement has been duly executed and delivered by the Company to the extent such execution and delivery are governed by the laws of the State of New York.
(ii) Assuming the Deposit Agreement has been duly authorized, executed and delivered by the Company in accordance with the laws of the Cayman Islands, the Deposit Agreement has been duly executed and delivered by the Company and, assuming due authorization, execution and delivery by the Depositary, constitutes a valid and legally binding obligation of the Company, enforceable in accordance with its terms, except that the enforcement thereof may be subject to (a) bankruptcy, insolvency, reorganization and other laws of general applicability now or hereinafter in effect relating to or affecting creditors' rights generally, (b) general equity principles and the discretion of the court before which any proceeding therefor may be brought (regardless of whether such enforceability is considered in a proceeding in equity or at law), and (c) an implied covenant of good faith and fair dealing, and except as rights of indemnification and contribution, if any, may be limited by principles of public policy and applicable law.
(iii) Upon the due issuance by the Depositary of ADSs evidenced by ADRs against the deposit of Ordinary Shares in accordance with the Deposit Agreement, such ADSs will be validly issued and persons in whose names such ADRs are duly registered will be entitled to the rights specified therein and in the Deposit Agreement.
(iv) The execution and delivery of the Underwriting Agreement and the Deposit Agreement by the Company do not violate any federal or New York statute, rule or regulation, and do not result in the breach of or a default under any agreement that is known to such counsel and that is governed by the U.S. federal laws or the laws of the State of New York and to which the Company or any of its subsidiaries is a party.
(v) Each of the Registration Statements has become effective under the Act and, to the best of our knowledge, no stop order suspending the effectiveness of the Registration Statements has been issued under the Act and no proceedings therefor have been initiated by the Commission; and any required filing of the Prospectus pursuant to Rule 424(b) under the Act has been made in accordance with Rule 424(b) under the Act.
(vi) Each Registration Statement, as of the date it was declared effective, and the Prospectus, as of its date, complied as to form in all material respects with the applicable requirements for registration statements on Form F-1 and Form F-6 under the Act and the rules and regulations of the Commission thereunder; it being understood, however, that we express no opinion with respect to Regulation S-T or the financial statements, schedules or other financial data included in, or omitted from, the Registration Statements or the Prospectus. In passing upon the compliance as to form of the Registration Statements and the Prospectus, such counsel has
assumed that the statements made therein are correct and complete.
(vii) The statements set forth in the Prospectus under the captions "Description of American Depositary Shares" and "Shares Eligible for Future Sale," insofar as they purport to describe or summarize certain provisions of the agreements, statutes or regulations referred to therein, are accurate descriptions or summaries in all material respects.
(viii) No consent, approval, authorization, order, registration or qualification of or with any federal or New York governmental agency or body or, to our knowledge, any federal or New York court is required for the compliance by the Company with all of the provisions of the Underwriting Agreement, except for (a) the registration under the Act and the Securities Exchange Act of 1934, as amended, of the ADSs, (b) such consents, approvals, authorizations, registrations or qualifications as may be required under state securities or Blue Sky laws in connection with the purchase and distribution of the ADSs by the Underwriters as contemplated in the Underwriting Agreement, and (c) such as are required by the National Association of Securities Dealers.
(ix) The Company is not an "investment company" or an entity "controlled" by an "investment company," as such terms are defined in the Investment Company Act of 1940, as amended.
(x) Under the laws of the State of New York relating to personal jurisdiction, (a) each of the Company and the Selling Shareholders has, under the Underwriting Agreement, validly submitted to the personal jurisdiction of any state or federal court located in the State of New York, County of New York in any action arising out of or relating to the Underwriting Agreement, and the transactions contemplated therein and has validly and effectively waived any objection to the venue of a proceeding in any such court as provided in Section 13 of the Underwriting Agreement, (b) its appointment thereunder of CT Corporation Systems as its authorized agent for service of process is valid, legal and binding, and (c) service of process in the matter set forth in Section 13 of the Underwriting Agreement is effective to confer valid personal jurisdiction over the Company and the Selling Shareholders.
(xi) Under the laws of the State of New York relating to personal jurisdiction, (a) the Company has, under the Deposit Agreement, validly submitted to the personal jurisdiction of any state or federal court located in the State of New York, County of New York in any action arising out of or relating to the Deposit Agreement and the transactions contemplated therein and has validly and effectively waived any objection to the venue of a proceeding in any such court as provided in Section 7.7 of the Deposit Agreement, (b) its appointment thereunder of CT Corporation Systems as its authorized agent for service of process is valid, legal and binding, and (c) service of process in the matter set forth in Section 7.7 of the Deposit Agreement is effective to confer valid personal jurisdiction over the Company.
(xii) Under the laws of the State of New York relating to choice of law, the Company has validly chosen New York law to govern its rights and duties under the Underwriting Agreement and the Deposit Agreement
(xiii) To the best of such counsel's knowledge, there are no contracts, documents or franchises of a character required to be described in the Registration Statements or the Prospectus or to be filed as exhibits to the Registration Statements that are not described or filed as required.
(xiv) Subject to certain assumptions and qualifications, upon indication by book entry that the ADSs sold by the Company and the Selling Shareholders as listed on Schedule B to the Underwriting Agreements (the "Securities") have been credited to a securities account maintained by the Representative at the Depository Trust Company ("DTC") and payment therefor in accordance with the Underwriting Agreement,
the Representative will acquire a securities entitlement on behalf of the several Underwriters with respect to the Securities and, under the NY UCC, an action based on an adverse claim to such securities entitlement, whether framed in conversion, replevin, constructive trust, equitable lien or other theory, may not be asserted against the Representative.
(xv) Based on such facts and subject to the limitations set forth in the Prospectus, it is such counsel's opinion that the statements in the Prospectus under the caption "Taxation - United States Federal Income Taxation," insofar as they purport to summarize certain provisions of the statutes and regulations referred to therein, are accurate summaries in all material respects.
(xvi) Based on such counsel's participation, review and reliance as described in its disclosure letter, such counsel advises the Underwriters that no facts came to its attention that caused it to believe that either of the Registration Statements, at the time it became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus, as of its date, contained an untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; it being understood that such counsel expresses no belief with respect to the financial statements, schedules, or other financial data included in, or omitted from, the Registration Statements or the Prospectus.
Exhibit C
FORM OF OPINION OF COMPANY'S PEOPLE'S REPUBLIC OF CHINA COUNSEL
TO BE DELIVERED PURSUANT TO SECTION 5(d)
(i) Each of Techfaith Wireless Communication Technology (Beijing) Limited
("Techfaith China"), Techfaith Wireless Communication Technology (Beijing)
Limited II ("Techfaith Beijing"), Techfaith Wirelss Communication Technology
(Shanghai) Limited ("Techfaith Shanghai") ("Techfaith Shanghai") and STEP
Technologies (Beijing) Co., Ltd. ("STEP Technologies") (each, a "PRC Subsidiary"
and together, the "PRC Subsidiaries") is a company duly incorporated with
limited liability and validly existing in good standing under the laws of the
People's Republic of China (the "PRC"). No steps have been or are being taken
and no order or resolution has been made or passed to appoint a receiver,
liquidator or similar officer of, or to wind up or dissolve, any PRC Subsidiary.
(ii) All of the issued shares of capital stock of each PRC Subsidiary have been duly and validly authorized and issued and are fully paid and non-assessable. All of the issued shares of capital stock of Techfaith China, Techfaith Beijing and Techfaith Shanghai are owned indirectly by Techfaith Wireless Communication Technology Limited ("Techfaith Wireless"), and 70% of the issued shares of capital stock of STEP Technologies are owned directly by Techfaith Wireless, free and clear of all liens, encumbrances, equities or claims. The remaining 30% of the issued shares of capital stock of STEP Technologies are owned directly by NEC. The liability of Techfaith Wireless in respect of equity interests in each PRC Subsidiary is limited to its investments therein.
(iii) Each PRC Subsidiary possesses adequate certificates, authorities, approvals, licenses or permits issued by appropriate governmental agencies or bodies in the PRC necessary to conduct its business as presently conducted and as proposed to be conducted.
(iv) Each PRC Subsidiary possesses valid licenses in full force and effect or otherwise have the legal right to use, or can acquire on reasonable terms, all material patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks and trade names or other intellectual property necessary to carry on the business now operated by them, and none of the PRC Subsidiaries has received any notice of infringement of or conflict with asserted rights of others with respect to any of the foregoing that, individually or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a Material Adverse Effect.
(v) To the best of such counsel's knowledge, there is not pending or threatened any action, suit, proceeding, inquiry or investigation, to which the Company or any subsidiary is a party, or to which the property of the Company or any subsidiary is subject, before or brought by any court or governmental agency or body in the PRC, that might reasonably be expected to result in a Material Adverse Effect, or which might reasonably be expected to materially and adversely affect the properties or assets thereof or the consummation of the transactions contemplated in the Underwriting Agreement or the performance by the Company of its obligations thereunder.
(vi) All descriptions in the Registration Statement and the Prospectus of contracts and other documents to which any PRC subsidiary is a party are accurate in all material respects; to the best of such counsel's knowledge.
(vii) To the best of such counsel's knowledge after due inquiry, there are no outstanding guarantees or contingent payment obligations of the PRC Subsidiaries in respect of indebtedness of third parties except as disclosed in the Prospectus.
(viii) To the best of such counsel's knowledge after due inquiry, the PRC Subsidiaries are not (A) in violation of their respective Articles of Association, business licenses and any other constituent documents or (B) in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any indenture, mortgage, deed of trust, loan agreement, lease or other agreement or instrument known to such counsel and to which any of the PRC Subsidiaries are a party or by which any of their respective properties may be bound.
(ix) To best of such counsel's knowledge after due inquiry, there is no pending or threatened PRC regulatory, administrative or other governmental initiative that, if implemented or adopted in the manner proposed or contemplated, would have a material adverse effect on the operations of any PRC Subsidiary in the PRC in the manner presently conducted or as disclosed in the Prospectus.
(x) The execution, delivery and performance of the Underwriting Agreement and the Deposit Agreement and the consummation of the transactions contemplated in the Underwriting Agreement, the Deposit Agreement and in the Registration Statement (including the issuance and sale of the Securities and the use of the proceeds from the sale of the Securities as described in the Prospectus under the caption "Use Of Proceeds") and compliance by the Company with its obligations under the Underwriting Agreement and the Deposit Agreement do not and will not, whether with or without the giving of notice or lapse of time or both, conflict with or constitute a breach of, or default under or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of any PRC Subsidiary pursuant to any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or any other agreement or instrument, known to such counsel, to which any PRC Subsidiary is a party or by which it or any of them may be bound, or to which any of the property or assets of any PRC Subsidiary is subject (except for such conflicts, breaches or defaults or liens, charges or encumbrances that would not have a Material Adverse Effect), nor will such action result in any violation of the provisions of the charter or by-laws of any PRC Subsidiary, or any applicable law, statute, rule, regulation, judgment, order, writ or decree, known to such counsel, of any government, government instrumentality or court, domestic or foreign, having jurisdiction over any PRC Subsidiary or any of their respective properties, assets or operations.
(xi) To be best of such counsel's knowledge after due inquiry, (A) the PRC tax laws and regulations and other PRC laws and regulations applicable to the activities of the PRC Subsidiaries in the PRC (including regulatory fees, capital gains, income, sales, withholding or other taxes and stamp or other issuance or transfer taxes or duties to which any of the PRC Subsidiaries may become subject due to the conduct of activities in the PRC) are assessed or apply to the PRC Subsidiaries in substantially the same manner as are currently applicable to any company incorporated under the PRC Company law that is engaged in the same or similar
industry in the PRC as each of the PRC Subsidiaries are engaged in and (B) there are no material PRC fees or taxes that are or will become applicable to any of the PRC Subsidiaries as a consequence of the issuance and sale of the Securities and the use of the proceeds from the sale of the Securities as described in the Prospectus under the caption "Use of Proceeds" that have not been disclosed in the Prospectus.
(xii) The statements in the Prospectus under "Risk Factors," "Enforceability of Civil Liabilities" and "Business -- Regulation," insofar as they purport to describe the provisions of PRC laws and documents referred to therein, are accurate, complete and fair summaries thereof.
Exhibit D
FORM OF OPINION OF COMPANY'S BVI COUNSEL
TO BE DELIVERED PURSUANT TO SECTION 5(e)
(i) Each of Techfaith Wireless, Great Earnest, Leo Technology and Finest Technology (collectively, the "BVI Subsidiaries") is duly incorporated and existing under the laws of the British Virgin Islands in good standing (meaning solely that it has not failed to make any filing with any British Virgin Islands governmental authority or to pay any British Virgin Islands government fee or tax which would make it liable to be struck off the Register of Companies and thereby cease to exist under the laws of the British Virgin Islands).
(ii) Each of the BVI Subsidiaries has the necessary corporate power and authority to engage in any act or activity for that is not prohibited under any law for the time being in force in the British Virgin Islands.
(iii) The execution and delivery of the Underwriting Agreement and the Deposit Agreement by the Company and the performance by the Company of its obligations thereunder will not violate the memorandum of association or articles of association of each of the BVI Subsidiaries nor any applicable law, regulation, order or decree in the British Virgin Islands.
(iv) Based solely on a search of the public records in respect of Techfaith Wireless maintained at the offices of the Registrar of Companies at [11:00 am] on [o], 2005 which would not reveal details of matters which have not been lodged for registration or have been lodged for registration but not actually registered at the time of our search) and a search of the Index of Civil Suits maintained at the Supreme Court Registry, Road Town, Tortola British Virgin Islands conducted at [3:00 pm] on [o], 2005 (which would not reveal details of proceedings which have been filed but not actually entered in the Index of Civil Suits at the time of our search), there are no judgments against Techfaith Wireless, nor any legal or governmental proceedings pending in the British Virgin Islands to which Techfaith Wireless is subject, and no steps have been, or are being, taken in the British Virgin Islands for the appointment of a receiver, administrator or liquidator to, or for the winding-up, dissolution, reconstruction or reorganisation of, Techfaith Wireless (however, it should be noted that failure to file notice of appointment of a receiver does not invalidate the receivership but only gives rise to penalties on the part of the receiver).
(v) Based solely on a search of the public records in respect of Leo Technology maintained at the offices of the Registrar of Companies at [11:00 am] on [o], 2005 which would not reveal details of matters which have not been lodged for registration or have been lodged for registration but not actually registered at the time of our search) and a search of the Index of Civil Suits maintained at the Supreme Court Registry, Road Town, Tortola British Virgin Islands conducted at [3:00 pm] on [o], 2005 (which would not reveal details of proceedings which have been filed but not actually entered in the Index of Civil Suits at the time of our search), there are no judgments against Leo Technology, nor any legal or governmental proceedings pending in the British Virgin Islands to which Leo Technology is subject, and no steps have been, or are being, taken in the British Virgin Islands for the appointment of a receiver, administrator or liquidator to, or for the winding-up, dissolution, reconstruction or reorganisation of, Leo Technology (however, it should be noted that failure to file notice of appointment of a receiver does not
invalidate the receivership but only gives rise to penalties on the part of the receiver).
(vi) Based solely on a search of the public records in respect of Great
Earnest maintained at the offices of the Registrar of Companies at [11:00 am] on
[o], 2005 which would not reveal details of matters which have not been lodged
for registration or have been lodged for registration but not actually
registered at the time of our search) and a search of the Index of Civil Suits
maintained at the Supreme Court Registry, Road Town, Tortola British Virgin
Islands conducted at [3:00 pm] on [o], 2005 (which would not reveal details of
proceedings which have been filed but not actually entered in the Index of Civil
Suits at the time of our search), there are no judgments against Great Earnest,
nor any legal or governmental proceedings pending in the British Virgin Islands
to which Great Earnest is subject, and no steps have been, or are being, taken
in the British Virgin Islands for the appointment of a receiver, administrator
or liquidator to, or for the winding-up, dissolution, reconstruction or
reorganisation of, Great Earnest (however, it should be noted that failure to
file notice of appointment of a receiver does not invalidate the receivership
but only gives rise to penalties on the part of the receiver).
(vii) Based solely on a search of the public records in respect of Finest Technology maintained at the offices of the Registrar of Companies at [11:00 am] on [o], 2005 which would not reveal details of matters which have not been lodged for registration or have been lodged for registration but not actually registered at the time of our search) and a search of the Index of Civil Suits maintained at the Supreme Court Registry, Road Town, Tortola British Virgin Islands conducted at [3:00 pm] on [o], 2005 (which would not reveal details of proceedings which have been filed but not actually entered in the Index of Civil Suits at the time of our search), there are no judgments against Finest Technology, nor any legal or governmental proceedings pending in the British Virgin Islands to which Finest Technology is subject, and no steps have been, or are being, taken in the British Virgin Islands for the appointment of a receiver, administrator or liquidator to, or for the winding-up, dissolution, reconstruction or reorganisation of, Finest Technology (however, it should be noted that failure to file notice of appointment of a receiver does not invalidate the receivership but only gives rise to penalties on the part of the receiver).
(viii) Based solely on such counsel's review of the share register of Techfaith Wireless certified by a director of Techfaith Wireless on [o], 2005, the registered holder of all the issued shares of Techfaith Wireless is the Company, all of which issued shares are validly issued, fully paid and non-assessable (meaning that no further sums are required to be paid by the holders thereof in connection with the issue thereof).
(ix) Based solely on such counsel's review of the share register of Leo Technology certified by a director of Leo Technology on [o], 2005, the registered holder of all the issued shares of Leo Technology is Techfaith Wireless, all of which issued shares are validly issued, fully paid and non-assessable (meaning that no further sums are required to be paid by the holders thereof in connection with the issue thereof).
(x) Based solely on such counsel's review of the share register of Great Earnest certified by a director of Great Earnest on [o], 2005, the registered holder of all the issued shares of Great Earnest is Techfaith Wireless, all of which issued shares are validly issued, fully paid and non-assessable (meaning that no further sums are required to be paid by the holders thereof in connection with the issue thereof).
(xi) Based solely on such counsel's review of the share register of Finest Technology certified by a director of Finest Technology on [o], 2005, the registered holder of all the issued shares of Finest Technology is Techfaith Wireless, all of which issued shares are validly issued, fully paid and non-assessable (meaning that no further sums are required to be paid by the holders thereof in connection with the issue thereof).
Exhibit E
FORM OF OPINION OF COUNSEL TO SELLING SHAREHOLDERS
TO BE DELIVERED PURSUANT TO SECTION 5(f)
(i) No filing with, or consent, approval, authorization, license, order, registration, qualification or decree of, any court or governmental authority or agency, domestic or foreign, (other than the issuance of the order of the Commission declaring the Registration Statement effective and such authorizations, approvals or consents as may be necessary under state securities laws, as to which we need express no opinion) is necessary or required to be obtained by the Selling Shareholders for the performance by each Selling Shareholder of its obligations under the Underwriting Agreement or in the Power of Attorney and Custody Agreement, or in connection with the offer, sale or delivery of the Securities.
(ii) Each of the Selling Shareholders has been duly incorporated and is validly existing and in good standing under the law of its jurisdiction of incorporation.
(iii) Each Power of Attorney and Custody Agreement has been duly executed and delivered by the respective Selling Shareholders named therein and constitutes the legal, valid and binding agreement of such Selling Shareholder.
(iv) The Underwriting Agreement have been duly authorized, executed and delivered by or on behalf of each Selling Shareholder.
(v) Each Attorney-in-Fact has been duly authorized by the Selling Shareholders to deliver the Securities on behalf of the Selling Shareholders in accordance with the terms of the Underwriting Agreement.
(vi) The execution, delivery and performance of the Underwriting Agreement and the Power of Attorney and Custody Agreement and the sale and delivery of the Securities and the consummation of the transactions contemplated in the Underwriting Agreement and in the Registration Statement and compliance by each Selling Shareholder with its obligations under the Underwriting Agreement have been duly authorized by all necessary action on the part of such Selling Shareholder and do not and will not result in any violation of the provisions of the charter or by-laws of the Selling Shareholders, if applicable, or any law, administrative regulation, judgment or order of any governmental agency or body or any administrative or court decree having jurisdiction over such Selling Shareholder or any of its properties.
Exhibit F
FORM OF OPINION OF U.S. COUNSEL TO THE DEPOSITARY
TO BE DELIVERED PURSUANT TO SECTION 5(h)
(i) The Deposit Agreement has been duly authorized, executed and delivered by the Depositary and constitutes a valid and legally binding obligation of the Depositary, enforceable in accordance with its terms, subject as to enforcement to bankruptcy, insolvency, reorganization and similar laws of general applicability relating to or affecting creditors' rights generally and to general equity principles;
(ii) Upon issuance by the Depositary of ADRs evidencing ADSs against the deposit of Ordinary Shares in respect thereof in accordance with the provisions of the Deposit Agreement, such ADRs will be duly and validly issued;
(iii) The ADRs issued under and in accordance with the provisions of the Deposit Agreement to evidence ADSs will entitle the holders thereof to the rights specified therein and in the Deposit Agreement, assuming that (A) the Ordinary Shares represented by the ADSs which are in turn evidenced by the ADRs have been duly authorized and validly issued and are fully paid and nonassessable and that any preemptive rights with respect to the Ordinary Shares have been validly waived or exercised and (B) such Ordinary Shares have been duly deposited with o, as Custodian, in each case under and in accordance with all applicable laws and regulations; and
(iv) The ADR Registration Statement and any amendments thereof or supplements thereto, as of their respective effective dates, complied as to form in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations. No stop order suspending the effectiveness of the ADR Registration Statement or any part thereof and any amendments or supplements thereto has been issued and no proceedings for that purpose have been instituted or are pending or contemplated under the 1933 Act and the 1933 Act Regulations.
In rendering such opinion, such counsel may state that they express no opinion as to the laws of any jurisdiction outside the United States.
Exhibit G
FORM OF LOCK-UP LETTER PURSUANT TO SECTION 5(p)
Merrill Lynch, Pierce, Fenner & Smith o, 2005
Incorporated
as Representative of the several Underwriters
Two World Financial Center
250 Vesey Street
New York, New York 10281
Re: Proposed Initial Public Offering by China Techfaith Wireless Communication Technology Limited
Dear Sirs:
The undersigned, a shareholder [and an officer and/or director] of China Techfaith Wireless Communication Technology Limited, a Cayman Islands corporation (the "Company"), understands that Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Representative"), on behalf of the several Underwriters, proposes to enter into an Underwriting Agreement (the "Underwriting Agreement") with the Company and certain selling shareholders named therein (the "Selling Shareholders") providing for the public offering of the Company's Ordinary Shares, par value $0.00002 per share (the "Ordinary Shares"), and American Depositary Shares ("ADSs"), each representing 15 of the Company's Ordinary Shares. In recognition of the benefit that such offering will confer upon the undersigned as a shareholder [and an officer and/or director] of the Company, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned agrees with the Underwriters that, during a period of 180 days from the date of the Underwriting Agreement (the "Lock-Up Period"), the undersigned will not, without the prior written consent of the Underwriters, directly or indirectly, (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of, or otherwise dispose of or transfer any Ordinary Shares or any securities convertible into or exchangeable or exercisable for ADSs or Ordinary Shares, held by the undersigned on the date of the Underwriting Agreement or cause the Company to file any registration statement under the United States Securities Act of 1933, as amended, with respect to any of the foregoing or (ii) enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of the Ordinary Shares held by the undersigned on the date of the Underwriting Agreement, whether any such swap or transaction is to be settled by delivery of Ordinary Shares or ADSs or other securities, in cash or otherwise. For the purposes hereof, if, on the date of the Underwriting Agreement, the undersigned holds securities convertible into Ordinary Shares, the undersigned will be deemed to hold such Ordinary Shares on the date of the Underwriting Agreement.
Notwithstanding the foregoing, if:
(1) during the last 17 days of the Lock-Up Period, the Company issues an earnings release or material news or a material event relating to the Company occurs; or
(2) prior to the expiration of the Lock-Up Period, the Company announces that it will release earnings results or becomes aware that material news or a material event will occur during the 16-day period beginning on the last day of the Lock-Up Period,
the restrictions imposed by this letter shall continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event, as applicable, unless Merrill Lynch waives, in writing, such extension.
The undersigned hereby consents and agrees to the entry of stop transfer instructions with the Company's transfer agent and registrar against the transfer of the undersigned's Ordinary Shares in violation of the restrictions set forth in this letter during the Lock-Up Period (as may be extended under the previous paragraph).
This agreement will be terminate and have no effect if the Underwriting Agreement is not executed on or prior to June 30, 2005.
.
Very truly yours,
EXHIBIT 3.2
THE COMPANIES LAW (2004 REVISION)
OF THE CAYMAN ISLANDS
COMPANY LIMITED BY SHARES
AMENDED AND RESTATED MEMORANDUM OF ASSOCIATION
OF
CHINA TECHFAITH WIRELESS COMMUNICATION TECHNOLOGY LIMITED
Adopted by Special Resolution
passed on March 18, 2005 and effective immediately upon commencement of the trading of the Company's American Depositary Shares representing its Ordinary Shares on the Nasdaq National Market
1. The name of the Company is CHINA TECHFAITH WIRELESS COMMUNICATION TECHNOLOGY LIMITED.
2. The Registered Office of the Company shall be at the offices of Century Yard, Cricket Square, Hutchins Drive, P.O. Box 2681GT, George Town, Grand Cayman, British West Indies, or at such other place as the Directors may from time to time decide.
3. The objects for which the Company is established are unrestricted and the Company shall have full power and authority to carry out any object not prohibited by the Companies Law (2004 Revision) or as the same may be revised from time to time, or any other law of the Cayman Islands.
4. The liability of each Member is limited to the amount from time to time unpaid on such Member's shares.
5. The authorized share capital of the Company is US$1,000,000,000 divided into 50,000,000,000,000 ordinary shares of a nominal or par value of US$0.00002 each. The Company has the power to redeem or purchase any of its shares and to increase or reduce the said capital subject to the provisions of the Companies Law (2004 Revision) and the Articles of Association and to issue any part of its capital, whether original, redeemed or increased with or without any preference, priority or special privilege or subject to any postponement of rights or to any conditions or restrictions and so that unless the conditions of issue shall otherwise expressly declare every issue of shares whether declared to be preference or otherwise shall be subject to the powers hereinbefore contained.
6. The Company has the power to register by way of continuation as a body corporate limited by shares under the laws of any jurisdiction outside the Cayman Islands and to be deregistered in the Cayman Islands.
7. Capitalized terms that are not defined in this Amended and Restated Memorandum of Association bear the same meaning as those given in the Amended and Restated Articles of Association of the Company adopted by Special Resolution passed on March 18, 2005 and effective immediately upon commencement of the trading of the Company's American Depositary Shares representing its Ordinary Shares on the Nasdaq National Market.
THE COMPANIES LAW (2004 REVISION)
OF THE CAYMAN ISLANDS
COMPANY LIMITED BY SHARES
AMENDED AND RESTATED ARTICLES OF ASSOCIATION
OF
CHINA TECHFAITH WIRELESS COMMUNICATION TECHNOLOGY LIMITED
Adopted by Special Resolution
passed on March 18, 2005 and effective immediately upon commencement of the trading of the Company's American Depositary Shares representing its Ordinary Shares on the Nasdaq National Market
INTERPRETATION
1. In these Articles, unless otherwise defined, the defined terms shall have the meanings assigned to them as follows:
"ARTICLES"
the Amended and Restated Articles of Association adopted by Special Resolution on March 18, 2005 and effective immediately upon commencement of the trading of the Company's American Depositary Shares representing its Ordinary Shares on the Nasdaq National Market as from time to time altered or added to in accordance with the Statutes and these Articles;
"BOARD"
the board of Directors for the time being of the Company;
"BUSINESS DAY"
a day, excluding Saturdays or Sundays, on which banks in Hong Kong, Shanghai and New York are open for general banking business throughout their normal business hours;
"COMMISSION"
Securities and Exchange Commission of the United States of America or any other federal agency for the time being administering the Securities Act;
"COMPANIES LAW"
the Companies Law (2004 Revision) of the Cayman Islands and any statutory amendment or re-enactment thereof. Where any provision of the Companies Law is referred to, the reference is to that provision as amended by any law for the time being in force;
"COMPANY"
China Techfaith Wireless Communication Technology Limited, a Cayman Islands company limited by shares;
"COMPANY'S WEBSITE"
the website of the Company, the address or domain name of which has been notified to Members;
"DIRECTORS" and "BOARD OF DIRECTORS" and "BOARD"
the directors of the Company for the time being, or as the case may be, the Directors assembled as a Board or as a committee thereof;
"ELECTRONIC"
the meaning given to it in the Electronic Transactions Law 2000 of the Cayman Islands and any amendment thereto or re-enactments thereof for the time being in force and includes every other law incorporated therewith or substituted therefore;
"ELECTRONIC COMMUNICATION"
electronic posting to the Company's Website, transmission to any number, address or internet website or other electronic delivery methods as otherwise decided and approved by not less than two-thirds of the vote of the Board;
"IN WRITING"
includes writing, printing, lithograph, photograph, type-writing and every other mode of representing words or figures in a legible and non-transitory form and, only where used in connection with a notice served by the Company on Members or other persons entitled to receive notices hereunder, shall also include a record maintained in an electronic medium which is accessible in visible form so as to be useable for subsequent reference;
"MEMBER"
a person whose name is entered in the Register of Members as the holder of a share or shares;
"MEMORANDUM OF ASSOCIATION"
the Memorandum of Association of the Company, as amended and re-stated from time to time;
"MONTH"
calendar month;
"ORDINARY RESOLUTION"
a resolution:
(a) passed by a simple majority of votes cast by such Members as, being entitled to do so, vote in person or, in the case of any Member being an organization, by its duly authorized representative or, where proxies are allowed, by proxy at a general meeting of the Company; or
(b) approved in writing by all of the Members entitled to vote at a general meeting of the Company in one or more instruments each signed by one or more of the Members and the effective date of the resolution so adopted shall be the date on which the instrument, or the last of such instruments if more than one, is executed;
"ORDINARY SHARES"
ordinary shares of par value of US$0.00002 each in the capital of the Company;
"PAID UP"
paid up as to the par value and any premium payable in respect of the issue of any shares and includes credited as paid up;
"REGISTER OF MEMBERS"
the register to be kept by the Company in accordance with Section 40 of the Companies Law;
"SEAL"
the Common Seal of the Company including any facsimile thereof;
"SECURITIES ACT"
the Securities Act of 1933 of the United States of America, as amended, or any similar federal statute and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time;
"SHARE"
any share in the capital of the Company, including the Ordinary Shares and shares of other classes;
"SHAREHOLDERS"
any or all of those persons at any time holding any shares;
"SIGNED"
includes a signature or representation of a signature affixed by mechanical means or an electronic symbol or process attached to or logically associated with an electronic communication and executed or adopted by a person with the intent to sign the electronic communication;
"SPECIAL RESOLUTION"
a resolution passed in accordance with Section 60 of the Companies Law and includes an unanimous written resolution expressly passed as a special resolution;
"STATUTES"
the Companies Law and every other laws and regulations of the Cayman Islands for the time being in force concerning companies and affecting the Company;
"YEAR"
calendar year.
2. In these Articles, save where the context requires otherwise:
(a) words importing the singular number shall include the plural number and vice versa;
(b) words importing the masculine gender only shall include the feminine gender;
(c) words importing persons only shall include companies or associations or bodies of persons, whether corporate or not;
(d) "MAY" shall be construed as permissive and "SHALL" shall be construed as imperative;
(e) a reference to a dollar or dollars (or $) is a reference to dollars of the United States;
(f) references to a statutory enactment shall include reference to any amendment or re-enactment thereof for the time being in force; and
(g) any phrase introduced by the terms "including", "include", "in particular" or any similar expression shall be construed as illustrative and shall not limit the sense of the words preceding those terms.
3. Subject to the last two preceding Articles, any words defined in the Companies Law shall, if not inconsistent with the subject or context, bear the same meaning in these Articles.
PRELIMINARY
4. The business of the Company may be commenced as soon after incorporation as the Directors see fit, notwithstanding that only part of the shares may have been allotted or issued.
5. The registered office of the Company shall be at such address in the Cayman Islands as the Directors shall from time to time determine. The Company may in addition establish and maintain such other offices and places of business and agencies in such places as the Directors may from time to time determine.
SHARE CAPITAL
6. The authorized share capital of the Company at the date of adoption of these Articles is US$1,000,000,000 divided into 50,000,000,000,000 shares of a nominal or par value of US$0.00002 each with power for the Company insofar as is permitted by law, to redeem or purchase any of its shares and to increase or reduce the said capital subject to the provisions of the Companies Law and these Articles and to issue any part of its capital, whether original, redeemed or increased with or without any preference, priority or special privilege or subject to any postponement of rights or to any conditions or restrictions and so that unless the conditions of issue shall otherwise expressly declare every issue of shares whether declared to be preference or otherwise shall be subject to the powers hereinbefore contained.
ISSUE OF SHARES
7. Subject to the provisions, if any, in that behalf in the Memorandum of Association and to any direction that may be given by the Company in a general meeting, the Directors may allot, issue, grant options over or otherwise dispose of shares of the Company (including fractions of a share) with or without preferred, deferred or other special rights or restrictions, whether in regard to dividend, voting, return of capital or otherwise and to such persons, at such times and on such other terms as they think proper. The Company shall not issue shares in bearer form.
REGISTER OF MEMBERS AND SHARE CERTIFICATES
8. The Company shall maintain a Register of its Members and every person whose name is entered as a member in the Register of Members shall, without payment, be entitled to a certificate within two months after allotment or lodgement of transfer (or within such other period as the conditions of issue shall provide) in the form determined by the Directors. All certificates shall specify the share or shares held by that person and the amount paid up thereon, provided that in respect of a share or shares held jointly by several persons the Company shall not be bound to issue more than one certificate, and delivery of a certificate for a share to one of several joint holders shall be sufficient delivery to all. All certificates for shares shall be delivered personally or sent through the post addressed to the member entitled thereto at the Member's registered address as appearing in the register.
9. Every share certificate of the Company shall bear legends required under the applicable laws, including the Securities Act.
10. Any two or more certificates representing shares of any one class held by any Member may at the Member's request be cancelled and a single new certificate for such shares issued in lieu on payment (if the Directors shall so require) of US$1.00 or such smaller sum as the Directors shall determine.
11. If a share certificate shall be damaged or defaced or alleged to have been lost, stolen or destroyed, a new certificate representing the same shares may be issued to the relevant member upon request subject to delivery up of the old certificate or (if alleged to have been lost, stolen or destroyed) compliance with such conditions as to evidence and indemnity and the payment of out-of-pocket expenses of the Company in connection with the request as the Directors may think fit.
12. In the event that shares are held jointly by several persons, any request may be made by any one of the joint holders and if so made shall be binding on all of the joint holders.
TRANSFER OF SHARES
13. The instrument of transfer of any share shall be in writing and executed by or on behalf of the transferor and shall be accompanied by the certificate of the shares to which it relates and such other evidence as the Directors may reasonably require to show the right of the transferor to make the transfer. The transferor shall be deemed to remain a holder of the share until the name of the transferee is entered in the Register of Members in respect thereof.
14. All instruments of transfer that shall be registered shall be retained by the Company.
REDEMPTION AND PURCHASE OF OWN SHARES
15. Subject to the provisions of the Statutes and these Articles, the Company may:
(a) issue shares on terms that they are to be redeemed or are liable to be redeemed at the option of the Company or the Member on such terms and in such manner as the Directors may, before the issue of such shares, determine;
(b) purchase its own shares (including any redeemable shares) on such terms and in such manner as the Directors may determine and agree with the Member; and
(c) make a payment in respect of the redemption or purchase of its own shares otherwise than out of profits or the proceeds of a fresh issue of shares.
16. Any share in respect of which notice of redemption has been given shall not be entitled to participate in the profits of the Company in respect of the period after the date specified as the date of redemption in the notice of redemption.
17. The redemption or purchase of any share shall not be deemed to give rise to the redemption or purchase of any other share.
18. The Directors may when making payments in respect of redemption or purchase of shares, if authorized by the terms of issue of the shares being redeemed or purchased or with the agreement of the holder of such shares, make such payment in any form of consideration.
VARIATION OF RIGHTS ATTACHING TO SHARES
19. If at any time the share capital is divided into different classes of shares, the rights attaching to any class (unless otherwise provided by the terms of issue of the shares of that class) may, subject to these Articles, be varied or abrogated with the consent in writing of the holders of a majority of the issued shares of that class, or with the sanction of a resolution passed by at least a majority of the holders of shares of the class present in person or by proxy at a separate general meeting of the holders of the shares of the class.
20. The provisions of these Articles relating to general meetings shall apply to every such general meeting of the holders of one class of shares except that the necessary quorum shall be one person holding or representing by proxy at least one-third of the issued shares of the class and that any holder of shares of the class present in person or by proxy may demand a poll.
21. The rights conferred upon the holders of the shares of any class issued with preferred or other rights shall not, unless otherwise expressly provided by the terms of issue of the shares of that class, be deemed to be varied by the creation or issue of further shares ranking pari passu therewith.
COMMISSION ON SALE OF SHARES
22. The Company may in so far as the Statutes from time to time permit pay a commission to any person in consideration of his subscribing or agreeing to subscribe whether absolutely or conditionally for any shares of the Company. Such commissions may be satisfied by the payment of cash or the lodgement of fully or partly paid-up shares or partly in one way and partly in the other. The Company may also on any issue of shares pay such brokerage as may be lawful.
NON-RECOGNITION OF TRUSTS
23. No person shall be recognised by the Company as holding any share upon any trust and the Company shall not be bound by or be compelled in any way to recognise (even when having notice thereof) any equitable, contingent, future, or partial interest in any share, or any interest in any fractional part of a share, or (except only as is otherwise provided by these Articles or the Statutes) any other rights in respect of any share except an absolute right to the entirety thereof in the registered holder.
LIEN ON SHARES
24. The Company shall have a first and paramount lien and charge on all shares (whether fully paid-up or not) registered in the name of a Member (whether solely or jointly with others) for all debts, liabilities or engagements to or with the Company (whether presently payable or not) by such Member or his estate, either alone or jointly with any other person, whether a Member or not, but the Directors may at any time declare any share to be wholly or in part exempt from the provisions of this Article. The registration of a transfer of any such share shall operate as a waiver of the Company's lien (if any) thereon. The Company's lien (if any) on a share shall extend to all dividends or other monies payable in respect thereof.
25. The Company may sell, in such manner as the Directors think fit, any shares on which the Company has a lien, but no sale shall be made unless some sum in respect of which the lien exists is presently payable nor until the expiration of 14 days after a notice in writing, stating and demanding payment of such part of the amount in respect of which the lien exists as is presently payable, has been given to the registered holder for the time being of the share, or the persons entitled thereto by reason of his death or bankruptcy.
26. For giving effect to any such sale the Directors may authorise some person to transfer the shares sold to the purchaser thereof. The purchaser shall be registered as the
holder of the shares comprised in any such transfer and he shall not be bound to see to the application of the purchase money, nor shall his title to the shares be affected by any irregularity or invalidity in the proceedings in reference to the sale.
27. The proceeds of the sale shall be received by the Company and applied in payment of such part of the amount in respect of which the lien exists as is presently payable, and the residue shall (subject to a like lien for sums not presently payable as existed upon the shares prior to the sale) be paid to the person entitled to the shares at the date of the sale.
CALLS ON SHARES
28. The Directors may from time to time make calls upon the Members in respect of any money unpaid on their shares, and each member shall (subject to receiving at least 14 days notice specifying the time or times of payment) pay to the Company at the time or times so specified the amount called on his shares. A call shall be deemed to have been made at the time when the resolution of the Directors authorising such call was passed.
29. The joint holders of a share shall be jointly and severally liable to pay calls in respect thereof.
30. If a sum called in respect of a share is not paid before or on the day appointed for payment thereof, the person from whom the sum is due shall pay interest upon the sum at the rate of eight percent per annum from the day appointed for the payment thereof to the time of the actual payment, but the Directors shall be at liberty to waive payment of that interest wholly or in part.
31. The provisions of these Articles as to the liability of joint holders and as to payment of interest shall apply in the case of non-payment of any sum which, by the terms of issue of a share, becomes payable at a fixed time, whether on account of the amount of the share, or by way of premium, as if the same had become payable by virtue of a call duly made and notified.
32. The Directors may make arrangements on the issue of shares for a difference between the Members, or the particular shares, in the amount of calls to be paid and in the times of payment.
33. The Directors may, if they think fit, receive from any member willing to advance the same all or any part of the moneys uncalled and unpaid upon any shares held by him, and upon all or any of the moneys so advanced may (until the same would, but for such advance, become presently payable) pay interest at such rate (not exceeding without the sanction of an Ordinary Resolution, eight percent. per annum) as may be agreed upon between the Member paying the sum in advance and the Directors. No such sum paid in advance of calls shall entitle the member paying such sum to any portion of a dividend declared in respect of any period prior to the date upon which such sum would, but for such payment, become presently payable.
FORFEITURE OF SHARES
34. If a Member fails to pay any call or instalment of a call on the day appointed for payment thereof, the Directors may, at any time thereafter during such time as any part of such call or instalment remains unpaid, serve a notice on him requiring payment of such much of the call or instalment as is unpaid, together with any interest which may have accrued.
35. The notice shall name a further day (not earlier than the expiration of 14 days from the date of the notice) on or before which the payment required by the notice is to be made, and shall state that in the event of non-payment at or before the time appointed the shares in respect of which the call was made will be liable to be forfeited.
36. If the requirements of any such notice as aforesaid are not complied with, any share in respect of which the notice has been given may at any time thereafter, before the payment required by notice has been made, be forfeited by a resolution of the Directors to that effect.
37. A forfeited share may be sold or otherwise disposed of on such terms and in such manner as the Directors think fit, and at any time before a sale or disposition the forfeiture may be cancelled on such terms as the Directors think fit.
38. A person whose shares have been forfeited shall cease to be a Member in respect of the forfeited shares, but shall, notwithstanding, remain liable to pay to the Company all moneys which at the date of forfeiture were payable by him to the Company in respect of the shares, but his liability shall cease if and when the Company receives payment in full of the fully paid up amount of the shares.
39. A statutory declaration in writing that the declarant is a Director of the Company, and that a share in the Company has been duly forfeited on a date stated in the declaration, shall be conclusive evidence of the facts therein stated as against all persons claiming to be entitled to the share. The Company may receive the consideration, if any, given for the share or any sale or disposition thereof and may execute a transfer of the share in favour of the person to whom the share is sold or disposed of and he shall thereupon be registered as the holder of the share, and shall not be bound to see to the application of the purchase money, if any, nor shall his title to the share be affected by any irregularity or invalidity in the proceedings in reference to the forfeiture, sale or disposal of the share.
40. The provisions of these Articles as to forfeiture shall apply in the case of non-payment of any sum which by the terms of issue of a share becomes due and payable, whether on account of the amount of the share, or by way of premium, as if the same had been payable by virtue of a call duly made and notified.
REGISTRATION OF EMPOWERING INSTRUMENTS
41. The Company shall be entitled to charge a fee not exceeding one dollar (US$1.00) on the registration of every probate, letters of administration, certificate of death or marriage, power of attorney, notice in lieu of distringas, or other instrument.
TRANSMISSION OF SHARES
42. The legal personal representative of a deceased sole holder of a share shall be the only person recognised by the Company as having any title to the share. In the case of a share registered in the name of two or more holders, the survivors or survivor, or the legal personal representatives of the deceased survivor, shall be the only person recognised by the Company as having any title to the share.
43. Any person becoming entitled to a share in consequence of the death or bankruptcy of a Member shall upon such evidence being produced as may from time to time be properly required by the Directors, have the right either to be registered as a member in respect of the share or, instead of being registered himself, to make such transfer of the share as the deceased or bankrupt person could have made. If the person so becoming entitled shall elect to be registered himself as holder he shall deliver or send to the Company a notice in writing signed by him stating that he so elects.
44. A person becoming entitled to a share by reason of the death or bankruptcy of the holder shall be entitled to the same dividends and other advantages to which he would be entitled if he were the registered holder of the share, except that he shall not, before being registered as a Member in respect of the share, be entitled in respect of it to exercise any right conferred by membership in relation to meetings of the Company, provided however, that the Directors may at any time give notice requiring any such person to elect either to be registered himself or to transfer the share, and if the notice is not complied with within ninety days, the Directors may thereafter withhold payment of all dividends, bonuses or other monies payable in respect of the share until the requirements of the notice have been complied with.
ALTERATION OF CAPITAL
45. Subject to these Articles, the Company may from time to time by Ordinary Resolution increase the share capital by such sum, to be divided into shares of such classes and amount, as the resolution shall prescribe.
46. Subject to these Articles, the Company may by Ordinary Resolution:
(a) consolidate and divide all or any of its share capital into shares of larger amount than its existing shares;
(b) sub-divide its existing shares, or any of them into shares of a smaller amount provided that in the subdivision the proportion between the amount paid and the amount, if any unpaid on each reduced share shall be the same as it was in case of the share from which the reduced share is derived;
(c) cancel any shares which, at the date of the passing of the resolution, have not been taken or agreed to be taken by any person and diminish the amount of its share capital by the amount of the shares so cancelled.
47. The Company may by Special Resolution reduce its share capital and any capital redemption reserve in any manner authorized by law.
48. All new shares created hereunder shall be subject to the same provisions with reference to the payment of calls, liens, transfer, transmission, forfeiture and otherwise as the shares in the original share capital.
CLOSING REGISTER OF MEMBERS OR FIXING RECORD DATE
49. For the purpose of determining those Members that are entitled to receive notice of, attend or vote at any meeting of Members or any adjournment thereof, or those Members that are entitled to receive payment of any dividend, or in order to make a determination as to who is a Member for any other purpose, the Directors may provide that the Register of Members shall be closed for transfers for a stated period but not to exceed in any case 40 days. If the Register of Members shall be so closed for the purpose of determining those Members that are entitled to receive notice of, attend or vote at a meeting of Members such register shall be so closed for at least 10 days immediately preceding such meeting and the record date for such determination shall be the date of the closure of the Register of Members.
50. In lieu of or apart from closing the Register of Members, the Directors may fix in advance a date as the record date for any such determination of those Members that are entitled to receive notice of, attend or vote at a meeting of the Members and for the purpose of determining those Members that are entitled to receive payment of any dividend the Directors may, at or within 90 days prior to the date of declaration of such dividend fix a subsequent date as the record date of such determination.
51. If the Register of Members is not so closed and no record date is fixed for the determination of those Members entitled to receive notice of, attend or vote at a meeting of Members or those Members that are entitled to receive payment of a dividend, the date on which notice of the meeting is posted or the date on which the resolution of the Directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of Members. When a determination of those Members that are entitled to receive notice of, attend or vote at a meeting of Members has been made as provided in this section, such determination shall apply to any adjournment thereof.
GENERAL MEETINGS
52. All general meetings other than annual general meetings shall be called extraordinary general meetings.
53. (a) The Company shall, if required by the Companies Law, in each year hold a general meeting as its annual general meeting and shall specify the meeting as such in the notices calling it. The annual general meeting shall be held at such time and place as may be determined by the Directors.
(b) At these meetings the report of the Directors (if any) shall be presented.
(c) The Company may hold an annual general meeting but shall not (unless required by the Companies Law) be obliged to hold an annual general meeting.
54. (a) The Directors may call general meetings, and they shall on a Members requisition forthwith proceed to convene an extraordinary general meeting of the Company.
(b) A Members requisition is a requisition of Members of the Company holding at the date of deposit of the requisition not less than 33% of the share capital of
the Company as at that date carries the right of voting at general meetings of the Company.
(c) The requisition must state the objects of the meeting and must be signed by the requisitionists and deposited at the Registered Office, and may consist of several documents in like form each signed by one or more requisitionists.
(d) If the Directors do not within twenty one days from the date of the deposit of the requisition duly proceed to convene a general meeting to be held within a further twenty-one days, the requisitionists, or any of them representing more than one half of the total voting rights of all of them, may themselves convene a general meeting, but any meeting so convened shall not be held after the expiration of three months after the expiration of the second said twenty one days.
(e) A general meeting convened as aforesaid by requisitionists shall be convened in the same manner as nearly as possible as that in which general meetings are to be convened by Directors.
NOTICE OF GENERAL MEETINGS
55. At least seven business days' notice shall be given for any general meeting. Every notice shall be exclusive of the day on which it is given or deemed to be given and of the day for which it is given and shall specify the place, the day and the hour of the meeting and the general nature of the business and shall be given in the manner hereinafter mentioned or in such other manner if any as may be prescribed by the Company, provided that a general meeting of the Company shall, whether or not the notice specified in this regulation has been given and whether or not the provisions of Articles regarding general meetings have been complied with, be deemed to have been duly convened if it is so agreed:
(a) in the case of an annual general meeting by all the Members (or their proxies) entitled to attend and vote thereat; and
(b) in the case of an extraordinary general meeting by a majority in number of the Members (or their proxies) having a right to attend and vote at the meeting, being a majority together holding not less than ninety five per cent in par value of the shares giving that right.
56. The accidental omission to give notice of a meeting to or the non-receipt of a notice of a meeting by any Member shall not invalidate the proceedings at any meeting.
PROCEEDINGS AT GENERAL MEETINGS
57. No business shall be transacted at any general meeting unless a quorum of Members is present at the time when the meeting proceeds to business. The holders of Ordinary Shares being not less than an aggregate of one-third of all Ordinary Shares in issue present in person or by proxy and entitled to vote shall be a quorum for all purposes. A person may participate at a general meeting by conference telephone or other communications equipment by means of which all the persons participating in the meeting can communicate with each other. Participation by a person in a general meeting in this manner is treated as presence in person at that meeting.
58. If within half an hour from the time appointed for the meeting a quorum is not present, the meeting, if convened upon the requisition of Members, shall be dissolved. In any other case it shall stand adjourned to the same day in the next week, at the same time and place, and if at the adjourned meeting a quorum is not present within half an hour from the time appointed for the meeting the Member or Members present and entitled to vote shall be a quorum.
59. The Chairman of the Board of Directors shall preside as chairman at every general meeting of the Company.
60. If at any meeting the Chairman of the Board of Directors is not present within fifteen minutes after the time appointed for holding the meeting or is unwilling to act as chairman, the Members present shall choose a chairman of the meeting.
61. The Chairman may with the consent of any meeting at which a quorum is present (and shall if so directed by the meeting) adjourn a meeting from time to time and from place to place, but no business shall be transacted at any adjourned meeting other than the business left unfinished at the meeting from which the adjournment took place. When a meeting is adjourned for 10 days or more, not less than seven business days' notice of the adjourned meeting shall be given as in the case of an original meeting. Save as aforesaid it shall not be necessary to give any notice of an adjournment or of the business to be transacted at an adjourned meeting.
62. At any general meeting a resolution put to the vote of the meeting shall be decided on a show of hands, unless a poll is (before or on the declaration of the result of the show of hands) demanded by one or more Members present in person or by proxy entitled to vote and who together hold not less than 10 per cent of the paid up voting share capital of the Company, and unless a poll is so demanded, a declaration by the chairman that a resolution has, on a show of hands, been carried, or carried unanimously, or by a particular majority, or lost, and an entry to that effect in the book of the proceedings of the Company, shall be conclusive evidence of the fact, without proof of the number or proportion of the votes recorded in favour of, or against, that resolution.
63. If a poll is duly demanded it shall be taken in such manner as the chairman directs, and the result of the poll shall be deemed to be the resolution of the meeting at which the poll was demanded. The demand for a poll may be withdrawn.
64. In the case of an equality of votes, whether on a show of hands or on a poll, the chairman of the meeting at which the show of hands takes place or at which the poll is demanded, shall not be entitled to a second or casting vote.
65. A poll demanded on the election of a chairman or on a question of adjournment shall be taken forthwith. A poll demanded on any other question shall be taken at such time as the chairman of the meeting directs.
VOTES OF MEMBERS
66. Subject to any rights and restrictions for the time being attached to any class or classes of shares, every Member present in person and every person representing a
Member by proxy at a general meeting of the Company shall have one vote for each share registered in his name in the Register of Members.
67. In the case of joint holders the vote of the senior who tenders a vote whether in person or by proxy shall be accepted to the exclusion of the votes of the joint holders and for this purpose seniority shall be determined by the order in which the names stand in the Register of Members.
68. A Member of unsound mind, or in respect of whom an order has been made by any court having jurisdiction in lunacy, may vote, whether on a show of hands or on a poll, by his committee, or other person in the nature of a committee appointed by that court, and any such committee or other person, may on a poll, vote by proxy.
69. No Member shall be entitled to vote at any general meeting unless all calls or other sums presently payable by him in respect of shares in the Company have been paid.
70. On a poll, votes may be given either personally or by proxy.
71. The instrument appointing a proxy shall be in writing under the hand of the appointor or of his attorney duly authorized in writing or, if the appointor is a corporation, either under seal or under the hand of an officer or attorney duly authorized. A proxy need not be a Member of the Company.
72. An instrument appointing a proxy may be in any usual or common form or such other form as the Directors may approve.
73. The instrument appointing a proxy shall be deemed to confer authority to demand or join in demanding a poll.
74. A resolution in writing signed by all the Members for the time being entitled to receive notice of and to attend and vote at general meetings (or being corporations by their duly authorized representatives) shall be as valid and effective as if the same had been passed at a general meeting of the Company duly convened and held.
CORPORATIONS ACTING BY REPRESENTATIVES AT MEETING
75. Any corporation which is a Member or a Director may by resolution of its directors or other governing body authorise such person as it thinks fit to act as its representative at any meeting of the Company or of any class of Members or of the Board of Directors or of a committee of Directors, and the person so authorized shall be entitled to exercise the same powers on behalf of the corporation which he represents as that corporation could exercise if it were an individual Member or Director.
CLEARING HOUSES
76. If a clearing house (or its nominee) is a member of the Company it may, by resolution of its directors or other governing body or by power of attorney, authorise such person or persons as it thinks fit to act as its representative or representatives at any general meeting of the Company or at any general meeting of any class of members of the Company provided that, if more than one person is so authorized, the authorisation shall specify the number and class of shares in respect of which each such person is so authorized. A person so authorized pursuant to this provision shall be entitled to
exercise the same powers on behalf of the clearing house (or its nominee) which he represents as that clearing house (or its nominee) could exercise if it were an individual member of the Company holding the number and class of shares specified in such authorisation.
DIRECTORS
77. (A) Unless otherwise determined by the Company in general meeting, the number of Directors shall not be less than three Directors, the exact number of Directors to be determined from time to time solely by resolution of Members at general meeting. The Directors shall be elected or appointed in the first place by the subscribers to the Memorandum of Association or by a majority of them and thereafter by the Members at general meeting.
(B) Each Director shall hold office until the expiration of his term and until his successor shall have been elected and qualified.
(C) The Board of Directors shall have a Chairman of the Board of Directors (the "Chairman") elected and appointed by a majority of the Directors then in office. The Directors may also elect a Vice-Chairman of the Board of Directors (the "Vice-Chairman"). The Chairman shall preside as chairman at every meeting of the Board of Directors. To the extent the Chairman is not present at a meeting of the Board of Directors, the Vice-Chairman, or in his absence, the attending Directors may choose one Director to be the chairman of the meeting. The Chairman's voting right as to the matters to be decided by the Board of Directors shall be the same as other Directors.
(D) Subject to these Articles and the Companies Law, the Company may by Ordinary Resolution elect any person to be a Director either to fill a casual vacancy on the Board or as an addition to the existing Board.
(E) The Directors by the affirmative vote of a simple majority of the remaining Directors present and voting at a Board meeting shall have the power from time to time and at any time to appoint any person as a Director to fill a casual vacancy on the Board or as an addition to the existing Board.
78. Subject to Article 77, a Director may be removed from office by Ordinary Resolution at any time before the expiration of his term notwithstanding anything in these Articles or in any agreement between the Company and such Director (but without prejudice to any claim for damages under such agreement).
79. A vacancy on the Board created by the removal of a Director under the provisions of Article 78 above may be filled by the election or appointment by Ordinary Resolution at the meeting at which such Director is removed or by the affirmative vote of a simple majority of the remaining Directors present and voting at a Board meeting.
80. The Board may, from time to time, and except as required by applicable law or the listing rules of the recognized stock exchange or automated quotation system where the Company's securities are traded, adopt, institute, amend, modify or revoke the corporate governance policies or initiatives, which shall be intended to set forth the
policies of the Company and the Board on various corporate governance related matters as the Board shall determine by resolution from time to time.
81. A Director shall not be required to hold any shares in the Company by way of qualification. A Director who is not a member of the Company shall nevertheless be entitled to receive notice of and to attend and speak at general meetings of the Company and all classes of shares of the Company.
DIRECTORS' FEES AND EXPENSES
82. The Directors may receive such remuneration as the Board may from time to time determine. The Directors may be entitled to be repaid all travelling, hotel and incidental expenses reasonably incurred or expected to be incurred by him in attending meetings of the Board or committees of the Board or general meetings or separate meetings of any class of shares or of debentures of the Company or otherwise in connection with the discharge of his duties as a Director.
83. Any Director who, by request, goes or resides abroad for any purpose of the Company or who performs services which in the opinion of the Board go beyond the ordinary duties of a Director may be paid such extra remuneration (whether by way of salary, commission, participation in profits or otherwise) as the Board may determine and such extra remuneration shall be in addition to or in substitution for any ordinary remuneration provided for by or pursuant to any other Article.
ALTERNATE DIRECTOR
84. Any Director may in writing appoint another person to be his alternate to act in his place at any meeting of the Directors at which he is unable to be present. Every such alternate shall be entitled to notice of meetings of the Directors and to attend and vote thereat as a Director when the person appointing him is not personally present and where he is a Director to have a separate vote on behalf of the Director he is representing in addition to his own vote. A Director may at any time in writing revoke the appointment of an alternate appointed by him. Such alternate shall not be an officer of the Company and shall be deemed to be the agent of the Director appointing him.
85. Any Director may appoint any person, whether or not a Director, to be the proxy of that Director to attend and vote on his behalf, in accordance with instructions given by that Director, or in the absence of such instructions at the discretion of the proxy, at a meeting or meetings of the Directors which that Director is unable to attend personally. The instrument appointing the proxy shall be in writing under the hand of the appointing Director and shall be in any usual or common form or such other form as the Directors may approve, and must be lodged with the chairman of the meeting of the Directors at which such proxy is to be used, or first used, prior to the commencement of the meeting.
POWERS AND DUTIES OF DIRECTORS
86. Subject to the provisions of the Companies Law, these Articles and to any resolutions made in a general meeting, the business of the Company shall be managed by the Directors, who may pay all expenses incurred in setting up and registering the
Company and may exercise all powers of the Company. No resolution made by the Company in a general meeting shall invalidate any prior act of the Directors that would have been valid if that resolution had not been made.
87. Subject to these Articles, the Directors may from time to time appoint any person, whether or not a director of the Company to hold such office in the Company as the Directors may think necessary for the administration of the Company, including without prejudice to the foregoing generality, the office of the Chief Executive Officer, one or more Vice Presidents, Chief Financial Officer, Manager or Controller, and for such term and at such remuneration (whether by way of salary or commission or participation in profits or partly in one way and partly in another), and with such powers and duties as the Directors may think fit. The Directors may also appoint one or more of their number to the office of Managing Director upon like terms, but any such appointment shall ipso facto determine if any Managing Director ceases from any cause to be a Director, or if the Company by Ordinary Resolution resolves that his tenure of office be terminated.
88. The Directors may delegate any of their powers to committees consisting of such member or members of their body as they think fit; any committee so formed shall in the exercise of the powers so delegated conform to any regulations that may be imposed on it by the Directors.
89. The Directors may from time to time and at any time by power of attorney appoint any company, firm or person or body of persons, whether nominated directly or indirectly by the Directors, to be the attorney or attorneys of the Company for such purposes and with such powers, authorities and discretion (not exceeding those vested in or exercisable by the Directors under these Articles) and for such period and subject to such conditions as they may think fit, and any such power of attorney may contain such provisions for the protection and convenience of persons dealing with any such attorney as the Directors may think fit, and may also authorise any such attorney to delegate all or any of the powers, authorities and discretion vested in him.
90. The Directors may from time to time provide for the management of the affairs of the Company in such manner as they shall think fit and the provisions contained in the following paragraphs shall be without prejudice to the general powers conferred by this paragraph.
91. The Directors from time to time and at any time may establish any committees, local boards or agencies for managing any of the affairs of the Company and may appoint any persons to be members of such committees or local boards and may appoint any managers or agents of the Company and may fix the remuneration of any of the aforesaid.
92. The Directors from time to time and at any time may delegate to any such committee, local board, manager or agent any of the powers, authorities and discretions for the time being vested in the Directors and may authorise the members for the time being of any such local board, or any of them to fill up any vacancies therein and to act notwithstanding vacancies and any such appointment or delegation may be made on such terms and subject to such conditions as the Directors may think fit and the Directors may at any time remove any person so appointed and may annul or vary any
such delegation, but no person dealing in good faith and without notice of any such annulment or variation shall be affected thereby.
93. Any such delegates as aforesaid may be authorized by the Directors to subdelegate all or any of the powers, authorities, and discretions for the time being vested to them.
94. The Directors may exercise all the powers of the Company to borrow money and to mortgage or charge its undertaking, property and uncalled capital or any part thereof, to issue debentures, debenture stock and other securities whenever money is borrowed or as security for any debt, liability or obligation of the Company or of any third party.
DISQUALIFICATION OF DIRECTORS
95. Subject to Article 77, the office of Director shall be vacated, if the Director:
(a) becomes bankrupt or makes any arrangement or composition with his creditors;
(b) is found to be or becomes of unsound mind;
(c) resigns his office by notice in writing to the Company;
(d) without special leave of absence from the Board, is absent from meetings of the Board for six consecutive months and the Board resolves that his office be vacated; or
(e) if he or she shall be removed from office pursuant to these Articles or the Statutes.
PROCEEDINGS OF DIRECTORS
96. Subject to Article 77, the Directors may meet together (whether within or outside the Cayman Islands) for the dispatch of business, adjourn, and otherwise regulate their meetings and proceedings as they think fit. Questions arising at any meeting of the Directors shall be decided by a majority of votes. In case of an equality of votes the chairman shall not have a second or casting vote. A Director may at any time summon a meeting of the Directors by at least two days' notice in writing to every other Director and alternate Director.
97. A Director or Directors may participate in any meeting of the Board of Directors, or of any committee appointed by the Board of Directors of which such Director or Directors are members, by means of telephone or similar communication equipment by way of which all persons participating in such meeting can hear each other and such participation shall be deemed to constitute presence in person at the meeting.
98. The quorum necessary for the transaction of the business of the Directors may be fixed by the Directors and unless so fixed shall be three, provided that a Director and his appointed alternate Director shall be considered only one person for this purpose. A meeting of the Directors at which a quorum is present when the meeting proceeds to business shall be competent to exercise all powers and discretions for the time being exercisable by the Directors. A meeting of the Directors may be held by means of telephone or teleconferencing or any other telecommunications facility provided
that all participants are thereby able to communicate immediately by voice with all other participants.
99. Subject to Article 77, a Director who is in any way, whether directly or indirectly, interested in a contract or proposed contract with the Company shall declare the nature of his interest at a meeting of the Directors. A general notice given to the Directors by any Director to the effect that he is a member of any specified company or firm and is to be regarded as interested in any contract which may thereafter be made with that company or firm shall be deemed a sufficient declaration of interest in regard to any contract so made. A Director may vote in respect of any contract or proposed contract or arrangement notwithstanding that he may be interested therein and if he does so his vote shall be counted and he may be counted in the quorum at any meeting of the Directors at which any such contract or proposed contract or arrangement shall come before the meeting for consideration.
100. A Director may hold any other office or place of profit under the Company (other than the office of auditor) in conjunction with his office of Director for such period and on such terms (as to remuneration and otherwise) as the Directors may determine and no Director or intending Director shall be disqualified by his office from contracting with the Company either with regard to his tenure of any such other office or place of profit or as vendor, purchaser or otherwise, nor shall any such contract or arrangement entered into by or on behalf of the Company in which any Director is in any way interested, be liable to be avoided, nor shall any Director so contracting or being so interested be liable to account to the Company for any profit realised by any such contract or arrangement by reason of such Director holding that office or of the fiduciary relation thereby established. A Director, notwithstanding his interest, may be counted in the quorum present at any meeting whereat he or any other Director is appointed to hold any such office or place of profit under the Company or whereat the terms of any such appointment are arranged and he may vote on any such appointment or arrangement.
101. Any Director may act by himself or his firm in a professional capacity for the Company, and he or his firm shall be entitled to remuneration for professional services as if he were not a Director; provided that nothing herein contained shall authorise a Director or his firm to act as auditor to the Company.
102. The Directors shall cause minutes to be made in books or loose-leaf folders provided for the purpose of recording:
(a) all appointments of officers made by the Directors;
(b) the names of the Directors present at each meeting of the Directors and of any committee of the Directors; and
(c) all resolutions and proceedings at all meetings of the Company, and of the Directors and of committees of Directors.
103. When the chairman of a meeting of the Directors signs the minutes of such meeting the same shall be deemed to have been duly held notwithstanding that all the Directors have not actually come together or that there may have been a technical defect in the proceedings.
104. A resolution signed by all the Directors shall be as valid and effectual as if it had been passed at a meeting of the Directors duly called and constituted. When signed a resolution may consist of several documents each signed by one or more of the Directors.
105. The continuing Directors may act notwithstanding any vacancy in their body but if and so long as their number is reduced below the number fixed by or pursuant to these Articles as the necessary quorum of Directors, the continuing Directors may act for the purpose of increasing the number, or of summoning a general meeting of the Company, but for no other purpose.
106. The Directors shall elect a chairman of their meetings and determine the period for which he is to hold office but if at any meeting the chairman is not present within fifteen minutes after the time appointed for holding the same, the Directors present may choose one of their number to be chairman of the meeting.
107. A committee appointed by the Directors may elect a chairman of its meetings. If no such chairman is elected, or if at any meeting the chairman is not present within five minutes after the time appointed for holding the same, the members present may choose one of their number to be chairman of the meeting.
108. A committee appointed by the Directors may meet and adjourn as it thinks proper. Questions arising at any meeting shall be determined by a majority of votes of the committee members present and in case of an equality of votes the chairman shall have a second or casting vote.
109. All acts done by any meeting of the Directors or of a committee of Directors, or by any person acting as a Director, shall notwithstanding that it be afterwards discovered that there was some defect in the appointment of any such Director or person acting as aforesaid, or that they or any of them were disqualified, be as valid as if every such person had been duly appointed and was qualified to be a Director.
PRESUMPTION OF ASSENT
110. A Director of the Company who is present at a meeting of the Board of Directors at which action on any Company matter is taken shall be presumed to have assented to the action taken unless his dissent shall be entered in the Minutes of the meeting or unless he shall file his written dissent from such action with the person acting as the Chairman or Secretary of the meeting before the adjournment thereof or shall forward such dissent by registered post to such person immediately after the adjournment of the meeting. Such right to dissent shall not apply to a Director who voted in favour of such action.
DIVIDENDS, DISTRIBUTIONS AND RESERVE
111. Subject to any rights and restrictions for the time being attached to any class or classes of shares and these Articles, the Directors may from time to time declare dividends (including interim dividends) and other distributions on shares in issue and authorise payment of the same out of the funds of the Company lawfully available therefor.
112. Subject to any rights and restrictions for the time being attached to any class or classes of shares and these Articles, the Company by Ordinary Resolution may declare dividends, but no dividend shall exceed the amount recommended by the Directors.
113. The Directors may, before recommending or declaring any dividend, set aside out of the funds legally available for distribution such sums as they think proper as a reserve or reserves which shall, at the discretion of the Directors be applicable for meeting contingencies, or for equalising dividends or for any other purpose to which those funds be properly applied and pending such application may, at the like discretion, either be employed in the business of the Company or be invested in such investments (other than shares of the Company) as the Directors may from time to time think fit.
114. Any dividend may be paid by cheque or warrant sent through the post to the registered address of the Member or person entitled thereto, or in the case of joint holders, to any one of such joint holders at his registered address or to such person and such address as the Member or person entitled, or such joint holders as the case may be, may direct. Every such cheque or warrant shall be made payable to the order of the person to whom it is sent or to the order of such other person as the Member or person entitled, or such joint holders as the case may be, may direct.
115. The Directors when paying dividends to the Members in accordance with the foregoing provisions may make such payment either in cash or in specie.
116. No dividend shall be paid otherwise than out of profits or, subject to the restrictions of the Companies Law, the share premium account.
117. Subject to the rights of persons, if any, entitled to shares with special rights as to dividends, all dividends shall be declared and paid according to the amounts paid or credited as fully paid on the shares, but if and so long as nothing is paid up on any of the shares in the Company dividends may be declared and paid according to the amounts of the shares. No amount paid on a share in advance of calls shall, while carrying interest, be treated for the purposes of this Article as paid on the share.
118. If several persons are registered as joint holders of any share, any of them may give effectual receipts for any dividend or other moneys payable on or in respect of the share.
119. No dividend shall bear interest against the Company.
BOOK OF ACCOUNTS
120. The books of account relating to the Company's affairs shall be kept in such manner as may be determined from time to time by the Directors.
121. The books of account shall be kept at the registered office of the Company, or at such other place or places as the Directors think fit, and shall always be open to the inspection of the Directors.
122. The Directors shall from time to time determine whether and to what extent and at what times and places and under what conditions or regulations the accounts and books of the Company or any of them shall be open to the inspection of Members not
being Directors, and no Member (not being a Director) shall have any right of inspecting any account or book or document of the Company except as conferred by law or authorized by the Directors or by the Company by Ordinary Resolution.
123. The accounts relating to the Company's affairs shall be audited in such manner and with such financial year end as may be determined from time to time by the Company by Ordinary Resolution or failing any such determination by the Directors or failing any determination as aforesaid shall not be audited.
ANNUAL RETURNS AND FILINGS
124. The Board shall make the requisite annual returns and any other requisite filings in accordance with the Companies Law.
AUDIT
125. The Directors may appoint an Auditor of the Company who shall hold office until removed from office by a resolution of the Directors and may fix his or their remuneration.
126. Every Auditor of the Company shall have a right of access at all times to the books and accounts and vouchers of the Company and shall be entitled to require from the Directors and Officers of the Company such information and explanation as may be necessary for the performance of the duties of the auditors.
127. Auditors shall, if so required by the Directors, make a report on the accounts of the Company during their tenure of office at the next annual general meeting following their appointment in the case of a company which is registered with the Registrar of Companies as an ordinary company, and at the next special meeting following their appointment in the case of a company which is registered with the Registrar of Companies as an exempted company, and at any time during their term of office, upon request of the Directors or any general meeting of the Members.
THE SEAL
128. The Seal of the Company shall not be affixed to any instrument except by the authority of a resolution of the Board of Directors provided always that such authority may be given prior to or after the affixing of the Seal and if given after may be in general form confirming a number of affixings of the Seal. The Seal shall be affixed in the presence of any one or more persons as the Directors may appoint for the purpose and every person as aforesaid shall sign every instrument to which the Seal of the Company is so affixed in their presence.
129. The Company may maintain a facsimile of its Seal in such countries or places as the Directors may appoint and such facsimile Seal shall not be affixed to any instrument except by the authority of a resolution of the Board of Directors provided always that such authority may be given prior to or after the affixing of such facsimile Seal and if given after may be in general form confirming a number of affixings of such facsimile Seal. The facsimile Seal shall be affixed in the presence of such person or persons as the Directors shall for this purpose appoint and such person or persons as aforesaid shall sign every instrument to which the facsimile Seal of the Company is so affixed
in their presence of and the instrument signed by a Director or the Secretary (or an Assistant Secretary) of the Company or in the presence of any one or more persons as the Directors may appoint for the purpose.
130. Notwithstanding the foregoing, a Director shall have the authority to affix the Seal, or the facsimile Seal, to any instrument for the purposes of attesting authenticity of the matter contained therein but which does not create any obligation binding on the Company.
OFFICERS
131. Subject to Article 87, the Company may have a Chief Executive Officer, Chief Technology Officer, Chief Operating Officer and Chief Financial Officer, one or more Vice Presidents appointed by the Directors. The Directors may also from time to time appoint such other officers as they consider necessary, all for such terms, at such remuneration and to perform such duties, and subject to such provisions as to disqualification and removal as the Directors from time to time subscribe.
CAPITALISATION OF PROFITS
132. Subject to the Statutes and these Articles, the Board may, with the authority of an Ordinary Resolution:
(a) resolve to capitalise an amount standing to the credit of reserves (including a share premium account, capital redemption reserve and profit and loss account), whether or not available for distribution;
(b) appropriate the sum resolved to be capitalised to the Members in proportion to the nominal amount of shares (whether or not fully paid) held by them respectively and apply that sum on their behalf in or towards:
(i) paying up the amounts (if any) for the time being unpaid on shares held by them respectively; or
(ii) paying up in full unissued shares or debentures of a nominal amount equal to that sum,
and allot the shares or debentures, credited as fully paid, to the Members (or as they may direct) in those proportions, or partly in one way and partly in the other, but the share premium account, the capital redemption reserved and profits which are not available for distribution may, for the purposes of this Article, only be applied in paying up unissued shares to be allotted to Members credited as fully paid;
(c) make any arrangements it thinks fit to resolve a difficulty arising in the distribution of a capitalised reserve and in particular, without limitation, where shares or debentures become distributable in fractions the Board may deal with the fractions as it thinks fit;
(d) authorise a person to enter (on behalf of all the Members concerned) an agreement with the Company providing for either:
(i) the allotment to the Members respectively, credited as fully paid, of shares or debentures to which they may be entitled on the capitalisation, or
(ii) the payment by the Company on behalf of the Members (by the application of their respective operations of the reserves resolved to be capitalised) of the amounts or part of the amounts remaining unpaid on their existing shares,
an agreement made under the authority being effective and binding on all those Members; and
(e) generally do all acts and things required to give effect to the resolution.
NOTICES
133. Except as otherwise provided in these Articles, any notice or document may be served by the Company or by the person entitled to give notice to any Member either personally, by facsimile or by sending it through the post in a prepaid letter or via a recognised courier service, fees prepaid, addressed to the Member at his address as appearing in the Register of Members or, to the extent permitted by all applicable laws and regulations, by electronic means by transmitting it to any electronic number or address or website supplied by the member to the Company or by placing it on the Company's Website provided that the Company has obtained the Member's prior express positive confirmation in writing to receive or otherwise have made available to him notices. In the case of joint holders of a share, all notices shall be given to that one of the joint holders whose name stands first in the Register of Members in respect of the joint holding, and notice so given shall be sufficient notice to all the joint holders.
134. Notices posted to addresses outside the Cayman Islands shall be forwarded by prepaid airmail.
135. Any Member present, either personally or by proxy, at any meeting of the Company shall for all purposes be deemed to have received due notice of such meeting and, where requisite, of the purposes for which such meeting was convened.
136. Any notice or other document, if served by (a) post, shall be deemed to have been served five days after the time when the letter containing the same is posted and if served by courier, shall be deemed to have been served five days after the time when the letter containing the same is delivered to the courier (in proving such service it shall be sufficient to prove that the letter containing the notice or document was properly addressed and duly posted or delivered to the courier), or (b) facsimile, shall be deemed to have been served upon confirmation of receipt, or (c) recognised delivery service, shall be deemed to have been served 48 hours after the time when the letter containing the same is delivered to the courier service and in proving such service it shall be sufficient to provide that the letter containing the notice or documents was properly addressed and duly posted or delivered to the courier or (d) electronic means as provided herein shall be deemed to have been served and delivered on the day following that on which it is successfully transmitted or at such later time as may be prescribed by any applicable laws or regulations.
137. Any notice or document delivered or sent to any Member in accordance with the terms of these Articles shall notwithstanding that such Member be then dead or bankrupt, and whether or not the Company has notice of his death or bankruptcy, be deemed to have been duly served in respect of any share registered in the name of such Member as sole or joint holder, unless his name shall at the time of the service of the notice or document, have been removed from the Register of Members as the holder of the share, and such service shall for all purposes be deemed a sufficient service of such notice or document on all persons interested (whether jointly with or as claiming through or under him) in the share.
138. Notice of every general meeting shall be given to:
(a) all Members who have supplied to the Company an address for the giving of notices to them; and
(b) every person entitled to a share in consequence of the death or bankruptcy of a Member, who but for his death or bankruptcy would be entitled to receive notice of the meeting.
No other person shall be entitled to receive notices of general meetings.
INFORMATION
139. No Member shall be entitled to require discovery of any information in respect of any detail of the Company's trading or any information which is or may be in the nature of a trade secret or secret process which may relate to the conduct of the business of the Company and which in the opinion of the Board would not be in the interests of the members of the Company to communicate to the public.
140. The Board shall be entitled to release or disclose any information in its possession, custody or control regarding the Company or its affairs to any of its members including, without limitation, information contained in the Register of Members and transfer books of the Company.
INDEMNITY
141. Every Director (including for the purposes of this Article any Alternate Director appointed pursuant to the provisions of these Articles) and officer of the Company for the time being and from time to time shall be indemnified and secured harmless out of the assets and funds of the Company against all actions, proceedings, costs, charges, expenses, losses, damages or liabilities incurred or sustained by him in connection with the execution or discharge of his duties, powers, authorities or discretions as a Director or officer of the Company, including without prejudice to the generality of the foregoing, any costs, expenses, losses or liabilities incurred by him in defending (whether successfully or otherwise) any civil proceedings concerning the Company or its affairs in any court whether in the Cayman Islands or elsewhere.
142. No such Director or officer of the Company shall be liable to the Company for any loss or damage unless such liability arises through the willful neglect or default of such Director or officer.
143. Each Member agrees to waive any claim or right of action he might have, whether individually or by or in the right of the Company, against any Director or officer on account of any action taken by such Director, or the failure of such Director to take any action in the performance of his duties with or for the Company; PROVIDED THAT such waiver shall not extend to any matter in respect of any fraud or dishonesty which may attach to such Director.
FINANCIAL YEAR
144. Unless the Directors otherwise prescribe, the financial year of the Company shall end on December 31st in each year and shall begin on January 1st in each year.
NON-RECOGNITION OF TRUSTS
145. No person shall be recognised by the Company as holding any share upon any trust and the Company shall not, unless required by law, be bound by or be compelled in any way to recognise (even when having notice thereof) any equitable, contingent or future interest in any of its shares or any other rights in respect thereof except an absolute right to the entirety thereof in each Member registered in the Register of Members.
WINDING UP
146. Subject to these Articles, if the Company shall be wound up the liquidator may, with the sanction of an Ordinary Resolution of the Company divide amongst the Members in specie or kind the whole or any part of the assets of the Company (whether they shall consist of property of the same kind or not) and may, for such purpose set such value as he deems fair upon any property to be divided as aforesaid and may determine how such division shall be carried out as between the Members or different classes of Members. The liquidator may, with the like sanction, vest the whole or any part of such assets in trustees upon such trusts for the benefit of the contributories as the liquidator, with the like sanction shall think fit, but so that no Member shall be compelled to accept any shares or other securities whereon there is any liability.
AMENDMENT OF MEMORANDUM AND ARTICLES OF ASSOCIATION AND NAME OF COMPANY
147. Subject to the Companies Law and these Articles, the Company may at any time and from time to time by Special Resolution alter or amend these Articles or the Memorandum of Association of the Company, in whole or in part, or change the name of the Company.
REGISTRATION BY WAY OF CONTINUATION
148. Subject to these Articles, the Company may by Special Resolution resolve to be registered by way of continuation in a jurisdiction outside the Cayman Islands or such other jurisdiction in which it is for the time being incorporated, registered or existing. In furtherance of a resolution adopted pursuant to this Article, the Directors may cause an application to be made to the Registrar of Companies to deregister the Company in the Cayman Islands or such other jurisdiction in which it is for the time being incorporated, registered or existing and may cause all such further steps as they
consider appropriate to be taken to effect the transfer by way of continuation of the Company.
Exhibit 4.2
Name of Company:
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
Number:
[ ]
Ordinary Shares:
[ ]
Issued to:
[ ]
Dated
Transferred from:
[ ]/[ORIGINAL ISSUE]
CHINA TECHFAITH WIRELESS COMMUNICATION TECHNOLOGY LIMITED
(Incorporated under the laws of the Cayman Islands)
Number Ordinary Shares [ ] [ ] |
US$1,000,000,000 Share Capital divided into 50,000,000,000,000 Ordinary Shares of a nominal or par value of US$0.00002 each
THIS IS TO CERTIFY THAT ----------------------- [ ]
---------------------------------------- is the registered holder of
------------------------------ [ ] ----------- Ordinary Shares in the
above-named Company subject to the memorandum and articles of association
thereof.
EXECUTED for and on behalf of the Company on 2005.
THESE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THE SECURITIES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT WITH RESPECT TO THE SECURITIES, OR (II) AN OPINION OF US COUNSEL, IN A GENERALLY ACCEPTED FORM, THAT REGISTRATION IS NOT REQUIRED UNDER THE ACT, OR (III) UNLESS SOLD PURSUANT TO RULE 144 UNDER THE ACT.
TRANSFER
I (the Transferor) for the value received DO HEREBY transfer to (the Transferee) the shares standing in my name in the |
undertaking called CHINA TECHFAITH WIRELESS COMMUNICATION TECHNOLOGY LIMITED
To hold the same unto the Transferee
Dated
Signed by the Transferor
in the presence of:
CHINA TECHFAITH WIRELESS COMMUNICATION TECHNOLOGY LIMITED
2005 SHARE INCENTIVE PLAN
ARTICLE 1
PURPOSE
The purpose of this China Techfaith Wireless Communication Technology Limited 2005 Share Incentive Plan (the "Plan") is to promote the success and enhance the value of China Techfaith Wireless Communication Technology Limited, a Cayman Islands company (the "Company") by linking the personal interests of the members of the Board, and Employees to those of Company shareholders and by providing such individuals with an incentive for outstanding performance to generate superior returns to Company shareholders. The Plan is further intended to provide flexibility to the Company in its ability to motivate, attract, and retain the services of members of the Board, and Employees upon whose judgment, interest, and special effort the successful conduct of the Company's operation is largely dependent.
ARTICLE 2
DEFINITIONS AND CONSTRUCTION
Wherever the following terms are used in the Plan they shall have the meanings specified below, unless the context clearly indicates otherwise. The singular pronoun shall include the plural where the context so indicates.
2.1 "Applicable Laws" means the legal requirements relating to the Plan and the Awards under applicable provisions of the corporate and securities laws of Bermuda, the Code, the PRC tax laws, rules, regulations and government orders, the rules of any applicable Share exchange or national market system, and the laws and the rules of any jurisdiction applicable to Awards granted to residents therein.
2.2 "Award" means an Option, a Restricted Share award, a Share Appreciation Right award, a Dividend Equivalents award, a Share Payment award, a Deferred Share award, or a Restricted Share Unit award granted to a Participant pursuant to the Plan.
2.3 "Award Agreement" means any written agreement, contract, or other instrument or document evidencing an Award, including through electronic medium.
2.4 "Board" means the Board of Directors of the Company.
2.5 "Change in Control" means and includes each of the following:
(a) A transaction or series of transactions (other than an offering of Shares to the general public through a registration statement filed with the U.S. Securities and Exchange Commission) whereby any "person" or related "group" of "persons" (as such terms are used in Sections 13(d) and 14(d)(2) of the Exchange Act) (other than the Company, any of its subsidiaries, an employee benefit plan maintained by the Company or any of its subsidiaries or a
"person" that, prior to such transaction, directly or indirectly controls, is controlled by, or is under common control with, the Company) directly or indirectly acquires beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act) of securities of the Company possessing more than 35% of the total combined voting power of the Company's securities outstanding immediately after such acquisition; or
(b) During any period of two consecutive years, individuals who, at the beginning of such period, constitute the Board together with any new director(s) (other than a director designated by a person who shall have entered into an agreement with the Company to effect a transaction described in Section 2.6(a) or Section 2.6(c)) whose election by the Board or nomination for election by the Company's shareholders was approved by a vote of a majority of the directors then still in office who either were directors at the beginning of the two year period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or
(c) The consummation by the Company (whether directly involving the Company or indirectly involving the Company through one or more intermediaries) of (x) an amalgamation, arrangement, merger, consolidation, reorganization, reverse takeover or series of related transactions culminating in a reverse takeover (including, but not limited to, a tender offer followed by a reverse takeover or other business combination or (y) a sale or other disposition of all or substantially all of the Company's assets in any single transaction or series of related transactions or (z) the acquisition of assets or stock of another entity, in each case other than a transaction:
(i) Which results in the Company's voting securities outstanding immediately before the transaction continuing to represent (either by remaining outstanding or by being converted into voting securities of the Company or the person that, as a result of the transaction, controls, directly or indirectly, the Company or owns, directly or indirectly, all or substantially all of the Company's assets or otherwise succeeds to the business of the Company (the Company or such person, the "Successor Entity")) directly or indirectly, at least a majority of the combined voting power of the Successor Entity's outstanding voting securities immediately after the transaction, and
(ii) After which no person or group beneficially owns voting securities representing 50% or more of the combined voting power of the Successor Entity; provided, however, that no person or group shall be treated for purposes of this Section 2.6(c)(ii) as beneficially owning 50% or more of combined voting power of the Successor Entity solely as a result of the voting power held in the Company prior to the consummation of the transaction; or
(d) The Company's shareholders approve a liquidation or dissolution of the Company.
The Committee shall determine whether a Change in Control of the Company has occurred under the above definition, and the date of the occurrence of such Change in Control and any incidental matters relating thereto.
2.6 "Code" means the Internal Revenue Code of 1986 of the United States, as amended.
2.7 "Committee" means the committee of the Board described in Article 11.
2.8 "Deferred Share" means a right to receive a specified number of Shares during specified time periods pursuant to Article 8.
2.9 "Disability" means that the Participant qualifies to receive long-term disability payments under the Company's long-term disability insurance program, as it may be amended from time to time, to which the Participant provides services regardless of whether the Participant is covered by such policy.
2.10 "Dividend Equivalents" means a right granted to a Participant pursuant to Article 8 to receive the equivalent value (in cash or Shares) of dividends paid on a Share.
2.11 "Effective Date" shall have the meaning set forth in Section 12.1.
2.12 "Employee" means any officer or other employee (as defined in accordance with Section 3401(c) of the Code) of the Company or any Subsidiary. A person shall not cease to be an Employee in the case of (a) any leave of absence approved by the Company, or (b) transfers between locations of the Company or between the Company, any Subsidiary or any successor. For purposes of Incentive Share Options, no such leave may exceed 90 days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. Neither service as a director nor payment of a director's fee by the Company shall be sufficient, by itself, to constitute "employment" by the Company
2.13 "Exchange Act" means the Securities Exchange Act of 1934 of the United States, as amended.
2.14 "Fair Market Value" means, as of any date, the value of Shares determined as follows:
(a) If the Shares are listed on any established stock exchange or a national market system, including without limitation, the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such Shares (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the date of determination, as reported in The Wall Street Journal or such other source as the Committee deems reliable;
(b) If the Shares are regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean of the closing bid and asked prices for the Shares on the date prior to the date of determination as reported in The Wall Street Journal or such other source as the Committee deems reliable; or
(c) In the absence of an established market for the Shares, the Fair Market Value thereof shall be determined in good faith by the Committee.
2.15 "Incentive Share Option" means an Option that is intended to meet the requirements of Section 422 of the Code or any successor provision thereto.
2.16 "Independent Director" means a member of the Board who is not an Employee of the Company.
2.17 "Non-Employee Director" means a member of the Board who qualifies as a "Non-Employee Director" as defined in Rule 16b-3(b)(3) of the Exchange Act, or any successor definition adopted by the Board.
2.18 "Non-Qualified Share Option" means an Option that is not intended to be an Incentive Share Option.
2.19 "Option" means a right granted to a Participant pursuant to Article 5 of the Plan to purchase a specified number of Shares at a specified price during specified time periods. An Option may be either an Incentive Share Option or a Non-Qualified Share Option.
2.20 "Participant" means a person who, as a member of the Board or Employee, has been granted an Award pursuant to the Plan.
2.21 "Plan" means this China Techfaith Wireless Communication Technology Limited 2005 Share Incentive Plan, as amended from time to time.
2.22 "PRC" means the People's Republic of China
2.23 "Restricted Share" means a Share awarded to a Participant pursuant to Article 6 that is subject to certain restrictions and may be subject to risk of forfeiture.
2.24 "Restricted Share Unit" means an Award granted pursuant to Section 8.6.
2.25 "Securities Act" means the Securities Act of 1933 of the United States, as amended.
2.26 "Share" means the ordinary share capital of the Company, par value US$0.00002 per share, and such other securities of the Company that may be substituted for Shares pursuant to Article 10.
2.27 "Share Appreciation Right" or "SAR" means a right granted pursuant to Article 7 to receive a payment equal to the excess of the Fair Market Value of a specified number of Shares on the date the SAR is exercised over the Fair Market Value on the date the SAR was granted as set forth in the applicable Award Agreement.
2.28 "Share Payment" means (a) a payment in the form of Shares, or (b) an option or other right to purchase Shares, as part of any bonus, deferred compensation or other arrangement, made in lieu of all or any portion of the compensation, granted pursuant to Article 8.
2.29 "Subsidiary" means any "subsidiary corporation" as defined in
Section 424(f) of the Code and any applicable regulations promulgated thereunder
or any corporation or other entity of which a majority of the outstanding voting
shares or voting power is beneficially owned directly or indirectly by the
Company.
ARTICLE 3
SHARES SUBJECT TO THE PLAN
3.1 Number of Shares.
(a) Subject to Article 7, Section 3.1(b) and 3.2, the aggregate number of Shares which may be issued or transferred pursuant to Awards under the Plan shall be 40,000,000 Shares.
(b) To the extent that an Award terminates, expires, or lapses for any reason, any Shares subject to the Award shall again be available for the grant of an Award pursuant to the Plan. Additionally, any Shares tendered or withheld to satisfy the grant or exercise price or tax withholding obligation pursuant to any Award shall again be available for the grant of an Award pursuant to the Plan. To the extent permitted by applicable law or any exchange rule, Shares issued in assumption of, or in substitution for, any outstanding awards of any entity acquired in any form of combination by the Company or any Subsidiary shall not be counted against Shares available for grant pursuant to this Plan.
3.2 Shares Distributed. Any Shares distributed pursuant to an Award may consist, in whole or in part, of authorized and unissued Shares, treasury or Shares purchased on the open market. Additionally, in the discretion of the Committee, American Depository Shares in an amount equal to the number of Shares which otherwise would be distributed pursuant to an Award may be distributed in lieu of Shares in settlement of any Award. If the number of Shares represented by an American Depository Share is other than on a one-to-one basis, the limitations of Section 3.1 shall be adjusted to reflect the distribution of American Depository Shares in lieu of Shares.
ARTICLE 4
ELIGIBILITY AND PARTICIPATION
4.1 Eligibility. Persons eligible to participate in this Plan include Employees, members of the Board and consultants of the Company or any of its Subsidiaries, as determined by the Committee.
4.2 Participation. Subject to the provisions of the Plan, the Committee may, from time to time, select from among all eligible individuals, those to whom Awards shall be granted and shall determine the nature and amount of each Award. No individual shall have any right to be granted an Award pursuant to this Plan.
4.3 Jurisdictions. In order to assure the viability of Awards granted to Participants employed in various jurisdictions, the Committee may provide for such special terms as it may consider necessary or appropriate to accommodate differences in local law, tax policy, or custom
applicable in the jurisdiction in which the Participant resides or is employed. Moreover, the Committee may approve such supplements to, or amendments, restatements, or alternative versions of, the Plan as it may consider necessary or appropriate for such purposes without thereby affecting the terms of the Plan as in effect for any other purpose; provided, however, that no such supplements, amendments, restatements, or alternative versions shall increase the share limitations contained in Section 3.1 of the Plan. Notwithstanding the foregoing, the Committee may not take any actions hereunder, and no Awards shall be granted, that would violate any Applicable Laws.
ARTICLE 5
OPTIONS
5.1 General. The Committee is authorized to grant Options to Participants on the following terms and conditions:
(a) Exercise Price. The exercise price per Share subject to an Award shall be determined by the Committee and set forth in the Award Agreement; provided that the exercise price for any Award shall not be less than Fair Market Value on the date the Award is granted.
(b) Time and Conditions of Exercise. The Committee shall determine
the time or times at which an Option may be exercised in whole or in part,
including exercise prior to vesting; provided that the term of any Option
granted under the Plan shall not exceed ten years, except as provided in Section
11.2. The Committee shall also determine any conditions, if any, that must be
satisfied before all or part of an Option may be exercised.
(c) Payment. The Committee shall determine the methods by which the exercise price of an Option may be paid, the form of payment, including, without limitation (i) cash or check denominated in U.S. Dollars, Chinese Renminbi, or any other local currency as approved by the Committee, (ii) Shares held for such period of time as may be required by the Committee in order to avoid adverse financial accounting consequences and having a Fair Market Value on the date of delivery equal to the aggregate exercise price of the Option or exercised portion thereof, (iii) by delivery of a notice that the Participant has placed a market sell order with a broker with respect to Shares then issuable upon exercise of the Option, and that the broker has been directed to pay a sufficient portion of the net proceeds of the sale to the Company in satisfaction of the Option exercise price; provided that payment of such proceeds is then made to the Company upon settlement of such sale), and the methods by which Shares shall be delivered or deemed to be delivered to Participants, or (iv) any combination of the foregoing. Notwithstanding any other provision of the Plan to the contrary, no Participant who is a member of the Board or an "executive officer" of the Company within the meaning of Section 13(k) of the Exchange Act shall be permitted to pay the exercise price of an Option in any method which would violate Section 13(k) of the Exchange Act.
(d) Evidence of Grant. All Options shall be evidenced by an Award Agreement between the Company and the Participant. The Award Agreement shall include such additional provisions as may be specified by the Committee.
5.2 Incentive Share Options. Incentive Share Options shall be granted only to
Employees of the Company or Subsidiary of the Company which is a corporation. Incentive Share Options may not be granted to Employees of a Related Entity. The terms of any Incentive Share Options granted pursuant to the Plan, in addition to the requirements of Section 5.1, must comply with the following additional provisions of this Section 5.2:
(a) Exercise Price. The exercise price per Share shall be set by the Committee; provided that subject to Section 5.2(e) the exercise price for any Incentive Share Option shall not be less than 100% of the Fair Market Value on the date of grant.
(b) Expiration. Subject to Section 5.2(e), an Incentive Share Option may not be exercised to any extent by anyone after the first to occur of the following events:
(i) Ten years from the date it is granted, unless an earlier time is set in the Award Agreement;
(ii) Three months after the Participant's termination of employment as an Employee; and
(iii) One year after the date of the Participant's termination of employment or service on account of Disability or death. Upon the Participant's Disability or death, any Incentive Share Options exercisable at the Participant's Disability or death may be exercised by the Participant's legal representative or representatives, by the person or persons entitled to do so pursuant to the Participant's last will and testament, or, if the Participant fails to make testamentary disposition of such Incentive Share Option or dies intestate, by the person or persons entitled to receive the Incentive Share Option pursuant to the applicable laws of descent and distribution.
(c) Individual Dollar Limitation. The aggregate Fair Market Value
(determined as of the time the Award is granted) of all Shares with respect to
which Incentive Share Options are first exercisable by a Participant in any
calendar year may not exceed $100,000 or such other limitation as imposed by
Section 422(d) of the Code, or any successor provision. To the extent that
Incentive Share Options are first exercisable by a Participant in excess of such
limitation, the excess shall be considered Non-Qualified Share Options.
(d) Ten Percent Owners. An Incentive Share Option shall be granted to any individual who, at the date of grant, owns shares possessing more than ten percent of the total combined voting power of all classes of equity securities of the Company only if such Award is granted at a price that is not less than 110% of Fair Market Value on the date of grant and the Award is exercisable for no more than five years from the date of grant.
(e) Notice of Disposition. The Participant shall give the Company prompt notice of any disposition of Shares acquired by exercise of an Incentive Share Option within (i) two years from the date of grant of such Incentive Share Option, or (ii) one year after the transfer of such Shares to the Participant.
(f) Right to Exercise. During a Participant's lifetime, an Incentive Share Option may be exercised only by the Participant.
5.3 Substitution of Share Appreciation Rights. The Committee may provide in the Award Agreement evidencing the grant of an Option that the Committee, in its sole discretion, shall have to right to substitute a Share Appreciation Right for such Option at any time prior to or upon exercise of such Option, provided that such Share Appreciation Right shall be exercisable for the same number of shares of Share as such substituted Option would have been exercisable for.
ARTICLE 6
RESTRICTED SHARES
6.1 Grant of Restricted Shares. The Committee is authorized to make Awards of Restricted Shares to any Participant selected by the Committee in such amounts and subject to such terms and conditions as determined by the Committee. All Awards of Restricted Shares shall be evidenced by an Award Agreement.
6.2 Issuance and Restrictions. Subject to Section 10.6, Restricted Shares shall be subject to such restrictions on transferability and other restrictions as the Committee may impose (including, without limitation, limitations on the right to vote Restricted Shares or the right to receive dividends on the Restricted Share). These restrictions may lapse separately or in combination at such times, pursuant to such circumstances, in such installments, or otherwise, as the Committee determines at the time of the grant of the Award or thereafter.
6.3 Forfeiture. Except as otherwise determined by the Committee at the time of the grant of the Award or thereafter, upon termination of employment or service during the applicable restriction period, Restricted Shares that are at that time subject to restrictions shall be forfeited; provided, however, that, except as otherwise provided by Section 10.6, the Committee may (a) provide in any Restricted Share Award Agreement that restrictions or forfeiture conditions relating to Restricted Shares will be waived in whole or in part in the event of terminations resulting from specified causes, and (b) in other cases waive in whole or in part restrictions or forfeiture conditions relating to Restricted Shares.
6.4 Certificates for Restricted Shares. Restricted Shares granted pursuant to the Plan may be evidenced in such manner as the Committee shall determine. If certificates representing Restricted Shares are registered in the name of the Participant, certificates must bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Restricted Shares, and the Company may, at its discretion, retain physical possession of the certificate until such time as all applicable restrictions lapse.
ARTICLE 7
SHARE APPRECIATION RIGHTS
7.1 Grant of Share Appreciation Rights.
(a) A Share Appreciation Right may be granted to any Participant selected by the Committee. A Share Appreciation Right shall be subject to such terms and conditions not
inconsistent with the Plan as the Committee shall impose and shall be evidenced by an Award Agreement.
(b) A Share Appreciation Right shall entitle the Participant (or other person entitled to exercise the Share Appreciation Right pursuant to the Plan) to exercise all or a specified portion of the Share Appreciation Right (to the extent then exercisable pursuant to its terms) and to receive from the Company an amount determined by multiplying the difference obtained by subtracting the exercise price per share of the Share Appreciation Right from the Fair Market Value of a Share on the date of exercise of the Share Appreciation Right by the number of Shares with respect to which the Share Appreciation Right shall have been exercised, subject to any limitations the Committee may impose.
7.2 Payment and Limitations on Exercise.
(a) Payment of the amounts determined under Section 7.1(b) above shall be in cash (denominated in U.S. Dollars, Chinese Renminbi, or any other local currency as approved by the Committee), in Shares (based on its Fair Market Value as of the date the Share Appreciation Right is exercised) or a combination of both, as determined by the Committee in the Award Agreement.
(b) To the extent payment for a Share Appreciation Right is to be made in cash the Award Agreements shall to the extent necessary to comply with the requirements to Section 409A of the Code, specify the date of payment which may be different than the date of exercise of the Share Appreciation right. If the date of payment for a Share Appreciation Right is later than the date of exercise, the Award Agreement may specify that the Participant be entitled to earnings on such amount until paid.
(c) To the extent any payment under Section 7.1(b) is effected in Shares it shall be made subject to satisfaction of all provisions of Article 5 above pertaining to Options.
ARTICLE 8
OTHER TYPES OF AWARDS
8.1 Dividend Equivalents. Any Participant selected by the Committee may be granted Dividend Equivalents based on the dividends declared on the Shares that are subject to any Award, to be credited as of dividend payment dates, during the period between the date the Award is granted and the date the Award is exercised, vests or expires, as determined by the Committee. Such Dividend Equivalents shall be converted to cash (denominated in U.S. Dollars, Chinese Renminbi, or any other local currency as approved by the Committee) or additional Shares by such formula and at such time and subject to such limitations as may be determined by the Committee.
8.2 Share Payments. Any Participant selected by the Committee may receive Share Payments in the manner determined from time to time by the Committee; provided, that unless otherwise determined by the Committee such Share Payments shall be made in lieu of base salary, bonus, or other cash compensation otherwise payable to such Participant. The number of shares shall be determined by the Committee and may be based upon the Performance Criteria or
other specific criteria determined appropriate by the Committee, determined on the date such Share Payment is made or on any date thereafter.
8.3 Deferred Shares. Any Participant selected by the Committee may be granted an award of Deferred Shares in the manner determined from time to time by the Committee. The number of shares of Deferred Shares shall be determined by the Committee and may be linked to such specific criteria determined to be appropriate by the Committee, in each case on a specified date or dates or over any period or periods determined by the Committee. Shares underlying a Deferred Share award will not be issued until the Deferred Share award has vested, pursuant to a vesting schedule or criteria set by the Committee. Unless otherwise provided by the Committee, a Participant awarded Deferred Shares shall have no rights as a Company shareholder with respect to such Deferred Shares until such time as the Deferred Share Award has vested and the Shares underlying the Deferred Share Award has been issued.
8.4 Restricted Share Units. The Committee is authorized to make Awards of Restricted Share Units to any Participant selected by the Committee in such amounts and subject to such terms and conditions as determined by the Committee. At the time of grant, the Committee shall specify the date or dates on which the Restricted Share Units shall become fully vested and nonforfeitable, and may specify such conditions to vesting as it deems appropriate. At the time of grant, the Committee shall specify the maturity date applicable to each grant of Restricted Share Units which shall be no earlier than the vesting date or dates of the Award and may be determined at the election of the grantee. On the maturity date, the Company shall transfer to the Participant one unrestricted, fully transferable Share for each Restricted Share Unit scheduled to be paid out on such date and not previously forfeited. The Committee shall specify the purchase price, if any, to be paid by the grantee to the Company for such Shares.
8.5 Term. Except as otherwise provided herein, the term of any Award of Dividend Equivalents, Share Payments, Deferred Share, or Restricted Share Units shall be set by the Committee in its discretion.
8.9 Exercise or Purchase Price. The Committee may establish the exercise or purchase price, if any, of any Award of Deferred Share, Share Payments or Restricted Share Units; provided, however, that such price shall not be less than the par value of a Share, unless otherwise permitted by Applicable Law.
8.10 Exercise Upon Termination of Employment or Service. An Award of Dividend Equivalents, Deferred Share, Share Payments, and Restricted Share Units shall only be exercisable or payable while the Participant is an Employee, Consultant or a member of the Board, as applicable; provided, however, that the Committee in its sole and absolute discretion may provide that an Award of Dividend Equivalents, Share Payments, Deferred Share, or Restricted Share Units may be exercised or paid subsequent to a termination of employment or service, as applicable, or following a Change of Control of the Company, or because of the Participant's retirement, death or Disability, or otherwise.
8.11 Form of Payment. Payments with respect to any Awards granted under this Article 8 shall be made in cash (denominated in U.S. Dollars, Chinese Renminbi, or any other
local currency as approved by the Committee), in Shares or a combination of both, as determined by the Committee.
8.12 Award Agreement. All Awards under this Article 8 shall be subject to such additional terms and conditions as determined by the Committee and shall be evidenced by an Award Agreement.
ARTICLE 9
PROVISIONS APPLICABLE TO AWARDS
9.1 Stand-Alone and Tandem Awards. Awards granted pursuant to the Plan may, in the discretion of the Committee, be granted either alone, in addition to, or in tandem with, any other Award granted pursuant to the Plan. Awards granted in addition to or in tandem with other Awards may be granted either at the same time as or at a different time from the grant of such other Awards.
9.2 Award Agreement. Awards under the Plan shall be evidenced by Award Agreements that set forth the terms, conditions and limitations for each Award which may include the term of an Award, the provisions applicable in the event the Participant's employment or service terminates, and the Company's authority to unilaterally or bilaterally amend, modify, suspend, cancel or rescind an Award.
9.3 Limits on Transfer. No right or interest of a Participant in any Award may be pledged, encumbered, or hypothecated to or in favor of any party other than the Company or a Subsidiary, or shall be subject to any lien, obligation, or liability of such Participant to any other party other than the Company or a Subsidiary. Except as otherwise provided by the Committee, no Award shall be assigned, transferred, or otherwise disposed of by a Participant other than by will or the laws of descent and distribution. The Committee by express provision in the Award or an amendment thereto may permit an Award (other than an Incentive Share Option) to be transferred to, exercised by and paid to certain persons or entities related to the Participant, including but not limited to members of the Participant's family, charitable institutions, or trusts or other entities whose beneficiaries or beneficial owners are members of the Participant's family and/or charitable institutions, or to such other persons or entities as may be expressly approved by the Committee, pursuant to such conditions and procedures as the Committee may establish. Any permitted transfer shall be subject to the condition that the Committee receive evidence satisfactory to it that the transfer is being made for estate and/or tax planning purposes (or to a "blind trust" in connection with the Participant's termination of employment or service with the Company or a Subsidiary to assume a position with a governmental, charitable, educational or similar non-profit institution) and on a basis consistent with the Company's lawful issue of securities.
9.4 Beneficiaries. Notwithstanding Section 9.3, a Participant may, in the manner determined by the Committee, designate a beneficiary to exercise the rights of the Participant and to receive any distribution with respect to any Award upon the Participant's death. A beneficiary, legal guardian, legal representative, or other person claiming any rights pursuant to the Plan is subject to all terms and conditions of the Plan and any Award Agreement applicable
to the Participant, except to the extent the Plan and Award Agreement otherwise provide, and to any additional restrictions deemed necessary or appropriate by the Committee. If the Participant is married and resides in a community property jurisdiction, a designation of a person other than the Participant's spouse as his or her beneficiary with respect to more than 50% of the Participant's interest in the Award shall not be effective without the prior written consent of the Participant's spouse. If no beneficiary has been designated or survives the Participant, payment shall be made to the person entitled thereto pursuant to the Participant's will or the laws of descent and distribution. Subject to the foregoing, a beneficiary designation may be changed or revoked by a Participant at any time provided the change or revocation is filed with the Committee.
9.5 Share Certificates. Notwithstanding anything herein to the contrary, the Company shall not be required to issue or deliver any certificates evidencing shares of Share pursuant to the exercise of any Award, unless and until the Board has determined, with advice of counsel, that the issuance and delivery of such certificates is in compliance with all Applicable Laws, regulations of governmental authorities and, if applicable, the requirements of any exchange on which the Shares are listed or traded. All Share certificates delivered pursuant to the Plan are subject to any stop-transfer orders and other restrictions as the Committee deems necessary or advisable to comply with federal, state, or foreign jurisdiction, securities or other laws, rules and regulations and the rules of any national securities exchange or automated quotation system on which the Shares are listed, quoted, or traded. The Committee may place legends on any Share certificate to reference restrictions applicable to the Share. In addition to the terms and conditions provided herein, the Board may require that a Participant make such reasonable covenants, agreements, and representations as the Board, in its discretion, deems advisable in order to comply with any such laws, regulations, or requirements. The Committee shall have the right to require any Participant to comply with any timing or other restrictions with respect to the settlement or exercise of any Award, including a window-period limitation, as may be imposed in the discretion of the Committee.
9.6 Paperless Administration. Subject to Applicable Laws, the Committee may make Awards, provide applicable disclosure and procedures for exercise of Awards by an internet website or interactive voice response system for the paperless administration of Awards.
9.7 Foreign Currency. A Participant may be required to provide evidence that any U.S. dollars used to pay the exercise price of any Award were acquired and taken out of the jurisdiction in which the Participant resides in accordance with Applicable Laws, including foreign exchange control laws and regulations. In the event the exercise price for an Award is paid in Chinese Renminbi or other foreign currency, as permitted by the Committee, the amount payable will be determined by conversion from U.S. dollars at the official rate promulgated by the People's Bank of China for Chinese Renminbi, or for jurisdictions other than the PRC, the exchange rate as selected by the Committee on the date of exercise.
ARTICLE 10
CHANGES IN CAPITAL STRUCTURE
10.1 Adjustments. In the event of any dividend, share split, combination or exchange of Shares, amalgamation, arrangement or consolidation, spin-off, recapitalization or other distribution (other than normal cash dividends) of Company assets to its shareholders, or any other change affecting the shares of Shares or the share price of a Share, the Committee shall make such proportionate adjustments, if any, as the Committee in its discretion may deem appropriate to reflect such change with respect to (a) the aggregate number and type of shares that may be issued under the Plan (including, but not limited to, adjustments of the limitations in Section 3.1); (b) the terms and conditions of any outstanding Awards (including, without limitation, any applicable performance targets or criteria with respect thereto); and (c) the grant or exercise price per share for any outstanding Awards under the Plan.
10.2 Acceleration upon a Change of Control. Except as may otherwise be provided in any Award Agreement or any other written agreement entered into by and between the Company and a Participant, if a Change of Control occurs and a Participant's Options, Restricted Share or Share Appreciation Rights settled in Shares are not converted, assumed, or replaced by a successor, such Awards shall become fully exercisable and all forfeiture restrictions on such Awards shall lapse; and provided such Change of Control is a change in the ownership or effective control of the Company or in the ownership of or a substantial portion of the assets of the Company within the meaning of Section 409A of the Code, then all Restricted Share Units, Deferred Share and Performance Share shall become deliverable upon the Change of Control. Upon, or in anticipation of, a Change of Control, the Committee may in its sole discretion provide for (i) any and all Awards outstanding hereunder to terminate at a specific time in the future and shall give each Participant the right to exercise such Awards during a period of time as the Committee shall determine, (ii) either the purchase of any Award for an amount of cash equal to the amount that could have been attained upon the exercise of such Award or realization of the Participant's rights had such Award been currently exercisable or payable or fully vested (and, for the avoidance of doubt, if as of such date the Committee determines in good faith that no amount would have been attained upon the exercise of such Award or realization of the Participant' s rights, then such Award may be terminated by the Company without payment), (iii) the replacement of such Award with other rights or property selected by the Committee in its sole discretion the assumption of or substitution of such Award by the successor or surviving corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of Shares and prices, or (iv) provide for payment of Awards in cash based on the value of Shares on the date of the Change of Control plus reasonable interest on the Award through the date such Award would otherwise be vested or have been paid in accordance with its original terms, if necessary to comply with Section 409A of the Code.
10.3 Outstanding Awards - Other Changes. In the event of any other change in the capitalization of the Company or corporate change other than a Change in Control or those specifically referred to in this Article 10, including any unusual or nonrecurring transactions or events affecting the Company, or any Subsidiary, or the financial statements of the Company or any Subsidiary, or of changes in Applicable Laws, or accounting principles, and whenever the Committee determines that action is appropriate in order to prevent the dilution or enlargement
of the benefits or potential benefits intended to be made available under the Plan or with respect to any Award under the Plan, to facilitate such transactions or events or to give effect to such changes in laws, regulations or principles, the Committee, in its sole discretion and on such terms and conditions as it deems appropriate, either by amendment of the terms of any outstanding Awards or by action taken prior to the occurrence of such transaction or event and either automatically or upon the Participant's request, is hereby authorized to take any one or more of the following actions:
(a) To provide for either (i) termination of any such Award in exchange for an amount of cash and/or other property, if any, equal to the amount that would have been attained upon the exercise of such Award (and, for the avoidance of doubt, if as of the date of the occurrence of the transaction or event described in this Section 10.3 the Committee determines in good faith that no amount would have been attained upon the exercise of such Award, then such Award may be terminated by the Company without payment) or (ii) the replacement of such Award with other rights or property selected by the Committee in its sole discretion;
(b) To provide that such Award be assumed by the successor or survivor corporation, or a parent or subsidiary thereof, or shall be substituted for by similar options covering the shares of the successor or survivor corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares and exercise prices; and
(c) To make adjustments in the number and type of Shares (or other securities or property) subject to outstanding Awards and/or in the terms and conditions of the Awards (including the exercise price), and the criteria included in, outstanding Awards and Awards which may be granted in the future;
(d) To provide that such Award shall be exercisable or fully vested with respect to all shares covered thereby, notwithstanding anything to the contrary in the Plan or the applicable Award Agreement; and
(e) To provide that the Award cannot vest or be exercised after such event.
10.4 No Other Rights. Except as expressly provided in the Plan, no Participant shall have any rights by reason of any subdivision or consolidation of Shares of any class, the payment of any dividend, any increase or decrease in the number of shares of any class or any dissolution, liquidation, merger, or consolidation of the Company or any other corporation. Except as expressly provided in the Plan or pursuant to action of the Committee under the Plan, no issuance by the Company of shares of any class, or securities convertible into shares of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number of shares subject to an Award or the grant or exercise price of any Award.
ARTICLE 11
ADMINISTRATION
11.1 Committee. The Plan shall be administered by the Compensation Committee of the Board; provided, however that the Compensation Committee may delegate to a committee the authority to grant or amend Awards to Participants other than Independent Directors and
executive officers of the Company (such committee being the "Committee"). The Committee shall consist of two or more individuals who are officers and/or directors of the Company. Reference to the Committee shall refer to the Board if the Compensation Committee ceases to exist and the Board does not appoint a successor Committee. Notwithstanding the foregoing, the full Board, acting by majority of its members in office shall conduct the general administration of the Plan if required by Applicable Law, and with respect to Awards granted to Independent Directors and executive officers of the Company and for purposes of such Awards the term "Committee" as used in the Plan shall be deemed to refer to the Board.
11.2 Action by the Committee. A majority of the Committee shall constitute a quorum. The acts of a majority of the members present at any meeting at which a quorum is present, and acts approved in writing by a majority of the Committee in lieu of a meeting, shall be deemed the acts of the Committee. Each member of the Committee is entitled to, in good faith, rely or act upon any report or other information furnished to that member by any officer or other employee of the Company or any Subsidiary, the Company's independent certified public accountants, or any executive compensation consultant or other professional retained by the Company to assist in the administration of the Plan.
11.3 Authority of Committee. Subject to any specific designation in the Plan, the Committee has the exclusive power, authority and discretion to:
(a) Designate Participants to receive Awards;
(b) Determine the type or types of Awards to be granted to each Participant;
(c) Determine the number of Awards to be granted and the number of Shares to which an Award will relate;
(d) Determine the terms and conditions of any Award granted pursuant to the Plan, including, but not limited to, the exercise price, grant price, or purchase price, any restrictions or limitations on the Award, any schedule for lapse of forfeiture restrictions or restrictions on the exercisability of an Award, and accelerations or waivers thereof, any provisions related to non-competition and recapture of gain on an Award, based in each case on such considerations as the Committee in its sole discretion determines;
(e) Determine whether, to what extent, and pursuant to what circumstances an Award may be settled in, or the exercise price of an Award may be paid in, cash, Shares, other Awards, or other property, or an Award may be canceled, forfeited, or surrendered;
(f) Prescribe the form of each Award Agreement, which need not be identical for each Participant;
(g) Decide all other matters that must be determined in connection with an Award;
(h) Establish, adopt, or revise any rules and regulations as it may deem necessary or advisable to administer the Plan;
(i) Interpret the terms of, and any matter arising pursuant to, the Plan or any Award Agreement; and
(j) Make all other decisions and determinations that may be required pursuant to the Plan or as the Committee deems necessary or advisable to administer the Plan.
11.4 Decisions Binding. The Committee's interpretation of the Plan, any Awards granted pursuant to the Plan, any Award Agreement and all decisions and determinations by the Committee with respect to the Plan are final, binding, and conclusive on all parties.
ARTICLE 12
EFFECTIVE AND EXPIRATION DATE
12.1 Effective Date. The Plan is effective as of the date the Plan is approved by the Company's shareholders (the "Effective Date"). The Plan will be deemed to be approved by the shareholders if it receives the affirmative vote of the holders of a majority of the share capital of the Company present or represented and entitled to vote at a meeting duly held in accordance with the applicable provisions of the Company's Memorandum of Association and Articles of Association. Notwithstanding the foregoing, the Effective Date shall not be later than the first anniversary of the date on which the Board adopts the Plan (the "Board Adoption Date"). Between the Board Adoption Date and the Effective Date, the Committee may grant Options to any persons pursuant to the terms of the Plan, provided that none of such persons shall be allowed to exercise the Options prior to the Effective Date.
12.2 Expiration Date. The Plan will expire on, and no Award may be granted pursuant to the Plan after, the tenth anniversary of the Effective Date. Any Awards that are outstanding on the tenth anniversary of the Effective Date shall remain in force according to the terms of the Plan and the applicable Award Agreement.
ARTICLE 13
AMENDMENT, MODIFICATION, AND TERMINATION
13.1 Amendment, Modification, And Termination. With the approval of the
Board, at any time and from time to time, the Committee may terminate, amend or
modify the Plan; provided, however, that (a) to the extent necessary and
desirable to comply with any applicable law, regulation, or stock exchange rule,
the Company shall obtain shareholder approval of any Plan amendment in such a
manner and to such a degree as required, and (b) shareholder approval is
required for any amendment to the Plan that (i) increases the number of Shares
available under the Plan (other than any adjustment as provided by Article 10),
(ii) permits the Committee to grant Options with an exercise price that is below
Fair Market Value on the date of grant, (iii) permits the Committee to extend
the exercise period for an Option beyond ten years from the date of grant, or
(iv) results in a material increase in benefits or a change in eligibility
requirements.
13.2 Awards Previously Granted. Except with respect to amendments made pursuant to Section 14.14, no termination, amendment, or modification of the Plan shall adversely affect
in any material way any Award previously granted pursuant to the Plan without the prior written consent of the Participant.
ARTICLE 14
GENERAL PROVISIONS
14.1 No Rights to Awards. No Participant, employee, or other person shall have any claim to be granted any Award pursuant to the Plan, and neither the Company nor the Committee is obligated to treat Participants, employees, and other persons uniformly.
14.2 No Shareholders Rights. No Award gives the Participant any of the rights of a Shareholder of the Company unless and until Shares are in fact issued to such person in connection with such Award.
14.3 Taxes. No Shares shall be delivered under the Plan to any Participant until such Participant has made arrangements acceptable to the Committee for the satisfaction of any income and employment tax withholding obligations under Applicable Laws, including without limitation the PRC tax laws, rules, regulations and government orders or the U.S. Federal, state or local tax laws, as applicable. The Company or any Subsidiary shall have the authority and the right to deduct or withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy federal, state, local and foreign taxes (including the Participant's payroll tax obligations) required by law to be withheld with respect to any taxable event concerning a Participant arising as a result of this Plan. The Committee may in its discretion and in satisfaction of the foregoing requirement allow a Participant to elect to have the Company withhold Shares otherwise issuable under an Award (or allow the return of Shares) having a Fair Market Value equal to the sums required to be withheld. Notwithstanding any other provision of the Plan, the number of Shares which may be withheld with respect to the issuance, vesting, exercise or payment of any Award (or which may be repurchased from the Participant of such Award after such Shares were acquired by the Participant from the Company) in order to satisfy the Participant's federal, state, local and foreign income and payroll tax liabilities with respect to the issuance, vesting, exercise or payment of the Award shall, unless specifically approved by the Committee, be limited to the number of Shares which have a Fair Market Value on the date of withholding or repurchase equal to the aggregate amount of such liabilities based on the minimum statutory withholding rates for federal, state, local and foreign income tax and payroll tax purposes that are applicable to such supplemental taxable income.
14.4 No Right to Employment or Services. Nothing in the Plan or any Award Agreement shall interfere with or limit in any way the right of the Service Recipient to terminate any Participant's employment or services at any time, nor confer upon any Participant any right to continue in the employ or service of any Service Recipient.
14.5 Unfunded Status of Awards. The Plan is intended to be an "unfunded" plan for incentive compensation. With respect to any payments not yet made to a Participant pursuant to an Award, nothing contained in the Plan or any Award Agreement shall give the Participant any rights that are greater than those of a general creditor of the Company or any Subsidiary.
14.6 Indemnification. To the extent allowable pursuant to applicable law, each
member of the Committee or of the Board shall be indemnified and held harmless by the Company from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by such member in connection with or resulting from any claim, action, suit, or proceeding to which he or she may be a party or in which he or she may be involved by reason of any action or failure to act pursuant to the Plan and against and from any and all amounts paid by him or her in satisfaction of judgment in such action, suit, or proceeding against him or her; provided he or she gives the Company an opportunity, at its own expense, to handle and defend the same before he or she undertakes to handle and defend it on his or her own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled pursuant to the Company's Memorandum of Association and Articles of Association,, as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless.
14.7 Relationship to other Benefits. No payment pursuant to the Plan shall be taken into account in determining any benefits pursuant to any pension, retirement, savings, profit sharing, group insurance, welfare or other benefit plan of the Company or any Subsidiary except to the extent otherwise expressly provided in writing in such other plan or an agreement thereunder.
14.8 Expenses. The expenses of administering the Plan shall be borne by the Company and its Subsidiaries.
14.9 Titles and Headings. The titles and headings of the Sections in the Plan are for convenience of reference only and, in the event of any conflict, the text of the Plan, rather than such titles or headings, shall control.
14.10 Fractional Shares. No fractional shares of Share shall be issued and the Committee shall determine, in its discretion, whether cash shall be given in lieu of fractional shares or whether such fractional shares shall be eliminated by rounding up or down as appropriate.
14.11 Limitations Applicable to Section 16 Persons. Notwithstanding any other provision of the Plan, the Plan, and any Award granted or awarded to any Participant who is then subject to Section 16 of the Exchange Act, shall be subject to any additional limitations set forth in any applicable exemptive rule under Section 16 of the Exchange Act (including any amendment to Rule 16b-3 of the Exchange Act) that are requirements for the application of such exemptive rule. To the extent permitted by applicable law, the Plan and Awards granted or awarded hereunder shall be deemed amended to the extent necessary to conform to such applicable exemptive rule.
14.12 Government and Other Regulations. The obligation of the Company to make payment of awards in Share or otherwise shall be subject to all Applicable Laws, rules, and regulations, and to such approvals by government agencies as may be required. The Company shall be under no obligation to register any of the Shares paid pursuant to the Plan under the Securities Act or any other similar law in any applicable jurisdiction. If the Shares paid pursuant to the Plan may in certain circumstances be exempt from registration pursuant to the Securities Actor other Applicable Laws the Company may restrict the transfer of such shares in such
manner as it deems advisable to ensure the availability of any such exemption.
14.13 Governing Law. The Plan and all Award Agreements shall be construed in accordance with and governed by the laws of Bermuda.
14.14 Section 409A. To the extent that the Committee determines that any Award granted under the Plan is or may become subject to Section 409A of the Code, the Award Agreement evidencing such Award shall incorporate the terms and conditions required by Section 409A of the Code. To the extent applicable, the Plan and the Award Agreements shall be interpreted in accordance with Section 409A of the Code and the U.S. Department of Treasury regulations and other interpretative guidance issued thereunder, including without limitation any such regulation r or other guidance that may be issued after the Effective Date. Notwithstanding any provision of the Plan to the contrary, in the event that following the Effective Date the Committee determines that any Award may be subject to Section 409A of the Code and related Department of Treasury guidance (including such Department of Treasury guidance as may be issued after the Effective Date), the Committee may adopt such amendments to the Plan and the applicable Award agreement or adopt other policies and procedures (including amendments, policies and procedures with retroactive effect), or take any other actions, that the Committee determines is necessary or appropriate to (a) exempt the Award from Section 409A of the Code and /or preserve the intended tax treatment of the benefits provided with respect to the Award, or (b) comply with the requirements of Section 409A of the Code and related U.S. Department of Treasury guidance.
14.15 Appendices. The Committee may approve such supplements, amendments or appendices to the Plan as it may consider necessary or appropriate for purposes of compliance with applicable laws or otherwise and such supplements, amendments or appendices shall be considered a part of the Plan; provided, however, that no such supplements shall increase the share limitations contained in Sections 3.1 of the Plan.
* * * * *
I hereby certify that the foregoing Plan was duly adopted by the Board of Directors of China Techfaith Wireless Communication Technology Limited on March 18, 2005.
* * * * *
I hereby certify that the foregoing Plan was approved by the shareholders of China Techfaith Wireless Communication Technology Limited on March 18, 2005.
Executed on this 19th day of April 2005.
/s/ Eva Hon -------------------------------- Name: Eva Hon Title: Company Secretary |
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the use in the Registration Statement of China Techfaith Wireless Technology Limited on Form F-1 of our audit report dated March 21, 2005, appearing in the prospectus, which is part of this Registration Statement.
We also consent to the reference made to us under the headings "Selected Consolidated Financial Data" and "Experts" in such prospectus.
/s/ Deloitte Touche Tohmatsu Hong Kong April 20, 2005 |
Exhibit 23.2
[LETTERHEAD OF CONYERS DILL & PEARMAN]
April 20, 2005
China Techfaith Wireless
Communication Technology Limited
3/F M8 West, No. 1 Jiu Xian Qiao East Road
Chao Yang District
Beijing 100016, People's Republic of China
Ladies and Gentlemen:
We hereby consent to the use of our name under the captions "Enforceability of Civil Liabilities", "Taxation" and "Legal Matters" in the prospectus included in the registration statement on Form F-1, originally filed by China Techfaith Wireless Communication Technology Limited on April 7, 2005, with the Securities and Exchange Commission under the Securities Act of 1933, as amended. In giving such consent, we do not thereby admit that we come within the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the regulations promulgated thereunder.
Sincerely yours,
/s/ Conyers Dill & Pearman |
EXHIBIT 23.3
41st Floor, One Exchange Square
8 Connaught Place, Central
Hong Kong
Tel: (852) 2522-7886 Fax: (852) 2522-7006
www.lw.com
[LETTERHEAD OF
LATHAM & WATKINS LLP]
FIRM/AFFILIATE OFFICES
Boston New Jersey Brussels New York Chicago Northern Virginia Frankfurt Orange County Hamburg Paris Hong Kong San Diego London San Francisco Los Angeles Silicon Valley Milan Singapore Moscow Tokyo Washington, D.C. April 20, 2005 China Techfaith Wireless Communication Technology Limited 3/F M8 West, No. 1 Jiu Xian Qiao East Road Chao Yang District Beijing 100016 People's Republic of China |
Ladies and Gentlemen:
We hereby consent to the use of our name under the captions "Taxation" and "Legal Matters" in the prospectus included in the registration statement on Form F-1, originally filed by China Techfaith Wireless Communication Technology Limited on April 7, 2005, with the Securities and Exchange Commission under the Securities Act of 1933, as amended. In giving such consent, we do not thereby admit that we come within the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the regulations promulgated thereunder.
Sincerely yours,
/s/ Latham & Watkins LLP |
Resident partners: Joseph A. Bevash (US), Sabrina Y. T. Maguire (US), John A. Otoshi (US), Mitchell D. Stocks (US), David Zhang (US)
EXHIBIT 23.4
[LETTERHEAD OF GUANTAO LAW FIRM]
April 20, 2005
China Techfaith Wireless
Communication Technology Limited
3/F M8 West, No. 1
Jiu Xian Qiao East Road
Chao Yang District
Beijing 100016
People's Republic of China
Ladies and Gentlemen:
We hereby consent to the use of our name under the captions "Enforceability of Civil Liabilities" and "Legal Matters" in the prospectus included in the registration statement on Form F-1, originally filed by China Techfaith Wireless Communication Technology Limited on April 7, 2005, with the Securities and Exchange Commission under the Securities Act of 1933, as amended. In giving such consent, we do not thereby admit that we come within the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the regulations promulgated thereunder.
Sincerely yours,
/s/ Guantao Law Firm |