Form 20-F
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(Mark One)
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REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR (G) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
OR
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2010.
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
OR
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SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
Date of event requiring this shell company report
Commission file number: 000-51242
CHINA TECHFAITH WIRELESS COMMUNICATION TECHNOLOGY LIMITED
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrants name into English)
Cayman Islands
(Jurisdiction of incorporation or organization)
No. 13, YongChang North Road
Beijing Economic-Technological Development Area (Yi Zhuang)
Beijing 100176
Peoples Republic of China
(Address of principal executive offices)
Jay Ji
Director of Investor Relations
China Techfaith Wireless Communication Technology Limited
No. 13, YongChang North Road
Beijing Economic-Technological Development Area (Yi Zhuang)
Beijing 100176
Peoples Republic of China
Phone: +86 10 5822 8390
Email: Jay.ji@techfaith.cn
(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
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Title of each class
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Name of each exchange on which registered |
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Ordinary shares, par value US$0.00002 per share*
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The NASDAQ Stock Market LLC |
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(The NASDAQ Global Market) |
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* |
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Not for trading, but only in connection with the listing on The NASDAQ
Global Market of American depositary shares, each representing 15
ordinary shares. |
Securities registered or to be registered pursuant to Section 12(g) of the Act.
NONE
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
NONE
(Title of Class)
Indicate the number of outstanding shares of each of the issuers classes of capital or common
stock as of the close of the period covered by the annual report: 794,003,193 ordinary shares, par
value US$0.00002 per share.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o No þ
If this report is an annual or transition report, indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o |
Indicate by check mark which basis of accounting the registrant has used to prepare the financial
statements included in this filing:
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US GAAP þ
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International Financial Reporting Standards as issued by
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Other o |
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the International Accounting Standards Board o |
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If Other has been checked in response to the previous question, indicate by check mark which
financial statement item the registrant has elected to follow. Item 17 o Item 18 o
If this is an annual report, indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes o No þ
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be
filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court. Yes o No o
TABLE OF CONTENTS
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2
INTRODUCTION
In this annual report, unless otherwise indicated,
China or PRC refers to the Peoples Republic of China, and solely for the purpose of this
annual report, excludes Taiwan, Hong Kong and Macau; and
Glomate refers to Glomate Mobile (Beijing) Co., Ltd., our 51% owned subsidiary in China;
One Net refers to One Net Entertainment Limited (formerly known as Techfaith Interactive
Technology (Beijing) Limited, and before then, Techfaith Wireless Communication Technology
(Beijing) Limited II and Beijing Centel Technology R&D Co., Ltd.), our 67.8% owned subsidiary in
China;
QIGI Technology refers to QIGI&BODEE Technology (Beijing) Co., Ltd., our variable interest
entity in China;
RMB refers to Renminbi, the legal currency of China, and $, dollars, US$ and U.S.
dollars refer to the legal currency of the United States;
shares or ordinary shares refers to our ordinary shares and ADSs refers to our American
depositary shares, each of which represents 15 ordinary shares;
Tecface Technology refers to Tecface Communication Technology (Beijing) Limited (formerly known
as STEP Technologies (Beijing)Co., Ltd), our wholly owned subsidiary in China;
Techfaith China refers to Techfaith Wireless Communication Technology (Beijing) Limited
(formerly known as Beijing Techfaith R&D Co., Ltd.), our wholly owned subsidiary in China;
Techfaith Hangzhou refers to Techfaith Wireless Communication Technology (Hangzhou) Limited,
our wholly owned subsidiary in China;
Techfaith Intelligent Handset Beijing refers to Techfaith Intelligent Handset Technology
(Beijing) Limited, our wholly owned subsidiary in China;
Techfaith Interactive refers to Beijing Techfaith Interactive Internet Technology Limited, our
variable interest entity in China;
Techfaith Shanghai refers to Techfaith Wireless Communication Technology (Shanghai) Limited
(formerly known as Leadtech Communication Technology (Shanghai) Limited), our wholly owned
subsidiary in China;
Techfaith Shenzhen refers to Techfaith Intelligent Handset Technology (Shenzhen) Limited, our
wholly owned subsidiary in China;
TechSoft refers to Techfaith Software (China) Limited, a wholly owned subsidiary, located in
China, of Techfaith Software (China) Holding Limited, our 70% owned joint venture with QUALCOMM
Incorporated in the Cayman Islands; and
we, us, our company, our and Techfaith refer to China Techfaith Wireless Communication
Technology Limited, its subsidiaries and variable interest entities.
We and certain selling shareholders of our company completed the initial public offering of
8,726,957 ADSs, each representing 15 of our ordinary shares, par value US$0.00002 per share, in May
2005. On May 5, 2005, we listed our ADSs on the NASDAQ Global Market, or NASDAQ, under the symbol
CNTF.
4
PART I
ITEM 1. Identity of Directors, Senior Management and Advisers
Not Applicable.
ITEM 2. Offer Statistics and Expected Timetable
Not Applicable.
ITEM 3. Key Information
A. Selected Financial Data
The following tables set forth our selected consolidated financial information. You should read the
following information in conjunction with Item 5. Operating and Financial Review and Prospects.
The selected consolidated statement of operations data for the years ended December 31, 2008, 2009
and 2010 and the selected consolidated balance sheet data as of December 31, 2009 and 2010 have
been derived from our audited consolidated financial statements and should be read in conjunction
with those statements, which are included in this annual report beginning on page F-1. The selected
consolidated statement of operations data for the years ended December 31, 2006 and 2007 and the
selected consolidated balance sheet data as of December 31, 2006, 2007 and 2008 have been derived
from our audited consolidated financial statements, which are not included in this annual report.
Our consolidated financial statements as of and for the year then ended December 31, 2009 have been
restated. For details, see Note 3, Restatement, to our consolidated financial statements
included in this annual report on Form 20-F and Item 5.A. Operating and Financial Review and
Prospects Operating Results Restatement of Previously-Issued Financial Statements. In
addition, we adopted authoritative guidance on accounting for uncertainty in income taxes on
January 1, 2007, prospectively. We also adopted authoritative guidance on noncontrolling interests
in consolidated financial statements on January 1, 2009, retrospectively.
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For the Year Ended December 31, |
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2009 |
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2006 |
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2007 |
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2008 |
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(As restated) |
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2010 |
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(In thousands, except share, per share and per ADS data) |
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Consolidated Statement of
Operations Data |
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Net revenues |
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$ |
80,804 |
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$ |
143,444 |
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$ |
208,850 |
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$ |
211,076 |
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$ |
271,877 |
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Gross profit |
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25,699 |
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38,649 |
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41,165 |
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38,211 |
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67,092 |
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Operating expenses |
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(40,728 |
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(47,440 |
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(40,125 |
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(24,881 |
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(32,323 |
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Government subsidy income |
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180 |
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1,734 |
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3,081 |
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481 |
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159 |
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Other operating income |
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2,443 |
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1,109 |
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Income (loss) from operations |
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(14,849 |
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(7,057 |
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6,564 |
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13,811 |
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36,037 |
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Equity in loss of an affiliate |
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(393 |
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(851 |
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Net income (loss) |
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(10,208 |
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(3,621 |
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7,349 |
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2,386 |
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28,658 |
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Less: Net loss (income)
attributable to
noncontrolling interest |
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1,808 |
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1,200 |
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652 |
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2,028 |
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(818 |
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Net income (loss)
attributable to Techfaith |
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$ |
(8,793 |
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$ |
(3,272 |
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$ |
8,001 |
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$ |
4,414 |
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$ |
27,840 |
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Earnings per share: |
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Net income (loss) per share
attributable to Techfaith |
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Basic |
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$ |
(0.01 |
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$ |
(0.01 |
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$ |
0.01 |
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$ |
0.01 |
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$ |
0.04 |
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Diluted |
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$ |
(0.01 |
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$ |
(0.01 |
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$ |
0.01 |
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$ |
0.01 |
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$ |
0.03 |
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Shares used in per share
computation |
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Basic |
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656,255,882 |
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649,807,421 |
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649,972,306 |
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650,057,866 |
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732,784,822 |
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Diluted |
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656,255,882 |
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649,807,421 |
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650,062,312 |
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720,889,120 |
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795,843,605 |
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5
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As of December 31, |
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2009 |
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2006 |
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2007 |
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2008 |
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(As restated) |
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2010 |
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(In thousands) |
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Consolidated Balance Sheet
Data |
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Cash and cash equivalents |
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$ |
113,172 |
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$ |
84,754 |
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$ |
78,926 |
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$ |
130,544 |
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$ |
198,536 |
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Accounts receivable |
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37,229 |
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40,014 |
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37,804 |
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28,992 |
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19,241 |
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Inventories |
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8,546 |
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50,763 |
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37,763 |
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22,937 |
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17,745 |
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Total assets |
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207,714 |
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234,861 |
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220,064 |
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250,667 |
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303,953 |
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Total current liabilities |
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37,123 |
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60,739 |
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28,248 |
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28,700 |
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33,976 |
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Total non-current liabilities |
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18,029 |
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430 |
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Total liabilities and equity |
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$ |
207,714 |
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$ |
234,861 |
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$ |
220,064 |
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$ |
250,667 |
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$ |
303,953 |
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Number of treasury stock |
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8,655,000 |
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8,655,000 |
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918,000 |
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Number of ordinary shares
issued |
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649,692,954 |
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649,913,136 |
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650,034,590 |
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650,156,045 |
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794,003,193 |
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B. Capitalization and Indebtedness
Not Applicable.
C. Reasons for the Offer and Use of Proceeds
Not Applicable.
D. Risk Factors
Risks Related to Our Business
Our limited operating history makes evaluating our business and prospects difficult.
We commenced operations in July 2002 and completed our first mobile handset design project in
September 2003. We started selling completed handsets in 2006 and such product sales constituted
81.9% of our total net revenues in 2010. We started to develop our online and mobile game business
in 2008, which constituted less than 1.0% and 4.0% of our total revenues in 2009 and 2010,
respectively; we expect it to become an increasingly significant contributor to our total net
revenues in the future. We have a limited operating history, especially in the game business, which
may not provide a meaningful basis for evaluating our business, financial performance and
prospects. We may not have sufficient experience to address the risks frequently encountered by
early stage companies, including our potential inability to:
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achieve and maintain our profitability and margins; |
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acquire and retain customers; |
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attract, train and retain qualified personnel; |
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maintain adequate control over our costs and expenses; |
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keep up with evolving industry standards and market developments; or |
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respond to competitive and changing market conditions. |
If we are unsuccessful in addressing any of the above risks, our business may be materially and
adversely affected.
Also, we recently restated our financial statements as of and for the year ended December 31, 2009.
The restatement is described in detail in
Note 3, Restatement, to our consolidated financial statements included in this annual report on
Form 20-F and Item 5.A. Operating and Financial Review and Prospects Operating Results -
Restatement of Previously-Issued Financial Statements. Despite our best efforts to carefully
consider and analyze accounting implications of non-routine events, we cannot be sure that there
will not be any restatement of our financial statements in the future, which may further complicate
attempts to evaluate our business and prospects.
6
If we do not succeed in our expansions into new businesses, our future results of operations and
growth prospects may be materially and adversely affected.
As part of our growth strategy, we enter into new businesses from time to time, including the
branded mobile phone business and the game business, to generate additional revenue streams.
Expansions into new businesses may present operating and marketing challenges that are different
from those that we currently encounter. For each new business into which we enter, we face
competition from existing leading players in that business. If we cannot successfully address the
new challenges and compete effectively against the existing leading players in each new business,
we may be unable to develop a sufficiently large customer and user base, recover costs incurred for
developing and marketing new businesses, and eventually achieve profitability from these
businesses, and our future results of operations and growth prospects may be materially and
adversely affected.
The slow-down of economic growth in China and the global economic downturn have adversely affected
our business, and may materially and adversely affect our business growth and profitability.
Our business and operations are primarily based in China and the majority of our revenues are
derived from our operations in China. Accordingly, our financial results have been, and are
expected to continue to be, affected by the economy and the mobile handset and mobile and online
game industries in China. Although the economy in China has grown significantly in the past
decades, any slow-down of economic growth in China could reduce expenditures for mobile handsets
and mobile and online games, which in turn may adversely affect our operating results and financial
condition.
The global financial markets have experienced significant disruptions since 2008, and most of the
worlds major economies entered into recession, with recovery being show and uncertain. Chinas
economy recovered after a significant slowdown that began in the second half of 2008, but it is
uncertain whether such recovery will continue into 2011 and beyond. Entering into 2011, inflation
remains the main risk for Chinas economy. The main causes of Chinas inflationary pressure include
the massive liquidity stimulus introduced after the global financial crisis in 2009 and rising
commodity prices. To cope with the global economic downturn and inflation, we undertook a human
resource restructuring in 2008 and streamlined business processes to improve efficiency. As a
result, the number of our employees was reduced from 1,363 as of December 31, 2007 to 522 as of
December 31, 2008. As of December 31, 2009 and 2010, we had 518 and 471 employees, respectively.
There is no assurance that we can continue to effectively meet market demand with our current
restructured work force. If we cannot timely and effectively meet market demand with our
restructured work force, our business may be materially and adversely affected.
Any persistent slow-down in Chinas economy or the recurrence of any financial disruptions may
materially and adversely affect our business, operating results and financial condition in a number
of ways. For example, the weakness in the economy could erode consumer confidence which, in turn,
could result in changes to consumer spending patterns relating to mobile handset and gaming
products and services. If consumer demand for the products and services we offer decreases, our
revenues may decline. Furthermore, the recent financial turmoil affecting the financial markets and
banking system may significantly restrict our ability to obtain financing in the capital markets or
from financial institutions on commercially reasonable terms, or at all. Although we are uncertain
about the extent to which the recent global financial and economic crisis and slow-down of the
Chinese economy may impact our business in the short term and long term, there is a risk that our
business, results of operations and prospects would be materially and adversely affected by the
continuing global economic downturn and any slow-down of the Chinese economy.
If we cannot keep up with industry standards and design or offer for sale new mobile handset models
in a timely and cost-efficient manner to meet customer demand, our business will be materially and
adversely affected.
The mobile handset market is characterized by changing end user preferences and demand for new and
advanced functions and applications on mobile handsets, rapid product obsolescence and price
erosion, intense competition, evolving industry standards and wide fluctuations in product supply
and demand. If we cannot design or offer for sale new mobile handset models in a timely and
cost-efficient manner to meet our customers demand, our business will be materially and adversely
affected.
As the market for 2.75G and third-generation, or 3G, mobile handsets continues to develop, our
existing and potential customers may increasingly demand 2.75G and 3G mobile handsets. Since 2006,
we have begun to design 2.75G, 3G and 3.5G mobile handsets. We have received orders for 3G and 3.5G
mobile handset designs and in 2007 we launched the WCDMA/GSM dual mode dual standby phone. In 2010,
we launched motion gaming mobile devices and TV phones. During 2010, we also received
increased sales orders from our customers for the above products. However, we cannot assure you
that there will be sufficient customer demand for such phones in the future. Further, we cannot
assure you that we will be able to successfully meet our customers demand with respect to cost,
quality and time to completion. Our failure to meet customer demand could hurt our reputation and
affect our business and results of operation.
QUALCOMM Incorporated, or QUALCOMM, has also lowered the entry barrier for many smaller handset
companies through the introduction of MSM6240 and MSM 6270 chipsets, greatly increasing our
competition in this area.
7
The introduction of Google Android represents both opportunities and threats for us. We would need
to shift our focus from windows mobile to Google Android platform and we may face difficulties
adapting our technology to work with the new operating system. More co-operation with third parties
providers are also required and this in turn increases our cost in this area.
If our customers fail to achieve success in their business, our business and results of operations
may be materially and adversely affected.
If any of our major customers is unsuccessful in its mobile handset sales, whether due to lack of
market acceptance of its products, shortage of component supplies, slowdown of replacement sales of
mobile handsets or otherwise, the customer may downsize or discontinue its mobile handset business,
which in turn could adversely affect our original developed products, or ODP, business and brand
name phone sales. Accordingly, our success depends on our customers success in their business. Our
largest customer in 2008, 2009 and 2010 contributed approximately 12.3%, 14.1% and 11.4% of our net
revenues, respectively, and our largest three customers in 2008, 2009 and 2010 contributed
approximately 28.8%, 34.2% and 30.4% of our net revenues, respectively. We are not certain whether
our customers will be able to achieve success in their business or how long they will remain
competitive in their business even if initially successful. If any of our customers experiences
financial difficulty or is otherwise unable to achieve success in its own business, our business
and results of operations may be materially and adversely affected.
Due to the global economic recession, many local and regional telecom operators in China have
reduced their subsidies on their mobile phones and modems, which in turn drive up the prices
charged to end users. This may reduce the demand from the end users and eventually affect our
business.
We are exposed to inventory risks and the credit risk in relation to our customers.
As our product sales constitute the majority of our revenues, we are correspondingly exposed to
inventory risks. Although we arrange with our electronics manufacturing services, or EMS, providers
for product manufacturing according to the sales orders we receive, we nevertheless need to order
some raw material and components in advance of assigning them to the EMS providers and to build
inventory in advance of customers orders to balance the longer lead time for components and
shorter delivery time requested by our customers. Because demand for our products is affected by a
number of factors, including competition and general economic conditions, there is a risk that we
may forecast customer demand incorrectly and order from third parties excess or insufficient
inventories of particular products.
In addition, credit risk in relation to our customers may arise from events or circumstances beyond
our control. For instance, an economic downturn may cause our customers to default under their ODP
product contracts with us and expose us to the risk that our customers may refuse to buy from us
the number of mobile handsets specified in their purchase orders or may not be able to pay us
timely or at all in accordance with the sales contracts. Even if we may sometimes be able to retain
as penalties the partial prepayments or deposits received from such defaulting customers, this
might not be sufficient to offset the resulting loss of profits and the increased cost of unsold
inventory. If our customers default in paying us, we would have to make provisions for doubtful
debts or incur bad debt write-offs and our business would be materially and adversely affected.
We are dependent on our suppliers and EMS providers for timely manufacturing and delivery of the
products sold to our customers.
We rely on our suppliers for procuring the raw materials and components required for the
manufacturing of the mobile handsets that we sell to our customers. As we do not have our own
manufacturing facilities, we rely on EMS providers for the assembling and manufacturing of these
products. If these suppliers or EMS providers fail to deliver their goods or services to us in a
timely manner, our ability to deliver the finished products to our customers on a timely basis will
be affected. If we fail to maintain our relationships with existing suppliers or EMS providers or
fail to find new suppliers or EMS providers on competitive terms, our business operations and
financial results may be materially and adversely affected.
The mobile handset market in China is highly competitive, and we cannot assure you that we will be
able to compete successfully against our competitors.
The mobile handset market in China is intensely competitive and highly fragmented. We face current
and potential competition from established suppliers of wireless communications solutions to mobile
device manufacturers. These competitors include original design manufacturers such as Sim Technology Group
Limited, BYD Electronico Limited and Longcheer Holdings Limited.
We also face competitors who outsource the manufacturing to EMS providers as they, like us, do not
own the manufacturing facility. For this group of competitors, the outsourcing of the manufacturing
process allows lower operating costs and reduced capital investments and other fixed costs. This in
turn results in the low barriers of entry, and accordingly an increasing number of new players may
enter this market in the near future.
Many of our current and potential competitors have significantly greater financial, technical,
marketing, sales and other resources than we do. We cannot assure you that we will be able to
compete successfully against our current or future competitors.
8
We face the risks of uncertainties regarding the growth of the mobile and online games business and
market acceptance of our mobile and online games and in-game items.
The mobile and online games business, our new developing business area, is a relatively new and
evolving industry and concept. The growth of the mobile and online games business and the level of
demand and market acceptance of our mobile and online games are subject to a high degree of
uncertainty. In spite of the significant resources we have devoted to this new business, our
operating results with respect to mobile and online games will continue to depend on numerous
factors beyond our control, including:
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the growth in mobile handset use, personal computer use, Internet use
and broadband users and mobile and online games penetration in China
and other markets in which we offer our mobile and online games, and
the rate of any such growth; |
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whether the mobile and online games business, particularly in China,
continues to grow and the rate of any such growth; |
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general economic conditions, particularly economic conditions
adversely affecting discretionary consumer spending; |
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the availability and popularity of other forms of entertainment; |
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changes in consumer demographics and public tastes and preferences; |
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the popularity and price of new mobile and online games and in-game
items that our competitors launch and distribute; and |
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market acceptance of our newly designed games. |
Our ability to plan for product development and distribution and promotional activities will be
significantly affected by our ability to anticipate and adapt to relatively rapid changes in
consumer tastes and preferences. Currently, for instance, massive multiplayer online role-playing
games, or MMORPGs, are popular in China. However, there is no assurance that MMORPGs will continue
to be popular in China or elsewhere. A decline in the popularity of online games in general, or of
the MMORPGs that we offer, will likely adversely affect our business and prospects. There is no
assurance that we would able to track and respond to these changes in consumer preferences in a
timely and effective manner.
Our strategy to acquire or invest in complementary businesses and assets and establish strategic
alliances involves significant risk and uncertainty that may prevent us from achieving our
objectives and harm our financial condition and results of operations.
As part of our plan to expand our product and service offerings, we have made and intend to
continue making strategic acquisitions or investments in the highly fragmented mobile handset and
mobile and online game industries in China. Our strategic acquisitions and investments could
subject us to uncertainties and risks, including:
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high acquisition and financing costs; |
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potential ongoing financial obligations and unforeseen or hidden liabilities; |
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failure to achieve our intended objectives, benefits or revenue-enhancing opportunities; |
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cost of, and difficulties in, integrating acquired businesses and managing a larger business; |
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potential claims or litigation regarding our boards exercise of its duty of care and other
duties required under applicable law in connection with any of our significant acquisitions
or investments approved by the board; and |
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diversion of our resources and management attention. |
Our failure to address these uncertainties and risks may have a material adverse effect on our
financial condition and results of operations. In addition, we establish strategic alliances with
various third parties to further our business purpose from time to time. Strategic alliances with
third parties could subject us to a number of risks, including risks associated with sharing
proprietary information, non-performance by counter-parties, and an increase in expenses incurred
in establishing new strategic alliances, any of which may materially and adversely affect our
business.
Our business depends substantially on the continued use of certain intellectual property rights,
and any termination of or infringement upon such rights may harm our business and competitive
position.
Our business depends substantially on the use of certain intellectual property rights. For example,
we are dependent on QUALCOMM for CDMA- and WCDMA-related technology we use in designing,
manufacturing and selling CDMA- and WCDMA-based mobile handsets. Suspension or termination of our
CDMA and WCDMA license agreement by QUALCOMM could adversely affect our business and prospects,
because we may not be able to obtain alternative licenses in a timely manner to meet our customers
demands.
9
We rely on a combination of patent, trademark, trade secret laws and copyrights, as well as
nondisclosure agreements and other methods to protect our intellectual property rights.
Implementation of PRC intellectual property-related laws has historically been lacking, primarily
because of ambiguities in the PRC laws and difficulties in enforcement. Accordingly, intellectual
property rights and confidentiality protections in China may not be as effective as in the United
States or other countries. Policing unauthorized use of proprietary technology is difficult and
expensive, and the steps we have taken to protect our intellectual property may be inadequate to
prevent the misappropriation of our proprietary technology. Reverse engineering, unauthorized
copying or other misappropriation of our proprietary technologies could enable third parties to
benefit from our technologies without paying us, which could harm our business and competitive
position. Although we are not currently involved in any litigation, we may need to resort to court
action to enforce our intellectual property rights. Litigation relating to our intellectual
property might result in substantial costs and diversion of resources and management attention. See
Risks Related to Doing Business in China Uncertainties with respect to the PRC legal system
could adversely affect us.
We may face intellectual property infringement and other claims that could be time-consuming and
costly to defend and result in our loss of significant rights.
Other parties may assert intellectual property infringement and other claims against us. Litigation
is expensive and time-consuming and could divert managements attention from our business. If there
is a successful claim of infringement, we may be required to pay substantial damages to the party
claiming infringement, develop alternate non-infringing technology or enter into royalty or license
agreements that may not be available on acceptable terms, if at all. Our failure to develop
non-infringing technologies or license the proprietary rights on a timely basis would harm our
business. Parties asserting infringement claims may be able to obtain an injunction, which could
prevent us from providing our services or using technology that contains the allegedly infringing
intellectual property. While currently we do not have any on-going infringement claims against us,
we had in the past been, and may in the future be, subject to claims by other parties alleging
infringements of their intellectual property rights by our products. To resolve such claims, we may
be required to pay licensing fees to third parties, which could adversely affect our financial
condition. Any such claims against us could have a material adverse effect on our business,
operating results or financial condition.
Our business depends substantially on the continuing efforts of our senior executives, and our
business may be severely disrupted if we lose their services.
Our future success depends heavily upon the continued services of our senior executives, especially
our Chairman and Chief Executive Officer, Mr. Defu Dong. We rely on the experience of our senior
executives in mobile handset design and manufacturing, business operations and selling and
marketing and on their relationships with our customers. We do not maintain key-man life insurance
for any of our key executives. If one or more of our key executives are unable or unwilling to
continue in their present positions, we may not be able to replace them easily or at all.
Therefore, our business may be severely disrupted, and we may incur additional expenses to recruit
and retain new officers.
Several executives of our company, including Mr. Defu Dong, have been involved in litigation,
arbitration or administrative proceedings in the past. Although we are not aware of any pending
claims against us or our executives, any future litigation or administrative proceedings involving
any of our key executives may result in diversion of management attention away from our business,
or damage to our reputation. In addition, if any of our executives joins a competitor or forms a
competing company, we may lose our customers. If any disputes arise between our executive officers
and us, we cannot assure you the extent to which our rights could be enforced in China, where these
executive officers reside and hold most of their assets, in light of the uncertainties with PRC
legal system. See Risks Related to Doing Business in China Uncertainties with respect to the
PRC legal system could adversely affect us.
We may incur losses due to business interruptions resulting from the occurrence of adverse public
events such as outbreak of epidemics, acts of terrorism, fires and natural catastrophes such as
earthquakes.
In April 2009, influenza A, or H1N1, a new strain of flu virus, was discovered in North America and
quickly spread to other parts of the world, including China. In June 2009, the World Health
Organization formally declared a H1N1 pandemic. Any prolonged recurrence of an H1N1, avian flu or
SARS epidemic or other adverse public health developments in China may lead to, among other events,
quarantines or closures of our offices which could severely disrupt our operations or the sickness
or death of our key officers and employees, and a general slowdown in the Chinese economy. Any of
the foregoing events or other unforeseen consequences of public health problems could adversely
affect our business and results of operations. We have not adopted any written preventive measures
or contingency plans to combat any future outbreak of H1N1 influenza, avian flu, SARS or any other
epidemic.
In addition, acts of terrorism, fires or natural disasters such as earthquakes that affect where
our principal offices are located or other locations where we have substantial business operations,
may lead to significant loss of revenue by disrupting our business operations and may also
materially and adversely affect our business. The recent 9.0 magnitude earth quake in Japan, for
example, has disrupted the supply of various components, affecting our production schedule for
several products and may eventually reduce our gross margin. The unstable situation in the Middle
East and the ongoing conflict in Libya has also affect our business in several ways, such as the
reduction of orders from customers and the increase of shipment costs to and from these regions.
10
Failure to maintain effective internal controls could have a material and adverse effect on the
trading price of our ADSs.
We are subject to the reporting obligations under the U.S. securities laws. The Securities and
Exchange Commission, or the SEC, as required under Section 404 of the Sarbanes-Oxley Act of 2002,
has adopted rules requiring public companies to include a report of management on the effectiveness
of such companies internal control over financial reporting in each of their annual reports. In
addition, an independent registered public accounting firm must attest to and report on the
effectiveness of each public companys internal controls over financial reporting. These
requirements apply to this annual report on Form 20-F.
Our management has concluded that our internal control over financial reporting was effective as of
December 31, 2010. See Item 15. Controls and Procedures. However, we cannot assure you that we
will be able to maintain effective internal control in the future, and if we fail to maintain
effective internal control in the future, our management and our independent registered public
accounting firm may not be able to conclude that we have effective internal controls over financial
reporting in accordance with the Sarbanes-Oxley Act of 2002. This could in turn result in the loss
of investor confidence in the reliability of our financial statements and negatively impact the
trading price of our ADSs. Furthermore, we have incurred and anticipate that we will continue to
incur considerable costs, management time and other resources in an effort to comply with Section
404 and other requirements of the Sarbanes-Oxley Act of 2002.
We are subject to product liability or product recall exposure and have limited insurance coverage.
Our sales agreements with customers require us to recall products that we, a regulatory body or any
of our customers determine as failing to meet pre-determined specifications, standards, laws,
regulations or containing substantial defects or substantial product hazards which could cause
damage. These events may be considered a breach of our purchase agreement warranty to our customers
and we may be required to bear all costs related to the resulting product recalls.
As we continue to sell completed feature phones and smart phones to our customers in 2010, we are
exposed to potential product liability claims in the event that the use of our products causes or
is alleged to have caused personal injuries or other adverse effects. A successful product
liability claim against us could require us to pay substantial damages. Product liability claims
against us, whether successful or not, are costly and time-consuming to defend. Also, in the event
that our products prove to be defective, we may be required to recall or redesign such products,
which could result in substantial costs, diversion of management attention and resources and damage
to our reputation. However, as the insurance industry in China is still in an early stage of
development, product liability insurance available in China offers limited coverage compared to
coverage offered in many other countries.
We cannot assure you that product liability insurance will continue to be available to us on
commercially reasonable terms, if at all. A product liability claim, with or without merit, could
result in significant adverse publicity against us and could negatively impact the marketability of
our products and our reputation, which in turn could materially and adversely affect our business,
financial condition and results of operations. In addition, we do not have any business
interruption insurance coverage for our operations. Any business disruption or natural disaster
could result in substantial costs and diversion of resources and materially and adversely affect
our business.
Risks from customers claims for refund and liquidated damages.
Our agreements with many customers contain refund and liquidated damages provisions, which entitle
the customers to demand refunds and liquidated damages if we cannot complete a mobile handset
design by a specified deadline, if the requisite certifications cannot be obtained, or if we cannot
timely deliver our smart phone or feature phone products to our customers. We cannot assure you
that we will be able to successfully perform under every customer contract, or that costs
associated with refunds and liquidated damages will not be material. Under the realigned business
of providing turn-key solutions to our smart phone customers, we will outsource the assembly of
final handset products to third-party companies. Any failure of such assembly companies in timely
delivering to us the finished products with the stipulated quality will cause us to be liable to
our customers.
Defects in our mobile handset designs could result in loss of customers and claims against us.
Our mobile handset designs are complex and must meet stringent quality requirements. Complex
designs such as mobile handset designs sometimes contain defects, errors and bugs when they are
first introduced. If any of our designs have reliability, quality or compatibility problems, we may
not be able to correct these problems on a timely basis. Consequently, our reputation may be
damaged, and customers may be reluctant to continue to contract with us, which could harm our
ability to retain existing customers and attract new customers. Because we cannot test for all
possible scenarios, our designs may contain errors that are not discovered until mobile handsets
have gone into mass production. These problems may result in a loss of our customers as well as
claims against us. We face such risk not only in the case of the customers for our handset design
services, but also in the case of the customers for our product sales. As our revenues continue to
be increasingly dominated by product sales, any design defects in the mobile handsets that we sell
to such customers may subject us to liability. We cannot assure you that we will not be subject to
claims by our customers in the future, and if we fail on the merits of these claims, our business
and results of operations could be materially and adversely affected.
11
Risks Related To Doing Business in China
Adverse changes in political and economic policies of the PRC government could have a material
adverse effect on the overall economic growth of China, which could reduce the demand for our
services and materially and adversely affect our competitive position.
Our business operations are primarily conducted in China and we believe that a significant portion
of the mobile handsets we design are sold
to end users in China. Accordingly, our results of operations, financial condition and prospects
are subject to a significant degree to the economic, political and legal developments of China.
Since the late 1970s, the PRC government has been reforming the economic system in China. These
reforms have resulted in significant economic growth. However, we cannot predict the future
direction of economic reforms or the effects such measures may have on our business, financial
position or results of operations. Any adverse change in the economic conditions in China, in
policies of the PRC government or in laws and regulations in China, could have a material adverse
effect on the overall economic growth of China and investment in the mobile handset industry. Such
developments could materially and adversely affect our business, lead to reduction in demand for
our services and materially and adversely affect our competitive position.
If the PRC government finds that the agreements that establish the structure for operating our
China business do not comply with PRC government restrictions on foreign investment in the online
game and mobile game industry, we could be subject to severe penalties and our business, financial
condition and results of operations may be materially and adversely affected.
As a Cayman company, we are classified as a foreign enterprise under PRC laws and regulations.
Certain PRC regulations restrict foreign ownership of companies that operate mobile games or online
games and prohibit foreign and foreign-invested enterprises from applying for or holding the
licenses required to operate online games in China or to provide Internet information content, such
as online advertising. In light of these regulations, we entered into contractual arrangements with
our variable interest entity in the PRC, Techfaith Interactive, in May 2009, under which Techfaith
Interactive is to operate all of our mobile and online game business in China. Techfaith
Interactive holds the necessary license to operate our mobile and online game business in China.
For details of our arrangement with Techfaith Interactive, see Item 4. Information on the
CompanyA. History and Development of the Company and Note 1 to our consolidated financial
statements included in this annual report on Form 20-F.
We currently conduct our mobile and online game business entirely through contractual arrangements
with Techfaith Interactive. These contractual arrangements include exclusive business cooperation
agreements where we provide complete business support services and consulting services to Techfaith
Interactive in exchange for a fee that constitutes substantially all of the net income of Techfaith
Interactive. If the relevant government authorities find that these agreements that establish the
structure for operating our China game business do not comply with the above restrictions on
foreign investment in the online game and mobile game business, we could be subject to severe
penalties and our business, financial condition and results of operations may be materially and
adversely affected.
The laws and regulations governing the online and mobile game industry and related businesses in
China are developing and subject to future changes. If we or any of our PRC operating subsidiaries
or variable interest entities fail to obtain or maintain all applicable permits and approvals, our
business and operations would be materially and adversely affected.
All Internet-related businesses in China, including the operation of online games, is highly
regulated by the PRC government. See Item 4. Information on the CompanyB. Business
OverviewRegulation. Techfaith Interactive, through which we operate our online games business in
the PRC, is required to obtain applicable permits or approvals from different regulatory
authorities in order to operate online games. If Techfaith Interactive fails to obtain or maintain
any of the required permits or approvals or if any of our practice is later challenged by
government authorities, we may also be subject to various penalties, including fines and the
discontinuation of or restriction on our operations. Any such disruption in business operations
would materially and adversely affect our financial condition and results of operations.
As the online game industry is in an early stage of development in China, new laws and regulations
may be adopted in the future to address new issues that arise from time to time, such as online
advertising and the use of virtual currency in online games. Also, different regulatory authorities
may have different views regarding the licensing requirements for the operation of online games and
related businesses. As a result, there is, and will continue to be, substantial uncertainty in the
interpretation and implementation of current and any future PRC laws and regulations applicable to
the online game industry and related businesses. While we believe that we are in material
compliance with all applicable PRC laws and regulations currently in effect, we cannot assure you
that we will not be found in violation of any current or future PRC laws and regulations in the
future.
Additional government regulations resulting from negative publicity in China regarding online games
or otherwise may have a material adverse effect on our business, financial condition and results of
operations.
Currently there are no laws or regulations in the PRC specifically governing virtual asset property
rights and if we, as an online game operator, are found to have liabilities regarding losses of
virtual assets, our business and operations maybe materially and adversely affected.
In the course of playing online games, some virtual assets, such as special equipment, player
experience grades and other features of a users game characters, are acquired and accumulated.
Such virtual assets can be important to online game players and in some cases are exchanged between
players for monetary value. Virtual assets can be lost for various reasons, often through
unauthorized use of the game account of one user by other users and occasionally through data loss
caused by a network service delay or by a network crash. It is unclear under PRC law whether an
operator of online games such as Techfaith Interactive would have any liability to game players or
other interested parties (whether in contract, tort or otherwise) for loss of such virtual assets
by game players. Several past judgments by PRC courts have required the online game operators to
return the virtual items or be liable for the loss and damage incurred from the loss of the virtual
items. In case of a loss of virtual assets, Techfaith Interactive may be sued and may be held
liable for damages, which may negatively affect our business, financial condition and results of
operations. See Item 4. Information on the CompanyB. Business OverviewRegulationsVirtual
Assets.
12
Our business benefits from certain tax incentives, and changes to these tax incentives could
adversely affect our operating results.
Our income tax is primarily governed by the new Enterprise Income Tax Law, or the EIT Law, which
became effective on January 1, 2008. Prior to December 31, 2008, Techfaith China, Techfaith
Intelligent Handset Beijing and Techfaith Shanghai applied for High and New Tech Enterprises, or
HNTE, status that would allow for a reduced applicable tax rate under the EIT Law. The official
HNTE certificates were issued to Techfaith China and Techfaith Intelligent Handset Beijing on
December 24, 2008. While the certificates are valid for three years, we believe we will be able to
reapply successfully for the renewal of the current certificates as we believe we will continue to
meet the published criteria. Accordingly, Techfaith China and Techfaith Intelligent Handset Beijing
have used the reduced applicable tax rate in calculating deferred tax balances for the foreseeable
future.
Some of our Chinese subsidiaries, including Techfaith Shenzhen, TechSoft and Techfaith Hangzhou,
also enjoyed various tax exemptions because they were qualified as production enterprises before
January 1, 2008. Based on the transition rules of the EIT Law, those Chinese subsidiaries continue
to enjoy preferential tax rates from 2008 through 2011 due to the preferential tax qualification
obtained prior to January 1, 2008. Those subsidiaries in China will not continue to receive such
preferential tax treatment after the transition period. There is no assurance that our subsidiaries
in China will continue to receive any other preferential tax treatment. If any of these incentives
are reduced or eliminated by government authorities in the future, the effective tax rates of our
subsidiaries in China and our effective tax rates on a consolidated basis could increase
significantly. Any such change could adversely affect our operating results. See Item 4.
Information on the CompanyB. Business OverviewRegulationsTax.
Under the EIT Law and its implementation rules, dividends payable by a foreign-invested enterprise
in China to its foreign investors who are non-resident enterprises are subject to a 10% withholding
tax, unless any such foreign investors jurisdiction of incorporation has a tax treaty or similar
arrangement with China that provides for a different withholding arrangement. Dividends of our PRC
subsidiaries that are directly held by our Hong Kong subsidiary historically benefited from a
reduced withholding tax rate of 5% under the arrangement to avoid double taxation between Hong Kong
and the PRC. However, under recently implemented PRC regulations, now our Hong Kong subsidiary must
obtain approval from the competent local branch of the State Administration of Taxation in order to
enjoy the 5% preferential withholding tax rate in accordance with the double-taxation agreement
between the PRC and Hong Kong. As stipulated in implementing rules published in year 2009, our Hong
Kong subsidiary shall fulfill the requirement for beneficial owner of the dividend to enjoy the
preferential withholding tax rate but given the relatively short history of these implementing
rules, we cannot assure you that our Hong Kong subsidiary would be able to qualify for the 5%
preferential withholding tax rate in the future.
Our subsidiaries in China are subject to restrictions on dividend payments, or making other
payments to us or any other affiliated company.
We are a holding company incorporated in the Cayman Islands. We conduct substantially all of our
operations through our subsidiaries in China. Current PRC regulations permit our subsidiaries in
China to pay dividends only out of their respective accumulated profits, if any, determined in
accordance with PRC accounting standards and regulations. In addition, our subsidiaries in China
are each required to set aside at least 10% of their respective accumulated profits each year, if
any, to fund certain reserve funds. These reserves are not distributable as cash dividends. In
addition, if any of our subsidiaries in China incurs debt on its own behalf in the future, the
instruments governing the debt may restrict the subsidiarys ability to pay dividends or make other
payments to us.
We may be treated as a resident enterprise for PRC tax purposes under the EIT Law, which may
subject us to PRC income tax for our income originated both within and outside the PRC and PRC
income tax withholding for any dividends we pay to our non-PRC shareholders.
Under the EIT Law and relevant implementing rules, enterprises established under the laws of
non-PRC jurisdictions, but whose de facto management body is located in the PRC, may be treated as
resident enterprises for PRC tax purposes. The implementing rules of the EIT Law define de facto
management as having substantial and overall management and control over the production and
operations, personnel, accounting, and properties of the enterprise. Based on our analysis of the
current facts, we believe that Techfaith and its overseas subsidiaries should not be treated as
resident enterprises for PRC tax purposes. However, it continues to be unclear as to how tax
authorities will determine tax residency based on the facts of each case. For the years ended
December 31, 2008, 2009 and 2010, our calculation of income taxes generally reflects our status as
a non-China tax resident company. If the PRC governmental authorities hold that Techfaith or its
overseas subsidiaries should be treated as a resident enterprise for PRC tax purposes after
January 1, 2008, the effective date of the EIT Law, our worldwide income will be subject to PRC
income tax at the 25% uniform tax rate, which will include any dividend income we receive from our
subsidiaries, unless such dividend income is otherwise exempted from taxable income under the EIT
Law. If we and our overseas subsidiaries are treated as resident enterprises and are required to
pay income tax for dividends received from subsidiaries, it will materially and adversely affect
our financial condition and results of operations.
With the 10% PRC dividend withholding tax imposed by the EIT Law in 2008, we will incur an
incremental PRC tax cost when PRC profits are distributed to ultimate shareholders. In addition, if
we are determined to be a PRC resident enterprise under the new PRC tax system and
receive income other than dividends, our profitability and cash flow would be adversely impacted
due to our worldwide income being taxed in China under the new PRC tax law.
13
Moreover, under the EIT Law, foreign ADS holders may be subject to a 10% withholding tax upon
dividends payable by us and gains realized on the sale or other disposition of ADSs or ordinary
shares, if such income is sourced from within the PRC. Although our company is incorporated in the
Cayman Islands, it remains unclear whether the dividends payable by us or the gains our foreign ADS
holders may realize will be regarded as income from sources within the PRC if we are classified as
a PRC resident enterprise. Any such tax on our dividend payments will reduce the returns of your
investment.
Fluctuation in the value of the Renminbi may have a material adverse effect on your investment.
The value of the Renminbi against the U.S. dollar, Euro and other currencies is affected by, among
other things, changes in Chinas political and economic conditions and Chinas foreign exchange
policies. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value
of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi was permitted to fluctuate
within a narrow and managed band against a basket of certain foreign currencies. This change in
policy caused the Renminbi to appreciate approximately 21.5% against the U.S. dollar over the
following three years. Since reaching a high against the U.S. dollar in July 2008, however, the
Renminbi has traded within a narrow band against the U.S. dollar, remaining within 1% of its July
2008 high but never exceeding it. It is difficult to predict how long the current situation may
last and when and how it may change again.
Although our reporting and financial statements are expressed in the U.S. dollar, the majority of
our revenues are denominated in Renminbi and only a small portion of our cost of revenues is
denominated in U.S. dollars. Fluctuations in exchange rates, primarily those involving the U.S.
dollar, may affect our cost of revenues and profit margins as well as our net income. In addition,
these fluctuations could result in exchange losses and increased costs in Renminbi terms. Also, as
dividends might be paid to us in the future by our subsidiaries in China, any significant
revaluation of the Renminbi may have a material adverse effect on the value of and any dividends
payable on our ADSs in foreign currency terms. If we decide to convert Renminbi we receive from our
subsidiaries into U.S. dollars for the purpose of distributing dividends on our ordinary shares or
for other purposes, appreciation of the U.S. dollar against the Renminbi would have a negative
effect on the U.S. dollar amount available to us. Conversely, to the extent that we need to convert
U.S. dollars into Renminbi for our operations, appreciation of Renminbi against the U.S. dollar
would have an adverse effect on the Renminbi amount we receive from the conversion. Very limited
hedging transactions are available in China to reduce our exposure to exchange rate fluctuations.
To date, we have not entered into any hedging transactions to reduce our exposure to foreign
currency exchange risk. In addition, our currency exchange losses may be magnified by Chinas
exchange control regulations that restrict our ability to convert Renminbi into U.S. dollars.
The M&A Rule sets forth complex procedures for acquisitions conducted by foreign investors which
could make it more difficult to pursue growth through acquisitions.
The Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the
M&A Rule, sets forth complex procedures and requirements that could make merger and acquisition
activities by foreign investors more time-consuming and complex, including requirements in some
instances that the Ministry of Commerce be notified in advance of any change-of-control transaction
in which a foreign investor takes control of a PRC domestic enterprise. We may expand our business
in part by acquiring complementary businesses or assets in China. Complying with the requirements
of the M&A Rule to complete such transactions could be time-consuming, and any required approval
processes, including obtaining approval from the Ministry of Commerce, may delay or inhibit our
ability to complete such transactions, which could affect our ability to expand our business or
maintain our market share.
Restrictions on currency exchange may limit our ability to receive and use our revenues
effectively.
The principal regulation governing foreign currency exchange in China is the Foreign Currency
Administration Rules, as amended. Under these rules, RMB are freely convertible for trade and
service-related foreign exchange transactions, but not for direct investment, loan or investment in
securities outside China unless the prior approval of the State Administration of Foreign Exchange,
or SAFE, is obtained. Although the PRC government regulations now allow greater convertibility of
RMB for current account transactions, significant restrictions still remain. For example, foreign
exchange transactions under our subsidiaries capital account, including principal payments in
respect of foreign currency-denominated obligations, remain subject to significant foreign exchange
controls and the approval of SAFE.
SAFE issued regulations that require approvals from, and registrations with, PRC government
authorities in connection with direct or indirect offshore investment activities by PRC residents
and PRC corporate entities. The SAFE regulations retroactively require approval and registration of
direct or indirect investments previously made by PRC residents in offshore companies. In the event
that a PRC shareholder with a direct or indirect stake in an offshore parent company fails to
obtain the required SAFE approval and make the required registration, the PRC subsidiaries of such
offshore parent company may be prohibited from making distributions of profit to the offshore
parent and from paying the offshore parent proceeds from any reduction in capital, share transfer
or liquidation in respect of the PRC subsidiaries. Further, failure to comply with the various SAFE
approval and registration requirements described above, as currently drafted, could result in
liability under PRC law for foreign exchange evasion.
Because a majority of our business operations is in China, these regulations could result in the
relevant PRC government authorities limiting or eliminating our ability to purchase and retain
currencies other than the RMB in the future, which could limit or eliminate our ability to
fund any business activities we may have outside China or to make dividend payments in U.S. dollars
in the future.
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PRC regulations relating to the establishment of offshore special purpose companies by PRC
residents may subject our PRC resident shareholders to personal liability and limit our ability to
inject capital into our PRC subsidiaries, limit our subsidiaries ability to distribute profits to
us, or otherwise adversely affect us.
SAFE issued a public notice in November 2005 requiring PRC residents to register with the local
SAFE branch before establishing or controlling any company outside of China for the purpose of
capital financing, referred to in the notice as a special purpose offshore company. PRC residents
that are shareholders of special purpose offshore companies established before November 1, 2005
were required to register with the local SAFE branch before March 31, 2006.
We have notified beneficial owners of our company who we know are PRC residents to register with
the local SAFE branch if they are required to register under the SAFE notice. The failure or
inability of beneficial owners of our company resident in the PRC to comply with the registration
procedures set forth therein may subject such beneficial owners to fines and legal sanctions and
may also limit our ability to contribute additional capital into our PRC subsidiary and our PRC
subsidiarys ability to distribute profits to our company or otherwise materially and adversely
affect our business.
Uncertainties with respect to the PRC legal system could adversely affect us.
We conduct substantially all of our business through our subsidiaries established in China. Our
subsidiaries are generally subject to laws and regulations applicable to foreign investment in
China and, in particular, PRC laws applicable to wholly foreign-owned enterprises and Sino-foreign
joint ventures. The PRC legal system is based on written statutes. Prior court decisions may be
cited for reference but have limited precedential value. Since 1979, PRC legislation and
regulations have significantly enhanced the protections afforded to various forms of foreign
investments in China. However, since the PRC legal system is still evolving, the interpretations of
many laws, regulations and rules are not always uniform and enforcement of these laws, regulations
and rules involve uncertainties, which may limit legal protections available to us. In addition,
any litigation in China may be protracted and result in substantial costs and diversion of
resources and management attention.
Risks Related to Shares and ADSs
The future sales by our existing shareholders of a substantial number of our ADSs in the public
market could adversely affect the price of our ADSs.
If our existing shareholders sell substantial amounts of our ADSs in the public market, the market
price of our ADSs could fall. Such sales also might make it more difficult for us to sell equity or
equity-related securities in the future at a time and price that we deem appropriate.
As of the date of this annual report, our management collectively beneficially owns approximately
31.94% of our outstanding shares. They and the other shareholders with registration rights may
cause us to register the sale of their shares under the Securities Act. Registration of these
shares under the Securities Act would result in these shares becoming freely tradable without
restriction under the Securities Act immediately upon the effectiveness of the registration.
On June 9, 2009, to finance the development of our game business, our subsidiary Leo Technology
Limited, now renamed 798 Entertainment Limited, issued US$10 million of common equity to the Hong
Kong-based venture capital firm Infiniti Capital Limited and US$10 million aggregate principal
amount of 8% senior secured convertible promissory notes with a maturity date of three years to
IDG-Accel China Growth Fund II L.P. and IDG-Accel China Investors II L.P., or the IDG Funds, which
are entities affiliated with IDGVC Partners, a leading venture capital firm. The notes were
convertible into our ordinary shares or Leo Technology Limiteds ordinary shares at the option of
the note holders. According to the relevant investor rights agreement, each of the IDG Funds chose
to convert 62.5% of its share of the principal amount of the 8% senior secured convertible
promissory notes into TechFaiths ordinary shares, and the remaining 37.5% was converted into
shares of 798 Entertainment Limited on September 8, 2010, and as a result of the conversion,
TechFaith issued 78,814,628 of TechFaiths ordinary shares to IDG Funds. As of the date of this
annual report, IDG Funds have met the terms and conditions for resale under Rule 144 of the
Securities Act in relation to these shares, represented by 5,254,309 ADSs, and may offer and sell
such ADSs from time to time on the open market.
Sales of the above-mentioned registered shares in the public market could cause the price of our
ADSs to decline.
The market price for our ADSs has been and may continue to be volatile.
The market price for our ADSs has been and may continue to be highly volatile and subject to wide
fluctuations in response to factors including the following:
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changes in financial estimates by securities research analysts; |
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conditions in the mobile handset and mobile and online games markets; |
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changes in the economic performance or market valuations of other
mobile handset design houses, original design product providers or
manufacturers; |
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performance of other China-based companies that are listed on NASDAQ; |
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announcements by us or our competitors of new products, acquisitions,
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addition or departure of key personnel; and |
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fluctuations of exchange rates between the RMB and U.S. dollar. |
In addition, the securities market has from time to time experienced significant price and volume
fluctuations that are not related to the operating performance of particular companies. In
particular, the global financial crisis and the ensuing deteriorating global economic conditions
have caused and may continue to cause extreme volatility in the global stock markets. These market
fluctuations may also materially and adversely affect the market price of our ADSs, regardless of
our operating performance. Volatility or a lack of positive performance in our stock price may also
adversely affect our ability to retain key employees, some of whom have been granted options or
other equity incentives.
We may need additional capital, and the sale of additional ADSs or other equity securities could
result in additional dilution to our shareholders.
We believe that our current cash and cash equivalents and cash flow from operations will be
sufficient to meet our anticipated cash needs for the next 12 months. We may, however, require
additional cash resources due to changed business conditions or other future developments,
including any investments or acquisitions we may decide to pursue. If these resources are
insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt
securities or obtain a credit facility. The sale of additional equity securities could result in
additional dilution to our shareholders. The incurrence of indebtedness would result in increased
debt service obligations and could result in operating and financing covenants that would restrict
our operations. We cannot assure you that financing will be available in amounts or on terms
acceptable to us, if at all.
You may face difficulties in protecting your interests, and our ability to protect our rights
through the U.S. federal courts may be limited, because we are incorporated under Cayman Islands
law.
Our corporate affairs are governed by our memorandum and articles of association and by the
Companies Law and common law of the Cayman Islands. The rights of our shareholders and the
fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established
as they would be under statutes or judicial precedents in the United States. In particular, the
Cayman Islands has a less developed body of securities laws as compared to the United States, and
provides significantly less protection to investors. Therefore, our public shareholders may have
more difficulties in protecting their interests in the face of actions by our management, directors
or controlling shareholders than would public shareholders of a corporation incorporated in a
jurisdiction in the United States. In addition, Cayman Islands companies may not have standing to
initiate a shareholder derivative action before the federal courts of the United States. As a
result, we may not be able to protect our interests if we are harmed in a manner that would
otherwise enable us to sue in a United States federal court.
Your ability to bring an action against us or against our directors and officers, or to enforce a
judgment against us or them, will be limited because we are incorporated in the Cayman Islands,
because we conduct a substantial portion of our operations in China and because the majority of our
directors and officers reside outside of the United States.
We are incorporated in the Cayman Islands, and we conduct a substantial portion of our operations
in China through our wholly owned subsidiaries and variable interest entities in China. Most of our
directors and officers reside outside of the United States and most of the assets of those persons
are located outside of the United States. As a result, it may be difficult or impossible for you to
bring an action against us or against these individuals in the event that you believe that your
rights have been infringed under the securities laws or otherwise. Even if you are successful in
bringing an action of this kind, the laws of the Cayman Islands and of China may render you unable
to enforce a judgment against our assets or the assets of our directors and officers.
You may not be able to exercise your right to vote.
As a holder of ADSs, you may instruct the depositary of our ADSs to vote the shares underlying your
ADSs but only if we ask the depositary to ask for your instructions. Otherwise, you will not be
able to exercise your right to vote unless you withdraw the shares. However, you may not know about
the meeting enough in advance to withdraw the shares. If we ask for your instructions, the
depositary will notify you of the upcoming vote and arrange to deliver our voting materials to you.
We cannot assure you that you will receive the voting materials in time to ensure that you can
instruct the depositary to vote your shares. In addition, the depositary and its agents are not
responsible for failing to carry
out voting instructions or for the manner of carrying out voting instructions. This means that you
may not be able to exercise your right to vote and there may be nothing you can do if the shares
underlying your ADSs are not voted as you requested.
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Your right to participate in any future rights offerings may be limited, which may cause dilution
to your holdings.
We may from time to time distribute rights to our shareholders, including rights to acquire our
securities. However, we cannot make rights available to you in the United States unless we register
the rights and the securities to which the rights relate under the Securities Act, or an exemption
from the registration requirements is available. Also, under the deposit agreement, the depositary
bank will not make those rights available to you unless the distribution to ADS holders of both the
rights and any related securities are either registered under the Securities Act, or exempt from
registration under the Securities Act. We are under no obligation to file a registration statement
with respect to any such rights or securities or to endeavor to cause such a registration statement
to be declared effective. Moreover, we may not be able to establish an exemption from registration
under the Securities Act. Accordingly, you may be unable to participate in our rights offerings and
may experience dilution in your holdings.
You may not receive distributions on ordinary shares or any value for them if it is illegal or
impractical to make them available to you.
The depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or
the custodian receives on ordinary shares or other deposited securities after deducting its fees
and expenses. You will receive these distributions in proportion to the number of ordinary shares
your ADSs represent. However, the depositary is not responsible if it decides that it is unlawful
or impractical to make a distribution available to any holders of ADSs. We have no obligation to
register ADSs, ordinary shares, rights or other securities under U.S. securities laws. We also have
no obligation to take any other action to permit the distribution of ADSs, ordinary shares, rights
or anything else to holders of ADSs. This means that you may not receive the distribution we make
on our ordinary shares or any value for them if it is illegal or impractical for us to make them
available to you. These restrictions may have a material adverse effect on the value of your ADSs.
You may be subject to limitations on transfer of your ADSs.
Your ADSs are transferable on the books of the depositary. However, the depositary may close its
transfer books at any time or from time to time when it deems expedient in connection with the
performance of its duties. In addition, the depositary may refuse to deliver, transfer or register
transfers of ADSs generally when our books or the books of the depositary are closed, or at any
time if we or the depositary thinks it advisable to do so because of any requirement of law or of
any government or governmental body, or under any provision of the deposit agreement, or for any
other reason.
We are controlled by a small group of our existing shareholders, whose interests may differ from
other shareholders.
As of the date of this annual report, our directors and executive officers as a group beneficially
own 253,589,908 ordinary shares of our company, of which Mr. Defu Dong, our Chairman and Chief
Executive Officer, beneficially owns 253,195,000 ordinary shares (constituting approximately 31.9%
of our current total issued and outstanding shares), and have the power to vote on behalf of the
record holders of these shares over matters requiring approval by our shareholders, including
electing directors and approving mergers or other business combination transactions. This
concentration of ownership may discourage, delay or prevent a change in control of our company,
which could deprive our shareholders of an opportunity to receive a premium for their shares as
part of a sale of our company and might reduce the price of our ADSs. These actions may be taken
even if they are opposed by our other shareholders.
We may be classified as a passive foreign investment company, which could result in adverse United
States federal income tax consequences to U.S. Holders.
Based on the price of the ADSs and our ordinary shares, the composition of our income and assets
and our operations, we believe that it is likely that we were classified as a passive foreign
investment company, or PFIC, for United States federal income tax purposes for our taxable year
ended December 31, 2010, and we will very likely be a PFIC for our current taxable year ending
December 31, 2011 unless our share value increases and/or we invest a substantial amount of the
cash and other passive assets we hold in assets that produce or are held for the production of
active income. A non-U.S. corporation will be considered a PFIC for any taxable year if either (1)
at least 75% of its gross income is passive income or (2) at least 50% of the value of its assets
(based on an average of the quarterly values of the assets during a taxable year) is attributable
to assets that produce or are held for the production of passive income. The value of our assets is
generally determined by reference to the market price of our ADSs and ordinary shares. If we were
treated as a PFIC for any taxable year during which a U.S. Holder held an ADS or an ordinary share,
certain adverse United States federal income tax consequences could apply to the U.S. Holder. See
Item 10. Additional Information E. Taxation United States Federal Income Taxation Passive
Foreign Investment Company.
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ITEM 4. Information on the Company
A. History and Development of the Company
We commenced operations in July 2002 through Techfaith Wireless Communication Technology (Beijing)
Limited, or Techfaith Beijing,
formerly known as Beijing Techfaith R&D Co., Ltd., a limited liability company established in
China. We created a holding company structure by incorporating Techfaith Wireless Technology Group
Limited in July 2003. We incorporated China Techfaith Wireless Communication Technology Limited on
June 25, 2004 under the Companies Law of the Cayman Islands. As part of a restructuring in
anticipation of our initial public offering, China Techfaith Wireless Communication Technology
Limited became our ultimate holding company in November 2004.
Our principal executive offices are located at Building 1, No. 13, YongChang North Road, Beijing
Economic-Technological Development Area (Yi Zhuang), Beijing 100176, Peoples Republic of China.
Our telephone number at this address is +86 10 5822-8288. Our registered office in the Cayman
Islands is located at Maples Corporate Services Limited, PO Box 309, Ugland House, Grand Cayman,
KY1-1104 Cayman Islands. Our telephone number at this address is +1 (345) 949-8066. Our agent for
service of process in the U.S. is CT Corporation System located at 111 Eighth Avenue, New York, New
York 10011.
We began to develop our game business in 2008, with mobile and online games that are developed by
our subsidiary or licensed from third parties. To raise funds for the game business, our
subsidiary, Leo Technology Limited, now renamed 798 Entertainment Limited, issued US$10 million
aggregate principal amount of 8% senior secured convertible promissory notes to the IDG Funds in
June 2009. Pursuant to conversion options granted to them under the relevant investor rights
agreement, the IDG Funds exercised their conversion rights in relation to the notes in September
2010, converting 62.5% of the principal amount of the notes into our ordinary shares and the
remaining principal amount into ordinary shares of LeoTechnology Limited, now 798 Entertainment
Limited. As a result of the conversion, the IDG Funds now hold 78,814,628 of our ordinary shares,
represented by 5,254,309 ADSs which the IDG Funds may offer and sell from time to time. In August
2010, we introduced a new product line-motion game, which generated an aggregate of US$5.1 million
revenue in the fourth quarter of 2010.
On May 14, 2009, we entered into contractual arrangements with Techfaith Interactive for the
operation of our online game business. Through exclusive business cooperation agreements with
Techfaith Interactive, we provide complete business support services and consulting services to
Techfaith Interactive in exchange for substantially all of the net income of Techfaith Interactive;
through a series of contractual arrangements with Techfaith Interactives equity owners, we have
the ability to effectively control Techfaith Interactives daily operations and financial affairs.
Therefore, we are the primary beneficiary of Techfaith Interactive. Techfaith Interactive currently
holds necessary license to operate our online game business in China, and our entire online game
business in China is currently operated through Techfaith Interactive. For details of our
arrangement with Techfaith Interactive, see Note 1 to our consolidated financial statements
included in this annual report on Form 20-F.
On February 10, 2010, we acquired Citylead Limited, or Citylead, together with its subsidiaries and
obtained control over Cityleads variable interest entity, QIGI Technology, a domestic brand mobile
phone company. The consideration consisted of $500,000 in cash and 65,934,066 of our ordinary
shares at a fair value of $0.19 per ordinary share paid as of the date of acquisition as well as
certain receivables contingent upon QIGI Technologys operating performance for 2010 and 2011.
Through this acquisition, we expanded our branding business to target enterprise users and
operator-tailored customers.
In May 2010, we sold 49% equity interest in our wholly-owned subsidiary, Time Spring Limited, or
Time Spring, to Billion Team Asia Limited, or Billion Team, an affiliate of D Magic Mobile
(Shanghai) Incorporation, an independent third party, or D Magic Mobile, for $49.00. Time Spring
was a shell company without any substantial operations prior to May 2010, and after this
transaction, we owned 51% of Time Spring. Time Spring in turn owns Media Chance Limited, an entity
in Hong Kong which owns 100% of Glomate. After the restructuring, Billion Team granted Glomate the
right to produce mobile phones with certain well-know brands. Glomate will focus on licensing
well-known, international brands for high-end, brand-name mobile phones and add to our effort to
maintain our existing strong presence in the market for ODP in China.
Our capital expenditures mainly relate to our purchase of plant, machinery and equipment related to
our business operations. Our capital expenditures amounted to US$14.8 million, US$1.4 million and
US$4.3 million in 2008, 2009 and 2010, respectively. Our capital expenditures for 2010 were mainly
financed from our operating cash flow.
B. Business Overview
We are a China-based ODP provider focused on the original design and development of handsets and
sales of finished products to our local and international customers. While we maintain the stable
growth of product sales, we enter into new businesses, including the branded mobile phone business
and the game business, to generate additional revenue streams as part of our growth strategy.
In 2010, our business comprised the following three areas: (1) ODP business; (2) brand name phone
sales ; and (3) game business. In 2010, ODP contributed 81.9% of our revenues, brand name phone
sales contributed 14.1% of our revenues and our game business contributed 4.0% of our revenues.
Since our inception in 2002, we have been providing complete handset design services spanning the
entire handset design cycle, which involves industrial design, hardware design, component selection
and sourcing, prototype testing, pilot production and production support. We design mobile handsets
based on major technology platforms including GSM/GPRS, CDMA1X, CDMA EVDO, WCDMA/UMTS, HSDPA, and
TD-SCDMA.
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In 2006, we expanded our business from an independent design house to an ODP provider. As an ODP
provider, we not only provide handset design services but also sell finished products by
subcontracting EMS providers to assemble or manufacture mobile phone handsets to meet the demand of
our customers. Currently, our revenues from product sales comprise the majority of our total net
revenues. Our revenues from ODP products as a percentage of our total net revenues increased from
over 46% in 2006 to 70% in 2007 to over 90% in 2008 and 2009, and decreased to 81.9% in 2010 due to
increased revenue in our game business and the offering of QIGI brand products.
Our strong technological capabilities, high-quality design capabilities, strong customer
relationships, strategic relationships with leading technology providers and ample skilled,
low-cost engineering resources enable us to deliver our services and products at competitive costs
and with relatively shorter product cycles when compared to our competitors.
In an effort to minimize the adverse effects of the global financial crisis and weakening economic
conditions, we have strengthened our market position through cooperation agreements with Beijing
Huaqi Information Digital Technology Co., Ltd., or Beijing Huaqi, which owns aigo, a leading
brand in Chinas consumer digital products for the operator-tailored market, and with QIGI
Technology for the smart phone business in China in 2008. These and similar strategic
collaborations have helped and will continue to help promote our products in China and swiftly
bring them to market. Under the strategic cooperation agreement with Beijing Huaqi, we will provide
total solutions products, including CDMA1X/EVDO and UMTS/HSDPA, under the aigo brand name and
through the sales channels of aigo for operator-tailored market in China.
In February 2009, we launched, under the aigo brand name, nine new mobile phones designed
specifically for the 3G network in China. The nine new models are from three different product
lines: dual mode GSM phones, modem card phones and EVDO phones. Of the five dual-mode GSM phones,
three are WCDMA plus GSM phones designed for new China Unicom subscribers and two CDMA plus GSM
phones designed for China Telecom CDMA subscribers. There are two modem card phones, one of which
utilizes a HSDPA modem card and the other uses an EVDO modem card. The final two models have GPS
functionality and run on CDMA1X and EVDO. These nine different models cover CDMA1X, WCDMA, GSM and
EVDO technologies and encompass a broad range of subscriber demands from the different telecom
operators in China.
We put emphasis on the branding of our mobile handset products because branded productsespecially
products bearing well-known brands and imagesoffer a higher profit margin compared with other
mobile handsets we sell. For instance, in the first quarter of 2010, we obtained control of QIGI
Technology which became one of our variable interest entities. QIGI Technology is a company based
in China and focused on the sale of smart phones. After the acquisition, QIGI Technology operated
largely independent of our existing operations; we have been, and intend to continue, focusing on
promoting QIGI as an important Techfaith brand, with emphasis on QIGI brand smart phones.
In May 2010, we sold 49% of the equity interest in our then-wholly owned subsidiary Time Spring to
Billion Team, an affiliate of D Magic Mobile, a cooperative licensee of a number of renowned
international brands in the mobile telecommunications industry. After this transaction, we owned
51% of Time Spring, which in turn owns Media Chance Limited, which owns 100% of Glomate. The
primary business of Glomate is to license well-known, international brands for high-end, brand-name
mobile phones in China targeted at high-end mobile phone users, teenagers and sports fans.
In 2008, we started to develop our online and mobile game business through One Net. In 2009, we began to provide mobile game
services and began to earn revenues in the fourth quarter of that year. We launched two MMORPG
games in 2010.
In 2010, we introduced the motion game
device as a new product line in our game business. Through this new platform, we not
only sell motion game controllers, accessories, but also design and manufacture mobile phones with
motion game controller functions. From the fourth quarter of 2010, our motion game business
generated US$5.1 million in income, and we expect our motion game business to continue to grow in
the future and to develop into a core part of our game business.
Products and Services
Our products and services comprise: (1) ODP; (2) brand name phone sales (3) game business.
ODP Products
When we started our operations in 2002, we focused primarily on providing mobile handset design
services. However, as a result of increasing customer requests for finished products from us, we
have been involved in the mass production phase of the product cycle since 2006. The products we
provide to our customers include feature phones and smart phones designed by us, wireless modules
and other electronic components. We do not have our own production facilities, however, and instead
outsource such production to EMS providers.
After our customers specify the required products from among our existing range of self-designed
mobile handset models (along with some possible customized modifications or additions), we enter
into sales contracts with each customer and begin procuring raw materials and components from our
suppliers, capitalizing on our materials procurement and inventory management expertise. Then we
enter into contracts with EMS providers, which are provided with the raw materials we procure for
their production of the mobile handsets. We also provide
supervisory and technical support to such EMS providers to ensure product quality in accordance
with our customers specifications and to control the use of our intellectual property.
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Our EMS providers engage in assembly and manufacturing operations and also offer testing services
for the assembled printed circuit boards, systems and subsystems to ensure the requisite consistent
high product quality. We send our employees to the production sites of our EMS providers to inspect
the finished products before we accept and make payment. For efficient inventory management, these
finished products are usually arranged to be collected by courier service providers for direct
delivery to locations designated by our customers.
We provide certain primary types of products to our customers: feature phones, smart phones,
wireless modules and data card, other components such as printed circuit board assemblies as well
as wireless software and applications.
Historically, we commenced operations as a mobile handset design house. We also provide production
support to facilitate our customers manufacturing and supply chain management processes. In
addition, since 2006, we have also begun to work with our customers in providing customized handset
design services to mobile service operators. Though we have expanded our business operations by
extending our production support to also include the actual production and sales of finished
products, we retain our strong technological capabilities to design mobile handsets to support a
broad range of wireless communications standards, baseband platforms and technologies.
We provide the following three types of mobile handset design services to our customers:
Mobile Handset Design Services Based on Existing Platforms We design a new model of mobile
handset based on our existing design platform.
Successor Model Design Services We design a successor model of an existing customers mobile
handset previously designed by us to incorporate additional functions and/or industrial design.
Mobile Handset Design Services Based on New Platforms We design a new model of mobile handset
based on a new design platform specified by the customer.
All three types of handset design services cover all major aspects of the design process, including
industrial design, mechanical design, software design, hardware design, sourcing of hardware
components and software, testing, quality assurance, assisting our customers in obtaining requisite
certifications, setting up pilot production lines and production support.
In addition, for our design contracts, after we deliver our design products to our customers, our
customers are required to purchase certain components (such as chips used in mobile handsets)
through us to manufacture the designed products. As this type of components is built in to the
design contracts, we included these component sales in the design contract related revenue, rather
than product sales.
As a result of acquiring Citylead on February 10, 2010, we adjusted our segment reporting since the
first quarter of 2010. We combined the previously reported handset design segment and product sales
segment into one segment, the ODP segment.
Brand name phone sales
In February 2010, we acquired Citylead together with its subsidiaries and obtained control over
Cityleads variable interest entity, QIGI Technology, a domestic brand mobile phone company.
Through this acquisition, we obtained the QIGI brand and commenced to sell brand name phones in the
brand name phone sales segment under the QIGI brand. We now operate a new business segment for the
sales of brand name phones. We emphasize the brand of our mobile handset products because branded
productsespecially products bearing well-known brands and imagesoffer a higher profit margin
compared with other mobile handsets we sell. As a result of the new business line, we changed our
segment reporting in the first quarter of 2010, and the business activities of QIGI Technology now
represent a new segment, the brand name phone sales segment.
Game
We began to develop mobile games and PC online games in 2008 and have since then launched multiple
products in this business. Our online games are large-scale MMORPG games which are free for
consumers to sign up and play but charge for the purchase of tools and weapons used in the games.
We launched two MMORPG games in 2010 which generated revenues amounting to US$103,000.
We also provide mobile game services to manufacturers of branded mobile phones. Under this type of
arrangements, we maintain a mobile phone web page so the end users of the manufacturers of branded
mobile phones can access the web page and download mobile phone games free of charge during the
contract period, usually one year. This part of our business contributed approximately 51.8% of our
game revenues in 2010.
20
We also provide mobile phone game design services to manufacturers of branded mobile phones. Under
this type of arrangements, we are
required to design mobile phone games according to customers specification for a fixed price in a
period, usually less than one year. Revenues from this type of contract is recognized under the
proportional performance method using an output measure determined by achievement of milestones
which include planning documentation and testing reports.
We began providing motion game services in 2010. Gamers can use motion game controllers or mobiles
to play motion games, which can be downloaded from www.17vee.com. The controller or mobile
is able to support hundreds of motion games such as racing, shooting, tennis, track and field. The
motion game controller can be accessed through Bluetooth connection with the end users computer or
laptop. Revenue from sales of motion game controllers and mobiles are recognized on goods delivery
and ownership transferred to customers. Usually we receive advance payment from customers and
deliver goods within one week of receiving payment. This part of our income contributed over 46.9%
of our game revenue in 2010.
Customers
Mobile handset brand owners are customers for both of our product sales business and handset design
services business. Our customers include leading Chinese mobile handset brand owners and
international mobile handset brand owners.
For each manufacturing and design project, we have a designated account manager who directly
interacts with the customer throughout the manufacturing and design process to report project
progress and handle customer input and comments. We provide technical support and production
support to assist customers of our handset design services in designing the manufacturing process.
A small number of customers have historically accounted for a substantial portion of our net
revenue. In 2008, 2009 and 2010, our largest three customers collectively accounted for
approximately 28.8%, 34.2% and 30.4%, of our net revenues, respectively.
We normally have multiple on-going contracts with each customer, and each contract may correspond
to more than one mobile handset model. While our contracts vary by customer and by mobile handset
model, each of our product sales contracts typically requires us to sell finished products based on
our pre-existing self-designed handset models along with some possible modified or additional
features, and each of our handset design services contracts typically requires us to develop and
design the mobile handset model, assist the customer in designing the manufacturing process, obtain
necessary certifications and provide technical and production support.
For our product sales, we typically charge payments based on the per unit price multiplied by the
total number of handsets. A portion of the total purchase price is usually payable at the execution
of the sales contracts as prepayment and full payment is required before the products are delivered
to our customers.
We typically charge two types of payment for our handset design services: design fee and royalty.
The design fee is a fixed amount paid in installments according to pre-agreed milestones. In
addition to the design fee, we also charge royalty to certain customers. The royalty is calculated
at a variable rate based on the volume of mobile handsets manufactured or sold by a customer.
Our contracts with many customers contain refund and liquidated damages provisions. These
provisions provide the customer with a right to demand a refund and liquidated damages if we cannot
complete a mobile handset design by the deadline mutually agreed between us and the customer, the
requisite certifications cannot be obtained, or if our products sold to the customers contain
defects or are otherwise not in compliance with the specifications agreed in the contracts. Under
the sales contracts with our customers, we are required to provide warranty and after-sales
services. These warranty and after-sales services will be performed either by EMS providers or by
us.
Our customers with respect to our mobile game business are manufacturers of branded mobile phones.
We maintain a mobile phone web page so the end users of the manufacturers of branded mobile phones
can access the web page and download mobile phone games free of charge during the contract period,
which is usually one year.
Our customers with respect to our motion game business are either distributors or individual end
users. We typically charge payments based on the per-unit price multiplied by total number of
motion game controllers. A portion of the total purchase price is usually payable upon the
execution of the relevant sales contracts as prepayment and full payment are required before we
deliver our products to our customers.
Sales and Marketing
We sell and market our product sales and mobile handset design services through a
sales force in China and direct marketing efforts. We maintain sales and marketing staff in Beijing
and Shanghai, covering the major cosmopolitan regions in China where most of our customers are
located. We also maintain sales and marketing staff to cover Southeast Asia, India, America,
Africa, Middle East and Europe, as we provide middle- to high-end products to these markets; these
staff members periodically travels to various trade shows to promote our products in those markets.
We engage in marketing activities to promote our services. We frequently attend conferences,
exhibitions and trade fairs to promote our products and services. We attend the GSMA Mobile World
Congress (formerly 3GSM World Congress) exhibition in Barcelona, the CTIA Wireless exhibition in
Las Vegas, Communic Asia in Singapore and GITEX Technology Week Exposition in Dubai. In
addition, we view our strategic relationships with leading technology companies and platform
providers as part of our efforts to promote our company. We
believe that some of the leading technology companies with which we have strategic relationships
will be instrumental in helping us secure our targeted multinational customers by providing us
opportunity referrals, since such referrals may also promote the use of their technology. We also
introduced additional baseband platforms to our existing customers to attract new product sales and
design contracts from them.
21
Technology
We build our successful product sales business upon the strong foundation of our technological
expertise gained in the process of designing a wide range of mobile handset models by the effective
and efficient deployment of our in-house research and development team.
We have extensive experience in designing 2.75G GSM/EDGE mobile handsets based on major baseband
platforms. To expand our design capabilities, in 2007 we acquired the technologies necessary for
the design and development of 3.5G and 3.75G mobile handsets based on EVDO/WCDMA/HSDPA/HSUPA
standards. We further expanded our design capabilities by launching WiFi enabled smart phones and
dual mode dual card phones.
We rely on third-party licensors for key technologies and other technologies embedded in our mobile
handset designs. These licenses are typically non-exclusive under royalty-accruing and/or paid-up
contracts. Among licenses, we have obtained licenses for GSM-related intellectual property from
Philips, Texas Instruments and Skyworks Solutions. We are the first independent mobile handset
design house in China to have obtained licenses from QUALCOMM to use its CDMA/WCDMA/HSDPA/HSUPA
technology and patent to develop relevant handsets.
We have a high degree of technological expertise in major areas of mobile handset design,
development and production. Our engineers are skilled at designing mobile handsets that integrate
many different functions and features in common or differentiated hardware and software
architectures. We have also developed a design approach that allows the production of enhanced
mobile handset models with minimal modifications and slight adjustments on the existing mass
production lines of our customers or the EMS providers that manufacture the products for our
customers. This allows our customers to launch new handset models at a relatively faster
time-to-market and with lower manufacturing costs.
We use advanced methodologies to design mobile handsets for our customers. We use
industry-standard, state-of-the-art design tools in our design process which we believe provides us
significant flexibility to adapt our research, development and product design work to new
manufacturing processes and technology platforms when desirable.
We launched GPS/GSM-CDMA dual module/GSM-GSM dual card phones and WiFi smart phones based on the
Windows Mobile 6 operating system handsets in 2007. We have developed handsets with technologies
such as GSM/WCDMA, GSM/TD-SCDMA and UMTS/CDMA and are capable of developing middleware MMI/UI
software on 2.75G GSM/EDGE, 3G(EV-DO, WCDMA/UMTS, TD-SCDMA) and 3.5G(HSDPA) communication
technologies that fulfill the specifications of handset brand owners and carriers in the global
market. During 2009, we also commercialized several promising products including our dual-GSM SIM
card G6, a device designed to serve as a feature-rich mobile phone, a durable mobile games platform
and a remote control for PC games. In addition, during 2009, we launched our HSUPA data modem card
in the U.S. market and shipped mobile phones with TV functions to markets in Latin America and
Southeast Asia. We launched wireless portable people meters device for our US customer to collect
marketing data which can monitor the media station which the people watching or listening.
We are also focusing our efforts to develop mobile games and online games, making progress in
implementing new technologies such as motion games for online game. During January 2010, we
launched our first MMORPG PC online game, developed entirely by our own studios. In 2011, we are
putting in more effort to launch number of motion games.
Research and Development
We believe that our future success primarily depends on our ability to efficiently design and
develop: (1) new models of mobile handsets and manufacturing processes that meet our customers
demand for cost-competitive, high-quality and technologically advanced mobile handsets and, to a
lesser degree, (2) new mobile and online games with, among other characteristics, authentic action
design as well as unique technology and programming. We seek to continue to enhance and expand our
design capability through in-house research and development efforts and strategic partnerships. The
goals of our research and development efforts include the following:
to keep abreast of the advanced technologies in the mobile handset and mobile and online game
industry;
to emphasize cost-effectiveness and manufacturability of our designs;
to develop high-quality handsets based on various commonly adopted platforms and to ensure
flexibility of design and production modifications; and
to make effective use of the technologies licensed from leading global technology companies.
As part of our newly developed mobile and online game business, we set up three online games
studios and one mobile games studio for research and development purposes. We also outsource part
of our online game design to an independent studio.
22
As of December 31, 2010, our research and development staff and supportive function consisted of
318 engineers, representing approximately 67.5% of our total staff. All of our engineers are based
in China and most of our senior engineers have extensive experience in the mobile handset industry.
For the years ended December 31, 2008, 2009 and 2010, we had research and development expenses of
US$18.2 million, US$12.0 million and US$11.6 million, respectively.
Intellectual Property
We also rely on third-party licensors for design cell phone and module card technologies and other
technologies embedded in our designs. These licenses are typically non-exclusive and
royalty-accruing. If we are unable to continue to have access to these licensed technologies, our
success could be adversely affected. In addition, we rely on commercially available third-party
software applications in carrying on our business operations. We generally obtain these software
applications from retail outlets or through third-party vendors which bundle them together with PCs
and servers purchased by us. We make efforts to ensure that we have proper licenses for software
applications used by us, including those provided by third-party vendors.
Competition
The mobile handset market is intensely competitive and highly fragmented. We face current and
potential future competition from established mobile device manufacturers. These include original
design manufacturers, such as Sim Technology Group Limited, BYD
Electronics Limited., and Longcheer
Holdings Limited, which compete with our product sales business by offering their own production
services to brand name owners. These original design manufacturers may also compete with us in the
mobile handset design business as they may be in a position to design mobile handsets on their own.
We also face worldwide competition from in-house design teams of original equipment manufacturers.
In addition, new players may enter the independent mobile handset production and design market in
the near future.
We compete in varying degrees on the basis of the following factors:
ability to effectively and efficiently provide know-how and support to our EMS providers which
manufacture handsets for our customers;
ability to design and integrate many hardware and software functions and features based on
different platforms;
product quality and reliability;
cost-effectiveness;
economies-of-scale;
ability to rapidly complete a design;
service and customer support capabilities; and
customer base and customer loyalty.
Competition in the mobile and online game market in China is intense. We believe that the key
competitive factors include the design, quality, popularity and price of online games and in-game
items, the ability to rapidly update and upgrade games, marketing activities, sales and
distribution network and customer service.
Many of our competitors have significantly greater financial, technical, manufacturing, marketing,
sales and other resources than we do. We cannot assure you that we will be able to compete
successfully against our current or future competitors.
Regulation
This section sets forth, in the opinion of our PRC counsel, Genland Law Firm, a summary of the most
significant regulations or requirements that affect our business activities in China or our
shareholders right to receive dividends and other distributions from us.
CTA Certification
The Ministry of Informational Industry, or MII, promulgated the Administration Measures of the
Network Entry of Telecommunication Equipment, which state that all telecommunication terminal
equipment subject to the network entry permit system, including mobile handsets, must obtain a
certification commonly known as China Type Approval, or CTA, from the MII before mass production.
CTA certifies that the use of telecommunication terminal equipment in the national
telecommunications network has been approved and complies with the requirements for network access
and the national standards established by the MII. Our customers generally require us to provide
technical support to assist them in obtaining CTA certification.
23
Tax
As a business enterprise operating in China, we are subject to the EIT Law, which became effective
on January 1, 2008. Prior to December 31, 2008, Techfaith China and Techfaith Intelligent Handset
Beijing applied for HNTE status that would allow for a reduced applicable tax rate; under the EIT
Law, however, Techfaith China and Techfaith Intelligent Handset Beijing are also required to
confirm and record the HTNE certificate with the competent tax bureau to enjoy the reduced tax
rate. The official HNTE certificates were issued to Techfaith China and Techfaith Intelligent
Handset Beijing on December 24, 2008. While the certificates are valid for three years, we believe
we will be able to reapply successfully for the renewal of the current certificates as we believe
we will continue to meet the published criteria. Accordingly, Techfaith China and Techfaith
Intelligent Handset Beijing have used the reduced applicable tax rate in calculations of deferred
tax balances for the foreseeable future. Techfaith Shanghai has qualified as a manufacturing
foreign investment enterprise (the FIE) located in Shanghai Pudong according to the old EIT law
and obtained HNTE in December 2008. It was entitled to a preferential tax rate of 15% prior to year
2008, with two-years exemption followed by a 50% reduction in tax rate for the subsequent three
years under the old EIT law starting from 2005. According to the transition rule from the old tax
laws to the new EIT Law, in 2008 and 2009, Techfaith Shanghai is entitled a tax rate of 18% and
20%, respectively. Starting from 2010, the tax rate for Techfaith Shanghai is 15%. Techfaith
Hangzhou is also qualified as a production enterprise and the relevant tax authorities have
agreed that it is entitled to a two-year exemption from income tax in 2007 and 2008, followed by a
50% reduction in tax rate for the succeeding three years 2009, 2010 and 2011. Based on the
transition rules of the EIT Law, those companies each qualified as production enterprise and can
continue to enjoy preferential tax rates from 2008 through 2011 due to the preferential tax
qualification obtained prior to January 1, 2008.
The EIT Law includes a provision specifying that legal entities organized outside China will be
considered residents for Chinese income tax purposes if their place of effective management or
control is within China. If legal entities organized outside China were considered residents for
Chinese income tax purpose, they would become subject to the EIT Law on their worldwide income.
This would cause any income legal entities organized outside China earned to be subject to Chinas
25% EIT. The Implementation Rules to EIT Law provide that non-resident legal entities will be
considered China residents if substantial and overall management and control over the manufacturing
and business operations, personnel, accounting and properties resides within China. The State
Administration of Taxation issued a notice in 2009 that sets out detailed rules for determining
whether a Chinese-controlled offshore incorporated enterprise is a tax resident of China, describes
the tax implications of such an enterprise being regarded as a tax resident and sets out the
procedures for an assessment of residence status by the relevant local tax bureau. Pursuant to this
notice, we do not believe that the legal entities of our group organized outside China would be
considered China tax residents for EIT Law purposes.
Under the EIT and its implementation rules, dividends payable by a foreign-invested enterprise in
China to its foreign investors who are non-resident enterprises are subject to a 10% withholding
tax, unless any such foreign investors jurisdiction of incorporation has a tax treaty or similar
arrangement with China that provides for a different withholding arrangement. Dividends of our PRC
subsidiaries that are directly held by our Hong Kong subsidiary historically benefited from a
reduced withholding tax rate of 5% under the arrangement to avoid double taxation between Hong Kong
and the PRC. However, in August 2009, the State Administration of Taxation released the
Administrative Measures for Non-Residents Enjoying Tax Treaty Benefits (Trial Implementation),
which took effect on October 1, 2009. Under these measures, our Hong Kong subsidiary needs to
obtain approval from the competent local branch of the State Administration of Taxation in order to
enjoy the preferential withholding tax rate of 5% in accordance with the double-taxation agreement
between the PRC and Hong Kong. In addition, the State Administration of Taxation has published
certain procedures and document requirements as well as sample tax resident certificates of certain
countries (regions) including Hong Kong, to be submitted to the competent tax bureau when claiming
the preferential withholding tax rate. As stipulated in rules published in year 2009, our Hong Kong
subsidiary shall fulfill the requirement for beneficial owner of the dividend to enjoy the
preferential withholding tax rate. However, given the relatively short history of these
implementation rules and procedures and document requirements, it is not clear our Hong Kong
subsidiary would be able to qualify for the 5% preferential withholding tax rate in the future.
Aggregate undistributed earnings of our subsidiaries located in the PRC that are taxable upon
distribution to us of approximately US$117.5 million at December 31, 2010 are considered to be
indefinitely reinvested, because we do not have any present plan to pay any cash dividends on its
ordinary shares in the foreseeable future and intends to retain most of our available funds and any
future earnings for use in the operation and expansion of our business. Accordingly, no deferred
tax liability has been accrued for the Chinese dividend withholding taxes that would be payable
upon the distribution of those amounts to us as of December 31, 2010.
We sell a significant portion of wireless modules and smart phones from our Hong Kong subsidiary,
and currently the statutory income tax rate in Hong Kong is 16.5%. The Inland Revenue Department of
Hong Kong approved our Hong Kong subsidiary to be effectively exempt from income tax in Hong Kong.
No provision for Hong Kong profits tax was made for the years ended December 31, 2008, 2009 and
2010 on the basis that Techfaith Intelligent Handset Technology (Hong Kong) Limited did not have
any assessable profits arising in or derived from Hong Kong for the years.
According to the Circular on Tax Issues Related to the Implementation of the Decision of the CPC
Central Committee and State Council on Strengthening Technical Innovation issued by the Ministry of
Finance and the State Administration of Taxation, Revenue generated under technology transfer
agreements or technology development that has been registered with relevant authorities, as well as
revenue generated from technology and consulting services associated with these two types of
arrangements, could be exempted from business tax.
Our subsidiaries in China are also entitled to a business tax exemption relating to their income
derived from any technology development
agreement and technical transfer agreement that has been registered with relevant government
authorities.
24
Pursuant to the Provisional Regulation of China on Value Added Tax and their implementing rules,
except as stipulated otherwise, our PRC subsidiaries are required to pay value added tax, or VAT,
at a rate of 17% of the gross sales proceeds received, called output VAT. On the other hand, input
VAT paid on the purchased goods or received VAT taxable labor services is used as a credit against
the output VAT levied on the gross sales.
Online Game and Mobile Game
All Internet-related businesses in China, including the operation of online games, are highly
regulated by the PRC government. Various regulatory authorities of the PRC government, such as the
State Council, the Ministry of Industry and Information Technology, the State Administration of
Industry and Commerce, the Ministry of Culture, the General Administration of Press and
Publication, the State Administration of Radio, Film and Television and the Ministry of Public
Security are empowered to promulgate and implement regulations governing various aspects of the
Internet and the online game industry. Our PRC operating companies are required to obtain
applicable permits or approvals from different regulatory authorities in order to operate online
games.
As the online game industry is at an early stage of development in China, new laws and regulations
may be adopted in the future to address new issues that arise from time to time, such as online
advertising and the use of virtual currency in online games. Also, different regulatory authorities
may have different views regarding the licensing requirements for the operation of online games and
related businesses. As a result, there is, and will continue to be, substantial uncertainty in the
interpretation and implementation of current and any future PRC laws and regulations applicable to
the online game industry and related businesses.
On December 11, 2001, the PRC State Counsel promulgated the Regulations for the Administration of
Foreign-invested Telecommunications Enterprises, or the FITE Regulations, which became effective on
January 1, 2002 and were subsequently amended on September 10, 2008. Under the FITE Regulations,
foreign ownership of companies that provide value-added telecommunication services, which includes
online game operation, is limited to 50%. In addition, foreign and foreign-invested enterprises are
currently not able to apply for the licenses required to operate online games in China or to
provide Internet information content, such as online advertising.
On July 13, 2006, the Ministry of Industry and Information Technology issued the Circular on
Strengthening the Administration of Foreign Investment in Value-added Telecommunication Services,
or the MIIT Circular 2006. According to the MIIT Circular 2006, since the FITE Regulations went
into effect, some foreign investors had engaged in value-added telecom services illegally by
conspiring with domestic value-added telecom enterprises to circumvent the requirements of the FITE
Regulations by delegating domain names and licensing trademarks. In order to further strengthen the
administration of foreign investors that conduct value-added telecommunications business, the MIIT
Circular 2006 provides that any domain name or trademark used by a value-added telecom carrier
shall be legally owned by such carrier or its shareholders. The MIIT Circular 2006 also provides
that the operation site and facilities of a value- added telecom carrier shall be installed within
the scope as prescribed by operating licenses obtained by the carrier and shall correspond to the
value-added telecom services that the carrier has been approved to provide. In addition,
value-added telecom carriers are required to establish or improve the measures of ensuring network
security. As to the companies which have obtained the operating licenses for value-added telecom
services, they are required to conduct self-examination and self-correction according to the said
requirements and report the result of such self-examination and self-correction to the provincial
branches of the Ministry of Industry and Information Technology.
Virtual Assets
In the course of playing online games, some virtual assets, such as special equipment, player
experience grades and other features of a users game characters, are acquired and accumulated.
Such virtual assets can be important to online game players and in some cases are exchanged between
players for monetary value. In practice, virtual assets can be lost for various reasons, often
through unauthorized use of the game account of one user by other users and occasionally through
data loss caused by a delay of network service or by a network crash. On June 4, 2009, the Ministry
of Culture and Ministry of Commerce of the PRC jointly issued a Notice on Reinforce Management
about the Virtual Asset Property of Online Games, which restricts the market access and publishes
more requirements for the on line games operators. However, it is still unclear who are the legal
owners of virtual assets and whether and how the ownership of virtual assets is protected by law.
It is unclear under PRC law whether an operator of online games such would have any liability to
game players or other interested parties (whether in contract, tort or otherwise) for loss of such
virtual assets by game players. Based on several judgments by PRC courts regarding the liabilities
of online game operators for loss of virtual assets by game players, the courts have generally
required the online game operators to return the virtual items or be liable for the loss and damage
incurred there from.
Foreign Currency Exchange
The principal regulation governing foreign currency exchange in China is the Foreign Currency
Administration Rules (1996), as amended. Under these rules, RMB is freely convertible for trade and
service-related foreign exchange transactions, but not for direct investment, loan or investment in
securities outside China unless the prior approval of SAFE is obtained.
25
Pursuant to the Administration of the Settlement, Sale and Payment of Foreign Exchange Provisions,
promulgated by the Peoples Bank of China (1996), foreign investment enterprises in China may
purchase foreign currency without the approval from SAFE for trade and service-related foreign
exchange (subject to a cap approved by SAFE) to satisfy foreign exchange liabilities or to pay
dividends. In addition, if and when they acquire companies in the middle and western areas of China
and the foreign investment accounts for not less than 25% of the registered capital of such
acquired companies, such acquired companies will also be entitled to enjoy the policies granted to
foreign investment enterprises. However, the relevant PRC government authorities may limit or
eliminate the ability of foreign investment enterprises to purchase and retain foreign currencies
in the future. In addition, foreign exchange transactions for direct investment, loan and
investment in securities outside China are still subject to limitations and require approvals from
SAFE.
Dividend Distribution
The principal regulations governing distribution of dividends by wholly foreign-owned enterprises
and the Chinese-foreign equity joint ventures include the Wholly Foreign-owned Enterprise Law
(1986), as amended by the Decision on Amending the Law of the Peoples Republic of China on
Foreign-funded Enterprises (2000), and the Implementing Rules of the Wholly Foreign-owned
Enterprise Law (1990), as amended by the Decision of the State Council on amending of the Rules for
the Implementation of the Law of the Peoples Republic of China on Foreign-funded Enterprises
(2001).
Under these regulations, foreign invested enterprises in China may pay dividends only out of their
accumulated profits, if any, determined in accordance with Chinese accounting standards and
regulations. In addition, foreign invested enterprises in China are required to set aside at least
10% of their respective accumulated profits each year, if any, to fund certain reserve funds, until
the cumulative amount of such fund reaches 50% of its registered capital. These funds are not
distributable as cash dividends.
26
C. Organizational Structure
The following chart illustrates our corporate structure, our equity interest in each of our
principal operating subsidiaries and variable interest entity as of the date of this annual report:
Note:
|
|
|
(1) |
|
Dotted line denotes variable interest entities. We have contractual arrangements with QIGI
Technology under which QIGI Technology focuses on smart phones under the QIGI brand. We
also have contractual arrangements with Techfaith Interactive under which Techfaith
Interactive operates our online and mobile game business |
|
(2) |
|
Billion Team Asia Limited is an affiliate entity of D Magic Mobile (Shanghai) Incorporation. |
27
We conduct substantially all of our operations through the following subsidiaries and variable
interest entities in China:
|
|
Techfaith Wireless Communication Technology (Beijing) Limited, or
Techfaith China, which primarily designs GSM-based mobile handsets; |
|
|
|
One Net Entertainment Limited, formerly known as Techfaith Interactive
Technology (Beijing) Limited, and before then, Techfaith Wireless
Communication Technology (Beijing) Limited II and Beijing Centel
Technology R&D Co., Ltd., which primarily designs online games and
provides motion game devices; |
|
|
|
Beijing Techfaith Interactive Internet Technology Limited, or
Techfaith Interactive, which has exclusive contractual arrangements
with us to operate our online and mobile game business; |
|
|
|
Techfaith Wireless Communication Technology (Shanghai) Limited,
formerly known as Leadtech Communication Technology (Shanghai)
Limited, which primarily designs CDMA mobile handsets using technology
licensed from QUALCOMM; |
|
|
|
Techfaith Intelligent Handset Technology (Beijing) Limited, or
Techfaith Intelligent Handset Beijing, which focuses on smart phones
and related products; |
|
|
|
Techfaith Wireless Communication Technology (Hangzhou) Limited, or
Techfaith Hangzhou, which focuses on handsets and smart phones sales; |
|
|
|
Techfaith Intelligent Handset Technology (Hong Kong) Limited, which
focuses on smart phones and handsets sales; |
|
|
|
QIGI&BODEE Technology (Beijing) Co., Ltd., or QIGI Technology, which
focuses on smart phones under the QIGI brand; and |
|
|
|
Glomate Mobile (Beijing) Co., Ltd., or Glomate, which will focus on
licensing well-known brands for high-end mobile phones. |
Except for TechSoft, One Net, Techfaith Interactive, and Glomate, all of our subsidiaries in China
are wholly owned. TechSoft is wholly owned by a Cayman Islands holding company, which is a joint
venture that is 70%-owned by us and 30%-owned by QUALCOMM. Infiniti Capital Limited, IDG-Accel
China Growth Fund II L.P. and IDG-Accel China Investor II L.P owns 23.4%, 8.1% and 0.7% of One Net
respectively. Glomate is a subsidiary that is 51%-owned by us and 49%-owned by Billion Team Asia
Limited, an affiliate of D Magic Mobile.
D. Plant, Machinery and Equipment
As of December 31, 2010, our principal executive offices were located on premises comprising 24,000
square meters in Beijing, China. We have regional offices in Shanghai, Hangzhou and Shenzhen. We
plan to establish our dedicated mobile handset pilot production facilities in Hangzhou. On
February 11, 2007, we contracted with a third party construction company to construct buildings in Hangzhou.
During the year ended December 31, 2010, the construction has completed and transferred to
property, machinery and equipment in the amount of US$24.5 million. In November 2010, the buildings
have been leased to a third party for three years. As of December 31, 2010, we had paid US$2.6
million for leasehold improvement. The leasehold improvement is for new rented office working place
in Beijing headquarter for the next three years starting from December 31, 2010. We believe that we
will be able to obtain adequate facilities to accommodate our future expansion plans.
Item 4A. Unresolved Staff Comments
We received a letter from the staff of the SEC (the Staff), dated
May 20, 2011, which contained a comment relating to our assessment on the effectiveness of our internal control over financial
reporting as of December 31, 2010. We concluded that there was a material weakness in our internal control over financial
reporting, and as a result, our internal control over financial reporting was not effective as of December 31, 2010, as set
out in Item 15. Controls and Procedures on this Form 20-F. On May 23, 2011, we submitted our response letter to the
Staff containing our conclusion and the related disclosure, and are awaiting confirmation from the Staff that the unsolved
comment is cleared.
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ITEM 5. Operating and Financial Review and Prospects
The following discussion of our financial condition and results of operations is based upon and
should be read in conjunction with our consolidated financial statements and their related notes
included in this annual report on Form 20-F. This report contains forward-looking information. See
Item 5. Operating and Financial Review and ProspectsG. Safe Harbor. In evaluating our business,
you should carefully consider the information provided under the caption Risk Factors in this
annual report on Form 20-F. We caution you that our businesses and financial performance are
subject to substantial risks and uncertainties.
A. Operating Results
Since our inception in 2002, we have been providing complete handset design services spanning the
entire handset design cycle, which involves industrial design, hardware design, component selection
and sourcing, prototype testing, pilot production and production support. In 2010, we re-organized
our business operations into three segments: (1) ODP products, (2) brand name phone sales, and (3)
game business.
Restatement of Previously-Issued Financial Statements
We issued our consolidated
financial statements as of December 31, 2008 and 2009
and for the years ended December 31, 2007, 2008 and 2009 on May 19,
2010. As described in Note 3 to the financial statements Restatement,
the financial statements as of and for the year ended December 31, 2009 were
restated subsequently.
In 2009, our subsidiary, Leo Technology Limited, now renamed 798 Entertainment Limited, issued to
the IDG Funds certain senior secured convertible promissory notes with a principal value of US$10
million that were issued at par less issuance costs of US$0.4 million. We recorded the notes as a
liability at the amount of the net proceeds of US$9.6 million. These notes included a number of
embedded derivatives, principally a right to convert into shares of Leo Technology or the shares of
our company at the holders discretion. We determined that the fair value of these embedded
derivatives at the date of issuance was US$12.8 million and pursuant to the authoritative
literature were required to be bifurcated from the debt host and subsequently marked to market
through earnings. In 2009 the loss charged to the income statement arising from the increase in the
fair value of the derivatives was US$5.3 million. In our previously reported 2009 financial
statements, we first allocated the proceeds to the embedded derivatives equal to the fair value of
these embedded derivatives, and then allocated the remaining carrying amount to the debt host.
Since the fair value of embedded derivatives exceeded the net proceeds of the notes and hence,
result in a debit amount of US$3.2 million for the debt host at the date of the issuance. We
accreted the residual amount (the residual amount of the debt host after deducting the embedded
derivatives) to the amount due on the redemption of the notes over the life of the debt instrument
assuming no conversion on redemption. In 2009, the charge to the income statement in respect of the
accretion of interest was US$0.6 million. The notes were subsequently converted into our equity
pursuant to the original conversion terms in September 2010, during which each investor chose to
convert 62.5% of its share of the principal amount of the notes into our ordinary shares, and the
remaining 37.5% was converted into shares of Leo Technology Limited, now renamed 798 Entertainment
Limited.
While we believed that the accounting treatment applied to the notes above was in compliance with
the relevant authoritative literature, we have subsequently determined that the more correct
accounting treatment to be applied upon the issuance of the debt was to recognize the embedded
derivatives at their fair value of US$12.8 million but to recognize the difference between that
amount and the amount of the net proceeds as a loss upon the issuance of the convertible notes. Our
earnings for the year ended December 31, 2009 was restated so as to result in the following
changes:
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|
|
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Impact on current earnings for year ended December 31, 2009: |
|
(in thousands) |
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|
|
|
|
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Decrease in net income in 2009 |
|
$ |
(2,588 |
) |
|
|
|
|
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Increase in net loss attributable to noncontrolling interest |
|
$ |
665 |
|
|
|
|
|
|
|
|
|
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Decrease in retained earning as of December 31, 2009 |
|
$ |
(1,923 |
) |
|
|
|
|
For details, see Note 3, Restatement, to our consolidated financial statements included in this
annual report on Form 20-F.
Major Factors Affecting Our Results of Operations
Net Revenues. We derive our current revenues primarily from sales of products, mobile handset
design services and game. Products we sell include smart phones and feature phones designed by us
and manufactured by EMS providers, wireless modules and other electronics components for mobile
handsets. Revenues from handset design services comprise design fees, royalty income, component
sales related to design, such as chips used in mobile handset we design, and service income.
Revenues from game comprise income from mobile phone game-related service and mobile game design
service.
29
Our revenues from ODP business as a percentage of our total net revenues increased from over 90% in
both 2008 and 2009, and decreased to
over 80% in 2010. However, a new business segment, brand name phone sales, contributed revenues
ofUS$38.5 million in 2010. and game business has generated revenues in 2010 at amount of US$10.9
million and we expect it to generate more revenues in both QIGI branded and game business in 2010.
Therefore, the revenues from ODP as a percentage of our total net revenues in 2010 fall in
comparison. We recognize revenues from ODP products after all the risks and rights have passed to
our customersas we outsource the production and assembly of our products to outside
manufacturers, we record revenue based on the gross amounts billed to our customers. We use this
revenue-recording method because our customers generally entrust everything involving production to
us and pay us fully and promptly upon being billed, for the following reasons: (1) we are the
primary obligor in these transactions, (2) we have latitude in establishing prices, (3) we are
involved in the determination of the service specifications, (4) we bear the credit risk, (5) we
bear the inventory risk and (6) we have the right to select the suppliers and the manufacturers.
Normally, full payment is required before products are shipped. We recognize revenues for products
shipped on credit only after collection is reasonably assured.
We also provide mobile handset design services to mobile handset brand owners. Our revenues from
mobile handset design services as a percentage of our total net revenues decreased from 9% in 2008
and 2% in 2009 to less than 1% in 2010, and the amount of revenue decreased from US$ 19.1 million
in 2008 and US$ 4.5 million in 2009 to US$3.5 million in 2010. The decrease in revenues from
handset design services is due to change in demands from customers as well as change in our product
strategy, as an increasing number of customers prefer to buy the finished products from us. From
2008, we started to put less emphasis on handset design service and focus more on product sales.
Our design gross margins have fluctuated since our inception and are expected to continue to
fluctuate as a result of a variety of factors, which include changes in the relative mix of our
services and the terms at which we offer them.
The mobile handset industry is characterized by relatively short product life cycles, increasing
competition, margin pressure for wireless handset brand owners and a growing trend toward
outsourcing. We expect our business to continue to be primarily driven by the industry trend to
outsource. Our net revenues from product sales are driven by the number of mobile handsets sold to
our customers as well as the average per unit price of such handsets. The number of mobile handsets
sold is in turn driven, in part, by the quality and reliability of our products, the number of our
customers and the number of product orders that our sales and marketing team is able to obtain from
each of our customers. We expect our business to continue to be primarily driven by the growing
mobile handset markets and the industry trend to outsource. Our net revenues from product sales are
driven by the number of mobile handsets sold to our customers as well as the average per unit price
of such handsets.
While the quality of our products and services is a key factor in attracting orders from our
customers, the number of orders we receive is also driven by the market demand for the specific
products we design and produce, and the level of competition from our competitors in terms of their
ability both to attract our target customers and to exert downward pressures on industry prices.
The market demand for mobile handsets is further influenced by the general economic conditions, the
level of disposable income of consumers and general consumer sentiment in China, and, to a lesser
extent, in other countries in which we sell our products. As we outsource the assembly and
manufacturing of our products to EMS providers, and as we believe it is relatively easy for us to
procure raw materials from existing and new suppliers and to procure manufacturing services from
existing and new EMS providers, we do not anticipate having any capacity problem in sales order
fulfillment as we are in a position to accept, and successfully fulfill, substantially more orders
than the volume that we have been handling so far.
Our revenues from product sales are net of value-added taxes which is 17% of the gross sales
proceeds received by our PRC subsidiaries.
Our revenues from PC online game and mobile game related services are net of 5% local business
taxes. We may, upon application to and approval from relevant tax authorities, be eligible for full
refunds of the business taxes to the extent they relate to the revenue generated under technology
development agreements and/or technical marketing agreements.
We have applied for and received refunds in connection with the revenues generated under several of
our mobile handset design contracts.
Cost of Revenues. Cost of revenues from our ODP products, including smart phones, feature phones,
wireless modules, consists primarily of the cost of acquiring the products from EMS factories, and
to a lesser extent, compensation and benefits to our staff associated with the ODP business. The
cost of acquiring the products from EMS factories include not only the service fees paid to the EMS
providers but also the cost of raw materials we buy from our suppliers and assign to the EMS
providers for processing and assembly. Our cost of revenues for ODP products may be lowered by our
ability to source the required raw materials and components from our suppliers at competitive cost
due to established and stable supplier relationships and price discounts from bulk purchases. Cost
of revenues from brand name phone sales include raw materials and components cost from supplier,
warranty and delivery cost. Cost of revenues for providing mobile game services to our customers
primarily consists of compensation and benefits for our game developers. Cost of PC online game
include maintenance expense, depreciation and amortization in web server and employee cost in
connection with our online game services. Cost of revenues from motion game include product cost to
EMS providers, warranty cost and delivery cost.
Operating Expenses. Our operating expenses consist of general and administrative, research and
development and selling and marketing expenses and expenses related to impairment of long-lived
assets.
General and Administrative. General and administrative expenses consist primarily of compensation
and benefits of administrative personnel, office expenses including staff traveling expenses and
other expenses for general and administrative purposes, as well as costs for professional services,
including legal and accounting services.
30
Research and Development. Research and development expenses consist primarily of the portion of our
engineers compensation and benefits not attributable to any mobile handset design project pursuant
to a design contract or to the development of mobile and online games, amortization of assets
related to research and development, compensation and benefits to our engineers who are involved in
the development of wireless modules, and lease expenses for occupancy associated with research and
development.
Selling and Marketing. Selling and marketing expenses consist primarily of expenses related to
marketing and promotion activities, compensation and benefits for sales and marketing personnel and
travel expenses of sales and marketing personnel. We expect our selling and marketing expenses to
increase in absolute terms as we hire additional sales and marketing personnel and expand our
selling and marketing network in Japan, Europe and North America to promote and sell our products
and services.
Income Taxes. Under the current laws of the Cayman Islands, where we are located, and the current
laws of the British Virgin Islands, where our holding company and intermediate holding companies
are located, we are not subject to tax on our income or capital gains. In addition, our payment of
dividends is not subject to withholding tax in these jurisdictions.
For more information in connection with the tax status of our subsidiaries in China and Hong Kong,
see Item 5. Information On the Company B. Business Overview Regulation Tax.
Critical Accounting Policies
We prepare our financial statements in conformity with the Generally Accepted Accounting Principles
in the United States of America, or U.S. GAAP, which require us to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenues and expenses in the financial
statements and the accompanying notes. The consolidated financial statements include the financial
statements of Techfaith, its subsidiaries and its variable interest entities. All inter-company
transactions and balances are eliminated upon consolidation. The preparation of financial
statements in conformity with U.S. GAAP requires our management to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenues and expenses in the financial
statements and accompanying notes. Significant accounting estimates reflected in our financial
statements include revenue recognition, allowance for doubtful accounts, provision for inventory
write-down, provision for warranty, useful lives and impairment for plant, machinery and equipment
and intangible assets, share based compensation expense and valuation allowance for deferred tax
assets. We continually evaluate these estimates and assumptions based on the most recently
available information, our own historical experience and various other assumptions that are
believed to be reasonable under the circumstances. Since the use of estimates is an integral
component of the financial reporting process, actual results could differ from those estimates.
Some of our accounting policies require higher degrees of judgment than others in their
application. We consider the policies discussed below to be critical to an understanding of our
financial statements as their application assists management in making their business decisions.
Revenue Recognition
Our revenues are derived from sales of products of the ODP segment, sale of products of brand name
phone sales segment and game-related revenue.
Revenue related to ODP segment
(1) Product sales
Revenue from sales of products, including feature phones and smart phones designed by us and
manufactured by EMS providers, wireless modules as well as other electronic components is
recognized when persuasive evidence of an arrangement exists, the fee is fixed or determinable,
collection is reasonably assured, and in the period in which delivery or performance has occurred.
The four criteria are generally met upon delivery of the product.
(2) Design fee
Design fee is a fixed amount paid in installments according to pre-agreed milestones. In general,
three milestones are identified in our design contracts with customers: GSM-based handsets
industry-based standard referred to as full type approval, or FTA; the regulatory approval for its
use in the intended country which, in the case of China, is a China-type approval, or CTA; and the
beginning of mass production referred to as shipping acceptance, or SA. We recognize revenues in
accordance with authoritative guidance with regard to software revenue recognition based on the
proportional performance method using an output measure determined by the achievement of each
milestone.
(3) Component sales related to design
After we have delivered design products to our customers, customers are required to purchase
certain components (such as chips used in mobile handsets) through us to manufacture the designed
products. As the component sales are built into the design contracts, we include these component
sales in the design contract related revenue rather than product sales. We recognize the net
revenue for component sales when persuasive evidence of an arrangement exists, the fee is fixed or
determinable, collection is reasonably assured, and in the period in which delivery or performance
has occurred. The four criteria are generally met upon delivery of the product.
31
Revenue related to brand name phone sales segment
Revenue from sales of brand name phones represent mobile phone under the QIGI brand, which is owned
by us. The QIGI brand phones are designed by us and manufactured by EMS providers. Revenue is
recognized when persuasive evidence of an arrangement exists, the fee is fixed or determinable,
collection is reasonably assured, and in the period in which delivery or performance has occurred.
The four criteria are generally met upon delivery of the product.
Revenue related to game segment
(1) Wireless gaming service
We provide mobile phone game-related services to brand mobile phone manufacturers. Under these
arrangements, we maintain a mobile phone web page so the brand mobile phone manufacturers end
users can access the web page and download mobile phone games free of charge during the relevant
contract period. In return, mobile phone manufactures pay us a fixed fee for the contract period,
usually one year. Revenue is recognized ratably over the contract period.
(2) Motion game device
Motion game device is a PC game control device that is used in motion games. Motion game device is designed by us and manufactured by EMS providers. Revenue is recognized when
persuasive evidence of an arrangement exists, the fee is fixed or determinable, collection is
reasonably assured, and in the period in which delivery or performance has occurred. The four
criteria are generally met upon delivery of the product.
(3) PC on-line game related service
We generate revenue from the provision of online game services. The online games can be accessed
and played by end users free of charge but the end users may choose to purchase in-game merchandise
or premium features to enhance their game-playing experience using virtual currency. The end users
can purchase virtual currency by making direct online payments to us or purchasing prepaid cards
(PP-Cards). The amounts received from direct online payments are recorded initially as deferred
revenues. We sell PP-Cards through distributors at a discount to the face value of the PP-Cards. We
record the amounts received from distributors after deduction of sales discounts as deferred
revenues.
End users are required to use access codes and passwords, either obtained from the PP-card or
through direct online payment, in exchange for the face value of these cards or the amount of
direct online payment to virtual currency and deposit into their personal accounts. End users
consume the virtual currency by purchasing in-game merchandise or premium features online. We
recognize the revenues as the in-game merchandise or premium features are consumed in the game by
the end users. We calculate the amount of revenues recognized for each unit of virtual currency
consumed using a weighted average method on a monthly basis by dividing the total cumulative
unrecognized deferred revenues by the amount of total unconsumed virtual currency.
Any deferred revenue remaining at the time the relevant PP-Card expires, which is normally one year
from the purchase of each PP-Ccard, is recognized as revenues at that time. The amount associated
with the unused virtual currency, which are without any contractual expiration terms, are carried
as deferred revenues indefinitely as, due to our short operating history, we are not able to
reasonably estimate the amount of virtual currency which will be ultimately given up by the end
users.
(4) Mobile phone game design service
We also provide mobile phone game design services to brand mobile phone manufacturers. Under this
type of arrangements, we are required to design mobile phone games according to customers
specification for a fixed price. Revenue from this type of contracts is recognized under the
proportional performance method using an output measure determined by achievement of milestones
which include planning documentation and testing reports.
Income taxes
Current income taxes are provided for in accordance with the laws of the relevant tax authorities.
Deferred income taxes are recognized when temporary differences exist between the tax bases of
assets and liabilities and their reported amounts in the consolidated financial statements. Net
operating loss carry forwards and credits are applied using enacted statutory tax rates applicable
to future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that a portion or all of the deferred tax assets will not be
realized. The components of the deferred tax assets and liabilities are individually classified as
current and non-current based on their characteristics.
32
Goodwill
The excess of the purchase price over the fair value of net assets acquired is recorded on the
consolidated balance sheet as goodwill. Goodwill
is not amortized but is tested for impairment annually or more frequently if events or changes in
circumstances indicate that it might be impaired.
We test goodwill for impairment on an annual basis. In this process, we rely on a number of
factors, including operating results, business plans and various assumptions such as projected
future cash flows. Impairment of goodwill is evaluated using a two-step process. The first step
compares the fair value of each reporting unit to its carrying amount, including goodwill. If the
fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to be
impaired and the second step will not be required. If the carrying amount of a reporting unit
exceeds its fair value, the second step compares the implied fair value of goodwill to the carrying
value of a reporting units goodwill. The implied fair value of goodwill is determined in a manner
similar to accounting for a business combination with the allocation of the assessed fair value
determined in the first step to the assets and liabilities of the reporting unit. The excess of the
fair value of the reporting unit over the amounts assigned to the assets and liabilities is the
implied fair value of goodwill. An impairment loss is recognized for any excess in the carrying
value of goodwill over the implied fair value of goodwill.
The total carrying amount of goodwill is $0.6 million as of December 31, 2009; this amount is
allocated to the ODP segment. As of December 31, 2010, the total carrying amount is $1.8 million,
of which $0.6 million is allocate to the ODP segment and $1.2 million is allocated to the brand
name phone sales segment. For the year 2010, we performed the impairment assessment for goodwill
allocated to the ODP and brand name phone sales segments. The fair values of the reporting units
are substantially higher than their carrying values. Therefore, we have not recognized any
impairment loss of goodwill in 2010.
To determine the fair values of the ODP segment and the brand name phone sales segment, we rely
primarily on tje income approach by applying the discounted cash flow analysis. The following are
critical assumptions in determining the fair values of the reporting units:
|
|
|
The revenue growth is projected at a compound annual growth rate, or
CAGR, of approximately 5% for the ODP segment for the period from
2011-2015; and the CAGR is projected to be approximately 8% or brand
name phone sales segment from 2011-2015. |
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|
In the projection period, the cost of revenues as a percentage of
revenues is expected to remain stable for the ODP segment; and cost of
revenues as percentage of revenue is expected to increase gradually. |
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|
Operating expenses, including selling and marketing expenses and
general and administrative expenses, as a as percentage of sales is
expected to remain stable. |
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|
Over the projection period, earnings before interest and tax, or EBIT
margins for the ODP segment, is expected to remain stable at 11.3%;
and expected EBIT margins for the brand name phone sales segment are
30.9% for 2011, 29.3% for 2012, 26.3% for 2013 and 23.1% for 2014 and
2015, respectively. |
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|
To maintain normal operations, capital expenditures are estimated to
be around 0.4% of revenues for the ODP segment and 0.1% of revenues
for the brand name phone sales segment. |
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The working capital requirement is estimated based on main accounts
turnover days. |
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|
A perpetual growth rate after 2015 is assumed to be at 3% per year for
the ODP segment and 2% per year for the brand name phone sales
segment. |
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|
The weighted average cost of capital, or WACC, used in the analysis is
23% for ODP segment and 39.5% for brand name brand
name phone sales segment. |
Estimates of fair value result from a complex series of judgments about future events and
uncertainties and rely heavily on estimates and assumptions at a point in time. The judgments made
in determining an estimate of fair value can materially impact our results of operations. The
valuations are based on information available as of the impairment review date and are based on
expectations and assumptions that have been deemed reasonable by management. Any changes in key
assumptions, including unanticipated events and circumstances, may affect the accuracy or validity
of such estimates and could potentially result in an impairment charge.
To assess the reasonableness of our fair value analysis, when appropriate, we may also use
market-based valuation approaches to corroborate the results of the income approach, such as
performing market capitalization reconciliation and analyzing comparable companies trading
multiples. Our overall market capitalization should reconcile, within a reasonable range, to the
sum of the fair values of the reporting units. While the sum of the reporting units values may not
equal market capitalization, the test may still indicate the reasonableness of the individual
valuations of the reporting units if the difference can be adequately explained. Comparable
companies trading multiples are compared to implied valuation multiples, and any differences
should be adequately explained.
At the time of the annual impairment test date, the sum of the fair values of the reporting units
was higher than our overall market capitalization. We analyzed the reasonableness of the difference
by assessing several factors including recent acquisition premium in the industry, composition of
our net assets and pricing trend of our shares. Based on our assessment, the difference between sum
of the fair values of the reporting units and our overall market capitalization could be reasonably
explained. As of the annual impairment test date,
implied valuation multiples were also within the range of comparable company public trading
multiples.
33
Impairment of long-lived assets and certain indefinite-lived intangible asset
We evaluate our long-lived assets (asset group) for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset (asset group) may not be recoverable.
When these events occur, we measure impairment by comparing the carrying amount of the assets
(asset group) to future undiscounted net cash flows expected to result from the use of the assets
(asset group) and their eventual disposition. If the sum of the expected undiscounted cash flow is
less than the carrying amount of the assets (asset group), we recognize an impairment loss equal to
the amount by which the carrying value of the asset (asset group) exceeds its fair value. The
determination of fair value of the long lived assets acquired involves certain judgments and
estimates. These judgments can include, but are not limited to, the cash flows that an asset is
expected to generate in the future. This analysis also relies on a number of factors, including
changes in strategic direction, business plans, regulatory developments, economic and budget
projections, technological improvements, and operating results.
In light of the deteriorating economic environment in 2008, we assessed long-lived assets and
intangible assets subject to amortization for impairment at the asset group level. Assets are
grouped with other assets and liabilities at the lowest level for which identifiable cash flows are
largely independent of the cash flows of other assets and liabilities. For each asset group, we
compared the sum of the expected undiscounted future cash flows from the use of the assets in each
of the asset groups with the carrying amount of such assets. The expected future cash flows of each
of the asset groups are based on a financial projection management used for planning purpose. When
estimating the fair value of the asset, we considered value in use and value in exchange. Value
in use of the asset was derived through the application of income approach discounted cash flow
method, while value in exchange was derived by primarily using the cost approach as well as the
market approach. According to the high and best use concept in the authoritative pronouncement on
fair value, we used the higher of value in use or value in exchange to determine the fair value of
the asset. We recorded a total of US$0.9 million impairment loss of long-lived assets in 2008.
During the years ended December 31, 2009 and 2010, there were no further impairment of long-lived
assets.
In 2010, through the acquisition of Citylead, we recognized a trade name and domain name as an
intangible asset with indefinite life. We review and test intangible assets with indefinite lives
for impairment at least annually, or more frequently if events or changes in circumstances indicate
that the carrying amount of such assets may be impaired. Intangible assets with an indefinite life
are tested for impairment by comparing the fair value with its carrying value. If the fair value is
less than the carrying value of the intangible asset with indefinite life, we recognize an
impairment loss equal to the difference. Fair value is generally determined using income approach.
Significant estimates used in the valuation methodologies include assumptions and estimates of
future cash flows, future short-term and long-term growth rates, future profitability, weighted
average cost of capital and industry economic factors. If these estimates or their related
assumptions change in the future, we may be required to record impairment charges for intangible
assets with an indefinite life. During the year ended December 31, 2010, there was no impairment of
indefinite life intangible assets.
In 2010, Through the business acquisition of Citylead, the intangible assets with indefinite life
represent trade name and domain name acquired. Intangible assets with indefinite life are not
amortized but tested for impairment annually. We performed the impairment test on the indefinite
life intangible for the year ended December 31, 2010, and found no impairment of indefinite life
intangible assets for that year.
Senior convertible promissory notes
In 2009, our subsidiary, Leo Technology Limited, now renamed 798 Entertainment Limited, issued to
the IDG Funds senior secured convertible promissory notes with a principle value of US$10 million
that were issued at par less issuance costs of US$0.4 million. We recorded the convertible notes as
a liability at the amount of the net proceeds of US$9.6 million. The notes included a number of
embedded derivatives, principally a right to convert into shares of Leo Technology Limited or the
shares of our company at the holders discretion. We determined that the fair value of these
embedded derivatives was at the date of issuance was US$12.8 million and pursuant to the
authoritative literature were required to be bifurcated from the debt and subsequently marked to
market through earnings. We limited the initial allocation of the proceeds to the embedded
derivatives to the amount of proceeds received with the excess of the fair value of the embedded
derivatives over the proceeds received charged to expense. Hence, the debt discount has exceeded
the principle amount of these notes by US$3.2 million and was recognized as a loss in our
consolidated statement of operations in 2009. We accreted the residual amount (the residual amount
of the debt host after deducting the embedded derivatives) to the amount due on the redemption of
the debt over the life of the debt instrument assuming no conversion on redemption. In 2009 and
2010, the interest expense recognized in the income statement in respect of the amortization of the
remaining debt discount were immaterial. In addition, the change in the fair value of bifurcated
embedded derivatives during 2009 and 2010 (till September 2010, which was the conversion date as
described below) was a loss of US$5.3 million and a gain of US$1.3 million, respectively.
The notes were subsequently converted into equity of our company pursuant to the original
conversion terms in September 2010, where each investor chose to convert 62.5% of its shares of the
principal amount of the notes into our ordinary shares, and the remaining 37.5% was converted into
shares of 798 Entertainment Limited. We considered the authoritative literature for the conversion
of convertible instrument
and believed that convertible debt instrument which does not include a beneficial conversion
feature, the carrying amount of the debt, including any unamortized premium or discount, shall be
credited to the capital accounts upon conversion to reflect the stock issued and no gain or loss is
recognized. In addition, we also considered the authoritative literature that no gain or loss would
arise from the conversion of the debt instrument which does not include a beneficial conversion
feature if it took place pursuant to the original conversion terms.
34
Accordingly, we credited the carrying amount of such notes to include any unrecognized premium or
discount, unamortized issuance costs and any part of the carrying value attributable to an embedded
derivative bifurcated or otherwise, to the capital accounts upon conversion to reflect the shares
issued for the conversion pursuant to the original terms with no inducement and no gain or loss
recognized.
Product warranty
Our product warranty relates to the provision of bug-fixing services to our designed mobile handset
for a period of one to three years commencing upon the mass production of the mobile handset, and
warranties to our customers on the sales of products. Accordingly, our product warranty accrual
reflects managements best estimate of probable liability under its product warranties. We
determine the warranty based on historical experience and other currently available evidence.
Results of Operations
The following table sets forth a summary of our consolidated statements of operations for the
periods indicated. Our business has evolved significantly since we commenced operations in July
2002. Our limited operating history makes the prediction of future operating results relatively
difficult. We believe that period-to-period comparisons of operating results should not be relied
upon as being indicative of future performance.
Our consolidated financial statements as of December 31, 2009 and for the year then ended have been
restated, due to the correction of the accounting treatment of the senior convertible promissory
notes described above. For details, see Note 3, Restatement, to our consolidated financial
statements included in this annual report on Form 20-F and Item 5.A. Operating and Financial
Review and Prospects Operating Results Restatement of Previously-Issued Financial Statements.
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For the Year Ended December 31, |
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2009 |
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2008 |
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(As restated) |
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2010 |
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(In thousands) |
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Consolidated Statement of Operations Data |
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Net revenues: |
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ODP |
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$ |
208,850 |
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$ |
210,588 |
|
|
$ |
222,549 |
|
Brand name phone sales |
|
|
|
|
|
|
|
|
|
|
38,462 |
|
Game |
|
|
|
|
|
|
488 |
|
|
|
10,866 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
208,850 |
|
|
|
211,076 |
|
|
|
271,877 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
ODP |
|
|
(167,685 |
) |
|
|
(172,801 |
) |
|
|
(180,517 |
) |
Brand name phone sales |
|
|
|
|
|
|
|
|
|
|
(22,066 |
) |
Game |
|
|
|
|
|
|
(64 |
) |
|
|
(2,202 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues |
|
|
(167,685 |
) |
|
|
(172,865 |
) |
|
|
(204,785 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
41,165 |
|
|
|
38,211 |
|
|
|
67,092 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
(15,553 |
) |
|
|
(9,600 |
) |
|
|
(14,626 |
) |
Research and development |
|
|
(18,195 |
) |
|
|
(12,040 |
) |
|
|
(11,613 |
) |
Selling and marketing |
|
|
(5,497 |
) |
|
|
(3,241 |
) |
|
|
(6,084 |
) |
Impairment of long-lived assets |
|
|
(880 |
) |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
(40,125 |
) |
|
|
(24,881 |
) |
|
|
(32,323 |
) |
Government subsidy income |
|
|
3,081 |
|
|
|
481 |
|
|
|
159 |
|
Other operating income |
|
|
2,443 |
|
|
|
|
|
|
|
1,109 |
|
Income from operations |
|
|
6,564 |
|
|
|
13,811 |
|
|
|
36,037 |
|
Interest expense |
|
|
(47 |
) |
|
|
(35 |
) |
|
|
(1 |
) |
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, |
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
2008 |
|
|
(As restated) |
|
|
2010 |
|
|
|
(In thousands) |
|
Interest income |
|
|
1,616 |
|
|
|
667 |
|
|
|
882 |
|
Investment income |
|
|
|
|
|
|
|
|
|
|
142 |
|
Other income (expenses), net |
|
|
(22 |
) |
|
|
115 |
|
|
|
(101 |
) |
Loss on issuance of convertible notes |
|
|
|
|
|
|
(3,176 |
) |
|
|
|
|
Change in fair value of put option |
|
|
(855 |
) |
|
|
(84 |
) |
|
|
(123 |
) |
Change in fair value of derivatives embedded in convertible notes |
|
|
|
|
|
|
(5,270 |
) |
|
|
1,280 |
|
Income tax benefit (expenses) |
|
|
93 |
|
|
|
(3,642 |
) |
|
|
(9,458 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
7,349 |
|
|
|
2,386 |
|
|
|
28,658 |
|
Less: net loss (income) attributable to the noncontrolling interest |
|
|
652 |
|
|
|
2,028 |
|
|
|
(818 |
) |
Net income attributable to Techfaith |
|
$ |
8,001 |
|
|
$ |
4,414 |
|
|
$ |
27,840 |
|
|
|
|
|
|
|
|
|
|
|
Comparison of the Year Ended December 31, 2009 and the Year Ended December 31, 2010
Net Revenues
Our net revenue increased by 28.8% from US$211.1 million in 2009 to US$271.9 million in 2010. The
increase was attributed to the increased sales of smart phones and feature phones in ODP business
and, brand name phone sales and increased revenues from our game business.
ODP business. Our net revenues from ODP increased by 5.7% from US$210.6 million in 2009 to US$222.5
million in 2010, due to the increase in sales orders of smart phones and feature phones.
ODP products revenues from our feature phones as a result of contracts for which the contract party
was incorporated inside the PRC increased by 38.6% from US$66.1 million in 2009 to US$91.6 million
in 2010. Product sales from our feature phone as a result of contracts for which the contract party
was incorporated outside the PRC decreased significantly from US$13.5 million in 2009 to US$10.8
million in 2010, due to our business strategy to expand the domestic markets for feature phones.
ODP product revenue from our smart phones as a result of contracts for which the contract party was
incorporated inside the PRC increased by 5.4% from US$104.3 million in 2009 to US$109.9 million in
2010 due to expand domestic markets for middle- and high-end smart phones. ODP revenue from our
smart phones as a result of contracts for which the contract party was incorporated outside the PRC
decreased by 19.0% from US$2.1 million in 2009 to US$1.7 million in 2010, due to our business
strategy to continuously expand the domestic marktes for middle and high-end smart phones.
Brand name phone sales. Revenues from Brand name phone sales increased from nil in 2009 to US$38.5
million in 2010. The increase was primarily due to our having newly acquired.
Game. Revenues from game increased from US$0.5 million in 2009 to US$10.9 million in 2010. The
increase was primarily due to revenue increase in mobile game services and motion game
devices during 2010. We began generating income from PC online games by launching two MMORPG games
during 2010 and we intend to continue our efforts to develop and launch more mobile and online
games in the future. In addition, we began to generate revenues from a new product line, motion
game, by selling motion game devices and mobiles. We expect game revenues to increase in the
coming years.
Cost of Revenues
Cost of revenues increased by 18.4% from US$172.9 million in 2009 to US$204.8 million in 2010. The
increase was attributable to the increase in cost of revenues for product sales.
ODP. Cost of revenues for ODP increased by 4.5% from US$172.8 million in 2009 to US$180.5 million
in 2010, due to the increase in the volume of our sales contracts. The increase is consistent with
the increase in our ODP revenues as an ODP provider..
Brand name phone sales. Cost of revenues from brand name phone sales increased from nil in 2009 to
US$22.1 million in 2010. The increase was primarily due to acquisition of control over QIGI
Technology in 2010.
Game. Cost of revenues from game increased from US$0.1 million in 2009 to US$2.2 million in 2010.
The increase was primarily due to the fact that we began to generate revenue in the game business
with two PC online games and motion game controller in 2010 and the increase revenues from
mobile phone game services. During 2010, we provided some more mobile game services to certain
manufacturers of branded mobile phones and continued efforts to develop and expand the online games
and motion games portions of our business.
36
Gross Profit
Our gross profit was US$ 67.1 million in 2010, compared to US$ 38.2 million in 2009, representing
gross margins of 24.7% and 18.1%,
respectively. The gross margin for ODP increased from 17.9% in 2009 to 18.9% in 2010. The increase
was primarily due to the fact that changes in our product mix also caused changes in gross margins
for feature phone and smart phones in 2010. Gross margin for brand name phone sales was 42.6% in
2010. This high growth margin was primarily due to the fact that we started to sell middle and
high-end QIGI-branded smart phones with over 40% gross margin. Revenues from ODP decreased from
99.8% of the total net revenue in 2009 to 81.9% in 2010. On the contrary, the revenues from brand
name phone sales contributed 14.1% of the total net revenues in 2010. Revenue from game business
increased from less than 1.0% of the total net revenue in 2009 to 4.0% in 2010. As a result of the
foregoing, our gross margins increased from 18.1% in 2009 to 24.7% in 2010.
Operating Expenses
Operating expenses increased by 29.7% from US$24.9 million in 2009 to US$32.3 million in 2010. The
increase was primarily due to the introduction of the brand-name phone sales business which
resulted in an increase in sales and marketing expanse as well as general and administrative
expenses.
General and Administrative. General and administrative expenses increased from US$9.6 million in
2009 to US$14.6 million in 2010. The increase was due primarily to a US$8.2 million bad debts
provision according to our general bad debts provision policy, which was US$2.1 million in 2009.
Research and Development. Research and development expenses decreased from US$12.0 million in 2009
to US$11.6 million in 2010. The decrease was due primarily to the cost savings resulting from a
decrease in material and testing fees, as the gaming business has increased significantly during
the year, research and development spending has shifted from our ODP business to our game business,
and less material and testing fees are required for the game business due to the nature of the
business.
Selling and Marketing. Selling and marketing expenses increased by 90.6% from US$3.2 million in
2009 to US$6.1 million in 2010. The increase was due primarily to the fact that we performed
large-scale sales and promotional campaigns for QIGI brand smart phones in 2010.
Government Subsidy Income
We recorded government subsidy income of US$0.5 million and US$0.2 million for the years ended
December 31, 2009 and 2010, respectively.
Some local governments in PRC give subsidies to companies as an incentive to establish business in
certain locales. These government subsidies are recognized as subsidy income when they are received
as we do not have further obligation to earn this subsidy once received. We recorded a government
subsidy income of US$0.3 million and US$0.2 million for the years ended December 31, 2009 and 2010,
respectively for this type of government subsidy.
We also receive government grants as compensation of performing government-endorsed projects. The
grants are refundable until we achieve certain performance measures. These government grants are
recorded as a liability until earned. We recognize these grants as subsidy income once we complete
the relevant projects and achieve the performance measures. We recorded a government subsidy income
of US$0.2 million and nil million for the years ended December 31, 2009 and 2010, respectively for
this type of government grants.
Other operating Income
We record other operating income of nil and US$1.1 million for the years ended December 31, 2009 and
2010, respectively. In 2010, primarily represented rental income received.
Interest income
Interest income increased by 28.6% from US$0.7 million in 2009 to US$0.9 million in 2010. The
increase was primarily due to the fact that cash and cash equivalents increased by 52.0% from 2009
to 2010.
Other (expenses) income
Other income of US$0.1 million in 2009 primarily represented penalty income received. In 2010, we
recorded a expense of US$0.1 million for the change in fair value of the contingent acquisition
consideration in relation to the acquisition of Citylead in February 2010. According to share
purchase agreement, if the acquired business cannot meet certain performance targets for 2010 and
2011, the selling shareholders are obliged to return certain number shares issued as consideration
to Techfaith. Therefore, the selling shareholders are obligated to return previously transferred
consideration, and we record the change in fair value of the contingent consideration receivable as
a other income or expenses.
Loss on issuance of convertible notes
Loss on issuance of convertible notes in 2009 represented the loss recognized for the portion of
the senior convertible promissory notes discounted in excess of the face value of the notes. There
is no such loss recognized in 2010.
37
Change in fair value of put option
Change in fair value of put option were losses of US$84,000 and US$123,000 in 2009 and 2010,
respectively, as a result of the increase in the fair value of certain underlying put option
relating to the Techsoft business, as the actual performance of the Techsoft business did not meet
the original budget and therefore, the fair value of the underlying put option was affected.
Change in fair value of derivatives embedded in convertible notes
As a result of issuance of convertible notes with embedded derivatives in 2009, we recognized a
loss of US$5.3 million and a gain of US$1.3 million for the years ended December 31, 2009 and 2010,
respectively, due to the change in fair value of the derivatives embedded in convertible notes of
such fair value was changed in line with the fluctuation of share price of the Company throughout
the period. In September 2010, the two investors have exercised their rights and converted into our
ordinary shares and 798 Entertainments class B ordinary shares by 62.5% and 37.5% of the face
value of the convertible notes, respectively. There was no such income or loss incurred since the
fourth quarter of 2010.
Income tax benefit (expenses)
Income tax expense increased from US$3.6 million in 2009 to US$9.5 million in 2010 was mainly due
to significant increases in our net revenues and gross profit.
Net Income Attributable to Techfaith
As a result of the cumulative effect of the foregoing factors, we incurred a net income
attributable to Techfaith of US$27.8 million in 2010, as compared to a net income attributable to
Techfaith of US$4.4 million in 2009.
Comparison of the Year Ended December 31, 2008 and the Year Ended December 31, 2009
Net Revenues
Our net revenue increased by 1.1% from US$208.9 million in 2008 to US$211.1 million in 2009. The
increase was attributed to the increased sales of smart phones and feature phones.
ODP Business. ODP revenues include two main components-handset design and ODP products. Our net
revenues from handset design decreased by 76.4% from US$19.1 million in 2008 to US$4.5 million in
2009, due to the decrease in the volume of our design contracts. The decrease was primarily due to
our transformation of business model to an ODP provider as well as our recent entry into the game
business, and is expected to continue.
Revenues from ODP products increased by 8.6% from US$189.7 million in 2008 to US$206.1 million in
2009. The increase was primarily due to the increase of sales orders for smart phones from our
customers. In addition, 3G wireless module card was introduced in 2009 and contributed 10% of
product sales revenue.
ODP product revenues from our feature phones as a result of contracts for which the contract party
was incorporated inside the PRC increased by 60.4% from US$41.2 million in 2008 to US$66.1 million
in 2009. ODP product revenues from our feature phone as a result of contracts for which the
contract party was incorporated outside the PRC decreased significantly from US$41.1 million in
2008 to US$13.5 million in 2009, due to our business strategy to expand the domestic markets for
feature phones.
ODP product revenues from our smart phones as a result of contracts for which the contract party
was incorporated inside the PRC increased significantly from US$93.2 million in 2008 to US$104.3
million in 2009. ODP product revenues from our smart phones as a result of contracts for which the
contract party was incorporated outside the PRC decreased by 68.7% from US$6.7 million in 2008 to
US$2.1 million in 2009, due to our business strategy to continuously expand the domestic markets
for middle- and high-end smart phones.
Mobile game design and other related service. Revenues from mobile game design and other related
service increased from nil in 2008 to US$488,000 in 2009. The increase was primarily due to the
fact that we started to provide mobile game services and mobile game design services during 2009
and began generating income from this business during 2009. We expect game revenues to increase in
the coming years as we continue our efforts to develop and launch more mobile and online games.
Cost of Revenue
Cost of revenues increased by 3.1% from US$167.7 million in 2008 to US$172.9 million in 2009. The
increase was attributable to the increase in cost of revenues for ODP product revenues.
ODP Business. Cost of revenues for handset design decreased by 57.3% from US$10.3 million in 2008
to US$4.4 million in 2009, due to the decrease in the volume of our design contracts. The decrease
is expected to continue due to our transformation of business model to an ODP
provider as well as our recent entry into the mobile and online game business.
38
Cost of revenue from ODP products increased by 7.0% from US$157.4 million in 2008 to US$168.4
million in 2009. The increase was primarily due to the increase of sales orders for smart phones,
feature phones and wireless modules from our customers.
Mobile game design and other related service. Cost of revenue from mobile game design and other
related service increased from nil in 2008 to US$64,000 in 2009. The increase was primarily due to
the fact that we began providing mobile game services and mobile game design services during 2009,
and generated income from one mobile phone game we developed for a customer and the mobile game
services we provided to some manufacturers of branded mobile phones. We expect this cost will
increase in the year 2010 and beyond due to our continued efforts to develop and expand the mobile
and online games portion of our business.
Gross Profit
Our gross profit was US$ 38.2 million in 2009, compared to US$41.2 million in 2008, representing
gross margins of 18.1% and 19.7%, respectively. Gross margin for ODP products decreased from 19.7%
in 2008 to 17.9% in 2009. The decrease was mainly due to the changes in the product mix, which also
caused changes in gross margins for handset design and ODP products revenues. ODP revenue from ODP
products decreased from 100% of the total net revenue in 2008 to 99.8% in 2009. The slight decrease
was primary due to the introduction of the new segment for game business. As a result of the
foregoing, our gross margins decreased from 19.7% in 2008 to 18.1% in 2009.
Operating Expenses
Operating expenses decreased by 37.9% from US$40.1 million in 2008 to US$24.9 million in 2009. The
decrease was primarily due to a general decrease in research and development expenses, general and
administrative expenses and selling and marketing expenses.
During 2008, we approved and announced a restructure plan to streamline our business processes.
This plan included the termination of 841 employees. The office building where the terminated
employees used to work is owned by us. We assessed the fair value of the office building and
determined that there was no impairment of the carrying amount of the building as of December 31,
2008. In March 2009, we relocated to another building in Beijing Economic-Technological Development
Area with the intention of leasing out our previous offices, but these offices were not leased
during 2009.
General and Administrative. General and administrative expenses decreased from US$15.6 million in
2008 to US$9.6 million in 2009. The decrease during 2009 was due primarily to the one-off expenses
in compensation for layoffs conducted in 2008, which was US$3.4 million; there was no such expense
in 2009. In addition, influenced by the financial crisis, we reduced employee salaries by
approximately 20% in comparison with 2008 figures, and reduced office expenses such as office
supplies and staff traveling expenses by US$0.5 million as a cost-control measure.
Research and Development. Research and development expenses decreased substantially from US$18.2
million in 2008 to US$12.0 million in 2009. The decrease was due primarily to the cost savings
resulting from the human resource restructuring that was initiated in 2008 and from the reduction
of relevant salaries by US$2.6 million as a cost-control measure.
Selling and Marketing. Selling and marketing expenses decreased by 41.8% from US$5.5 million in
2008 to US$3.2 million in 2009. The decrease was due primarily to the decline in the need for
large-scale sales and promotional campaigns in 2009 as well as the decrease in sales and marketing
personnel after the human resource restructuring that was initiated in 2008.
Impairment Loss. Impairment loss was US$0.9 million in 2008, compared to $nil in 2009. The
impairment loss in 2008 was incurred because the carrying amounts of certain fixed assets and
intangible assets were not recoverable as they exceeded the sum of the undiscounted cash flows
expected to result from the use and eventual disposition of assets; no such amount applied in 2009.
Government Subsidy Income
We recorded government subsidy income of US$3.1 million and US$0.5 million for the years ended
December 31, 2008 and 2009, respectively.
Some local governments in PRC give subsidies to companies as an incentive to establish business in
certain locales. These government subsidies are recognized as subsidy income when they are received
as we do not have further obligation to earn this subsidy once received. We recorded a government
subsidy income of US$2.3 million and US$0.3 million for the years ended December 31, 2008 and 2009,
respectively for this type of government subsidy.
We also receive government grants as compensation of performing government endorsed projects. The
grants are refundable until we achieve certain performance measures. These government grants are
recorded as a liability until earned. We recognize these grants as subsidy income once we complete
the relevant projects and achieve the performance measures. We recorded a government subsidy income
of US$0.8 million and US$0.2 million for the years ended December 31, 2008 and 2009, respectively
for this type of government grants.
39
Other operating income
Other operating income for year ended December 31, 2008 primarily represented a gain of US$2.4
million recognised in connection with the reversal of the excess amount of accrued contribution
recorded in previous years pursuant to the government-mandated defined contribution employee
benefit plan upon the verification by the local government agency.
Interest income
Interest income decreased by 56.3% from US$1.6 million in 2008 to US$0.7 million in 2009. The
decrease was primarily due to term deposits with an aggregate amount of RMB 50 million were matured
in 2009 and thereafter, we allocated more money in savings account for operation purpose.
Other (expenses) income
Other expense of US$22,000 in 2008 represented a donation. Other income of US$115,000 in 2009
primarily represented penalty income received.
Loss on issuance of convertible notes
Loss on issuance of convertible notes in 2009 represented the loss recognized for the portion of
the senior convertible promissory notes discount in excess of the face value of the notes. These is
no such loss recognized in 2008.
Change in fair value of put option
Change in fair value of put option was US$855,000 in 2008 as a result of the expectation exceeding
performance of the Techfaith Software (China) Limited (Techsoft) business underlying the put
option. The fair value of the put option changed slighted by US$84,000 in 2009 because Techsoft
business in 2009 was not significantly different from the expectation as of the beginning of that
year.
Change in fair value of derivatives embedded in convertible notes
As a result of issuance of convertible notes with embedded derivatives in 2009, we recognized a
loss of US$5.3 million for the year ended December 31, 2009 due to increase in fair value of the
derivatives embedded in convertible notes of such fair value was changed in line with the
fluctuation of share price of the Company throughout the period.
Income tax benefit (expenses)
Income tax benefit of US$93,000 in 2008 was resulted due to our PRC entities were still entitled to
the tax exemption and preferential tax rates during the year ended December 31, 2008. Income tax
expense increased to US$ 3.6 million in 2009 due to these preferential tax treatments granted to
our PRC entities were expired in 2009.
Net Income Attributable to Techfaith
As a result of the cumulative effect of the foregoing factors, we incurred a net income
attributable to Techfaith of US$4.4 million in 2009, as compared to a net income attributable to
Techfaith of US$8.0 million in 2008.
Accounting Pronouncements Not Yet Adopted
In October 2009, the Financial Accounting Standards Board (FASB) issued amended revenue recognition
guidance for arrangements with multiple deliverables. The new guidance eliminates the residual
method of revenue recognition and allows the use of managements best estimate of selling price for
individual elements of an arrangement when vendor specific objective evidence (VSOE), vendor
objective evidence (VOE) or third-party evidence (TPE) is unavailable. Prospective application of
this new guidance for revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010, with earlier application permitted. Alternatively, an entity
can elect to adopt this guidance on a retrospective basis. We are in the process of evaluating what
effect the adoption of this pronouncement will have on our consolidated financial condition and
results of operations.
In October 2009, the FASB issued authoritative guidance which amends the scope of existing software
revenue recognition accounting. Tangible products containing software components and non-software
components that function together to deliver the products essential functionality would be scoped
out of the accounting guidance on software and accounted for based on other appropriate revenue
recognition guidance. Prospective application of this new guidance for revenue arrangements
entered into or materially modified in fiscal years beginning on or after June 15, 2010, with
earlier application permitted. Alternatively, an entity can elect to adopt this new guidance on a
retrospective basis. We are in the process of evaluating what effect the adoption of this
pronouncement will have on our consolidated financial condition and results of operations.
40
In April 2010, the FASB issued an authoritative pronouncement regarding the milestone method of
revenue recognition. The scope of this
pronouncement is limited to arrangements that include milestones relating to research or
development deliverables. The pronouncement specifies guidance that must be met for a vendor to
recognize consideration that is contingent upon achievement of a substantive milestone in its
entirety in the period in which the milestone is achieved. The guidance applies to milestones in
arrangements within the scope of this pronouncement regardless of whether the arrangement is
determined to have single or multiple deliverables or units of accounting. The pronouncement will
be effective for fiscal years, and interim periods within those years, beginning on or after June
15, 2010. Early application is permitted. Companies can apply this guidance prospectively to
milestones achieved after adoption. However, retrospective application to all prior periods is also
permitted. We are in the process of evaluating what effect the adoption of this pronouncement will
have on our consolidated financial condition and results of operations.
In April 2010, the FASB issued an authoritative pronouncement on effect of denominating the
exercise price of a share-based payment award in the currency of the market in which the underlying
equity securities trades and that currency is different from (1) entitys functional currency, (2)
functional currency of the foreign operation for which the employee providesservices, and (3)
payroll currency of the employee. The guidance clarifies that an employee share-based payment award
with an exercise price denominated in the currency of a market in which a substantial portion of
the entitys equity securities trades should not be considered to contain a condition that is not a
market, performance, or service condition, and therefore should be considered an equity award
assuming all other criteria for equity classification are met. The pronouncement is for interim and
annual periods beginning on or after December 15, 2010, and will be applied prospectively. Affected
entities will be required to record a cumulative catch-up adjustment for all awards outstanding as
of the beginning of the annual period in which the guidance is adopted. We are in the process of
evaluating what effect the adoption of this pronouncement will have on our consolidated financial
condition and results of operations.
In December 2010, the FASB issued an authoritative pronouncement on when to perform Step 2 of the
goodwill impairment test for reporting units with zero or negative carrying amounts. The amendments
in this update modify Step 1 so that for those reporting units, an entity is required to perform
Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment
exists. In determining whether it is more likely than not that goodwill impairment exists, an
entity should consider whether there are any adverse qualitative factors indicating that an
impairment may exist. The qualitative factors are consistent with existing guidance, which requires
that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs
or circumstances change that would more likely than not reduce that fair value of a reporting unit
101 below its carrying amount. For public entities, the guidance is effective for impairment tests
performed during entities fiscal years (and interim periods within those years) that begin after
December 15, 2010. Early adoption will not be permitted. We do not expect the adoption of this
pronouncement will have a significant effect on our consolidated financial position or results of
operations.
In December 2010, the FASB issued an authoritative pronouncement on disclosure of supplementary pro
forma information for business combinations. The objective of this guidance is to address diversity
in practice regarding the interpretation of the pro forma revenue and earnings disclosure
requirements for business combinations. The amendments in this update specify that if a public
entity presents comparative financial statements, the entity should disclose revenue and earnings
of the combined entity as though the business. The amendments also expand the supplemental pro
forma disclosures to include a description of the nature and amount of material, non-recurring pro
forma adjustments directly attributable to the business combination included in the reported pro
forma revenue and earnings. The amendments affect any public entity as defined by Topic 805 that
enters into business combinations that are material on an individual or aggregate basis. The
amendments will be effective for business combinations consummated in periods beginning after
December 15, 2010, and should be applied prospectively as of the date of adoption. Early adoption
is permitted. We do not expect the adoption of this pronouncement will have a significant effect on
our consolidated financial position or results of operations.
B. Liquidity and Capital Resources
The following table sets forth a summary of our cash flows for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
2008 |
|
|
(As restated) |
|
|
2010 |
|
|
|
(In thousands) |
|
Net cash provided by operating activities |
|
$ |
1,496 |
|
|
$ |
33,241 |
|
|
$ |
53,729 |
|
Net cash (used in) provided by investing activities |
|
|
(11,409 |
) |
|
|
(1,146 |
) |
|
|
9,291 |
|
Net cash provided by financing activities |
|
|
|
|
|
|
19,389 |
|
|
|
290 |
|
Effect of exchange rate changes |
|
|
4,085 |
|
|
|
134 |
|
|
|
4,682 |
|
Net increase (decrease) in cash and cash equivalents |
|
|
(5,828 |
) |
|
|
51,618 |
|
|
|
67,992 |
|
Cash and cash equivalents at beginning of period |
|
|
84,754 |
|
|
|
78,926 |
|
|
|
130,544 |
|
Cash and cash equivalents at end of period |
|
$ |
78,926 |
|
|
$ |
130,544 |
|
|
$ |
198,536 |
|
41
We have financed our operations through cash generated from our operating activities and securities
issuances, including our initial public offering in May 2005. As of December 31, 2010 and December
31, 2009, we had US$198.5 million and US$130.5 million, respectively, in
cash and cash equivalents. Our cash and cash equivalents primarily consist of cash on hand and bank
deposits with terms of three months or less.
To develop our game business, on June 9, 2009, our subsidiary, Leo Technology Limited, now renamed
798 Entertainment Limited, issued to certain entities affiliated with IDGVC Partners, a leading
venture capital firm, senior secured convertible promissory notes with an aggregate principal
amount of US$10 million, a maturity date of three years and an interest rate of 8% per annum
compounded annually. At the earlier of (i) 30 months after the note issuance date if a qualified
initial public offering of the note issuer has not occurred by that time, or (ii) the occurrence of
an event of default, the note holders may also require the note issuer to redeem the notes in cash
equal to the redemption amount plus an annual return of 20% compounded annually on the redemption
amount, accrued but unpaid dividend (if any) and late charges (if any). In addition, Infiniti
Capital Limited invested US$10 million cash in Leo Technologys common equity under a definitive
agreement entered in 2009. In September, 2010, according to relevant investor rights agreement,
each of the IDG Funds chose to convert 62.5% of its share of the principal amount of the
convertible note into TechFaiths ordinary shares, and the remaining 37.5% was converted into
shares of 798 Entertainment Limited. As a result of the conversion, TechFaith issued 78,814,628 of
TechFaiths ordinary shares to IDG Funds, representing approximately 9.9% of TechFaiths total
outstanding share capital immediately on September 8, 2010. As of the date of this annual report,
IDG Funds have met the terms and conditions for resale under Rule 144 of the Securities Act in
relation to these shares, represented by 5,254,309 ADSs, and may offer and sell such ADSs from time
to time on the open market.
We believe that our current cash and cash equivalents and cash flow from operations will be
sufficient to meet our anticipated cash needs, including our cash needs for working capital and
capital expenditures for the next 12 months. We may, however, require additional cash resources
beyond the next 12 months due to higher than expected growth in our business or other changing
business conditions or future developments, including any possible investments or acquisitions. If
our existing cash resources are insufficient to meet our requirements, we may seek to sell
additional equity securities, debt securities or borrow from banks. We cannot assure you that
financing will be available in the amounts we need or on terms acceptable to us, if at all. The
sale of additional securities, including convertible debt securities, in one or more public
offerings or private placements could result in additional dilution to our shareholders. The
incurrence of indebtedness would result in debt service obligations and could result in operating
and financial covenants that restrict our operations and our ability to pay dividends to our
shareholders. If we are unable to obtain additional equity or debt financing as required, our
business, operations and prospects may suffer.
The ability of our subsidiaries in China to convert Renminbi into U.S. dollars and make payments to
us is subject to PRC foreign exchange regulations. Under these regulations, Renminbi is convertible
for current account items, including the distribution of dividends, interest payments, trade and
service-related foreign exchange transactions. Conversion of Renminbi for capital account items,
such as direct investment, loan, security investment and repatriation of investment, however, is
still subject to the approval of relevant PRC government authorities. Techfaith is a holding
company and has no present plan to pay any cash dividends on its ordinary shares in the foreseeable
future. See Item 8. Financial Information A. Consolidated Statements and Other Financial
Information Dividend Policy.
Operating Activities. Net cash provided by operating activities was US$53.7 million in 2010 as
compared to US$33.2 million in 2009. The increase was mainly due to the operating profit from our
ODP business and branded business. Net cash provided by operating activities increased
substantially; in 2008, net cash provided by operating activities was US$1.5 million; in 2009, net
cash provided by operating activities was US$33.2 million. This increase is primarily due to
operating profits from our ODP business.
In connection with sales of products, our customers typically pay us a portion of the selling price
before the products are delivered. We account for such prepayment as advance from customers until
all the risks and rights associated with the products have been passed to our customers. Advance
from customers increased from US$4.7 million in 2009 to US$7.5 million in 2010. The increase was
due primarily to higher amount of prepayments paid by customers with the increase of sales of
products from 2009 to 2010. Advance from customers decreased from US$5.3 million in 2008 to US$4.7
million in 2009. The decrease was primarily due to the lower amount of prepayments paid by
customers despite the increase of sales of products from 2008 to 2009. In connection with our
handset design services, our customers typically pay us a portion of design fees immediately after
the design contract is executed. Such design fee advances received from customers are accounted for
as deferred revenue and are not recognized until a pre-agreed milestone has been reached. Along
with the substantial decrease of revenues from design fees from US$2.3 million in 2009 to US$1.8
million in 2010, deferred revenue decreased slightly from US$0.8 million in 2009 to US$0.3 million
in 2010. The decrease was due primarily to the significant decrease of revenues from design fees
and design contracts from 2008 to 2009. Deferred revenue increased from US$1.7 million in 2008 to
US$0.8 million in 2009.
Our accounts receivable amounted to US$37.8 million, US$29.0 million and US$19.2 million as of
December 31, 2008, 2009 and 2010, respectively. Our inventories amounted to US$37.8 million,
US$22.9 million and US$17.7 million as of December 31, 2008, 2009 and 2010, respectively.
Investing Activities. Net cash used in investing activities was US$1.1 million in 2009. In 2010,
the cash provided by investing activities US$9.3 million. The increase in our investing activities
in 2010 was due primarily to acquire branded business and partially offset by an increase in
purchase of plant, machinery and equipment. Net cash used in investing activities decreased from
US$11.4 million in 2008 to US$1.1 million in 2009. The decrease in our investing activities in 2009
was due primarily to the reduced capital investment in 2009.
42
Financing Activities. Net cash provided by financing activities were US$19.4 million in 2009 and
US$0.3 million in 2010. Net cash used by financing activities were at $nil in 2008. In 2009, we
undertook the following financing activities: on June 9, 2009, our subsidiary, Leo
Technology Limited, now renamed 798 Entertainment Limited, issued to certain entities affiliated
with IDGVC Partners senior secured convertible promissory notes with an aggregate principal amount
of US$10 million, and Infiniti Capital Limited invested US$10 million cash in the common equity of
Leo Technology Limited under a definitive agreement entered into in 2009.
Our capital expenditures amounted to US$14.8 million, US$1.4 million and US$4.3 million in 2008,
2009 and 2010, respectively. Our historical capital expenditure consisted principally of purchases
of software, machinery, equipment and other items related to our mobile handset design services. We
incurred capital expenditures totaling approximately US$4.3 million in 2010, which primarily
consisted of plant and machinery, furniture, fixtures and equipment.
Our capital expenditure plan for 2011 is US$3.1 million, which primarily consists of the purchase
of license and equipment and construction of buildings in Hangzhou and Beijing.
C. Research and Development, Patents and Licenses, etc.
See Item 4. Information on the Company B. Business Overview.
D. Trend Information
Other than as disclosed elsewhere in this annual report, we are not aware of any trends,
uncertainties, demands, commitments or events for the year ended December 31, 2010 that are
reasonably likely to have a material adverse effect on our net revenues, income, profitability,
liquidity or capital resources, or that caused the disclosed financial information to be not
necessarily indicative of future operating results or financial conditions.
E. Off-Balance Sheet Arrangements
We do not have any outstanding off-balance sheet guarantees, interest rate swap transactions or
foreign currency forward contracts. We do not engage in trading activities involving non-exchange
traded contracts.
F. Contractual Obligations
The following table sets forth our contractual obligations as of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period |
|
|
|
|
|
|
|
Less Than |
|
|
1-3 |
|
|
3-5 |
|
|
More Than |
|
Contractual Obligations |
|
Total |
|
|
1 Year |
|
|
Years |
|
|
Years |
|
|
5 Years |
|
|
|
(In thousands of $) |
|
Operating lease obligations(1) |
|
|
279 |
|
|
|
279 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital obligations(2) |
|
|
3,106 |
|
|
|
3,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase obligations(3) |
|
|
1,865 |
|
|
|
1,865 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
5,250 |
|
|
|
5,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Operating lease obligations arise from operating lease agreements principally for office spaces in China. |
|
(2) |
|
Capital obligations represent commitments for construction of property, purchase of plant, machinery and equipment. |
|
(3) |
|
Purchase obligations represent commitments under non-cancellable contracts we entered into with certain EMS
providers that allow them to procure inventory required to provide the manufacturing services for our products. |
Other than the contractual obligations set forth above, we do not have any long-term commitments.
43
G. Safe Harbor
This annual report on Form 20-F contains statements of a forward-looking nature. These statements
are made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of
1995. You can identify these forward-looking statements by words or phrases such as may, will,
expects, anticipates, future, intend, plan, believe, estimate, is/are likely to or
other and similar expressions. A number of business risks and uncertainties could cause actual
results, performance or achievements to differ materially from those expressed or implied by the
forward-looking statements. These risks and uncertainties relate to:
|
|
our limited operating history as a mobile handset design and software
solution provider and, to an even larger extent, as a seller of
completed handsets; |
|
|
|
our ability to successfully expand into the new branded mobile phone
and game businesses; |
|
|
|
our ability to timely and cost-efficiently sell completed handsets to
meet our customers demands; |
|
|
|
decrease in demand for completed handsets by mobile handset brand
owners; and |
|
|
|
other risks outlined in this annual report on Form 20-F. |
We would like to caution you not to place undue reliance on these statements and you should read
these statements in conjunction with the risk factors disclosed in Item 3. Key InformationD.
Risk Factors. We do not undertake any obligation to update the forward-looking statements except
as required under applicable law.
ITEM 6. Directors, Senior Management and Employees
A. Directors and Senior Management
The following table sets forth information regarding our directors and executive officers as of the
date of this annual report.
|
|
|
|
|
|
|
Directors and Executive Officers |
|
Age |
|
Position/Title |
Defu Dong
|
|
|
40 |
|
|
Chairman and Chief Executive Officer |
Deyou Dong
|
|
|
36 |
|
|
Director and Chief Operating Officer |
Jy-Ber Gilbert Lee
|
|
|
55 |
|
|
Director |
Hung Hsin (Robert) Chen
|
|
|
65 |
|
|
Independent Director |
Ken Lu
|
|
|
48 |
|
|
Independent Director |
Ling Sui
|
|
|
55 |
|
|
Independent Director |
Hui (Tom) Zhang
|
|
|
38 |
|
|
Independent Director |
Yuping Ouyang
|
|
|
36 |
|
|
Chief Financial Officer |
Changke He
|
|
|
49 |
|
|
Chief Technology Officer |
Yibo Fang
|
|
|
42 |
|
|
Senior Vice President |
Shugang Li
|
|
|
43 |
|
|
President |
Executive Directors
Mr. Defu Dong has been the Chairman and Chief Executive Officer of our company since our inception.
Prior to founding our company in July 2002, Mr. Dong co-founded Beijing Sino-Electronics Future
Telecommunication R&D, Ltd., a mobile handset design house, in February 2001, and was that
companys director, shareholder and Chief Executive Officer from its inception until July 2002. Mr.
Dong worked at Motorola (China) as a sales manager from 1997 to 2001. Prior to joining Motorola
(China), Mr. Dong was a sales manager at Mitsubishi (China) for one year. Mr. Dong received his
bachelors degree in mechanical engineering from Chongqing University in China in 1994.
Mr. Deyou Dong has been our director since August 2009. He joined Techfaith in 2007, acting as
general manager of sales department. Prior this, he served as director of marketing department and
finance department in Century Legend Technology Beijing Limited in 1998, and General Manager of
system integration department in China System Integration Technology Beijing Limited in 2003. Mr.
Dong received a diploma in accounting from the Jilin University of Agricultural Science And
Technology in 1997.
Dr. Jy-Ber Gilbert Lee has been our director since May 2005. Mr. Lee was our President and Chief
Operating Officer from February 2006 to August 2008. Prior to joining our company, Dr. Lee was the
deputy general manager of the Guangdong branch of China Netcom Corp., a subsidiary of China Netcom
Group. From June 2001 to February 2004, Dr. Lee was the Managing Director of Sales of China Netcom
Corp. From July 2000 to May 2001, Dr. Lee was a Vice President of Motorola Inc., and Deputy General
Manager of Global Telecom Solution, Greater China. Dr. Lee received his bachelors degree in
mechanical engineering from National Taiwan University in 1977, his masters degree in energy
engineering and his Ph.D. degree in mechanical engineering from the University of Illinois in 1980
and 1984, respectively.
Independent Directors
Mr. Hung Hsin (Robert) Chen has been our independent director since September 2005. Prior to that,
Mr. Chen had worked at SangFei Consumer Communications Co., Ltd, or SangFei, a joint venture
between Philips and China Electronics Corporation, which produces mobile phones and MP3 players for
original equipment manufacturers and original design manufacturers. Mr. Chen had been the general
manager of SangFei and a senior consultant of Philips China for nine years. Prior to joining
SangFei, Mr. Chen was a general manager of National Semiconductor China, a joint venture with
National Semiconductor. Mr. Chen has over 30 years experience in the consumer electronic
products and wireless terminals industries. Mr. Chen received his bachelors degree from Taiwan
National Cheng Kung University in 1969.
44
Dr. Ken Lu has been our
independent director since August 2006. Dr. Lu is a founder and managing director of
Seres Asset Management Limited, an investment management company focusing on the Asian
equity markets. Prior to that, Dr. Lu was a managing director of APAC Capital Advisors
Limited. Dr. Lu has also worked as a research analyst at a number of leading investment
banks, including JP Morgan and Credit Suisse, serving as the Head of China Research at
Credit Suisse from October 2001 to May 2004. Dr. Lu also serves on the boards and audit
committees of AsiaInfo-Linkage, Inc., a company listed on the NASDAQ, and China Cord Blood
Corporation, a company listed on the New York Stock Exchange, and Enerchina Holdings Ltd,
a company listed in Hong Kong. He received his Bachelor of Science degree from Peking
University in 1985, his Master of Science degree from Brigham Young University in 1988,
and his Ph. D. degree in finance from the University of California, Los Angeles in 1998.
Ms. Ling Sui has been our independent director since August 2007. Ms. Sui is a partner and general
manager of CFO Resource, a financial consulting company since May 2008. From November 2007 to
February 2008, Ms. Sui was vice president of Hangzhou Casa Limited, a heating equipment
manufacturing company. Prior to that, Ms. Sui was the vice chairman of the Human Resource
Association for Chinese & Foreign Enterprises in Beijing. Ms. Sui served as the assistant to the
chief executive officer and general manager of the group finance department of China Netcom (Group)
Company Ltd. from 2004 to 2007 and vice president and financial controller of China Netcom
Corporation Ltd. from 1999 to 2004. Prior to that, Ms. Sui worked with Motorola for six years as
the service operation controller in the personal communication sector. Ms. Sui received her
bachelors degree in finance and banking from Northeast University of Finance & Economics in China
in 1978.
Dr. Hui (Tom) Zhang has been our independent director since March 2006. Dr. Zhang is a co-founder
and chief executive officer of Innofidei Inc., a fabless semiconductor company in China founded in
2006. Dr. Zhang was a co-founder of Vimicro International (NASDAQ: VIMC). He also serves as an
independent director of KongZhong Corporation and Qiaoxing Mobile. He is secretary general of the
Mobile Multimedia Technology Alliance. Dr. Zhang received his bachelors degree from the University
of Science & Technology of China in 1993 and his Ph.D. degree in electrical engineering from the
University of California at Berkeley in 1999. He received the 2005 University of California at
Berkeley Outstanding Engineering Alumni Award.
Other Executive Officers
Ms. Yuping Ouyang has been our Chief Financial Officer since August 2008. From September 2004 to
August 2008, Ms. Ouyang was in various financial positions at our company, including US GAAP
reporting manager and chief accounting officer. Prior to joining our company, she served as an
accounting manager at Guangzhou Metro Corporation. Ms. Ouyang received her MBA from the Sun Yat-sen
University in 2006 and her bachelors degree in management from the Guangdong University of Foreign
Studies in 1996. Ms. Ouyang is also a member of the Association of Chartered Certified Accountants.
Mr. Changke He is the Chief Technology Officer of our company. He previously served as the
President of STEP Technologies (Beijing) Co., Ltd., a subsidiary of Techfaith, from May 2004 to
February 2005, and was a director of our company. Prior to joining us in September 2002, Mr. He
worked at Beijing Sino-Electronics Future Telecommunication R&D, Ltd. for three months. From 1995
to May 2002, Mr. He worked at Motorola (China) as a radio frequency engineer. Mr. He received his
bachelors degree in automatic control and computer engineering from China Central Polytechnic
College in 1982 and his masters degree in electronics and automatic engineering from Tianjin
University in China in 1990.
Mr. Yibo Fang is the President of STEP Technologies (Beijing) Co., Ltd. From August 2002 to March
2005, Mr. Fang was the Vice President and Chief Technology Officer of Techfaith China. Before
joining our company in August 2002, Mr. Fang worked at Beijing Sino-Electronics Future
Telecommunication R&D, Ltd. for five months as a hardware director. From August 2001 to January
2002, Mr. Fang worked at ZT Telecom as a hardware engineer. From 1995 to July 2001, Mr. Fang worked
at Motorola (China) as a hardware engineer. Mr. Fang received his bachelors degree in electrical
engineering and applied electronic technology from Tsinghua University in China in 1991.
Mr. Shugang Li is the President of Techfaith Electronics. From 2002 to August 2008, Mr. Li served
in several positions at our company, including vice president in charge of production support,
sourcing, project management and quality assurance and as president of Step Technologies (Beijing)
Co., Ltd. Prior to joining our company, Mr. Li served as an engineering department manager at
Motorola China for seven years. He received his bachelors degree in electronic engineering from
Tianjin University in China in 1990.
The business address of our directors and executive officers is c/o China Techfaith Wireless
Communication Technology Limited, Tower C, No. 5, Rongchang East Street, Beijing
Economic-Technological Development Area (Yi Zhuang), Beijing 100176, Peoples Republic of China.
45
B. Compensation of Directors and Executive Officers
In 2010, the aggregate cash compensation and benefits that we paid to our executive officers,
including all the directors, was approximately US$0.15 million. No executive officer is entitled to
any severance benefits upon termination of his or her employment with our company. We provided
$0.02 million for executive pension and retirement benefits in 2010 as required by PRC law.
Share Incentives
In 2005, our board of directors and our shareholders approved a 2005 share incentive plan, or the
2005 plan, in order to attract and retain the best available personnel for positions of substantial
responsibility, provide additional incentive to employees, directors and consultants and promote
the success of our business. A total of 40,000,000 ordinary shares have been reserved for issuance
under the 2005 plan, under which 1,931,636 options and 644,090 non-vested shares were issued as of
May 23, 2011. Our future grants of share incentives will be made pursuant to the 2005 plan.
The following table summarizes, as of December 31, 2010, the basic terms of the outstanding options
granted under the 2005 plan to our directors and senior executive officers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
|
|
|
Ordinary Shares Underlying |
|
|
Price |
|
|
Date of |
|
|
Date of |
|
|
|
Options Granted |
|
|
(US$/Share) |
|
|
Grant |
|
Expiration |
Jy-Ber Gilbert Lee |
|
|
131,636 |
|
|
|
1.083 |
|
|
August 13, 2005 |
|
August 13, 2015 |
Total |
|
|
131,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
On April 21, 2011, we granted 1,500,000 options to directors named below. The following table
summarizes the basic terms of these grants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Ordinary Shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
Underlying the Options Granted, as |
|
|
Price |
|
|
|
|
|
|
Vesting |
|
|
|
of the Date of Grant |
|
|
(US$/Share) |
|
|
Date of Grant |
|
|
Schedule |
|
Hung Hsin (Robert) Chen |
|
|
300,000 |
|
|
|
0.272 |
|
|
April 21,2011 |
|
|
(1 |
) |
Jy-Ber Gilbert Lee |
|
|
300,000 |
|
|
|
0.272 |
|
|
April 21,2011 |
|
|
(1 |
) |
Hui (Tom) Zhang |
|
|
300,000 |
|
|
|
0.272 |
|
|
April 21,2011 |
|
|
(1 |
) |
Ken Lu |
|
|
300,000 |
|
|
|
0.272 |
|
|
April 21,2011 |
|
|
(1 |
) |
Sui Ling |
|
|
300,000 |
|
|
|
0.272 |
|
|
April 21,2011 |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,500,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of May 23, 2011, under the 2005 plan, a total of 1,931,636 options had been granted to our
directors and senior executive officers.
|
|
|
(1) |
|
50% of the shares subject to the option vested immediately on the
grant date and remaining 50% will be vested on April 21, 2012. As of
May 23,2011, the any vested options have not been exercised yet. |
46
The following table summarizes, as of May 23, 2011, the nonvested shares granted under the 2005
plan to our directors and senior executive officer named below since our board of directors adopted
the 2005 plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Ordinary Shares |
|
|
|
|
|
|
|
|
|
|
|
|
Underlying the Nonvested Shares |
|
|
Price |
|
|
Date of |
|
|
Vesting |
|
|
|
Granted, as of the Date of Grant |
|
|
(US$/Share) |
|
|
Grant |
|
|
Schedule |
|
Hung Hsin (Robert) Chen |
|
|
65,818 |
|
|
|
|
|
|
August 12, 2006 |
|
|
(1 |
) |
Ying Han |
|
|
65,818 |
|
|
|
|
|
|
August 12, 2006 |
|
|
(2 |
) |
Hui (Tom) Zhang |
|
|
65,818 |
|
|
|
|
|
|
August 12, 2006 |
|
|
(2 |
) |
Ken Lu |
|
|
65,818 |
|
|
|
|
|
|
November 11, 2006 |
|
|
(3 |
) |
Sui Ling |
|
|
65,818 |
|
|
|
|
|
|
August 11, 2007 |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
329,090 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
100% of the shares vested immediately on the grant date. |
|
(2) |
|
50% of the nonvested shares vested immediately on the grant date, and
the remaining 50% of the nonvested shares vested on April 1, 2007. |
|
(3) |
|
50% of the nonvested shares vested immediately on the grant date, and
the remaining 50% of the nonvested shares vested on November 1, 2007. |
|
(4) |
|
One quarter of the nonvested shares vested immediately on the grant
date, and the remaining three quarters vested on August 12, 2008, 2009
and 2010 averagely. |
The following paragraphs describe the principal terms of the 2005 plan.
Types of Awards. We may grant the following types of awards under our 2005 plan:
|
|
|
our ordinary shares; |
|
|
|
|
options to purchase our ordinary shares; |
|
|
|
|
nonvested shares, which are non-transferable ordinary shares, subject
to forfeiture upon termination of a grantees employment or service; |
|
|
|
|
nonvested share units, which represent the right to receive our
ordinary shares at a specified date in the future, subject to
forfeiture upon termination of a grantees employment or service; |
|
|
|
|
share appreciation rights, which provide for the payment to the
grantee based upon increases in the price of our ordinary shares over
a set base price; and |
|
|
|
|
dividend equivalent rights, which represent the value of the dividends
per share that we pay. |
Awards may be designated in the form of ADSs instead of ordinary shares. If we designate an award
in the form of ADSs, the number of shares issuable under the 2005 plan will be adjusted to reflect
that one ADS represents 15 ordinary shares.
Plan Administration. Our board of directors, or a committee designated by our board or directors,
will administer the 2005 plan. The committee or the full board of directors, as appropriate, will
determine the provisions and terms and conditions of each award grant.
Award Agreement. Awards granted under our 2005 option plan are evidenced by an award agreement that
sets forth the terms, conditions and limitations for each award. In addition, in the case of
options, the award agreement also specifies whether the option constitutes an incentive stock
option, or ISO, or a non-qualifying stock option.
Eligibility. We may grant awards to employees, directors and consultants of our company or any of
our related entities, which include our subsidiaries or any entities in which we hold a substantial
ownership interest. However, we may grant options that are intended to qualify as ISOs only to our
employees.
Acceleration of Awards upon Corporate Transactions. The outstanding awards will accelerate upon
occurrence of a change-of-control corporate transaction where the successor entity does not assume
our outstanding awards under the 2005 plan. In such event, each outstanding award will become fully
vested and immediately exercisable, and the transfer restrictions on the awards will be released
and the repurchase or
forfeiture rights will terminate immediately before the date of the change-of-control transaction.
If the successor entity assumes our outstanding awards and later terminates the grantees service
without cause within 12 months of the change-of-control transaction, the outstanding awards will
automatically become fully vested and exercisable.
47
Terms of Awards. In general, the plan administrator determines the exercise price of an option or
the purchase price of the nonvested shares and sets forth the price in the award agreement. The
exercise price may be a fixed or variable price related to the fair market value of our ordinary
shares. If we grant an ISO to an employee, who, at the time of that grant, owns shares representing
more than 10% of the voting power of all classes of our share capital, the exercise price cannot be
less than 110% of the fair market value of our ordinary shares on the date of that grant. The term
of each award shall be stated in the award agreement. The term of an award shall not exceed 10
years from the date of the grant.
Vesting Schedule. In general, the plan administrator determines, or the award agreement specifies,
the vesting schedule.
Amendment and Termination. Our board of directors may at any time amend, suspend or terminate the
2005 plan. Amendments to the 2005 plan are subject to shareholder approval to the extent required
by law, or stock exchange rules or regulations. Additionally, shareholder approval is specifically
required to increase the number of shares available for issuance under the 2005 plan or to extend
the term of an option beyond 10 years. Unless terminated earlier, the 2005 plan will expire and no
further awards may be granted after the tenth anniversary of the shareholder approval of the 2005
plan.
C. Board Practices
In 2010, our directors held four meetings. Each director participated in all the meetings of our
board and its committees on which he served after becoming a member of our board. No director is
entitled to any severance benefits upon termination of his directorship with us. As of the date of
this annual report, a majority of our directors meet the independence definition under The NASDAQ
Stock Market, Inc. Marketplace Rules, or the NASDAQ Rules.
Committees of the Board of Directors
Audit Committee. Our audit committee reports to the board regarding the appointment of our
independent auditors, the scope of the annual audits, the fees paid to our independent auditors,
the results of our annual audits, compliance with our accounting and financial policies and
managements procedures, policies relating to the adequacy of our internal accounting controls and
pre-approval of non-audit services rendered to us by our independent auditors. In 2010, our audit
committee held four meetings.
Our audit committee currently consists of Dr. Ken Lu, Mr. Robert Chen and Ms. Ling Sui, all of whom
meet the audit committee independence standard under Rule 10A-3 under the Securities Exchange Act.
Each of them also meets the independence definition under Rule 5605 of the NASDAQ Rules. Mr. Ken Lu
and Ms. Ling Sui are financial experts as defined under the NASDAQ Rules.
Compensation Committee. Our compensation committee reviews and evaluates and, if necessary, revises
the compensation policies adopted by the management. Our compensation committee also determines all
forms of compensation to be provided to our three most senior executive officers. In addition, the
compensation committee reviews all annual bonuses, long-term incentive compensation, share options,
employee pension and welfare benefit plans. Our Chief Executive Officer may not be present at any
committee meeting during which his compensation is deliberated.
Our compensation committee currently consists of Dr. Hui (Tom) Zhang, Dr. Ken Lu and Mr. Robert
Chen, all of whom meet the independence definition under the NASDAQ Rules. In 2009, our
compensation committee did not hold any meetings.
Corporate Governance and Nominating Committee. Our corporate governance and nominating committee
assists our board of directors in identifying individuals qualified to become our directors and in
determining the composition of the board and its committees. The corporate governance and
nominating committee monitor compliance with the code of business conduct and ethics and applicable
laws and practice of corporate governance.
Our corporate governance and nominating committee currently consists of Dr. Hui (Tom) Zhang, Dr.
Ken Lu and Mr. Robert Chen, all of whom meet the independence definition under the NASDAQ Rules.
In 2009, our corporate governance and nominating committee held one meeting.
Duties of Directors
Under Cayman Islands laws, our directors have a fiduciary duty to act honestly in good faith with a
view to our best interests. Our directors also have a duty to exercise the skill they actually
possess and such care and diligence that a reasonably prudent person would exercise in comparable
circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with
our memorandum and articles of association.
48
Terms of Directors and Officers
All directors hold office until the expiration of their terms and until their successors have been
duly elected and qualified. A director may only be removed by our shareholders at any time before
the expiration of his term. Officers are elected by and serve at the discretion of the board of
directors.
D. Employees
As of December 31, 2010, we had 471 employees, including 318 in research and development and
supportive function, 84 in selling and marketing and 69 in management and administration.
E. Share Ownership
As of December 31, 2010 and May 23, 2011, 794,003,193 ordinary shares and 794,003,193 ordinary
shares, respectively, of our company were outstanding, excluding shares issuable upon exercise of
outstanding options. Our shareholders are entitled to vote together as a single class on all
matters submitted to shareholders vote. No shareholder has different voting rights from other
shareholders. We are not aware of any arrangement that may, at a subsequent date, result in a
change of control of our company.
As of May 23, 2011, approximately 50.3% of the issued and outstanding shares were held by three
record shareholders in the United States, including 26,645,026 ADSs held by our ADS depositary.
The following table sets forth information with respect to our directors and executive officers
beneficial ownership of our ordinary shares as of May 23, 2011, to the extent such ownership
exists.
|
|
|
|
|
|
|
|
|
|
|
Ordinary Shares Beneficially Owned(1) |
|
|
|
Number |
|
|
%(2) |
|
Directors and Executive Officers: |
|
|
|
|
|
|
|
|
Defu Dong (3) |
|
|
253,195,000 |
|
|
|
31.89 |
% |
Jy-Ber Gilbert Lee (4) |
|
|
131,636 |
|
|
|
* |
|
Hung Hsin (Robert) Chen (5) |
|
|
65,818 |
|
|
|
* |
|
Hui (Tom) Zhang (6) |
|
|
65,818 |
|
|
|
* |
|
Ken Lu (7) |
|
|
65,818 |
|
|
|
* |
|
Sui Ling (8) |
|
|
65,818 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
All directors and executive officers as a group (9 |
|
|
253,589,908 |
|
|
|
31.94 |
% |
|
|
|
* |
|
Less than 1%. |
|
(1) |
|
Beneficial ownership is determined in accordance with the rules of the Securities and
Exchange Commission, or the SEC, and includes voting or investment power with respect to
the securities. |
|
(2) |
|
For each person and group included in this table, percentage ownership is calculated by
dividing the number of shares beneficially owned by such person or group by the sum of
(1) 794,003,193 being the number of ordinary shares outstanding as of May 23, 2011 and
(2) the number of ordinary shares underlying share options held by such person or group,
if any, that were exercisable within 60 days after May 23, 2011, or the number of
nonvested shares held by such person or group, if any, that will fully vest within 60
days after May 23, 2011, or the number of other securities of the company that such
person or group otherwise has the right to acquire, if any, within 60 days after
May 23, 2011 by option or other agreement. |
|
(3) |
|
Includes 165,750,000 ordinary shares held by Oasis Land Limited, which is ultimately
owned by Dongs Family Trust, and 83,500,000 ordinary shares held by Helio Glaze
Limited, which is ultimately owned by Huos Offshore Trust. Mr. Defu Dong is the sole
director of each of Oasis Land Limited and Helio Glaze Limited, with the sole power to
vote on behalf of Oasis Land Limited and Helio Glaze Limited on all matters of Techfaith
requiring shareholder approval. In December 2010 and March 2011, Mr. Defu Dong
repurchased 263,000 ADSs representing 3,945,000 ordinary shares through Oasis Land
Limited. The business address for Mr. Defu Dong is Building 1, No. 13, YongChang North
Road, Beijing Economic-Technological Development Area (Yi Zhuang), Beijing 100176,
Peoples Republic of China. |
|
(4) |
|
Includes 131,636 ordinary shares that were issuable upon exercise of options exercisable
within 60 days after May 23, 2011 held by Mr. Lee. |
|
(5) |
|
Includes 65,818 nonvested shares that were granted to Robert Chen on August 12, 2006;
the previous granted 131,636 share options were cancelled accordingly; |
49
|
|
|
(6) |
|
Includes 65,818 nonvested shares that were granted to Hui (Tom) Zhang on August 12, 2006; |
|
(7) |
|
Includes 65,818 nonvested shares that were granted to Ken Lu on November 11, 2006; |
|
(8) |
|
Includes 65,818 nonvested shares that were granted to Sui Ling on August 11, 2007; |
|
(9) |
|
Shares owned by all of our directors and executive officers as a group include shares
beneficially owned by Defu Dong, Jy-Ber Gilbert Lee, Hung Hsin (Robert) Chen, Sui Ling,
Hui (Tom) Zhang, and Ken Lu. |
The following table sets forth information with respect to the beneficial ownership of our ordinary
shares, as of May 23, 2011, by our other principal shareholder.
|
|
|
|
|
|
|
|
|
|
|
Ordinary Shares Beneficially Owned(1) |
|
|
|
Number |
|
|
%(2) |
|
Other Principal Shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IDGVC Partners (3) |
|
|
78,814,628 |
|
|
|
9.93 |
% |
Active Century Holdings Limited(4) |
|
|
65,934,066 |
|
|
|
8.3 |
% |
|
|
|
(1) |
|
Beneficial ownership is determined in accordance with the rules of the
SEC, and includes voting or investment power with respect to the
securities. |
|
(2) |
|
For each person and group included in this table, percentage ownership
is calculated by dividing the number of shares beneficially owned by
such person or group by the sum of (1) 794,003,193 being the number of
ordinary shares outstanding as of May 23, 2011 and (2) the number of
ordinary shares underlying share options held by such person or group,
if any, that were exercisable within 60 days after May 23, 2011 or the
number of nonvested shares held by such person or group, if any, that
will fully vest within 60 days after May 23, 2011 or the number of
other securities of the company that such person or group otherwise
has the right to acquire, if any, within 60 days after May 23, 2011 by
option or through any other agreement. |
|
(3) |
|
On June 9, 2009, our subsidiary Leo Technology Limited, now renamed
798 Entertainment Limited, issued US$10 million aggregate principal
amount of 8% senior secured convertible promissory notes with a
maturity date of three years to IDG Funds, affiliates of IDGVC
Partners, a leading venture capital firm. The notes are convertible
into our ordinary shares or Leo Technology Limiteds ordinary shares
at the option of the note holders. According to the relevant investor
rights agreement, each of the IDG Funds chose to convert 62.5% of its
share of the principal amount of the notes into TechFaiths ordinary
shares, and the remaining 37.5% was converted into shares of 798
Entertainment Limited. As a result of the conversion, TechFaith issued
78,814,628 of TechFaiths ordinary shares to IDG Funds on September 8,
2010. Following this conversion, the IDG Funds exercised their
registration rights under the notes. represented by 5,254,309 ADSs
outstanding on a fully diluted basis. |
|
(4) |
|
In January 2010, we entered into an agreement to obtain control of
QIGI Technology in a stock-plus-cash transaction valued at
approximately US$13.1 million; the consideration for this transaction
is 65,934,066 of our ordinary shares, which share number is subject to
an earnings adjustment pending the audited net profit of QIGI
Technology for the years 2010 and 2011. |
ITEM 7. Major Shareholders and Related Party Transactions
A. Major Shareholders
Please refer to Item 6. Directors, Senior Management and Employees E. Share Ownership.
B. Related Party Transactions
Transactions with Techfaith Technology and De Ming
In 2007, we purchased raw materials from related parties, Techfaith Technology (Shenyang) Ltd., or
Techfaith Technology, and De Ming Technology (Hangzhou) Ltd. (formerly known as Kang Mu Ni
Electronics (Hangzhou) Ltd.), or De Ming, for US$34,000 and US$0.5 million,
respectively. Techfaith Technology and De Ming are subsidiaries of Techfaith Electronics Limited, a
company established in September 2007, of which our founder and chief executive officer, Mr. Defu
Dong, holds 43% equity interest.
50
In 2008, Techfaith Technology became one of our EMS providers. During the year ended December 31,
2008, we sold raw materials to Techfaith Technology for US$18.8 million and purchased products from
Techfaith Technology for US$17.0 million. In 2008, we purchased raw materials from De Ming for
US$2.4 million. In 2009, we sold raw materials to Techfaith Technology for US$0.8 million and
purchased products from Techfaith Technology for US$3.5 million.
In 2009, we also purchased raw materials from De Ming for US$1.2 million.
In 2010, we sold raw materials to Techfaith Technology for US$0.8 million and purchased products
from Techfaith Technology for US$10.7 million. In 2010, we also purchased raw materials from De
Ming for US$0.1 million.
As of December 31, 2010, amounts due from related parties are as follows:
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2009 |
|
|
2010 |
|
|
|
(In thousands of US$) |
|
Techfaith Technology |
|
$ |
9,941 |
|
|
$ |
8,061 |
|
|
|
|
|
|
|
|
As of December 31, 2010, amounts due to related parties are as follows:
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2009 |
|
|
2010 |
|
|
|
(In thousands of US$) |
|
Techfaith Technology |
|
$ |
7 |
|
|
$ |
14 |
|
|
|
|
|
|
|
|
|
|
De Ming |
|
$ |
259 |
|
|
$ |
32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
266 |
|
|
$ |
46 |
|
|
|
|
|
|
|
|
C. Interests of Experts and Counsel
Not applicable.
ITEM 8. Financial Information
A. Consolidated Statements and Other Financial Information
We have appended consolidated financial statements filed as part of this annual report.
Legal Proceedings
We are not currently involved in any litigation or other legal matters that would have a material
adverse impact on our business or operations.
Dividend Policy
We do not have any present plan to pay any cash dividends on our ordinary shares in the foreseeable
future. We currently intend to retain most, if not all, of our available funds and any future
earnings for use in the operation and expansion of our business.
Subject to the Cayman Islands Companies Law (2009 Revision), our board of directors may from time
to time declare dividends on shares in issue. Even if our board of directors determines to
distribute dividends, the form, frequency and amount of our dividends will depend upon our future
operations and earnings, capital requirements and surplus, general financial condition, contractual
restrictions and other factors as the board of directors may deem relevant. Any dividend we declare
will be paid to the holders of ADSs, subject to the terms of the deposit
agreement, to the same extent as holders of our ordinary shares, less the fees and expenses payable
under the deposit agreement. Any dividend we declare will be distributed by the depositary to the
holders of our ADSs. Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.
51
B. Significant Changes
Except as disclosed elsewhere in this annual report, we have not experienced any significant
changes since the date of our audited consolidated financial statements included in this annual
report.
ITEM 9. The Offer and Listing
A. Offer and Listing Details
Our ADSs, each representing 15 of our ordinary shares, have been listed on the NASDAQ since May 5,
2005. Our ADSs are traded under the symbol CNTF.
For 2010, the trading price of our ADSs on the NASDAQ ranged from $1.91 to $4.34 per ADS.
The following table provides the high and low trading prices for our ADSs on the NASDAQ for (1) the
years 2005, 2006, 2007, 2008 and 2009; (2) the first quarter in 2010, all quarters in 2008 and
2009; and (3) each of the past six months.
|
|
|
|
|
|
|
|
|
|
|
Sales Price |
|
|
|
High |
|
|
Low |
|
Annual High and Low |
|
|
|
|
|
|
|
|
2005 |
|
|
19.88 |
|
|
|
7.8 |
|
2006 |
|
|
18.00 |
|
|
|
6.58 |
|
2007 |
|
|
11.13 |
|
|
|
4.01 |
|
2008 |
|
|
6.98 |
|
|
|
0.71 |
|
2009 |
|
|
3.93 |
|
|
|
1.11 |
|
2010 |
|
|
4.34 |
|
|
|
1.91 |
|
|
|
|
|
|
|
|
|
|
Quarterly Highs and Lows |
|
|
|
|
|
|
|
|
First Quarter 2008 |
|
|
6.79 |
|
|
|
3.40 |
|
Second Quarter 2008 |
|
|
6.98 |
|
|
|
4.00 |
|
Third Quarter 2008 |
|
|
4.60 |
|
|
|
0.85 |
|
Fourth Quarter 2008 |
|
|
1.33 |
|
|
|
0.71 |
|
First Quarter 2009 |
|
|
1.94 |
|
|
|
1.11 |
|
Second Quarter 2009 |
|
|
2.69 |
|
|
|
1.31 |
|
Third Quarter 2009 |
|
|
3.85 |
|
|
|
1.95 |
|
Fourth Quarter 2009 |
|
|
3.93 |
|
|
|
2.88 |
|
First Quarter 2010 |
|
|
3.65 |
|
|
|
2.58 |
|
Second Quarter 2010 |
|
|
2.98 |
|
|
|
1.91 |
|
Third Quarter 2010 |
|
|
3.70 |
|
|
|
2.49 |
|
Fourth Quarter 2010 |
|
|
4.34 |
|
|
|
3.46 |
|
|
|
|
|
|
|
|
|
|
Monthly Highs and Lows |
|
|
|
|
|
|
|
|
November 2010 |
|
|
4.34 |
|
|
|
3.80 |
|
December 2010 |
|
|
4.30 |
|
|
|
3.66 |
|
January 2011 |
|
|
4.69 |
|
|
|
3.99 |
|
February 2011 |
|
|
4.47 |
|
|
|
3.85 |
|
March 2011 |
|
|
4.78 |
|
|
|
3.95 |
|
April 2011 |
|
|
4.73 |
|
|
|
3.75 |
|
May 2011 (through May 23, 2011) |
|
|
6.96 |
|
|
|
4.72 |
|
B. Plan of Distribution
Not applicable.
C. Markets
Our ADSs, each representing 15 of our ordinary shares, have been listed on the NASDAQ since May 5,
2005 under the symbol CNTF.
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
52
ITEM 10. Additional Information
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
We incorporate by reference into this Annual Report the description of our amended and restated
memorandum of association contained in our F-1 registration statement (File No. 333-123921) filed
with the Commission on April 20, 2005. Our shareholders had in 2005 approved an amended and
restated memorandum and articles of association of our company, which became effective immediately
upon the trading of our ADSs on the NASDAQ.
C. Material Contracts
1. Share Purchase Agreement dated January 1, and January 4, 2010, among Active Century Holdings
Limited (Active Century), Citylead Limited
(Citylead) Techfaith, QIGI&BODEE Technology Limited,
QIGI Technology and certain persons listed therein.
On
January 1, 2010, Techfaith and Citylead signed a share purchase agreement. According to
the purchase agreement Techfaith purchased four Class B ordinary shares of Citylead at the price of US$125,000 per
share for an aggregate purchase price of US$500,000. Techfaith then holds 4% of the outstanding
shares of Citylead.
On January 4, 2010, Techfaith and Active Century entered into a share purchase agreement. Subject
to the terms and conditions of this agreement, Active Century sold 96 ordinary shares of Citylead,
representing 96% of the equity interests in Active Century, to Techfaith. As consideration,
Techfaith would issue 65,934,066 of its own ordinary shares, each with par value US$0.00002, to
Active Century. Active Century undertook to return a certain number of Techfaiths ordinary shares
if the QIGI Technologys 2010 and 2011 performance cannot meet certain performance target.
2. Shareholders Agreement among Techfaith Hangzhou, Techfaith
Intelligent Handset Beijing and Beijing E-town International Investment and Development Co Ltd
(BEIID)
In April 2011, Techfaith
Hangzhou, Techfaith Intelligent
Handset Beijing and BEIID
entered into an agreement to establish a subsidiary to develop a 10 million-unit capacity
smartphone and feature phone
production line in the Beijing Economic and Technological Development Area.
(1) |
|
The registered capital of the newly established subsidiary is RMB500 million. Techfaith
Hangzhou will invest RMB 245 million and hold 49% share interest; Techfaith Intelligent Handset
Beijing will invest by contributing land use right valued at approximately RMB 55 million and
hold 11% share interest; BEIID will invest RMB 200 million and hold 40% share interest. All
the capital injection shall be paid in four installments and be completed on or before April
30, 2013. |
(2) |
|
The board of the subsidiary consists of five members, of which two are nominated by
Techfaith Hangzhou, one is nominated by Techfaith Intelligent Handset Beijing, and the other
two are nominated by BEIID. Each board decision will be passed by approval from a simple
majority (more than 50% of the board members). Any decision to invest more than RMB 4 million
or any guaranttee, loan and assets disposal (through transfer or donation) to one beneficiary
in a fiscal year would require approval from two-thirds of the board. There are two
supervisors, to be nominated by each of Techfaith Intelligent Handset Beijing and BEIID and to
be approved by shareholders. |
(3) |
|
Profit distribution shall be approved by shareholders for each financial year according to
such shareholders share percentage in the newly established subsidiary. |
53
3. Agreement between Techfaith Wireless Technology Group Limited (Techfaith BVI) and the
Administration Committee of Shenyang PuHe New Town (PuHe)
In May 2011, Techfaith BVI and PuHe
entered into an agreement to establish a subsidiary which would focus on mobile phone research and
production.
The registered capital of the newly established subsidiary was set at RMB 240 million. Techfaith
BVI will invest RMB 200 million and hold 83.3% share interest in the subsidiary. PuHe will invest
RMB 40 million and hold 16.7% share interest. The registered capital would be made in two
installments over the course of two years.
In addition, PuHe also agreed to provide a government subsidy of RMB 10 million for the
acquisition of fixed assets, with certain conditions attached.
D. Exchange Controls
See Item 4.B. Information on the CompanyBusiness OverviewRegulationForeign Currency
Exchange.
E. Taxation
The following summary of the material Cayman Islands and United States federal income tax
consequences of an investment in our ADSs or ordinary shares is based upon laws and relevant
interpretations thereof in effect as of the date of this report, all of which are subject to
change. This summary does not deal with all possible tax consequences relating to an investment in
our ADSs or ordinary shares, such as the tax consequences under state, local and other tax laws.
Cayman Islands Taxation
According to our Cayman Islands counsel, Maples and Calder, the Cayman Islands currently levies no
taxes on individuals or corporations based upon profits, income, gains or appreciation and there is
no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be
material to us levied by the government of the Cayman Islands except for stamp duties which may be
applicable on instruments executed in, or brought within the jurisdiction of, the Cayman Islands.
The Cayman Islands is not party to any double tax treaties that are applicable to any payments made
to or by our Company. There are no exchange control regulations or currency restrictions in the
Cayman Islands.
United States Federal Income Taxation
The following discussion describes the material United States federal income tax consequences to
U.S. Holders (defined below) under present law of an investment in the ADSs or ordinary shares.
This summary applies only to investors that hold the ADSs or ordinary shares as capital assets and
that have the U.S. dollar as their functional currency. This discussion is based upon United States
federal income tax law, which is subject to differing interpretations or change, possibly with
retroactive effect.
The following discussion does not deal with the tax consequences to any particular investor or to
persons in special tax situations such as:
banks;
financial institutions;
insurance companies;
broker dealers;
traders that elect to mark to market;
tax-exempt entities;
persons liable for alternative minimum tax;
persons holding an ADS or ordinary share as part of a straddle, hedging, conversion or integrated
transaction;
persons that actually or constructively own 10% or more of our voting shares;
persons holding ADSs or ordinary shares through partnerships or other pass-through entities; or
persons who acquired ADSs or ordinary shares pursuant to the exercise of any employee share
option or otherwise as consideration.
54
U.S. Holders are urged to consult their tax advisors about the application of the United States
federal tax rules to their particular circumstances as well as the state and local and foreign tax
consequences to them of the purchase, ownership and disposition of ADSs or ordinary shares.
The discussion below of the United States federal income tax consequences to U.S. Holders will
apply if you are the beneficial owner of ADSs or ordinary shares and you are, for United States
federal income tax purposes,
a citizen or individual resident of the United States;
a corporation (or other entity taxable as a corporation for United States federal income tax
purposes) organized under the laws of the United States, any State or the District of Columbia;
an estate whose income is subject to United States federal income taxation regardless of its
source; or
a trust that (1) is subject to the supervision of a court within the United States and the
control of one or more United States persons or (2) has a valid election in effect under applicable
United States Treasury regulations to be treated as a United States person.
The discussion below assumes that the representations contained in the deposit agreement are true
and that the obligations in the deposit agreement and any related agreement will be complied with
in accordance with their terms. If you hold ADSs, you will be treated as the holder of the
underlying ordinary shares represented by those ADSs for United States federal income tax purposes.
The U.S. Treasury has expressed concerns that parties to whom ADSs are pre-released may be taking
actions that are inconsistent with the claiming, by U.S. Holders of ADSs, of foreign tax credits
for United States federal income tax purposes. Such actions would also be inconsistent with the
claiming of the reduced rate of tax applicable to dividends received by certain non-corporate U.S.
Holders, as described below. Accordingly, the availability of the reduced tax rate for dividends
received by certain non-corporate U.S. Holders could be affected by future actions that may be
taken by the U.S. Treasury or parties to whom ADSs are pre-released.
Passive Foreign Investment Company
Due to the price of our ADSs and ordinary shares during 2010 and the composition of our assets (in
particular, the retention of a large amount of cash), we believe that for our taxable year ended
December 31, 2010, it is likely that we were classified as a passive foreign investment company
(PFIC) for United States federal income tax purposes. A non-U.S. corporation is considered a PFIC
for any taxable year if either:
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at least 75% of its gross income is passive income (the income
test), or |
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at least 50% of the value of its assets (based on an average of the
quarterly values of the assets during a taxable year) is attributable
to assets that produce or are held for the production of passive
income (the asset test). |
We will be treated as owning our proportionate share of the assets and earning our proportionate
share of the income of any other corporation in which we own, directly or indirectly, more than 25%
(by value) of the shares.
The total value of our assets for purposes of the asset test generally will be calculated using the
market price of our ADSs and ordinary shares. Because of our share value during 2010 and our
retention of a significant amount of cash, more than 50% of the value of our assets during 2010 may
be viewed as passive for purposes of the asset test and, as a result we may have been a PFIC during
2010.
We must make a separate determination each year as to whether we are a PFIC (after the close of
each taxable year) and we expect that we will very likely be a PFIC for our current taxable year
ending December 31, 2011 unless our share value increases and/or we invest a
substantial amount of the cash and other passive assets we hold in assets that produce or are held
for the production of active income. If we are a PFIC for any year during which you hold ADS or
ordinary shares, we will continue to be treated as a PFIC for all succeeding years during which you
hold ADS or ordinary shares. However, if we cease to be a PFIC, provided that you have not made a
mark-to-market election, as described below, you may avoid some of the adverse effects of the PFIC
regime by making a deemed sale election with respect to the ADSs or ordinary shares, as applicable.
If such election is made, you will be deemed to have sold our ADSs or shares you hold at their fair
market value and any gain from such deemed sale would be subject to the consequences described in
the following paragraph. After the deemed sale election, you ADSs or shares with respect to which
the deemed sale election was made would not be treated as shares in a PFIC unless we subsequently
became a PFIC. The rules dealing with deemed sale elections are very complex. You are strongly
encouraged to consult your tax advisor about the deemed sale election with regard to our company
and subsidiaries.
If we are a PFIC for any taxable year and any of our non-U.S. subsidiaries is also a PFIC, a U.S.
Holder would be treated as owning a proportionate amount (by value) of the shares of the lower-tier
PFIC for purposes of the application of these rules, and could incur liability for the deferred tax
and interest charge described below if either (1) we receive a distribution from, or dispose of all
or part of our interest in, the lower-tier PFICs or (2) you dispose of all or part of your ADSs or
ordinary shares.
55
If we are a PFIC for any taxable year during which you hold ADSs or ordinary shares, you will be
subject to special tax rules with respect to any excess distribution that you receive and any
gain you realize from a sale or other disposition (including a pledge) of the ADSs or ordinary
shares, unless you make a mark-to-market election as discussed below. Distributions you receive
in a taxable year that are greater than 125% of the average annual distributions you received
during the shorter of the three preceding taxable years or your holding period for the ADSs or
ordinary shares will be treated as an excess distribution. Under the PFIC rules:
such excess distribution or gain will be allocated ratably over your holding period for the ADSs
or ordinary shares,
such amount allocated to the current taxable year, and any taxable year prior to the first
taxable year in which we became a PFIC, will be treated as ordinary income, and
such amount allocated to each other taxable year will be subject to the highest tax rate in
effect for that taxable year and an interest charge generally applicable to underpayments of tax
will be imposed on the resulting tax attributable to each such taxable year.
The tax liability for amounts allocated to years prior to the year of disposition or excess
distribution cannot be offset by any net operating losses for such years, and gains (but not
losses) realized on the sale of the ADSs or ordinary shares cannot be treated as capital, even if
you hold the ADSs or ordinary shares as capital assets.
Alternatively, a U.S. Holder of marketable stock (as defined below) in a PFIC may make a
mark-to-market election for such stock of a PFIC to elect out of the tax treatment discussed in the
two preceding paragraphs. If you make a valid mark-to-market election for the ADSs or ordinary
shares, you will include in income each year an amount equal to the excess, if any, of the fair
market value of the ADSs or ordinary shares as of the close of your taxable year over your adjusted
basis in such ADSs or ordinary shares. You are allowed a deduction for the excess, if any, of the
adjusted basis of the ADSs or ordinary shares over their fair market value as of the close of the
taxable year. However, deductions are allowable only to the extent of any net mark-to-market gains
on the ADSs or ordinary shares included in your income for prior taxable years. Amounts included in
your income under a mark-to-market election, as well as gain on the actual sale or other
disposition of the ADSs or ordinary shares, are treated as ordinary income. Ordinary loss treatment
also applies to the deductible portion of any mark-to-market loss on the ADSs or ordinary shares,
as well as to any loss realized on the actual sale or disposition of the ADSs or ordinary shares,
to the extent that the amount of such loss does not exceed the net mark-to-market gains previously
included for such ADSs or ordinary shares. Your basis in the ADSs or ordinary shares will be
adjusted to reflect any such income or loss amounts. If you make such a mark-to-market election,
tax rules that apply to distributions by corporations which are not PFICs would apply to
distributions by us (except that the lower applicable capital gains rate would not apply).
The mark-to-market election is available only for marketable stock which is stock that is traded
in other than de minimis quantities on at least 15 days during each calendar quarter (regularly
traded) on a qualified exchange or other market, as defined in applicable Treasury regulations. We
expect that the ADSs will continue to be listed on the NASDAQ, which is a qualified exchange for
these purposes, and, consequently, assuming that the ADSs are regularly traded, if you are a holder
of ADSs, it is expected that the mark-to-market election would be available to you. If any of our
subsidiaries are or become PFICs, the mark-to-market election will likely not be available with
respect to the shares of such subsidiaries that are treated as owned by you. Consequently, you
could be subject to the PFIC rules with respect to income of the lower-tier PFICs the value of
which already had been taken into account indirectly via mark-to-market adjustments.
If you hold ADSs or ordinary shares in any year in which we are a PFIC, you are required to file an
annual report containing such information as the U.S. Treasury may require. In addition, if you
hold ADSs or ordinary shares in any year in which we are a PFIC, you will be required to file
Internal Revenue Service Form 8621 regarding distributions received on the ADSs or ordinary shares
and any gain realized on the disposition of the ADSs or ordinary shares.
Taxation of Dividends and Other Distributions on the ADSs or Ordinary Shares
Subject to the passive foreign investment company rules discussed above, the gross amount of all
our distributions to you with respect to the
ADSs or ordinary shares will be included in your gross income as dividend income on the date of
receipt by the depositary, in the case of ADSs, or by you, in the case of ordinary shares, but only
to the extent that the distribution is paid out of our current or accumulated earnings and profits
(computed under United States federal income tax principles). Because we do not intend to determine
our earnings and profits on the basis of United States federal income tax principles, a U.S. Holder
should assume distributions will be reported as a dividend. The dividends will not be eligible for
the dividends-received deduction allowed to corporations in respect of dividends received from
other U.S. corporations.
With respect to non-corporate U.S. Holders (including individuals) for taxable years beginning
before January 1, 2013, dividends may be taxed at the lower applicable capital gains rate
(qualified dividend income) provided that (1) the ADSs or ordinary shares are readily tradable on
an established securities market in the United States or we are eligible for the benefit of the
income tax treaty between the United States and the PRC, (2) we are not a passive foreign
investment company (as discussed above) for either our taxable year in which the dividend was paid
or the preceding taxable year, and (3) certain holding period requirements are met. For this
purpose, ADSs listed on the NASDAQ will be considered to be readily tradable on an established
securities market in the United States. There can be no assurance that our ADSs will be considered
readily tradable on an established securities market in the United States in later years. You
should consult your tax advisor regarding the availability of the lower rate for dividends paid
with respect to our ADSs or ordinary shares.
Dividends will generally be treated as income from foreign sources for United States foreign
tax credit purposes. A U.S. Holder may be eligible, subject to a number of complex limitations, to
claim a foreign tax credit in respect of any foreign withholding taxes imposed on dividends
received on ADSs or ordinary shares. A U.S. Holder who does not elect to claim a foreign tax credit
for foreign tax withheld may instead claim a deduction for United States federal income tax
purposes, in respect of such withholdings, but only for a year in which such holder elects to do so
for all creditable foreign income taxes. If PRC withholding taxes apply to dividends paid to you
with respect to the ADSs or ordinary shares, such PRC withholding taxes may be treated as foreign
taxes eligible for credit against your United States federal income tax liability.
56
Taxation of Disposition of Shares
Subject to the passive foreign investment company rules discussed above, you will recognize capital
gain or loss on any sale, exchange or other taxable disposition of an ADS or ordinary share equal
to the difference between the amount realized (in U.S. dollars) for the ADS or ordinary share and
your tax basis (in U.S. dollars) in the ADS or ordinary share. Any capital gain or loss will be
long-term if the ADSs or ordinary shares have been held for more than one year and will generally
be United States source gain or loss for United States foreign tax credit purposes. The
deductibility of a capital loss may be subject to limitations. In the event that gain from the
disposition of the ADSs or ordinary shares is subject to tax in the PRC, a U.S. Holder that is
eligible for the benefits of the U.S.-PRC treaty may elect to treat the gain as PRC source income.
U.S. Holders are advised to consult their tax advisors regarding the tax consequences if a foreign
withholding tax is imposed on a disposition of our ADSs or ordinary shares, including the
availability of the foreign tax credit under their particular circumstances.
Information Reporting and Backup Withholding
The United States tax compliance rules impose reporting requirements on certain United States
investors in connection with holding interests of a non-United States company, including our ADSs
or ordinary shares, either directly or through a foreign financial institution. These rules also
impose penalties if an individual U.S. Holder is required to submit such information to the United
States Internal Revenue Service and fails to do so. In addition, U.S. Holders may be subject to
information reporting to the United States Internal Revenue Service with respect to dividends on
and proceeds from the sale or other disposition of our ADSs or ordinary shares. Dividend payments
with respect to our ADSs or ordinary shares and proceeds from the sale or other disposition of our
ADSs or ordinary shares are not generally subject to United States backup withholding (provided
that certain certification requirements are satisfied). U.S. Holders are advised to consult their
tax advisors regarding the application of the United States information reporting and backup rules
to their particular circumstances.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
We have previously filed with the Commission our registration statement on Form F-1, as amended and
prospectus under the Securities Act of 1933, with respect to our ordinary shares.
We are subject to the periodic reporting and other informational requirements of the Securities
Exchange Act of 1934, as amended, or the Exchange Act. Under the Exchange Act, we are required to
file reports and other information with the Securities and Exchange Commission. Specifically, we
are required to file annually a Form 20-F no later than six months after the close of each fiscal
year, which is December 31. Copies of reports and other information, when so filed, may be
inspected without charge and may be obtained at prescribed rates at the public reference facilities
maintained by the Securities and Exchange Commission at 100 F. Street, N.E., Washington, D.C.
20549, and at the regional office of the Securities and Exchange Commission located at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. The public may obtain
information regarding the Washington, D.C. Public Reference Room by calling the Commission at
1-800-SEC-0330. The SEC also maintains a Web site at www.sec.gov that contains reports, proxy and
information statements, and other information regarding registrants that make electronic filings
with the SEC using its EDGAR system. As a foreign private issuer, we are exempt from the rules
under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy
statements, and officers, directors and principal shareholders are exempt from the reporting and
short-swing profit recovery provisions contained in Section 16 of the Exchange Act.
We will furnish The Bank of New York Mellon, the depositary of our ADSs, with our annual reports,
which will include a review of operations and annual audited consolidated financial statements
prepared in conformity with U.S. GAAP, and all notices of shareholders meetings and other reports
and communications that are made generally available to our shareholders. The depositary will make
such notices, reports and communications available to holders of ADSs and, upon our request, will
mail to all record holders of ADSs the information contained in any notice of a shareholders
meeting received by the depositary from us.
I. Subsidiary Information
For a listing of our subsidiaries, see Item 4. Information on the Company C. Organizational
Structure.
57
ITEM 11. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk. Our risk exposure from changes in interest rates relates primarily to the
interest income generated by excess cash invested in short-term bank deposits. Interest-earning
instruments carry a degree of interest rate risk. We have not used any derivative financial
instruments to manage our interest risk exposure. Interest-earning instruments carry a degree of
interest rate risk. We have not been nor do we anticipate being exposed to material risks due to
changes in interest rates. However, our future interest income may be lower than expected due to
changes in market interest rates. A hypothetical 0.5 percentage point decrease in interest rates
would have resulted in a decrease of approximately US$0.9 million in our interest income for the
year ended December 31, 2010.
Foreign Exchange Risk. Substantially all of our revenues and substantially all our cost of revenues
are denominated in RMB, with an immaterial portion of our cost of revenues denominated in the U.S.
dollar, for which we have not incurred any material foreign exchange gains or losses.
The value of your investment in our ADSs may be affected by the foreign exchange rate between
U.S. dollars and RMB, even though we use the U.S. dollar as our functional and reporting currency,
because most of our expenses are denominated in RMB and the functional currency of our PRC
subsidiaries is the RMB while the ADSs will be traded in U.S. dollars.
The
conversion of RMB into foreign currencies, including U.S. dollars, is based on rates
set by the Peoples Bank of China. The PRC government allowed the Renminbi to appreciate by more
than 20% against the U.S. dollar between July 2005 and July 2008. Between July 2008 and June 2010,
this appreciation halted and the exchange rate between the Renminbi and the U.S. dollar remained
within a narrow band. Since June 2010, the PRC government has allowed the Renminbi to appreciate
slowly against the U.S. dollar again. It is difficult to predict how market forces or PRC or U.S.
government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the
future.
To the extent that we need to convert U.S. dollars into RMB for our operations, acquisitions, or
other uses within the PRC, appreciation of the RMB against the U.S. dollar would have an adverse
effect on the RMB amount we receive from the conversion. To the extent that we seek to convert RMB
into U.S. dollars, depreciation of the RMB against the U.S. dollar would have an adverse effect on
the U.S. dollar amount we receive from the conversion. As of December 31, 2010, we had
RMB-denominated cash balances of RMB1,188.2 million and U.S. dollar-denominated cash balances of
$18.4 million. Assuming we had converted the RMB-denominated cash balance of RMB1,188.2 million
into U.S. dollars at the exchange rate of $1.00 for RMB6.6000 as of December 31, 2010, this cash
balance would have been $180.0 million. Assuming a 1.0% depreciation of the RMB against the U.S.
dollar, this cash balance would have decreased to $178.2 million.
Inflation Risk. Inflation in China has not materially impacted our results of operations. According
to the National Bureau of Statistics of
China, the change of consumer price index in China was 5.9%, -0.7% and 3.3% in 2008, 2009 and 2010,
respectively. Although we were not materially affected by inflation in the past, we can provide no
assurance that we will not be affected in the future by potentially higher rates of inflation in
China. For example, certain operating costs and expenses, such as employee compensation and office
operating expenses may increase as a result of higher inflation. Additionally, because a
substantial portion of our assets consists of cash and cash equivalents and short-term investments,
high inflation could significantly reduce the value and purchasing power of these assets. We are
not able to hedge our exposure to higher inflation in China.
ITEM 12. Description of Securities Other than Equity Securities
A. Debt Securities
Not applicable.
B. Warrants and Rights
Not applicable.
C. Other Securities
Not applicable.
D. American Depositary Shares
58
Fees and Charges Our ADS holders May Have to Pay
The Bank of New York Mellon, the depositary of our ADS program, collects its fees for delivery and
surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of
withdrawal or from intermediaries acting for them. The depositary collects fees for making
distributions to investors by deducting those fees from the amounts distributed or by selling a
portion of distributable property to pay the fees. The depositary may collect its annual fee for
depositary services by deductions from cash distributions or by directly billing investors or by
charging the book-entry system accounts of participants acting for them. The depositary may
generally refuse to provide fee-attracting services until its fees for those services are paid.
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Persons depositing or withdrawing shares must pay: |
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For: |
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US$5.00 or less per 100 ADSs (or portion of 100 ADSs)
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Issuance of ADSs, including issuances resulting
from a distribution of shares or rights or other property |
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Cancellation of ADSs for the purpose of withdrawal,
including if the deposit agreement terminates |
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US$0.02 or less per ADS
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Any cash distribution to registered ADS holders |
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A fee equivalent to the fee that would be payable if
securities distributed had been shares and the
shares had been deposited for issuance of ADSs
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Distribution of securities distributed to holders
of deposited securities which are distributed by the
depositary to registered ADS holders |
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US$0.02 per ADSs per calendar year (if the
depositary has not collected any cash distribution
fee during that year)
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Depositary services |
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Expenses of the depositary
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Cable, telex and facsimile transmissions (as
expressly provided in the deposit agreement) |
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Converting foreign currency to U.S. dollars |
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Registration or transfer fees
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Transfer and registration of shares on our share
register to or from the name of the depositary or its
agent or the custodian or its nominee when you deposit or
withdraw shares |
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Taxes, stamp duty and other governmental charges the
depositary or the custodian have to pay on any ADS
or share underlying an ADS
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As necessary |
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Any charges incurred by the depositary or its agents
for servicing the deposited securities
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As necessary |
Fees and Other Payments Made by the Depositary to Us
The depositary has agreed to reimburse us annually for our expenses incurred in connection with the
administration and maintenance of our ADS facility including, but not limited to, investor
relations expenses, exchange listing fees or any other program related expenses. The depositary has
also agreed to provide additional payments to us based on the applicable performance indicators
relating to our ADS facility. There are limits on the amount of expenses for which the depositary
will reimburse us, but the amount of reimbursement available to us is not necessarily tied to the
amount of fees the depositary collects from investors. For the year ended December 31, 2010, we
were entitled to receive US$57,019.72 (after withholding tax) from the depositary as reimbursement
for our expenses incurred in connection with, among other things, investor relationship programs
related to the ADS facility. This amount has been paid as of the date of this annual report.
59
PART II
ITEM 13. Defaults, Dividend Arrearages and Delinquencies
Not Applicable.
ITEM 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
Not Applicable.
ITEM 15. Controls and Procedures
Disclosure Controls and Procedures
Our
chief executive officer and chief financial officer
have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) of the Exchange Act) as of the end of the period covered by this annual report.
Our management has concluded that our disclosure controls and procedures
as of the end of the period ended December 31, 2010 were ineffective
because of the material weakness in our internal
control over financial reporting described below.
Managements Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Rules 13a-15(f) under the Exchange Act, as amended,
for our company. Internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
consolidated financial statements in accordance with generally accepted accounting principles, and
includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of a companys
assets, (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of consolidated financial statements in accordance with generally accepted accounting
principles, and that a companys receipts and expenditures are being made only in accordance with
authorizations of a companys management and directors, and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or disposition of a
companys assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, a system of internal control over financial reporting can
provide only reasonable assurance with respect to consolidated financial statement preparation and
presentation, and may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies and procedures may
deteriorate.
As required by
Section 404 of the Sarbanes-Oxley Act of 2002 and related rules as promulgated by
the Securities and Exchange Commission, our management assessed the effectiveness of the internal
control over financial reporting as of December 31, 2010 using criteria established in the Internal
Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this evaluation, our management concluded that our internal control over financial
reporting was ineffective as of December 31, 2010 due to the material weakness identified
related to the accounting personnel within our financial
accounting and reporting departments not having sufficient U.S. GAAP knowledge and
experience to handle the accounting of complex and non-recurring transactions.
We have
reported the material weaknesses to our audit committee and proposed
an action plan for the audit committees approval in order to
remediate the weakness.
The steps we have planned to take include:
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the CFO to apply to become a member of Certified Public
Accountant association in the U.S.; |
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(2) |
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to provide ongoing training on U.S. GAAP and SEC
regulations for our senior accounting and financial personnel
to improve the capability of handling complex and non-recurring
transaction; and |
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(3) |
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to recruit additional financial personnel who have sufficient
relevant education and experience in U.S. GAAP, including those who are
Certified Public Accountants in the U.S., and to consult external qualified
consultant when there are complex non-recurring and complex transactions. |
Our independent registered public accounting firm has issued an attestation report on our internal
control over financial reporting. The
attestation report appears below:
Report of the Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
China Techfaith Wireless Communication Technology Limited
We have audited China Techfaith Wireless Communication Technology Limited (the Company), its subsidiaries,
variable interest entities and variable interest entitys subsidiarys (collectively the Group) internal control
over financial reporting as of December 31, 2010, based on criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Groups management is
responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying Managements Annual Report on
Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Groups internal control
over financial reporting based on our audit.
60
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all material respects. Our audit included
obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of internal control based on that risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed by, or under the supervision of, the
companys principal executive and principal financial officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A companys internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of
collusion or improper management override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal
control over financial reporting to future periods are subject to the risk that the controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting,
such that there is a reasonable possibility that a material misstatement of the companys annual or interim financial
statements will not be prevented or detected on a timely basis. The material weakness has been identified and included
in managements assessment was related to the accounting personnel within the
financial accounting and reporting departments of the Group not having
sufficient U.S. GAAP knowledge and
experience in handling the accounting of complex and non-recurring transactions. This material weakness was considered
in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial
statements and financial statement schedule as of and for the year ended December 31, 2010, of the Group and this
report does not affect our report on such financial statements and financial statement schedule.
In our opinion, because of the effect of the material weakness identified above on the achievement of the objectives of
the control criteria, the Group has not maintained effective internal control over financial reporting as of December
31, 2010, based on the criteria established in Internal Control Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated financial statements and financial statement schedule as of and for the year ended December
31, 2010, of the Group and our report dated May 24, 2011 expressed an unqualified opinion on those financial statements
and financial statement schedule.
/s/ Deloitte Touche Tohmatsu CPA Ltd.
Beijing, the Peoples Republic of China
May 24, 2011
Changes in internal control over financial reporting
There were no changes in our internal controls over financial reporting that occurred during the
period covered by this annual report on Form 20-F that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
ITEM 16A. Audit Committee Financial Expert
See Item 6. Directors, Senior Management and Employees C. Board Practices.
ITEM 16B. Code of Ethics
Our board of directors has adopted a code of ethics that applies to our directors, officers,
employees and agents, including certain provisions that specifically apply to our chief executive
officer, chief financial officer, chief operating officer, financial controller, vice presidents
and any other persons who perform similar functions for us. We have filed our code of business
conduct and ethics as an exhibit to our registration statement on Form F-1, and posted the code on
our www.techfaithwireless.com website. We hereby undertake to provide to any person without charge,
a copy of our code of business conduct and ethics within ten working days after we receive such
persons written request.
61
ITEM 16C. Principal Accountant Fees and Services
The following table sets forth the aggregate fees by categories specified below in connection with
certain professional services rendered by Deloitte Touche Tohmatsu, our independent registered
public accounting firm, for the periods indicated. We did not pay any tax related or other fees to
our independent registered public accounting firm during the periods indicated below.
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For the Year Ended December 31, |
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|
2009 |
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2010 |
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|
|
(In thousands of US$) |
|
Audit fees (1) |
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|
942 |
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|
|
1,000 |
|
Audit-related fees |
|
|
|
|
|
|
200 |
|
Tax fees (2) |
|
|
18 |
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|
|
5 |
|
All other fees |
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|
|
|
|
|
|
|
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(1) |
|
Audit fees means the aggregate fees billed in each of the fiscal
years listed for professional services rendered by our principal
auditors for the audit of our annual financial statements. |
|
(2) |
|
Audit-related fees means the aggregate fees billed in each of the
fiscal years listed for professional services rendered by our
principal auditors for the purpose of the filing of the Form F-3 and
related audit of our subsidiaries. |
|
(3) |
|
Tax fees means the aggregate fees billed in each of the fiscal years
listed for professional services rendered by the principal accountant
for tax compliance, tax advice, and tax planning. |
All audit and non-audit services provided by our independent auditors must be pre-approved by our
audit committee. Our audit committee has adopted a combination of two approaches in pre-approving
proposed services: general pre-approval and specific pre-approval. With general approval, proposed
services are pre-approved without consideration of specific case-by-case services; with specific
approval, proposed services require the specific pre-approval of the audit committee. Unless a type
of service has received general pre-approval, it will require specific pre-approval by our audit
committee. Any proposed services exceeding pre-approved cost levels or budgeted amounts will also
require specific pre-approval by our audit committee.
All requests or applications for services to be provided by our independent auditors that do not
require specific approval by our audit committee will be submitted to our chief financial officer
and must include a detailed description of the services to be rendered. The chief financial officer
will determine whether such services are included within the list of services that have received
the general pre-approval of the audit committee. The audit committee will be informed on a timely
basis of any such services. Requests or applications to provide services that require specific
approval by our audit committee will be submitted to the audit committee by both our independent
auditors and our chief financial officer and must include a joint statement as to whether, in their
view, the request or application is consistent with the SECs rules on auditor independence.
ITEM 16D. Exemptions from the Listing Standards for Audit Committees
We are in compliance with Rule 10A-3 under the Exchange Act and The Nasdaq Stock Market, Inc.
Marketplace Rules with respect to the audit committee.
ITEM 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
In September 2008, our board of directors approved a share repurchase program pursuant to
authorization previously obtained from our shareholders. Under the program, our company is
authorized, but not obligated, to repurchase up to US$10 million worth of our outstanding ADSs from
time to time, depending on market conditions, share price and other factors, as well as subject to
the relevant rules under United States securities regulations and are subject to restrictions
relating to volume, price and timing. From September 2008 to the date of this annual report, a
total of 61,200 shares have been purchased under this program, all during December 2009. Pursuant
to the board resolutions, our board will review this share repurchase program periodically and may
adjust its terms and size accordingly, including suspending or discontinuing the program altogether
at anytime.
The following tables set forth some additional information about our repurchases made in the fiscal
years ended December 31, 2008 and 2009. The ordinary shares underlying the repurchased ADSs have
been canceled pursuant to Cayman Islands law.
Issuer Repurchases in the Years Ended December 31, 2008, 2009 and 2010
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Maximum |
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Number (or |
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|
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Approximate |
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|
|
Total |
|
|
Dollar |
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|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Value) of |
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|
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|
|
|
|
|
|
|
|
ADSs |
|
|
ADSs that |
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|
|
|
|
|
|
|
|
Purchased as |
|
|
May |
|
|
|
(a) Total |
|
|
Average |
|
|
Part of |
|
|
Yet be |
|
|
|
Number of |
|
|
Price Paid |
|
|
Publicly |
|
|
Purchased |
|
|
|
ADSs |
|
|
Per |
|
|
Announced |
|
|
Under |
|
Period |
|
Purchased |
|
|
ADS |
|
|
Program(1) |
|
|
the Program |
|
December 2009 |
|
|
61,200 |
|
|
|
3.2191 |
|
|
|
61,200 |
|
|
$ |
9,802,991 |
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62
ITEM 16F. Change in Registrants Certifying Accountant
Not applicable.
ITEM 16G. Corporate Governance
Nasdaq Marketplace Rule 5620(a) requires each issuer to hold an annual meeting of shareholders no
later than one year after the end of the issuers fiscal year-end. However, Nasdaq Marketplace Rule
5615(a)(3) permits foreign private issuers like us to follow home country practice in certain
corporate governance matters. Maples and Calder, our Cayman Islands counsel, has provided a letter
to the Nasdaq Stock Market certifying that under Cayman Islands law, we are not required to hold
annual shareholder meetings every year.
We intend to follow home country practice with respect to annual meetings. We did not hold any
annual meeting of shareholders in 2009. We may hold additional annual shareholder meetings in the
future if there are significant issues that require shareholders approvals.
Other than the annual meeting requirements, we have followed and intend to continue to follow the
applicable corporate governance standards under Nasdaq Marketplace Rules.
In accordance with Nasdaq Marketplace Rule 5250(d), we will post this annual report on Form 20-F on
our www.techfaithwireless.com website. In addition, we will provide hardcopies of our annual report
free of charge to shareholders and ADS holders upon request.
PART III
ITEM 17. Financial Statements
We have elected to provide financial statements pursuant to Item 18.
ITEM 18. Financial Statements
The consolidated financial statements for China Techfaith Wireless Communication Technology Limited
and its subsidiaries are included at the end of this annual report.
ITEM 19. Exhibits
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|
Exhibit |
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|
Number |
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Document |
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|
|
|
|
1.1 |
|
|
Amended and Restated Memorandum and Articles of Association
of the Registrant (incorporated by reference to Exhibit 3.2
from our Registration Statement on Form F-1 (file no.
333-123921) filed with the Securities and Exchange
Commission on April 20, 2005). |
|
|
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|
|
|
2.1 |
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|
Registrants Specimen American Depositary Receipt
(incorporated by reference to Exhibit 4.1 from our
Registration Statement on Form F-1 (file no. 333-123921)
filed with the Securities and Exchange Commission on April
7, 2005). |
|
|
|
|
|
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2.2 |
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|
Registrants Specimen Certificate for Ordinary Shares
(incorporated by reference to Exhibit 4.2 from our
Registration Statement on Form F-1 (file no. 333-123921)
filed with the Securities and Exchange Commission on April
20, 2005). |
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2.3 |
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Note Subscription and Rights Agreement, dated as of April
9, 2004, among the Registrant and other parties therein
(incorporated by reference to Exhibit 4.4 from our
Registration Statement on Form F-1 (file no. 333-123921)
filed with the Securities and Exchange Commission on April
7, 2005). |
|
|
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|
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2.4 |
|
|
Transfer and Assumption Agreement dated November 9, 2004 among the
Registrant and other parties thereto (incorporated by reference to
Exhibit 4.5 from our Registration Statement on Form F-1 (file no.
333-123921) filed with the Securities and Exchange Commission on
April 7, 2005). |
|
|
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|
|
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2.5 |
|
|
Share Swap Agreement dated November 9, 2004 among the Registrant and
other parties thereto (incorporated by reference to Exhibit 4.6 from
our Registration Statement on Form F-1 (file no. 333-123921) filed
with the Securities and Exchange Commission on April 7, 2005). |
63
|
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|
Exhibit |
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Number |
|
Document |
|
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|
|
|
2.6 |
|
|
Investor Rights Agreement dated June 9, 2009 among the Registrant,
Leo Technology Limited, now renamed 798 Entertainment Limited,
affiliates of IDGVC Partners, Infiniti Capital Limited and other
parties thereto (incorporated by reference to Exhibit 2.6 from our Annual Report on
Form 20-F (file no. 000-51242) filed with the Securities and Exchange
Commission on May 19, 2010). |
|
|
|
|
|
|
4.1 |
|
|
2005 Share Incentive Plan (incorporated by reference to Exhibit 10.1
from our Registration Statement on Form F-1 (file no. 333-123921)
filed with the Securities and Exchange Commission on April 20, 2005). |
|
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|
|
|
4.2 |
|
|
Form of Indemnification Agreement with the Registrants directors
(incorporated by reference to Exhibit 10.2 from our Registration
Statement on Form F-1 (file no. 333-123921) filed with the Securities
and Exchange Commission on April 7, 2005). |
|
|
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|
|
4.3 |
|
|
Form of Employment Agreement between the Registrant and a Senior
Executive Officer of the Registrant (incorporated by reference to
Exhibit 10.3 from our Registration Statement on Form F-1 (file no.
333-123921) filed with the Securities and Exchange Commission on
April 7, 2005). |
|
|
|
|
|
|
4.4 |
|
|
Memorandum of Understanding dated December 24, 2003 between a
subsidiary of the Registrant and QUALCOMM (incorporated by reference
to Exhibit 99.1 from our Registration Statement on Form F-1 (file no.
333-123921) filed with the Securities and Exchange Commission on
April 7, 2005). |
|
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|
|
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|
4.5 |
|
|
CDMA Modem Card License Agreement dated March 9, 2004 between a
subsidiary of the Registrant and QUALCOMM (incorporated by reference
to Exhibit 99.2 from our Registration Statement on Form F-1 (file no.
333-123921) filed with the Securities and Exchange Commission on
April 7, 2005). |
|
|
|
|
|
|
4.6 |
|
|
Joint Venture Agreement dated September 26, 2003 between the
Registrant and NEC (incorporated by reference to Exhibit 99.3 from
our Registration Statement on Form F-1 (file no. 333-123921) filed
with the Securities and Exchange Commission on April 7, 2005). |
|
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|
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4.7 |
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|
Lease Agreement dated July 31, 2004 between the Registrant and
Beijing Sino-Electronics Future Telecommunication R&D, Ltd.
(incorporated by reference to Exhibit 99.4 from our Registration
Statement on Form F-1 (file no. 333-123921) filed with the Securities
and Exchange Commission on April 7, 2005). |
|
|
|
|
|
|
4.8 |
|
|
Agreement dated June 29, 2004 between the Registrant and a PRC
subsidiary of NEC (translation) (incorporated by reference to Exhibit
99.6 from our Registration Statement on Form F-1 (file no.
333-123921) filed with the Securities and Exchange Commission on
April 7, 2005). |
|
|
|
|
|
|
4.9 |
|
|
Agreement dated December 20, 2004 between the Registrant and a PRC
subsidiary of NEC (translation) (incorporated by reference to Exhibit
99.7 from our Registration Statement on Form F-1 (file no.
333-123921) filed with the Securities and Exchange Commission on
April 7, 2005). |
|
|
|
|
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4.10 |
|
|
Series A Preferred Share Purchase and Sale Agreement dated March 22,
2006 among the Registrant, QUALCOMM and Techfaith Software (China)
Holding Limited (incorporated by reference to Exhibit 4.11 from our
Registration Statement on Form 20-F (file no. 000-51242) filed with
the Securities and Exchange Commission on June 29, 2006). |
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4.11 |
|
|
Contract for Purchase of Building dated March 23, 2006 between Beijing
Electronics City Co., Ltd. and Techfaith Wireless Communication Technology
(Beijing) Limited (English translation of the Chinese language document)
(incorporated by reference to Exhibit 4.12 from our Registration Statement
on Form 20-F (file no. 000-51242) filed with the Securities and Exchange
Commission on June 29, 2006). |
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4.12 |
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Contract for Purchase of Building dated March 23, 2006 between Beijing
Electronics City Co., Ltd. and Techfaith Intelligent Handset Technology
(Beijing) Limited (English translation of the Chinese language document)
(incorporated by reference to Exhibit 4.13 from our Annual Report
on Form 20-F (file no. 000-51242) filed with the Securities and Exchange
Commission on June 29, 2006). |
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4.13 |
|
|
Construction Contract dated February 11, 2007 between Techfaith Wireless
Communication Technology (Hangzhou) Limited and Hangzhou Jiang Qian
Construction Engineering Co., Ltd. (incorporated by reference to Exhibit
4.14 from our Annual Report on Form 20-F (file no. 000-51242) filed with
the Securities and Exchange Commission on June 29, 2007. |
64
|
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|
Exhibit |
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|
Number |
|
Document |
|
|
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|
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|
4.14 |
* |
|
Share Purchase Agreement dated January 1, 2010 between Active Century
Holdings Limited, Citylead Limited, the Registrant, QIGI&BODEE Technology Limited, QIGI& BODEE Technology (Beijing) Co., Ltd.
and certain persons listed therein. |
|
|
|
|
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|
4.15 |
* |
|
Share Purchase Agreement dated January 4, 2010 between Active Century
Holdings Limited, Citylead Limited, the Registrant, QIGI&BODEE Technology Limited, QIGI& BODEE Technology (Beijing) Co., Ltd.
and certain persons listed therein. |
|
|
|
|
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|
4.16 |
* |
|
Shareholders Agreement dated April 22, 2011 between Techfaith Wireless
Communication Technology (Hangzhou) Limited, Techfaith Intelligent Handset
Technology (Beijing) Limited and Beijing E-town International Investment
and Development Co, Ltd. (English translation of the Chinese language
document). |
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|
4.17 |
* |
|
Agreement dated May 10, 2011 between Techfaith BVI and the Administration
Committee of Shenyang Puhe New Town (PuHe) (English translation of the
Chinese language document). |
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8.1 |
* |
|
Subsidiaries of the Registrant. |
|
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11.1 |
|
|
Code of Business Conduct and Ethics of the Registrant, as amended
(incorporated by reference to Exhibit 4.8 from our Annual Report on Form
20-F (file no. 000-51242) filed with the Securities and Exchange Commission
on June 25, 2009). |
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|
12.1 |
* |
|
CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
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12.2 |
* |
|
CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
13.1 |
* |
|
CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
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|
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13.2 |
* |
|
CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
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|
|
15.1 |
* |
|
Consent of Maples and Calder. |
|
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15.2 |
* |
|
Consent of Guan Teng Law Firm. |
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|
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* |
|
Filed with this annual report on Form 20-F. |
65
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing its annual report
on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report
on its behalf.
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CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
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By: |
/s/ Defu Dong |
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Name: |
Defu Dong |
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|
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Title: |
Chief Executive Officer |
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Date: May 24, 2011
66
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
Report of Independent Registered
Public Accounting Firm and
Consolidated Financial Statements
For the years ended December 31, 2008, 2009 and 2010
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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CONTENTS |
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PAGE |
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F - 1 |
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F - 2 |
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F - 4 |
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F - 5 |
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F - 6 |
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F - 8 |
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F - 59 |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
CHINA TECHFAITH WIRELESS COMMUNICATION TECHNOLOGY LIMITED
We have audited the accompanying consolidated balance sheets of China Techfaith Wireless
Communication Technology Limited, its subsidiaries, variable interest entities and variable
interest entitys subsidiary (collectively the Group) as of December 31, 2009 and 2010,
and the related consolidated statements of operations, changes in equity and comprehensive
income, and cash flows for each of the three years in the period ended December 31, 2010,
and related financial statement schedule included in Schedule 1. These financial statements
and financial statement schedule are the responsibility of the Groups management. Our
responsibility is to express an opinion on these financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of the Group as of December 31, 2009 and 2010, and the
results of its operations and its cash flows for each of the three years in the period ended
December 31, 2010, in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, such financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
As discussed in Note 3 to the consolidated financial statements, the accompanying 2009
financial statements have been restated in relation to the accounting for the issuance of
convertible notes in 2009.
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Groups internal control over financial reporting as of
December 31, 2010, based on the criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and
our report dated May 24, 2011 expressed an adverse opinion on the Groups internal
control over financial reporting.
/s/ Deloitte Touche Tohmatsu CPA Ltd.
Beijing, the Peoples Republic of China
May 24, 2011
F - 1
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
|
|
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|
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|
Year ended December 31, |
|
|
|
2009 |
|
|
2010 |
|
|
|
(As restated) |
|
|
|
|
ASSETS |
|
|
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|
|
|
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|
|
|
|
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|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
130,544 |
|
|
$ |
198,536 |
|
Accounts receivable, net of allowances of $9,151 and
$13,133 as of December 31, 2009 and 2010, respectively |
|
|
28,992 |
|
|
|
19,241 |
|
Amount due from a related party |
|
|
9,941 |
|
|
|
8,061 |
|
Inventories |
|
|
22,937 |
|
|
|
17,745 |
|
Prepaid expenses and other current assets |
|
|
12,420 |
|
|
|
7,997 |
|
Deferred tax assets-current |
|
|
|
|
|
|
163 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
204,834 |
|
|
|
251,743 |
|
|
|
|
|
|
|
|
Plant, machinery and equipment, net |
|
|
44,582 |
|
|
|
44,408 |
|
Acquired intangible assets, net |
|
|
645 |
|
|
|
2,799 |
|
Other asset |
|
|
|
|
|
|
3,155 |
|
Goodwill |
|
|
606 |
|
|
|
1,848 |
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
250,667 |
|
|
$ |
303,953 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable (including accounts payable of the consolidated variable interest
entities without recourse to China TechfaithWireless Communication Technology
Limited, $30 and $nil as of December 31, 2009 and 2010, respectively) |
|
$ |
10,514 |
|
|
$ |
7,819 |
|
Amounts due to related parties |
|
|
266 |
|
|
|
46 |
|
Accrued expenses and other current liabilities (including accrued expenses and
other current liabilities of the consolidated variable interest entities without
recourse to China Techfaith Wireless Communication Technology Limited,
$223 and $1,272 as of December 31, 2009 and 2010, respectively) |
|
|
10,026 |
|
|
|
13,815 |
|
Advance from customers (including advance from customers of the consolidated
variable interest entities without recourse to China Techfaith Wireless
Communication Technology Limited, $178 and $339 as of December 31, 2009
and 2010, respectively) |
|
|
4,720 |
|
|
|
7,450 |
|
Deferred revenue |
|
|
755 |
|
|
|
291 |
|
Income tax payable (including income tax payable of consolidated variable interest
entities without recourse to China Techfaith Wireless Communication Technology
Limited, $25 and $1,282 as of December 31, 2009 and 2010, respectively) |
|
|
1,162 |
|
|
|
3,175 |
|
Put option liability |
|
|
1,257 |
|
|
|
1,380 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
28,700 |
|
|
|
33,976 |
|
|
|
|
|
|
|
|
F - 2
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
CONSOLIDATED BALANCE SHEETS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2009 |
|
|
2010 |
|
|
|
(As restated) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax
liability-non-current |
|
|
|
|
|
|
140 |
|
Long-term loan |
|
|
|
|
|
|
290 |
|
Convertible notes and embedded derivatives |
|
|
18,029 |
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
46,729 |
|
|
|
34,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments (Note 24) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity: |
|
|
|
|
|
|
|
|
Ordinary shares of par value $0.00002: |
|
|
|
|
|
|
|
|
(50,000,000,000,000 shares authorized; shares issued and outstanding,
650,156,045 and 794,003,193, including 918,000 and nil held as treasury stock,
as of December 31, 2009 and 2010, respectively) |
|
|
13 |
|
|
|
16 |
|
Additional paid-in capital |
|
|
113,657 |
|
|
|
139,495 |
|
Treasury stock, at cost (918,000 and nil shares as of
December 31, 2009 and 2010, respectively) |
|
|
(199 |
) |
|
|
|
|
Accumulated other comprehensive income |
|
|
23,863 |
|
|
|
31,098 |
|
Statutory reserve |
|
|
10,993 |
|
|
|
16,679 |
|
Retained earnings |
|
|
53,943 |
|
|
|
76,097 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total China Techfaith Wireless Communication
Technology Limited shareholders equity |
|
|
202,270 |
|
|
|
263,385 |
|
|
|
|
|
|
|
|
Noncontrolling interests |
|
|
1,668 |
|
|
|
6,162 |
|
|
|
|
|
|
|
|
Total equity |
|
|
203,938 |
|
|
|
269,547 |
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND EQUITY |
|
$ |
250,667 |
|
|
$ |
303,953 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F - 3
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
|
|
|
|
(As restated) |
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
ODP |
|
$ |
208,850 |
|
|
$ |
210,588 |
|
|
$ |
222,549 |
|
Brand name phone sales |
|
|
|
|
|
|
|
|
|
|
38,462 |
|
Game |
|
|
|
|
|
|
488 |
|
|
|
10,866 |
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
208,850 |
|
|
|
211,076 |
|
|
|
271,877 |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
ODP |
|
|
(167,685 |
) |
|
|
(172,801 |
) |
|
|
(180,517 |
) |
Brand name phone sales |
|
|
|
|
|
|
|
|
|
|
(22,066 |
) |
Game |
|
|
|
|
|
|
(64 |
) |
|
|
(2,202 |
) |
|
|
|
|
|
|
|
|
|
|
Total cost of revenues |
|
|
(167,685 |
) |
|
|
(172,865 |
) |
|
|
(204,785 |
) |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
41,165 |
|
|
|
38,211 |
|
|
|
67,092 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
(15,553 |
) |
|
|
(9,600 |
) |
|
|
(14,626 |
) |
Research and development |
|
|
(18,195 |
) |
|
|
(12,040 |
) |
|
|
(11,613 |
) |
Selling and marketing |
|
|
(5,497 |
) |
|
|
(3,241 |
) |
|
|
(6,084 |
) |
Impairment of long-lived assets |
|
|
(880 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
(40,125 |
) |
|
|
(24,881 |
) |
|
|
(32,323 |
) |
|
|
|
|
|
|
|
|
|
|
Government subsidy income |
|
|
3,081 |
|
|
|
481 |
|
|
|
159 |
|
Other operating income |
|
|
2,443 |
|
|
|
|
|
|
|
1,109 |
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
6,564 |
|
|
|
13,811 |
|
|
|
36,037 |
|
|
|
|
|
|
|
|
|
|
|
Interest expenses |
|
|
(47 |
) |
|
|
(35 |
) |
|
|
(1 |
) |
Interest income |
|
|
1,616 |
|
|
|
667 |
|
|
|
882 |
|
Investment income |
|
|
|
|
|
|
|
|
|
|
142 |
|
Loss on issuance of convertible notes |
|
|
|
|
|
|
(3,176 |
) |
|
|
|
|
Other income (expenses), net |
|
|
(22 |
) |
|
|
115 |
|
|
|
(101 |
) |
Change in fair value of derivatives embedded
in convertible notes |
|
|
|
|
|
|
(5,270 |
) |
|
|
1,280 |
|
Change in fair value of put option |
|
|
(855 |
) |
|
|
(84 |
) |
|
|
(123 |
) |
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
7,256 |
|
|
|
6,028 |
|
|
|
38,116 |
|
Income tax benefit (expenses) |
|
|
93 |
|
|
|
(3,642 |
) |
|
|
(9,458 |
) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
7,349 |
|
|
|
2,386 |
|
|
|
28,658 |
|
Less: Net (income) loss attributable to
noncontrolling interests |
|
|
652 |
|
|
|
2,028 |
|
|
|
(818 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to China Techfaith Wireless
Communication Technology Limited |
|
$ |
8,001 |
|
|
$ |
4,414 |
|
|
$ |
27,840 |
|
|
|
|
|
|
|
|
|
|
|
Net income per share attributable to China
Techfaith Wireless Communication Technology Limited: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.01 |
|
|
$ |
0.01 |
|
|
$ |
0.04 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.01 |
|
|
$ |
0.01 |
|
|
$ |
0.03 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computation: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
649,972,306 |
|
|
|
650,057,866 |
|
|
|
732,784,822 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
650,062,312 |
|
|
|
720,889,120 |
|
|
|
795,843,605 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F - 4
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
AND COMPREHENSIVE INCOME
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity attributable to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
China Techfaith Wireless |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
other |
|
|
|
|
|
|
|
|
|
|
Communication |
|
|
|
|
|
|
|
|
|
|
Com- |
|
|
|
Ordinary shares |
|
|
paid-in |
|
|
Treasury |
|
|
comprehensive |
|
|
Statutory |
|
|
Retained |
|
|
Technology Limited |
|
|
Noncontrolling |
|
|
Total |
|
|
prehensive |
|
|
|
Number |
|
|
Amount |
|
|
capital |
|
|
stock |
|
|
income |
|
|
reserve |
|
|
earnings |
|
|
Shareholders |
|
|
Interests |
|
|
equity |
|
|
income |
|
|
Balance at January 1, 2008 |
|
|
649,913,136 |
|
|
$ |
13 |
|
|
$ |
110,327 |
|
|
$ |
(4,628 |
) |
|
$ |
13,629 |
|
|
$ |
6,813 |
|
|
$ |
45,708 |
|
|
$ |
171,862 |
|
|
$ |
1,807 |
|
|
$ |
173,669 |
|
|
|
|
|
Cancellation of treasury stock |
|
|
|
|
|
|
|
|
|
|
(4,628 |
) |
|
|
4,628 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,466 |
|
|
|
|
|
|
|
|
|
|
|
10,466 |
|
|
|
185 |
|
|
|
10,651 |
|
|
$ |
10,651 |
|
Share-based compensation |
|
|
121,454 |
|
|
|
|
|
|
|
147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
147 |
|
|
|
|
|
|
|
147 |
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,001 |
|
|
|
8,001 |
|
|
|
(652 |
) |
|
|
7,349 |
|
|
|
7,349 |
|
Provision for statutory reserve |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,729 |
|
|
|
(1,729 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
|
650,034,590 |
|
|
|
13 |
|
|
|
105,846 |
|
|
|
|
|
|
|
24,095 |
|
|
|
8,542 |
|
|
|
51,980 |
|
|
|
190,476 |
|
|
|
1,340 |
|
|
|
191,816 |
|
|
$ |
18,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of ordinary shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(199 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(199 |
) |
|
|
|
|
|
|
(199 |
) |
|
|
|
|
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77 |
|
|
|
|
|
|
|
|
|
|
|
77 |
|
|
|
|
|
|
|
77 |
|
|
$ |
77 |
|
Share-based compensation |
|
|
121,455 |
|
|
|
|
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20 |
|
|
|
|
|
|
|
20 |
|
|
|
|
|
Net income (as restated) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,414 |
|
|
|
4,414 |
|
|
|
(2,028 |
) |
|
|
2,386 |
|
|
|
2,386 |
|
Provision for statutory reserve |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,451 |
|
|
|
(2,451 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital contribution by a noncontrolling
shareholder |
|
|
|
|
|
|
|
|
|
|
7,791 |
|
|
|
|
|
|
|
(309 |
) |
|
|
|
|
|
|
|
|
|
|
7,482 |
|
|
|
2,356 |
|
|
|
9,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 (as restated) |
|
|
650,156,045 |
|
|
|
13 |
|
|
|
113,657 |
|
|
|
(199 |
) |
|
|
23,863 |
|
|
|
10,993 |
|
|
|
53,943 |
|
|
|
202,270 |
|
|
|
1,668 |
|
|
|
203,938 |
|
|
$ |
2,463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issue of ordinary shares for acquisition of
Citylead |
|
|
65,934,066 |
|
|
|
1 |
|
|
|
12,834 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,835 |
|
|
|
|
|
|
|
12,835 |
|
|
|
|
|
Cancellation of treasury stock |
|
|
(918,000 |
) |
|
|
|
|
|
|
(199 |
) |
|
|
199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of convertible notes |
|
|
78,814,628 |
|
|
|
2 |
|
|
|
13,202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,204 |
|
|
|
3,546 |
|
|
|
16,750 |
|
|
|
|
|
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,235 |
|
|
|
|
|
|
|
|
|
|
|
7,235 |
|
|
|
130 |
|
|
|
7,365 |
|
|
$ |
7,365 |
|
Share-based compensation |
|
|
16,454 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,840 |
|
|
|
27,840 |
|
|
|
818 |
|
|
|
28,658 |
|
|
|
28,658 |
|
Provision for statutory reserve |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,686 |
|
|
|
(5,686 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010 |
|
|
794,003,193 |
|
|
$ |
16 |
|
|
$ |
139,495 |
|
|
$ |
|
|
|
$ |
31,098 |
|
|
$ |
16,679 |
|
|
$ |
76,097 |
|
|
$ |
263,385 |
|
|
$ |
6,162 |
|
|
$ |
269,547 |
|
|
$ |
36,023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F - 5
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
|
(As restated) |
|
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
7,349 |
|
|
$ |
2,386 |
|
|
$ |
28,658 |
|
Adjustments to reconcile net income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss (gain) on disposal of plant, machinery and equipment |
|
|
73 |
|
|
|
125 |
|
|
|
(479 |
) |
Impairment of long-lived assets |
|
|
880 |
|
|
|
|
|
|
|
|
|
Amortization of acquired intangible assets |
|
|
794 |
|
|
|
377 |
|
|
|
616 |
|
Inventory provision |
|
|
648 |
|
|
|
409 |
|
|
|
2,186 |
|
Warranty provision |
|
|
1,067 |
|
|
|
365 |
|
|
|
341 |
|
Bad debts expense |
|
|
2,996 |
|
|
|
2,081 |
|
|
|
8,204 |
|
Depreciation of plant, machinery and equipment |
|
|
6,103 |
|
|
|
4,213 |
|
|
|
2,769 |
|
Change in fair value of put option |
|
|
855 |
|
|
|
84 |
|
|
|
123 |
|
Share-based compensation |
|
|
147 |
|
|
|
20 |
|
|
|
1 |
|
Change in fair value of derivatives associated
with convertible notes |
|
|
|
|
|
|
5,270 |
|
|
|
(1,280 |
) |
Amortization of convertible notes interest |
|
|
|
|
|
|
|
|
|
|
1 |
|
Loss on issuance of convertible notes |
|
|
|
|
|
|
3,176 |
|
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(1,536 |
) |
|
|
2,385 |
|
|
|
(3,356 |
) |
Notes receivable |
|
|
4,212 |
|
|
|
85 |
|
|
|
|
|
Inventories |
|
|
15,877 |
|
|
|
14,417 |
|
|
|
5,104 |
|
Prepaid expenses and other current assets |
|
|
(4,836 |
) |
|
|
(2,498 |
) |
|
|
8,927 |
|
Deferred tax assets |
|
|
129 |
|
|
|
132 |
|
|
|
(163 |
) |
Deferred tax liability |
|
|
|
|
|
|
|
|
|
|
(30 |
) |
Accounts payable |
|
|
(27,747 |
) |
|
|
1,140 |
|
|
|
(2,915 |
) |
Accrued expenses and other current liabilities |
|
|
(3,198 |
) |
|
|
(406 |
) |
|
|
743 |
|
Advance from customers |
|
|
(2,423 |
) |
|
|
(540 |
) |
|
|
2,730 |
|
Deferred revenue |
|
|
106 |
|
|
|
(993 |
) |
|
|
(464 |
) |
Income tax payable |
|
|
|
|
|
|
1,013 |
|
|
|
2,013 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
1,496 |
|
|
|
33,241 |
|
|
|
53,729 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of plant, machinery and equipment |
|
|
(13,389 |
) |
|
|
(865 |
) |
|
|
(3,888 |
) |
Proceeds from sale of plant, machinery and equipment |
|
|
116 |
|
|
|
47 |
|
|
|
57 |
|
Purchase of intangible assets |
|
|
(1,364 |
) |
|
|
(490 |
) |
|
|
(334 |
) |
Cash acquired from business acquisition of Citylead, net
of cash consideration paid of $500 |
|
|
|
|
|
|
|
|
|
|
10,683 |
|
Deposit received for disposal of other asset |
|
|
|
|
|
|
|
|
|
|
2,773 |
|
Decrease in restricted cash |
|
|
3,228 |
|
|
|
162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities |
|
|
(11,409 |
) |
|
|
(1,146 |
) |
|
|
9,291 |
|
|
|
|
|
|
|
|
|
|
|
F - 6
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
|
(As restated) |
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Capital contribution by a noncontrolling shareholder |
|
|
|
|
|
|
9,838 |
|
|
|
|
|
Proceeds from issuance of convertible notes,
net of issuance cost paid of $250 |
|
|
|
|
|
|
9,750 |
|
|
|
|
|
Proceeds from long-term borrowing |
|
|
|
|
|
|
|
|
|
|
290 |
|
Repurchase of ordinary shares |
|
|
|
|
|
|
(199 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
|
|
|
|
19,389 |
|
|
|
290 |
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on
cash and cash equivalents |
|
|
4,085 |
|
|
|
134 |
|
|
|
4,682 |
|
Net increase (decrease) in cash and cash equivalents |
|
|
(5,828 |
) |
|
|
51,618 |
|
|
|
67,992 |
|
Cash and cash equivalents at the beginning of the year |
|
|
84,754 |
|
|
|
78,926 |
|
|
|
130,544 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of the year |
|
$ |
78,926 |
|
|
$ |
130,544 |
|
|
$ |
198,536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expenses |
|
$ |
26 |
|
|
$ |
25 |
|
|
$ |
26 |
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
36 |
|
|
$ |
2,499 |
|
|
$ |
7,860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Share consideration issued in connection with
the acquisition of Citylead (Note 4) |
|
$ |
|
|
|
$ |
|
|
|
$ |
12,835 |
|
|
|
|
|
|
|
|
|
|
|
Conversion of the convertible notes (Note 17) |
|
$ |
|
|
|
$ |
|
|
|
$ |
16,750 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F - 7
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
1. |
|
ORGANIZATION AND PRINCIPAL ACTIVITIES |
China Techfaith Wireless Communication Technology Limited (the Company) was incorporated
under the laws of the Cayman Islands on June 25, 2004 and its subsidiaries, variable
interest entities (the VIEs) and VIEs subsidiary include the following as of December 31,
2010:
|
|
|
|
|
|
|
|
|
|
|
Date of |
|
Place of |
|
Percentage of |
|
Subsidiaries |
|
incorporation/acquisition |
|
incorporation |
|
legal ownership |
|
|
Techfaith Wireless Communication Technology |
|
July 26, 2002 |
|
Peoples Republic of China |
|
|
100 |
% |
(Beijing) Limited (Techfaith China) |
|
|
|
(the PRC) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Techfaith Wireless Technology Group Limited |
|
July 8, 2003 |
|
British Virgin Islands |
|
|
100 |
% |
(Techfaith BVI) (formerly known as Techfaith |
|
|
|
(the BVI) |
|
|
|
|
Wireless Communication Technology Limited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Great Earnest Technology Limited (Great Earnest) |
|
August 8, 2003 |
|
BVI |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
One Net Entertainment Limited (One Net) |
|
September 5, 2003 |
|
PRC |
|
|
67.8 |
% |
(formerly known as Techfaith Interactive
Technology (Beijing) Limited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
798 Entertainment Limited (798 Entertainment) |
|
October 15, 2003 |
|
BVI |
|
|
67.8 |
% |
(formerly known as Leo Technology Limited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tecface Communication Technology (Beijing) Limited
(Tecface Technology) (formerly known as
STEP Technologies (Beijing) Co., Ltd.) |
|
November 20, 2003 |
|
PRC |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
Techfaith
Intelligent Handset Technology (Hong Kong) Limited (Techfaith HK)
(formerly known as First Achieve Technology Ltd.) |
|
December 29, 2003 |
|
Hong Kong |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
Finest Technology Limited (Finest Technology) |
|
January 8, 2004 |
|
BVI |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
Techfaith Wireless Communication Technology |
|
March 22, 2004 |
|
PRC |
|
|
100 |
% |
(Shanghai) Limited (Techfaith Shanghai) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Infoexcel Technology Limited (Infoexcel Technology) |
|
April 18, 2005 |
|
BVI |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
Boost Time Limited (Boost Time) |
|
August 25, 2005 |
|
BVI |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
Techfaith Intelligent Handset Technology |
|
August 25, 2005 |
|
PRC |
|
|
100 |
% |
(Shenzhen) Limited (Techfaith Shenzhen) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Techfaith Intelligent Handset Technology (Beijing) |
|
September 9, 2005 |
|
PRC |
|
|
100 |
% |
Limited (Techfaith Intelligent Handset Beijing) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charm Faith Limited (Charm Faith) |
|
November 21, 2005 |
|
BVI |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
Techfaith Wireless Communication Technology |
|
April 24, 2006 |
|
PRC |
|
|
100 |
% |
(Hangzhou) Limited (Techfaith Hangzhou) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Nice Technology Limited (Fair Nice) |
|
February 26, 2007 |
|
BVI |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
Techfaith
Wireless Communication Technology (Shenyang) Limited (Techfaith Shenyang) |
|
March 27, 2007 |
|
PRC |
|
|
100 |
% |
F - 8
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
1. |
|
ORGANIZATION AND PRINCIPAL ACTIVITIES continued |
|
|
|
|
|
|
|
|
|
|
|
Date of |
|
Place of |
|
Percentage of |
|
Subsidiaries |
|
incorporation/acquisition |
|
incorporation |
|
legal ownership |
|
|
Techfaith Wireless Technology (HK) Limited |
|
December 10, 2008 |
|
Hong Kong |
|
|
100 |
% |
(Technology HK) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Media Chance Limited (Media Chance) |
|
August 13, 2009 |
|
Hong Kong |
|
|
51 |
% |
|
|
|
|
|
|
|
|
|
Time Spring Limited (Time Spring) |
|
October 28, 2009 |
|
BVI |
|
|
51 |
% |
|
|
|
|
|
|
|
|
|
UU Internet Technology (Shenyang) Limited |
|
November 26, 2009 |
|
PRC |
|
|
67.8 |
% |
(UU Shenyang) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Glomate Mobile (Beijing) Co., Ltd. (Glomate) |
|
January 5, 2010 |
|
PRC |
|
|
51 |
% |
|
|
|
|
|
|
|
|
|
Citylead Limited (Citylead) |
|
February 10, 2010 |
|
BVI |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
QIGI&BODEE Technology Limited (QIGI HK) |
|
February 10, 2010 |
|
Hong Kong |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
QIGI&BODEE International Technology
(Beijing) Limited (QIGI International) |
|
February 10, 2010 |
|
PRC |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
VIEs and VIEs subsidiary |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Techfaith Software (China) Holding Limited |
|
March 17, 2006 |
|
Cayman Islands |
|
|
70 |
% |
(TechSoft Holding) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Techfaith Software (China) Limited (TechSoft) |
|
May 26, 2006 |
|
PRC |
|
|
70 |
% |
|
|
|
|
|
|
|
|
|
Beijing Techfaith Interactive Internet Technology |
|
May 14, 2009 |
|
PRC |
|
nil |
|
Limited (Techfaith Interactive) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
QIGI&BODEE Technology (Beijing) Co., Ltd.
(QIGI Technology) |
|
February 10, 2010 |
|
PRC |
|
nil |
|
The Company and all of its subsidiaries, VIEs and VIEs subsidiary are collectively
referred to as the Group.
In 2006, the Group started to design and manufacture handsets and smart phones through
Electronics Manufacturing Service (EMS) providers for sales to mobile handset brand owners
and electronic products wholesale distributors. Since 2008, the Group generated the majority
of its revenue from sales of products. In 2009, the Group started generating revenue from
mobile game design and other related services. In 2010, the Group acquired Citylead with its
subsidiaries and VIE (the Citylead Group) and started to sell mobile phones under QIGI
brand, and in the same year, the group launched its PC on-line games for revenue operation.
F - 9
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
1. |
|
ORGANIZATION AND PRINCIPAL ACTIVITIES continued |
|
|
|
Variable interest entities |
|
|
|
TechSoft Holding |
In March 2006, the Group entered into Series A Preferred Shares Purchase and Sell Agreement
(the Agreement) with QUALCOMM Incorporated (QUALCOMM) to establish a 70%-owned
subsidiary, TechSoft Holding, which engaged in the business of developing software
applications for wireless communication devices. The Group and QUALCOMM subscribed 70% and
30% of the issued Series A preferred shares of TechSoft Holding, respectively. QUALCOMM is
granted the right to, upon the occurrence of certain conditions, require the Group to
purchase back any or all of its Series A Preferred Shares (Put Option); and the right to,
upon the occurrence of certain conditions, purchase any or all of the Series A Preferred
Shares held by the Group at the price and on the terms pre-defined (Call Option). The
terms in the Agreement give QUALCOMM the unconditional right to
exercise the Put Option at
its discretion, and the Group is expected to absorb the expected losses of TechSoft Holding.
Accordingly, the Group is the primary beneficiary of TechSoft Holding. TechSoft Holding set
up a wholly owned subsidiary, TechSoft, in PRC on May 26, 2006.
Techfaith Interactive
PRC laws and regulations restrict foreign ownership of mobile and online game business. To
comply with these foreign ownership restrictions, on May 14, 2009, through a series of
contractual arrangements, the Group obtained control of Techfaith Interactive, an entity
already obtained the internet content provider (ICP) license authorized by the PRC
government for operating mobile and online game business in the PRC. The Group extended
interest-free loans with total principal of $1,465 to the nominee shareholders to finance
their investments in Techfaith Interactive. The Group has entered into Exclusive Business
Agreement, with Techfaith Interactive, which entitles the Group to receive all of Techfaith
Interactives net income. The Group also entered certain agreements with nominee
shareholders of Techfaith Interactive, including Option Agreement to acquire the
shareholding of Techfaith Interactive at a nominal price or the minimum price permitted
under applicable laws; Voting Rights Agreements to delegate the voting rights of the
shareholders to the Group and Equity Pledge Agreements to pledge the shares in Techfaith
Interactive to the Group.
As a result of these contractual arrangements, the Group became the primary beneficiary of
Techfaith Interactive and pursuant to the authoritative literature relating to the
consolidation of variable interest entities, it has consolidated Techfaith Interactive from
May 14, 2009.
As of May 14, 2009, the net assets of Techfaith Interactive include an ICP licence with fair
value of $15 and cash of $1,450.
F - 10
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
1. |
|
ORGANIZATION AND PRINCIPAL ACTIVITIES continued |
Variable interest entities continued
QIGI Technology
On February 10, 2010 the Group acquired Citylead, a Chinese brand mobile phone company, as
set out in Note 4. Citylead, through QIGI International, entered into a series of agreements
with QIGI Technology and its equity owners on February 5, 2010. QIGI International entered
into exclusive business cooperation agreements with QIGI Technology, where QIGI
International provides complete business support services and consulting services to QIGI
Technology in exchange for a fee that constitutes substantially all of QIGI Technologys net
income. QIGI International also entered into equity pledge arrangements and equity interest
transfer agreements, which assigned all of the equity owners rights and obligations to QIGI
International, including the right to declare dividends, resulting in the equity owners
lacking the ability to make decisions that have a significant effect on QIGI Technologys
operations and QIGI International s ability to extract the profits from the operation of
QIGI Technology, and assume QIGI Technologys residual benefits. Therefore, QIGI
International is the primary beneficiary of QIGI Technology.
Risks in relation to the VIE structure
The Group believes that the contractual arrangements with the VIEs are in compliance with
PRC law and are legally enforceable. The shareholders of the VIEs are also shareholders of
the Group and therefore have no current interest in seeking to act contrary to the
contractual arrangements. However, uncertainties in the PRC legal system could limit the
Groups ability to enforce these contractual arrangements and if the shareholders of the
VIEs were to reduce their interest in the Group, their interests may diverge from that of
the Group and that may potentially increase the risk that they would seek to act contrary to
the contractual terms, for example by influencing the VIEs not to pay the service fees when
required to do so.
The Groups ability to control the VIEs also depends on the power of attorney have to vote
on all matters requiring shareholder approval in the VIEs. As noted above, the Group
believes this power of attorney is legally enforceable but may not be as effective as direct
equity ownership.
In addition, if the legal structure and contractual arrangements were found to be in
violation of any existing PRC laws and regulations, the Group may be subject to fines or
other actions. The Group does not believe such actions would result in the liquidation or
dissolution of the Group or the VIEs.
There are no consolidated VIEs assets that are collateral for the VIEs obligations and can
only be used to settle the VIEs obligations.
F - 11
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
1. |
|
ORGANIZATION AND PRINCIPAL ACTIVITIES continued |
Variable interest entities continued
The following financial statement amounts and balances of the Groups VIEs were included in
the accompanying consolidated financial statements as of and for the years ended:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
7,090 |
|
|
$ |
30,958 |
|
Total liabilities |
|
$ |
456 |
|
|
$ |
2,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
155 |
|
|
$ |
740 |
|
|
$ |
44,120 |
|
Net income (loss) |
|
$ |
(2,172 |
) |
|
$ |
(127 |
) |
|
$ |
11,708 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
Net cash provided by (used in)
operating activities |
|
$ |
(5,926 |
) |
|
$ |
188 |
|
|
$ |
35,004 |
|
Net cash used in investing activities |
|
$ |
(5 |
) |
|
$ |
(80 |
) |
|
$ |
(473 |
) |
Net cash provided by financing
activities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
2. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Basis of presentation
The consolidated financial statements of the Group have been prepared in accordance with the
accounting principles generally accepted in the United States of America (U.S. GAAP).
Basis of consolidation
The consolidated financial statements include the financial statements of the Company, its
subsidiaries, VIEs and VIEs subsidiary. All inter-company transactions and balances are
eliminated upon consolidation.
F - 12
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
2. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued |
|
|
|
Use of estimates |
The preparation of financial statements in conformity with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses in the financial statements and accompanying notes. Significant
accounting estimates reflected in the Groups financial statements include revenue
recognition, valuation allowance for deferred tax assets, impairment for goodwill, useful
lives and impairment for plant, machinery and equipment and intangible assets and provision
for warranty.
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand, demand deposits and highly liquid
investments, which are unrestricted as to withdrawal and use, and which have maturities of
three months or less when purchased.
Fair value
Fair value is the price that would be received from selling an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date. When
determining the fair value measurements for assets and liabilities required or permitted to
be recorded at fair value, the Group considers the principal or most advantageous market in
which it would transact and it considers assumptions that market participants would use when
pricing the asset or liability.
Authoritative literature provides a fair value hierarchy, which prioritizes the inputs to
valuation techniques used to measure fair value into three broad levels. The level in the
hierarchy within which the fair value measurement in its entirety falls is based upon the
lowest level of input that is significant to the fair value measurement as follows:
|
|
|
Level 1-inputs are based upon unadjusted quoted prices for identical
instruments traded in active markets. |
|
|
|
|
Level 2-inputs are based upon quoted prices for similar instruments in active
markets, quoted prices for identical or similar instruments in markets that are not
active and model-based valuation techniques for which all significant assumptions are
observable in the market or can be corroborated by observable market data for
substantially the full term of the assets or liabilities. |
|
|
|
|
Level 3-inputs are generally unobservable and typically reflect managements
estimates of assumptions that market participants would use in pricing the asset or
liability. The fair values are therefore determined using model-based techniques that
include option pricing models, discounted cash flow models, and similar techniques. |
F - 13
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
2. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued |
|
|
|
Inventories |
Inventories of the Group consist of raw materials, finished goods and work in progress.
Inventories are stated at the lower of cost or market. Inventory costs include expenses that
are directly or indirectly incurred in the acquisition, including shipping and handling
costs charged to us by suppliers, and production of manufactured products for sale. Expenses
include the cost of materials and supplies used in production, direct labour costs and
allocated overhead costs such as depreciation, insurance, employee benefits, and indirect
labour. Cost is determined using the weighted average method. Inventories are written down
for provisions for obsolescence to net realizable value based upon estimates of future
demand, technology developments, and market conditions.
Plant, machinery and equipment, net
Plant, machinery and equipment are carried at cost less accumulated depreciation and
amortization. Assets under construction are not depreciated until construction is completed
and the assets are ready for their intended use. Depreciation and amortization are
calculated on a straight-line basis over the following estimated useful lives:
|
|
|
|
|
Office building |
|
47 or 48 years |
Plant and machinery |
|
4 years |
Furniture, fixtures and equipment |
|
4 years |
Motor vehicles |
|
4 years |
Software |
|
3-4 years |
Leasehold improvements |
|
Shorter of the lease terms or 4 years |
Acquired intangible assets, net
Acquired intangible assets with definite lives are amortized on a straight-line basis over
their expected useful economic lives. Intangible assets with indefinite life represent trade
name and domain name acquired through business acquisition of Citylead. Intangible assets
with indefinite life are not amortized but tested for impairment annually. Amortization is
calculated on a straight-line basis over the following estimated useful lives:
|
|
|
|
|
Software license |
|
2-5 years |
Certification of internet content provider |
|
5 years |
Customer base |
|
5 years |
Contract backlog |
|
2 months |
F - 14
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
2. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued |
|
|
|
Impairment of long-lived assets and intangible assets with definite life |
The Group reviews its long-lived assets and intangible assets with definite life for
impairment whenever events or change in circumstances indicate that the carrying amount of an
asset may no longer be recoverable. When these events occur, the Group measures impairment by
comparing the carrying values of the long- lived assets to the estimated undiscounted future
cash flows expected to result from the use of the assets and their eventual disposition. If
the sum of the expected undiscounted cash flows is less than the carrying amounts of the
assets, the Group would recognize an impairment loss based on the fair values of these assets.
Impairment of intangible assets with indefinite life
The Group evaluates the remaining useful life of an intangible asset that is not being
amortized in each reporting period to determine whether events and circumstances continue to
support an indefinite useful life. If the intangible asset that is not being amortized is
subsequently determined to have a definite useful life, the asset is then tested for
impairment in the same way as intangible assets with definite life.
An intangible asset that is not subject to amortization is tested for impairment annually or
more frequently if events or changes in circumstances indicate that the asset might be
impaired. The impairment test of intangible assets with indefinite life consist of a
comparison of the fair value of an intangible asset with its carrying amount.
Goodwill
The excess of the purchase price over the fair value of net assets acquired is recorded on
the consolidated balance sheet as goodwill.
The Group completes a two-step goodwill impairment test. The first step compares the fair
value of each reporting unit (operating segment or one level below an operating segment) to
its carrying amount, including goodwill. If the fair value of each reporting unit exceeds
its carrying amount, goodwill is not considered to be impaired and the second step will not
be required. If the carrying amount of a reporting unit exceeds its fair value, the second
step compares the implied fair value of the affected reporting units goodwill to the
carrying value of that goodwill. The implied fair value of goodwill is determined in a
manner similar to accounting for a business combination with the allocation of the assessed
fair value determined in the first step to the assets and liabilities of the reporting unit.
The excess of the fair value of the reporting unit over the amounts assigned to the assets
and liabilities is the implied fair value of goodwill. This allocation process is only
performed for purposes of evaluating goodwill impairment and does not result in an entry to
adjust the value of any assets or liabilities. An impairment loss is recognized for any
excess in the carrying value of goodwill over the implied fair value of goodwill. The annual
impairment test is performed as of December 31of every year. During the years ended December
31, 2008, 2009 and 2010, no goodwill impairment loss was recorded.
The total carrying amount of goodwill is $1,848, among which $606 is allocated to ODP
segment and $1,242 is allocated to brand name phone sales segment.
F - 15
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
2. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued |
|
|
|
Long-term investments |
A company that is not consolidated, but over which the Group exercises significant
influence, is accounted for under the equity method of accounting. Whether or not the Group
exercises significant influence with respect to an affiliate depends on an evaluation of
several factors including, among others, representation on the affiliated companys board of
directors and ownership level, which is generally a 20% to 50% interest in the voting
securities of the affiliated company. Under the equity method of accounting, the affiliated
companys accounts are not reflected within the Groups consolidated balance sheets and
statements of operations; however, the Groups share of the earnings or losses of the
affiliated company will be reflected in the consolidated statements of operations.
When the Groups carrying value in an equity method affiliated company is reduced to zero,
no further losses are recorded in the Groups consolidated financial statements unless the
Group guaranteed obligations of the affiliated company or has committed additional funding.
When the affiliated company subsequently reports income, the Group will not record its share
of such income until it equals the amount of its share of losses not previously recognized.
When the Group cannot exercise significant influence over the investees operating and
financial policies, the Group records its investment as a cost method investment. The Group
carries the investment at cost and recognizes as income any dividends received from a
distribution of the investees earnings.
Deferred revenue
Deferred revenue relates to both design fee revenue and PC-online game revenue. Design fee
advances received from customers immediately after the design contracts are executed, such
advances are not recognized as design fee revenue until a pre-agreed milestone has been
reached. PC-online game advances received from customers for purchase of prepaid game point
cards, the amount are not recognized as PC-online game revenue until the in-game merchandise
or premium features are consumed by the game player.
F - 16
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
2. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued |
|
|
|
Revenue recognition |
|
|
|
Revenue related to ODP segment |
|
(1) |
|
Product sales |
|
|
|
|
Revenue from sales of products, including feature phones and smart phones designed by
the Group and manufactured by EMS providers, wireless modules as well as other
electronic components is recognized when persuasive evidence of an arrangement
exists, the fee is fixed or determinable, collection is reasonably assured, and in
the period in which delivery or performance has occurred. The four criteria are
generally met upon delivery of the product. |
|
|
(2) |
|
Design fee |
|
|
|
|
Design fee is a fixed amount paid in installments according to pre-agreed milestones.
In general, three milestones are identified in the Groups design contracts with
customers. Three milestones include: 1, GSM-based handsets industry based standard
referring as full type approval, or FTA; 2, the regulatory approval for its use in
the intended country, in the case of China, a China type approval, or CTA; and 3, the
beginning of mass production refers to as shipping acceptance, or SA. The Group
recognizes revenues in accordance with authoritative guidance regarding to software
revenue recognition based on the proportional performance method using an output
measure determined by achievement of each milestone. |
|
|
(3) |
|
Component sales related to design |
|
|
|
|
After the Group has delivered design products to its customers, customers are
required to purchase certain components (such as chips used in mobile handsets)
through the Group to manufacture the designed products. As the component sales are
built into the design contracts, the Group includes these component sales in the
design contract related revenue rather than product sales. The Group recognizes the
net revenue for component sales when persuasive evidence of an arrangement exists,
the fee is fixed or determinable, collection is reasonably assured, and in the period
in which delivery or performance has occurred. The four criteria are generally met
upon delivery of the product. |
Revenue related to brand name phone sales segment
Revenue from sales of brand name phones, represent mobile phone under QIGI brand. The
brand is owned by the Group. The QIGI brand phones are designed by the Group and
manufactured by EMS providers. Revenue is recognized when persuasive evidence of an
arrangement exists, the fee is fixed or determinable, collection is reasonably
assured, and in the period in which delivery or performance has occurred. The four
criteria are generally met upon delivery of the product.
F - 17
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
2. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued |
|
|
|
Revenue recognition continued |
|
|
|
Revenue related to game segment |
|
(1) |
|
Wireless gaming service |
|
|
|
|
The Group provides mobile phone game related services to brand mobile phone
manufacturers. Under these arrangements, the Group maintains a mobile phone web page
so the brand mobile phone manufacturers end users can access the web page and
download mobile phone games free of charge during the contract period. In return,
mobile phone manufactures pay the Group a fixed fee for the contract period, usually
one year. Revenue is recognized ratably over the contract period. |
|
|
(2) |
|
Motion game device |
|
|
|
|
Motion game device is a PC game control device that is used in motion games.
Motion game device is designed by the Group and manufactured by EMS providers.
Revenue is recognized when persuasive evidence of an arrangement exists, the fee is
fixed or determinable, collection is reasonably assured, and in the period in which
delivery or performance has occurred. The four criteria are generally met upon
delivery of the product. |
|
|
(3) |
|
PC on-line game related service |
|
|
|
|
The Group generates revenue from the provision of online game services. The online
games can be accessed and played by end users free of charge but the end users may
choose to purchase in-game merchandise or premium features to enhance their game
playing experience using the virtual currency. The end users can purchase the virtual
currency by making direct online payments to the Group or purchasing prepaid cards
(PP-Cards). The amounts received from direct online payments were recorded
initially as deferred revenues. The Group sells PP-Cards through distributors at a
discount to the face value of the PP-Card. The Group records the amounts received
from distributors after deduction of sales discounts as deferred revenues. |
|
|
|
|
The end users are required to use the access codes and passwords, either obtained
from the PP-card or through direct online payment, to exchange the face value of
these cards or the amount of direct online payment to virtual currency and deposit
into their personal accounts. End users consume the virtual currency by purchasing
in-game merchandise or premium features online. The Group recognizes the revenues as
the in-game merchandise or premium features are consumed in the game by the end
users. The Group calculates the amount of revenues recognized for each unit of
virtual currency consumed using weighted average method on monthly basis by dividing
the total cumulative unrecognized deferred revenues by total unconsumed virtual
currency. |
|
|
|
|
Any deferred revenue remaining at the time of the inactive PP-cards is expired, which
is normally one year from the purchase, is recognized as revenues at that time. The
amount associated with the unused virtual currency, which are without contractual
expiration term, are carried as deferred revenues indefinitely as the Group was not
able to reasonably estimate the amount of virtual currency which will be ultimately
given up by the users due to the short operating history of the Group. |
F - 18
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
2. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued |
Revenue recognition continued
Revenue related to game segment continued
|
(4) |
|
Mobile phone game design service |
|
|
|
|
The Group also provides mobile phone game design services to brand mobile phone
manufacturers. Under this type of arrangements, the Group is required to design
mobile phone games according to customers specification for a fixed price. Revenue
from this type of contracts is recognized under the proportional performance method
using an output measure determined by achievement of milestones which include
planning documentation and testing reports. |
Business taxes
The Groups PRC subsidiaries, VIEs and VIEs subsidiary are subject to business taxes at the
rate of 5% on certain types of services and the related revenues are presented net of
business taxes incurred. The Group reports revenue net of business taxes. Business taxes
deducted in arriving net revenue during 2008, 2009, and 2010 totaled $302, $41 and $319,
respectively.
Value added tax (VAT) and VAT refund
VAT on sales is calculated at 17% on revenue from product and component sales and paid after
deducting input VAT on purchases. The Group reports revenue net of VAT.
For products sold to overseas customers by PRC entities, the Group is entitled to a refund
of VAT paid at rate of 13% for some component sales and 17% for other products sales. The
Group records VAT refund on accrual basis. VAT refund is recorded as other current assets on
the consolidated balance sheets. The Group reports revenue net of VAT.
Product warranty
The Groups product warranty relates to the provision of bug fixing services to the Groups
designed mobile handset for a period of one to three years commencing upon the mass
production of the mobile handset, and warranties to the Groups customers on the sales of
products. Accordingly, the Groups product warranty accrual reflects managements best
estimate of probable liability under its product warranty. Management determines the
warranty based on historical experience and other currently available evidence.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of the year |
|
$ |
1,672 |
|
|
$ |
1,733 |
|
|
$ |
377 |
|
Current period provision |
|
|
1,067 |
|
|
|
365 |
|
|
|
341 |
|
Utilized during the year |
|
|
(1,061 |
) |
|
|
(1,720 |
) |
|
|
(447 |
) |
Exchange difference |
|
|
55 |
|
|
|
(1 |
) |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
Balance at end of the year |
|
$ |
1,733 |
|
|
$ |
377 |
|
|
$ |
277 |
|
|
|
|
|
|
|
|
|
|
|
F - 19
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
2. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued |
Government subsidies and grants
Some local governments in PRC give subsidies to companies as an incentive to establish
business in its jurisdiction. These government subsidies are recognized as subsidy income
when they are received as the Group does not have further obligation to earn these
subsidies. The Group recorded government subsidy income of $2,318, $282 and $159 for the
years ended December 31, 2008, 2009 and 2010, respectively for this type of government
subsidy.
The Group also receives government grants as compensation of performing government endorsed
projects. The grants are refundable until the Group achieves certain performance measures.
These government grants are recorded as a liability until earned. The Group recognizes these
grants as subsidy income once it completes the relevant projects and achieves the
performance measures. The Group recorded a government subsidy income of $763, $199 and $nil
for the years ended December 31, 2008, 2009 and 2010, respectively for this type of
government grants. The amount of $59 and $394 were recorded as a liability on the balance
sheet as of December 31, 2009 and 2010, respectively.
The Group recorded total government subsidy income of $3,081, $481 and $159 for the years
ended December 31, 2008, 2009 and 2010, respectively.
Research and development costs
Research and development expenses are incurred in the development of handset design and
wireless software application. Technological feasibility for the Groups internally
developed products is reached shortly before the products are released to customers. Costs
incurred after technological feasibility has historically been immaterial. Accordingly, the
Group has expensed all research and development costs when incurred.
Advertising costs
The Group expenses advertising costs as incurred. Total advertising expenses were $750, $908
and $2,983 in 2008, 2009 and 2010, respectively, and have been included as part of selling
and marketing expenses.
F - 20
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
2. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued |
|
|
|
Foreign currency translation |
The functional and reporting currency of the Company is the United States dollar (U.S.
dollar). The financial records of the Groups subsidiaries, VIEs and VIEs subsidiary
located in the PRC are maintained in their local currencies, the Renminbi (RMB), which are
also the functional currencies of these entities. The financial records of the Groups
subsidiaries located in Hong Kong are maintained in U.S. dollar, which are also the
functional currencies of these entities.
Monetary assets and liabilities denominated in currencies other than the functional currency
are translated into the functional currency at the rates of exchange ruling at the balance
sheet date. Transactions in currencies other than the functional currency during the year are
converted into functional currency at the applicable rates of exchange prevailing when the
transactions occurred. Transaction gains and losses are recognized in the statement of
operations.
The Groups entities with functional currency of RMB, translate their operating results and
financial position into the U.S. dollar, the Groups reporting currency. Assets and
liabilities are translated using the exchange rates in effect on the balance sheet date.
Revenues, expenses, gains and losses are translated using the average rate for the year.
Translation adjustments are reported as cumulative translation adjustments and are shown as
a separate component of other comprehensive income.
Income taxes
Current income taxes are provided for in accordance with the laws of the relevant tax
authorities. Deferred income taxes are recognized when temporary differences exist between
the tax bases of assets and liabilities and their reported amounts in the consolidated
financial statements. Net operating loss carry forwards and credits are applied using
enacted statutory tax rates applicable to future years. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more-likely-than-not that a
portion of or all of the deferred tax assets will not be realized. The components of the
deferred tax assets and liabilities are individually classified as current and non-current
based on their characteristics.
The impact of an uncertain income tax position on the income tax return is recognized at the
largest amount that is more likely-than-not to be sustained upon audit by the relevant tax
authority. An uncertain income tax position will not be recognized if it has less than a 50%
likelihood of being sustained. Interest and penalties on income taxes will be classified as
a component of the provisions for income taxes. The Group did not identify significant
unrecognized tax benefits for years ended December 31, 2009 and 2010. The Group did not
incur any interest and penalties related to potential underpaid income tax expenses and also
believed that the Groups unrecognized tax benefits would not change significantly within 12
months from December 31, 2010.
F - 21
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
2. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued |
|
|
|
Comprehensive income |
Comprehensive income includes net income and foreign currency translation adjustments.
Comprehensive income for the years presented has been disclosed within the consolidated
statements of changes in equity and comprehensive income.
Financial instruments
Financial instruments consist of cash and cash equivalents, accounts receivable, accounts
payable, the Put Option, long-term investment, amount due from a related party, amount due to
related parties, the principle amount of senior secured convertible promissory notes (the
Convertible Notes) and derivatives embedded in the Convertible Notes.
The carrying values of all these financial instruments except for long-term investment, the Put
Option and derivatives embedded in the Convertible Notes approximate their fair values due to
the short-term nature of these instruments. Estimates of fair values of long-term investments
in non-marketable securities including cost and equity method investments other than those
subjected to other than temporary impairment cannot be practicably made without incurring
excessive costs. The Put Option and derivatives embedded in the Convertible Notes are carried
at fair value. The fair value of the debt host of the Convertible Notes was $10,183 as
determined by the management with the assistance from an independent appraisal firm as of
December 31, 2009. The Convertible Notes were fully converted in the year 2010.
Concentration of credit risk
Financial instruments that potentially expose the Group to concentrations of credit risk
consist primarily of cash and cash equivalents, and accounts receivable. The Group places
its cash and cash equivalents with financial institutions with high credit ratings and
quality.
The Group conducts credit evaluations of customers and generally does not require collateral
or other security from its customers; however, upfront deposit based on a portion of the
design fee under the contract will generally be required to be received when the design
contract is entered into. The Group establishes an allowance for doubtful accounts primarily
based upon the age of the receivables and factors surrounding the credit risk of specific
customers. Information relating to the Groups major customers is summarized in Note 25.
F - 22
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
2. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued |
|
|
|
Share-based payment |
Share-based payment transactions with employees, such as share options and nonvested shares,
are measured based on the grant-date fair value of the equity instrument issued, and
recognized as compensation expense over the period during which an employee is required to
provide service in exchange for the award, which generally is the vesting period, based on
graded vesting attribution method, with a corresponding impact reflected in additional
paid-in capital.
Shares awards issued to non-employees (other than non-employee directors), such as
consultants, are measured at fair value at the earlier of the commitment date or the date the
service is completed and recognized over the period the service is provided.
Net income (loss) per share
Basic net income (loss) per ordinary share is computed by dividing net income (loss)
attributable to ordinary shareholders by the weighted average number of ordinary shares
outstanding during the period.
Diluted net income (loss) per ordinary share reflects the potential dilution that could
occur if securities or other contracts to issue ordinary shares were exercised or converted
into ordinary shares. The Convertible Notes issued are accounted for using if converted
method when calculate diluted net income (loss) per ordinary share. Ordinary share
equivalents are excluded from the computation of the diluted net loss per share in periods
when their effect would be anti-dilutive. The effect of the stock options is computed using
the treasury stock method.
Accounting pronouncements not yet adopted
In October 2009, the Financial Accounting Standards Board (FASB) issued amended revenue
recognition guidance for arrangements with multiple deliverables. The new guidance
eliminates the residual method of revenue recognition and allows the use of managements
best estimate of selling price for individual elements of an arrangement when vendor
specific objective evidence (VSOE), vendor objective evidence (VOE) or third-party evidence
(TPE) is unavailable. Prospective application of this new guidance for revenue arrangements
entered into or materially modified in fiscal years beginning on or after June 15, 2010,
with earlier application permitted. Alternatively, an entity can elect to adopt this
guidance on a retrospective basis. The Group is in the process of evaluating what effect the
adoption of this pronouncement will have on our consolidated financial condition and results
of operations.
F - 23
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
2. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued |
Accounting pronouncements not yet adopted continued
In October 2009, the FASB issued authoritative guidance which amends the scope of existing
software revenue recognition accounting. Tangible products containing software components
and non-software components that function together to deliver the products essential
functionality would be scoped out of the accounting guidance on software and accounted for
based on other appropriate revenue recognition guidance. Prospective application of this
new guidance for revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010, with earlier application permitted. Alternatively, an
entity can elect to adopt this new guidance on a retrospective basis. The Group is in the
process of evaluating what effect the adoption of this pronouncement will have on our
consolidated financial condition and results of operations.
In April 2010, the FASB issued an authoritative pronouncement regarding the milestone method
of revenue recognition. The scope of this pronouncement is limited to arrangements that
include milestones relating to research or development deliverables. The pronouncement
specifies guidance that must be met for a vendor to recognize consideration that is
contingent upon achievement of a substantive milestone in its entirety in the period in which
the milestone is achieved. The guidance applies to milestones in arrangements within the
scope of this pronouncement regardless of whether the arrangement is determined to have
single or multiple deliverables or units of accounting. The pronouncement will be effective
for fiscal years, and interim periods within those years, beginning on or after June 15,
2010. Early application is permitted. Companies can apply this guidance prospectively to
milestones achieved after adoption. However, retrospective application to all prior periods
is also permitted. The Group is in the process of evaluating what effect the adoption of this
pronouncement will have on our consolidated financial condition and results of operations.
In April 2010, the FASB issued an authoritative pronouncement on effect of denominating the
exercise price of a share-based payment award in the currency of the market in which the
underlying equity securities trades and that currency is different from (1) entitys
functional currency, (2) functional currency of the foreign operation for which the employee
provides services, and (3) payroll currency of the employee. The guidance clarifies that an
employee share-based payment award with an exercise price denominated in the currency of a
market in which a substantial portion of the entitys equity securities trades should not be
considered to contain a condition that is not a market, performance, or service condition,
and therefore should be considered an equity award assuming all other criteria for equity
classification are met. The pronouncement is for interim and annual periods beginning on or
after December 15, 2010, and will be applied prospectively. Affected entities will be
required to record a cumulative catch-up adjustment for all awards outstanding as of the
beginning of the annual period in which the guidance is adopted. The Group is in the process
of evaluating what effect the adoption of this pronouncement will have on our consolidated
financial condition and results of operations.
F - 24
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
2. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued |
Accounting pronouncements not yet adopted continued
In December 2010, the FASB issued an authoritative pronouncement on when to perform Step 2 of
the goodwill impairment test for reporting units with zero or negative carrying amounts. The
amendments in this update modify Step 1 so that for those reporting units, an entity is
required to perform Step 2 of the goodwill impairment test if it is more likely than not that
a goodwill impairment exists. In determining whether it is more likely than not that goodwill
impairment exists, an entity should consider whether there are any adverse qualitative
factors indicating that an impairment may exist. The qualitative factors are consistent with
existing guidance, which requires that goodwill of a reporting unit be tested for impairment
between annual tests if an event occurs or circumstances change that would more likely than
not reduce that fair value of a reporting unit below its carrying amount. For public
entities, the guidance is effective for impairment tests performed during entities fiscal
years (and interim periods within those years) that begin after December 15, 2010. Early
adoption will not be permitted. The Group does not expect the adoption of this pronouncement
will have a significant effect on our consolidated financial position or results of
operations.
In December 2010, the FASB issued an authoritative pronouncement on disclosure of
supplementary pro forma information for business combinations. The objective of this guidance
is to address diversity in practice regarding the interpretation of the pro forma revenue and
earnings disclosure requirements for business combinations. The amendments in this update
specify that if a public entity presents comparative financial statements, the entity should
disclose revenue and earnings of the combined entity as though the business combination(s)
that occurred during the current year had occurred as of the beginning of the comparable
prior annual reporting period only. The amendments also expand the supplemental pro forma
disclosures to include a description of the nature and amount of material, non-recurring pro
forma adjustments directly attributable to the business combination included in the reported
pro forma revenue and earnings. The amendments affect any public entity as defined by Topic
805 that enters into business combinations that are material on an individual or aggregate
basis. The amendments will be effective for business combinations consummated in periods
beginning after December 15, 2010, and should be applied prospectively as of the date of
adoption. Early adoption is permitted. The Group does not expect the adoption of this
pronouncement will have a significant effect on our consolidated financial position or
results of operations.
F - 25
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
In 2009, the 798 Entertainment, a subsidiary of the Group, issued the Convertible Notes to a
group of unrelated third party investors (the Note Holders). The Convertible Notes had a
principal value of $10,000 and was issued at par less issuance costs of $417. We recorded
the Convertible Notes as a liability at the amount of the net proceeds of $9,583. The
Convertible Notes included a number of embedded derivatives, principally a right to convert
into shares of 798 Entertainment or the shares of the Company at the Note Holders
discretion. The Group determined that the fair value of these embedded derivatives at
the date of issuance was $12,759 and pursuant to the authoritative literature were required
to be bifurcated from the debt host and subsequently marked to market through earnings. In
2009 the loss charged to the income statement arising from the increase in the fair value of
the derivatives was $5,270. In the Groups previously reported 2009 financial statements,
the Group first allocated the proceeds to the embedded derivatives equal to the fair value
of these embedded derivatives and then allocated the remaining carrying amount to the debt
host. Since the fair value of the embedded derivatives exceeded the net proceeds of the
Convertible Notes and hence, resulted in a debit amount of $3,176 for the debt host at the
date of the issuance. The Group accreted the residual amount (the residual amount of the
debt host after deducting the embedded derivatives) to the amount due on the redemption of
the debt over the life of the debt instrument assuming no conversion on redemption. In 2009
the charge to the income statement in respect of the accretion of interest was $588. (The Convertible Notes were subsequently converted into equity of 798 Entertainment and the Company pursuant
to the original conversion terms in September 2010).
While the Group believed that the accounting applied was in compliance with the relevant
authoritative literature, it has subsequently determined that the more correct accounting
upon the issuance of the debt was to recognize the embedded derivatives at their fair value
of $12,759 but to recognize the difference between that amount and the amount of the net
proceeds as a loss upon the issuance of the Convertible Notes. Consequently we have restated
certain amounts in our financial statements for the year ended December 31, 2009 as follows:
|
|
|
|
|
Impact on current earnings for year ended December 31, 2009: |
|
|
|
|
Decrease in net income in 2009 |
|
$ |
(2,588 |
) |
Increase in net loss attributable to noncontrolling interest |
|
$ |
665 |
|
|
|
|
|
Decrease in retained earning |
|
$ |
(1,923 |
) |
|
|
|
|
F - 26
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
3. |
|
RESTATEMENT continued |
The following table shows the impact of the restatement on the consolidated balance sheet as
of December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009 |
|
|
|
Previously |
|
|
Increase |
|
|
|
|
|
|
reported |
|
|
(decrease) |
|
|
Restated |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
130,544 |
|
|
$ |
|
|
|
$ |
130,544 |
|
Accounts receivable, net of allowances of $9,151 |
|
|
28,992 |
|
|
|
|
|
|
|
28,992 |
|
Amount due from a related party |
|
|
9,941 |
|
|
|
|
|
|
|
9,941 |
|
Inventories |
|
|
22,937 |
|
|
|
|
|
|
|
22,937 |
|
Prepaid expenses and other current assets |
|
|
12,420 |
|
|
|
|
|
|
|
12,420 |
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
204,834 |
|
|
|
|
|
|
|
204,834 |
|
|
|
|
|
|
|
|
|
|
|
Plant, machinery and equipment, net |
|
|
44,582 |
|
|
|
|
|
|
|
44,582 |
|
Acquired intangible assets, net |
|
|
645 |
|
|
|
|
|
|
|
645 |
|
Goodwill |
|
|
606 |
|
|
|
|
|
|
|
606 |
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
250,667 |
|
|
$ |
|
|
|
$ |
250,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
10,514 |
|
|
$ |
|
|
|
$ |
10,514 |
|
Amounts due to related parties |
|
|
266 |
|
|
|
|
|
|
|
266 |
|
Accrued expenses and other current liabilities |
|
|
10,026 |
|
|
|
|
|
|
|
10,026 |
|
Advance from customers |
|
|
4,720 |
|
|
|
|
|
|
|
4,720 |
|
Deferred revenue |
|
|
755 |
|
|
|
|
|
|
|
755 |
|
Income tax payable |
|
|
1,162 |
|
|
|
|
|
|
|
1,162 |
|
Put option liability |
|
|
1,257 |
|
|
|
|
|
|
|
1,257 |
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
28,700 |
|
|
|
|
|
|
|
28,700 |
|
|
|
|
|
|
|
|
|
|
|
Convertible notes and embedded derivatives |
|
|
15,441 |
|
|
|
2,588 |
|
|
|
18,029 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
44,141 |
|
|
|
2,588 |
|
|
|
46,729 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares of par value $0.00002: |
|
|
|
|
|
|
|
|
|
|
|
|
50,000,000,000,000 shares authorized; shares issued and
outstanding, 650,156,045 in 2009 |
|
|
13 |
|
|
|
|
|
|
|
13 |
|
Additional paid-in capital |
|
|
113,657 |
|
|
|
|
|
|
|
113,657 |
|
Treasury stock, at cost (918,000 shares) |
|
|
(199 |
) |
|
|
|
|
|
|
(199 |
) |
Accumulated other comprehensive income |
|
|
23,863 |
|
|
|
|
|
|
|
23,863 |
|
Statutory reserve |
|
|
10,993 |
|
|
|
|
|
|
|
10,993 |
|
Retained earnings |
|
|
55,866 |
|
|
|
(1,923 |
) |
|
|
53,943 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total China Techfaith Wireless Communication
Technology Limited shareholders equity |
|
|
204,193 |
|
|
|
(1,923 |
) |
|
|
202,270 |
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interests |
|
|
2,333 |
|
|
|
(665 |
) |
|
|
1,668 |
|
|
|
|
|
|
|
|
|
|
|
Total equity |
|
|
206,526 |
|
|
|
(2,588 |
) |
|
|
203,938 |
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND EQUITY |
|
$ |
250,667 |
|
|
$ |
|
|
|
$ |
250,667 |
|
|
|
|
|
|
|
|
|
|
|
F - 27
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
3. |
|
RESTATEMENT continued |
The following table shows the impact of the restatement on the consolidated statement of
operations for the year ended December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year ended December 31, 2009 |
|
|
|
Previously |
|
|
Increase |
|
|
|
|
|
|
reported |
|
|
(decrease) |
|
|
Restated |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
ODP |
|
$ |
210,588 |
|
|
$ |
|
|
|
$ |
210,588 |
|
Game |
|
|
488 |
|
|
|
|
|
|
|
488 |
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
211,076 |
|
|
|
|
|
|
|
211,076 |
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
ODP |
|
|
(172,801 |
) |
|
|
|
|
|
|
(172,801 |
) |
Game |
|
|
(64 |
) |
|
|
|
|
|
|
(64 |
) |
|
|
|
|
|
|
|
|
|
|
Total cost of revenues |
|
|
(172,865 |
) |
|
|
|
|
|
|
(172,865 |
) |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
38,211 |
|
|
|
|
|
|
|
38,211 |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
(9,600 |
) |
|
|
|
|
|
|
(9,600 |
) |
Research and development |
|
|
(12,040 |
) |
|
|
|
|
|
|
(12,040 |
) |
Selling and marketing |
|
|
(3,241 |
) |
|
|
|
|
|
|
(3,241 |
) |
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
(24,881 |
) |
|
|
|
|
|
|
(24,881 |
) |
|
|
|
|
|
|
|
|
|
|
Government subsidy income |
|
|
481 |
|
|
|
|
|
|
|
481 |
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
13,811 |
|
|
|
|
|
|
|
13,811 |
|
|
|
|
|
|
|
|
|
|
|
Interest expenses |
|
|
(623 |
) |
|
|
588 |
|
|
|
(35 |
) |
Interest income |
|
|
667 |
|
|
|
|
|
|
|
667 |
|
Loss on issuance of convertible notes |
|
|
|
|
|
|
(3,176 |
) |
|
|
(3,176 |
) |
Other income |
|
|
115 |
|
|
|
|
|
|
|
115 |
|
Change in fair value of put option |
|
|
(84 |
) |
|
|
|
|
|
|
(84 |
) |
Change in fair value of derivatives embedded
in convertible notes |
|
|
(5,270 |
) |
|
|
|
|
|
|
(5,270 |
) |
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
8,616 |
|
|
|
(2,588 |
) |
|
|
6,028 |
|
Income tax expenses |
|
|
(3,642 |
) |
|
|
|
|
|
|
(3,642 |
) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
4,974 |
|
|
|
(2,588 |
) |
|
|
2,386 |
|
Less: Net loss attributable to noncontrolling interests |
|
|
1,363 |
|
|
|
665 |
|
|
|
2,028 |
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to China Techfaith Wireless
Communication Technology Limited |
|
$ |
6,337 |
|
|
$ |
(1,923 |
) |
|
$ |
4,414 |
|
|
|
|
|
|
|
|
|
|
|
Net income per share attributable to China
Techfaith Wireless Communication Technology Limited: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.01 |
|
|
$ |
|
|
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.01 |
|
|
$ |
|
|
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computation: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
650,057,866 |
|
|
|
|
|
|
|
650,057,866 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
720,889,120 |
|
|
|
|
|
|
|
720,889,120 |
|
|
|
|
|
|
|
|
|
|
|
F - 28
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
On February 10, 2010, the Group acquired Citylead together with its subsidiaries and VIE,
QIGI Technology, a domestic brand mobile phone company.
The consideration paid includes $500 of cash and 65,934,066 ordinary shares of the Company
at a fair value of $0.19 per ordinary share as of the acquisition date. There are contingent
receivables according to the acquisition agreements based on QIGI Technologys operating
performance. If QIGI Technology does not meet the performance target for year 2010 or 2011
as stipulated in the share purchase agreement, the former shareholders of Citylead are
obligated to return certain number of ordinary shares of the Company back to the Group based
on a pre-determined formula. Such contingent share receivable was initially recorded as
contingent consideration receivable at fair value as of the acquisition date and
subsequently remeasured at fair value at each period end.
Through this acquisition the Group expanded its branding business to target enterprise users
and operator tailored customers.
The transaction was considered an acquisition of a business and accordingly the purchase
method of accounting has been applied.
The purchase price allocation of the transaction was determined by the Group with the
assistance of an independent valuation firm, which was allocated to assets acquired and
liabilities assumed as of the date of acquisition as follows:
|
|
|
|
|
Cash consideration |
|
$ |
500 |
|
Fair value of ordinary shares |
|
|
12,835 |
|
Fair value of contingent receivable |
|
|
(196 |
) |
|
|
|
|
Total consideration |
|
$ |
13,139 |
|
|
|
|
|
The purchase price was preliminarily allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization |
|
|
|
|
|
|
|
period |
|
|
Cash acquired |
|
$ |
11,183 |
|
|
|
|
|
Intangible assets: |
|
|
|
|
|
|
|
|
Contract backlog |
|
|
20 |
|
|
0.1 year |
|
Customer base |
|
|
680 |
|
|
5 years |
|
Trade name & domain name |
|
|
1,670 |
|
|
Indefinite life |
|
Goodwill |
|
|
1,242 |
|
|
|
|
|
Deferred tax liability |
|
|
(170 |
) |
|
|
|
|
Other net liabilities acquired |
|
|
(1,486 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
13,139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
F - 29
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
4. |
|
ACQUISITION continued |
The goodwill is mainly attributable to intangible assets that cannot be recognized
separately as identifiable assets under U.S. GAAP, and comprise (a) the assembled work
force and (b) the expected but unidentifiable business growth as a result of the synergy
resulting from the acquisition.
The change of fair value of the contingent consideration from date of acquisition to
December 31, 2010 was determined to be a decrease in asset of $107, which was recognized in
other income (expense) in the consolidated statement of operations in the period of year
2010.
The following pro forma information summarizes the results of operations for the Group as
if the acquisition had occurred as of January 1, 2009 and 2010. The following pro forma
financial information is not necessarily indicative of the results that would have occurred
had the acquisition been completion at the beginning of the periods indicated, nor is it
indicative of future operating results:
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2009 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
Total Revenue |
|
$ |
240,755 |
|
|
$ |
273,340 |
|
Net income attributable to China Techfaith Wireless
Communication Technology Limited |
|
$ |
8,356 |
|
|
$ |
27,591 |
|
|
|
|
|
|
|
|
Net income per share attributable to China Techfaith
Wireless Communication Technology Limited |
|
|
|
|
|
|
|
|
- Basic |
|
$ |
0.01 |
|
|
$ |
0.04 |
|
- Diluted |
|
$ |
0.01 |
|
|
$ |
0.03 |
|
|
|
|
|
|
|
|
F - 30
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
Accounts receivable consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
Billed receivables |
|
$ |
28,316 |
|
|
$ |
19,241 |
|
Unbilled receivables |
|
|
676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
28,992 |
|
|
$ |
19,241 |
|
|
|
|
|
|
|
|
Unbilled receivables represent amounts earned under handset design service contracts in
progress but not billable at the respective balance sheet dates. These amounts become
billable according to the contract terms, which usually consider the achievement of certain
milestones or completion of the project. The Group anticipates that substantially all of
such unbilled amounts will be billed and collected within twelve months of balance sheet
date.
Movement of allowance for doubtful accounts is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
3,838 |
|
|
$ |
7,128 |
|
|
$ |
9,151 |
|
Charge to expenses |
|
|
2,996 |
|
|
|
2,081 |
|
|
|
8,204 |
|
Utilized during the year |
|
|
|
|
|
|
(62 |
) |
|
|
(4,498 |
) |
Exchange difference |
|
|
294 |
|
|
|
4 |
|
|
|
276 |
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
7,128 |
|
|
$ |
9,151 |
|
|
$ |
13,133 |
|
|
|
|
|
|
|
|
|
|
|
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
Work in progress |
|
$ |
480 |
|
|
$ |
31 |
|
Raw materials |
|
|
21,443 |
|
|
|
16,525 |
|
Finished goods |
|
|
1,014 |
|
|
|
1,189 |
|
|
|
|
|
|
|
|
Inventories, net |
|
$ |
22,937 |
|
|
$ |
17,745 |
|
|
|
|
|
|
|
|
Inventories are written down for provisions for obsolescence to net realizable value based
upon estimates of future demand, technology developments, and market conditions. These
provisions charged to income were of $648, $409 and $2,186 in 2008, 2009 and 2010,
respectively.
F - 31
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
7. |
|
PREPAID EXPENSES AND OTHER CURRENT ASSETS |
Prepaid expenses and other current assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
Value added taxes recoverable |
|
$ |
3,739 |
|
|
$ |
3,061 |
|
Advance to EMS providers |
|
|
4,216 |
|
|
|
1,042 |
|
Rebate receivable |
|
|
2,817 |
|
|
|
796 |
|
Rental receivable |
|
|
|
|
|
|
703 |
|
Deposits |
|
|
358 |
|
|
|
642 |
|
Social insurance borne by employee |
|
|
183 |
|
|
|
560 |
|
Prepaid software license fee |
|
|
280 |
|
|
|
384 |
|
Prepaid testing and tooling fee |
|
|
261 |
|
|
|
302 |
|
Staff advances |
|
|
217 |
|
|
|
251 |
|
Prepaid commercial insurance |
|
|
94 |
|
|
|
99 |
|
Contingent acquisition receivable |
|
|
|
|
|
|
89 |
|
Other prepaid and current assets |
|
|
255 |
|
|
|
68 |
|
|
|
|
|
|
|
|
|
|
$ |
12,420 |
|
|
$ |
7,997 |
|
|
|
|
|
|
|
|
8. |
|
PLANT, MACHINERY AND EQUIPMENT, NET |
Plant, machinery and equipment, net consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
Construction in progress |
|
$ |
23,680 |
|
|
$ |
2,576 |
|
Office building |
|
|
19,236 |
|
|
|
42,020 |
|
Leasehold improvements |
|
|
1,653 |
|
|
|
1,807 |
|
Motor vehicles |
|
|
721 |
|
|
|
745 |
|
Plant and machinery |
|
|
11,988 |
|
|
|
11,749 |
|
Furniture, fixtures and equipment |
|
|
4,968 |
|
|
|
5,244 |
|
Software |
|
|
7,555 |
|
|
|
7,789 |
|
|
|
|
|
|
|
|
|
|
|
69,801 |
|
|
|
71,930 |
|
Less: Accumulated depreciation |
|
|
(25,219 |
) |
|
|
(27,522 |
) |
|
|
|
|
|
|
|
Plant, machinery and equipment, net |
|
$ |
44,582 |
|
|
$ |
44,408 |
|
|
|
|
|
|
|
|
The Group recorded depreciation expenses of $6,103, $4,213 and $2,769 for the years ended
December 31, 2008, 2009 and 2010, respectively.
The Group recognized impairment loss of $253, $nil and $nil for the years ended December 31,
2008, 2009 and 2010, respectively.
F - 32
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
9. |
|
ACQUIRED INTANGIBLE ASSETS, NET |
Acquired intangible assets, net consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
December 31, 2010 |
|
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
|
carrying |
|
|
Accumulated |
|
|
carrying |
|
|
carrying |
|
|
Accumulated |
|
|
carrying |
|
|
|
amount |
|
|
amortization |
|
|
amount |
|
|
amount |
|
|
amortization |
|
|
amount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets with definite life: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software license |
|
$ |
2,593 |
|
|
$ |
(1,962 |
) |
|
$ |
631 |
|
|
$ |
3,013 |
|
|
$ |
(2,453 |
) |
|
$ |
560 |
|
Certification of internet
content provider |
|
|
15 |
|
|
|
(1 |
) |
|
|
14 |
|
|
|
15 |
|
|
|
(5 |
) |
|
|
10 |
|
Customer base |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
680 |
|
|
|
(121 |
) |
|
|
559 |
|
Contract backlog |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20 |
|
|
|
(20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,608 |
|
|
|
(1,963 |
) |
|
|
645 |
|
|
|
3,728 |
|
|
|
(2,599 |
) |
|
|
1,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets with indefinite life: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade name and domain name |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,670 |
|
|
|
|
|
|
|
1,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,608 |
|
|
$ |
(1,963 |
) |
|
$ |
645 |
|
|
$ |
5,398 |
|
|
$ |
(2,599 |
) |
|
$ |
2,799 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Group had recorded amortization expenses of $794, $377 and $616 for the years ended
December 31, 2008, 2009 and 2010, respectively.
The Group recognized impairment loss of $627, $nil and $nil for the years ended December 31,
2008, 2009 and 2010, respectively.
The future amortization expenses for the net carrying amount of intangible assets with
definite lives as of December 31, 2010 were as follows:
|
|
|
|
|
Year 2011 |
|
$ |
415 |
|
Year 2012 |
|
|
384 |
|
Year 2013 |
|
|
181 |
|
Year 2014 |
|
|
138 |
|
Year 2015 |
|
|
11 |
|
|
|
|
|
|
|
$ |
1,129 |
|
|
|
|
|
F - 33
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
Changes in the carrying amount of goodwill by reportable segments for the years ended
December 31, 2009 and 2010, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brand name |
|
|
|
|
|
|
ODP |
|
|
phone sales |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2009 |
|
$ |
606 |
|
|
|
|
|
|
$ |
606 |
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2009 |
|
$ |
606 |
|
|
|
|
|
|
$ |
606 |
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2010 |
|
$ |
606 |
|
|
|
|
|
|
$ |
606 |
|
Acquisition of Citylead (Note 4) |
|
|
|
|
|
$ |
1,242 |
|
|
$ |
1,242 |
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2010 |
|
$ |
606 |
|
|
$ |
1,242 |
|
|
$ |
1,848 |
|
|
|
|
|
|
|
|
|
|
|
11. |
|
LONG-TERM INVESTMENTS |
The Group has one equity method investment and one cost method investment with accumulated
carrying value of $nil as of December 31, 2010.
BYTE
On March 15, 2007, BYTE Holding Ltd. (BYTE) was established by Techfaith BVI and BYD Co.,
Ltd. (BYD) in the BVI. BYTEs registered capital is $2,724, of which Techfaith BVI and BYD
injected $nil and $2,724, and owns 31% and 69% equity interest, respectively. BYTE is
principally engaged in providing one-stop EMS to global leading handset customers. As of
December 31, 2010, Techfaith BVI had not injected capital in BYTE. The Group could not
obtain BYTEs financial statements for 2009 and 2010. Since the Group has no obligation to
fund BYTEs loss, the Group did not record its share of BYTEs result. The investment in
BYTE is reported as a cost method investment in 2010 as the Group does not have the ability
to exercise significant influence over BYTEs operating and financial policies.
Arasor
On July 20, 2007, the Group and Arasor International Group (Arasor) jointly formed a
company named Joined Fame Technology Limited (Joined Fame) in the BVI to expand the
wireless handset opportunities in the worlds emerging markets. As of December 31, 2010,
both the Group and Arasor had not injected capital in Joined Fame and Joined Fame had not
started its business.
F - 34
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
In 2010, the Group negotiated with Guanghua Xinwang Limited (Guanghua) to sell a portion
of the office building and the transaction was taken a form as follows. On July 19, 2010,
the Group jointly formed a company named Beijing Ruike Xinwang Limited (Ruike) in Beijing
with a third party as designated by Guanghua. The Group legally owned 70% equity interest of
Ruike by injecting the portion of the office building with a carrying amount of $3,155 which
was agreed to be sold to Guanghua verbally. In January 2011, the Group signed the agreement
with Guanghua to sell the 70% equity interest in Ruike with a consideration of $4,058 in
cash.
The Group considered the substance of the arrangement was to sell the office building with
carrying amount of $3,155 at a price of $4,058. Since the transaction was not closed in
2010, the Group did not recognize the gain from disposal in 2010. The office building with
carrying amount of $3,155 was reclassified from plant, machinery and equipment account to
other asset on the balance sheet and ceased the depreciation from July 2010. In addition,
the Group received $2,773 security deposit in connection with the arrangements from Guanghua
in 2010 and recorded the amount as a current liability as set out in Note 13 as of December
31, 2010.
13. |
|
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES |
Accrued expenses and other current liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
Deposit received for disposal of other asset (Note 12) |
|
$ |
|
|
|
$ |
2,773 |
|
Business tax, value added tax and other tax payables |
|
|
1,840 |
|
|
|
2,141 |
|
Social insurance payables |
|
|
931 |
|
|
|
2,113 |
|
Accrued professional fees |
|
|
752 |
|
|
|
1,356 |
|
Accrued royalty and license fee |
|
|
1,116 |
|
|
|
1,157 |
|
Prepayment from suppliers |
|
|
1,076 |
|
|
|
870 |
|
Accrued wages |
|
|
416 |
|
|
|
647 |
|
Accrued testing fee |
|
|
988 |
|
|
|
495 |
|
Government grants |
|
|
59 |
|
|
|
394 |
|
Accrued facility fee |
|
|
481 |
|
|
|
391 |
|
Warranty provision |
|
|
377 |
|
|
|
277 |
|
Rental payable |
|
|
149 |
|
|
|
210 |
|
Customer deposits for minimum purchase |
|
|
218 |
|
|
|
152 |
|
Payable for purchase of software |
|
|
799 |
|
|
|
|
|
Others |
|
|
824 |
|
|
|
839 |
|
|
|
|
|
|
|
|
|
|
$ |
10,026 |
|
|
$ |
13,815 |
|
|
|
|
|
|
|
|
F - 35
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
During 2008, the Group approved and announced to employees a restructuring plan to
streamline its business processes. This plan included the termination of 841 employees. This
plan was completed in 2008 and resulted in restructuring charges, including $3,419 reflected
in the general and administrative expenses for employee severance and benefits in compliance
with the New Labour Law of the PRC. The office building where the terminated employees used
to work is owned by the Group. The Group assessed the fair value of the office building and
determined that there was no impairment of the carrying amount of the office building as of
December 31, 2008, 2009 and 2010.
Cayman Islands
The Company and TechSoft Holding are tax exempted companies incorporated in the Cayman
Islands.
British Virgin Islands
Under the current BVI law, income from Techfaith BVI, Great Earnest, 798 Entertainment,
Finest Technology, Infoexcel Technology, Boost Time, Charm Faith, Fair Nice and Time Spring
are not subject to taxation.
Hong Kong
No provision for Hong Kong Profits Tax was made for the years ended December 31, 2008, 2009
and 2010 on the basis that Techfaith HK, Technology HK, QIGI HK and Media Chance did not have
any assessable profits arising in or derived from Hong Kong for the years.
PRC
On March 16, 2007, the National Peoples Congress adopted the Enterprise Income Tax Law
(the New EIT Law) which became effective on January 1, 2008. The New EIT Law applies a
uniform 25% enterprise income tax rate to both foreign invested enterprises and domestic
enterprises. Under the New EIT Law, an enterprise which qualifies as a high and new
technology enterprise (the new HNTE) is entitled to a tax rate of 15%.
Techfaith China and Techfaith Intelligent Handset Beijing have obtained HNTE under the old
EIT law and obtained the new HNTE in December 2008 under the New EIT Law. They were entitled
to a three-years tax exemption followed by a 50% reduction in tax rate for the subsequent
three years, starting from and 2003 and 2006, respectively.
F - 36
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
15. |
|
INCOME TAXES continued |
PRC continued
Techfaith Shanghai has qualified as manufacturing foreign investment enterprise (the FIE)
located in Shanghai Pudong according to the old EIT law and obtained HNTE in December 2008.
It was entitled to a preferential tax rate of 15% prior to year 2008, with two-years
exemption followed by a 50% reduction in tax rate for the subsequent three years under the
old EIT law starting from 2005. According to the transition rule from the old EIT law to the
New EIT Law, in 2008 and 2009, Techfaith Shanghai is entitled a tax rate of 18% and 20%,
respectively. Start from 2010, the tax rate for Techfaith Shanghai is 15%.
Techfaith Shenzhen is located in Shenzhen Special Economic Zone, and entitled to a
preferential tax rate of 15% under the old EIT law in 2007, with a two-year exemption
followed by a 50% reduction in tax rate in the following three years starting from year
2008. In accordance with the transition rules of the New EIT Law, the applicable tax rate
from year 2008 to year 2012 are 18%, 20%, 22%, 24% and 25%.
Techfaith Hangzhou and TechSoft are foreign investment enterprises which were entitled with
a two-year exemption followed by a 50% reduction in tax rate for the subsequent three years
over the statuary tax rate of 25% starting from 2007 and 2008, respectively.
The preferential tax rates, which are rates enjoyed by the PRC entities of the Group,
different from the statutory rates, are presented in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiaries and VIEs subsidiary |
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Techfaith China (1) |
|
|
7.5 |
% |
|
|
15.0 |
% |
|
|
15.0 |
% |
|
|
15.0 |
% |
|
|
15.0 |
% |
Techfaith Intelligent Handset Beijing (1) |
|
|
0.0 |
% |
|
|
7.5 |
% |
|
|
7.5 |
% |
|
|
7.5 |
% |
|
|
15.0 |
% |
Techfaith Shanghai (1) |
|
|
9.0 |
% |
|
|
10.0 |
% |
|
|
15.0 |
% |
|
|
15.0 |
% |
|
|
15.0 |
% |
Techfaith Shenzhen |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
11.0 |
% |
|
|
12.0 |
% |
|
|
12.5 |
% |
Techfaith Hangzhou |
|
|
0.0 |
% |
|
|
12.5 |
% |
|
|
12.5 |
% |
|
|
12.5 |
% |
|
|
25.0 |
% |
TechSoft |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
12.5 |
% |
|
|
12.5 |
% |
|
|
12.5 |
% |
|
|
|
(1) |
|
The new HNTE status obtained by Techfaith China, Techfaith Intelligent Handset
Beijing and Techfaith Shanghai in 2008 under the New EIT Law is valid for three years
and qualifying entities can then apply to renew for an additional three years provided
their business operations continue to qualify for the new HNTE status. The Group
believes it is highly likely that its qualifying entities will continue to obtain the
renewal in the future. |
Accordingly, in calculating deferred tax assets and liabilities, the Group assumed its
qualifying entities will continue to renew the new HNTE status at the conclusion of the
initial three year period.
F - 37
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
15. |
|
INCOME TAXES continued |
PRC continued
The EIT Law includes a provision specifying that legal entities organized outside China will
be considered residents for Chinese income tax purposes if their place of effective
management or control is within China. If legal entities organized outside China were
considered residents for Chinese income tax purpose, they would become subject to the EIT
Law on their worldwide income. This would cause any income legal entities organized outside
China earned to be subject to Chinas 25% EIT. The Implementation Rules to EIT Law provide
that non-resident legal entities will be considered China residents if substantial and
overall management and control over the manufacturing and business operations, personnel,
accounting, properties, etc. resides within China. Pursuant to the additional guidance
released by the Chinese government on April 22, 2009, management does not believe that the
legal entities organized outside China should be characterized as China tax residents for
EIT Law purposes.
Under the new EIT Law and its implementation rules, dividends generated after January 1,
2008 and payable by a foreign-invested enterprise in China to its foreign investors who are
nonresident enterprises are subject to a 10% withholding tax, unless any such foreign
investors jurisdiction of incorporation has a tax treaty with China that provides for a
different withholding arrangement.
Aggregate undistributed earnings of the Companys subsidiaries, VIEs and VIEs subsidiary
located in the PRC that are taxable upon distribution to the Company of approximately
$95,110 and $117,483 at December 31, 2009 and 2010, respectively, are considered to be
indefinitely reinvested under authoritative pronouncement, because the Group does not have
any present plan to pay any cash dividends on its ordinary shares in the foreseeable future
and intends to retain most of its available funds and any future earnings for use in the
operation and expansion of its business. Accordingly, no deferred tax liability has been
accrued for the Chinese dividend withholding taxes that would be payable upon the
distribution of those amounts to the Company as of December 31, 2010.
The current and deferred components of the income tax expense appearing in the consolidated
statements of operation are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current tax |
|
$ |
36 |
|
|
$ |
3,513 |
|
|
$ |
9,651 |
|
Deferred tax |
|
|
(129 |
) |
|
|
129 |
|
|
|
(193 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(93 |
) |
|
$ |
3,642 |
|
|
$ |
9,458 |
|
|
|
|
|
|
|
|
|
|
|
All of the income taxes are related to the PRC entities of the Group.
F - 38
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
15. |
|
INCOME TAXES continued |
PRC continued
The principal components of the Groups deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2009 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
Deferred tax assets current: |
|
|
|
|
|
|
|
|
Accrued expense |
|
$ |
190 |
|
|
$ |
361 |
|
Product warranty provision |
|
|
32 |
|
|
|
32 |
|
Allowance for doubtful accounts |
|
|
1,077 |
|
|
|
723 |
|
Inventory provision |
|
|
337 |
|
|
|
460 |
|
Less: Valuation allowance |
|
|
(1,636 |
) |
|
|
(1,413 |
) |
|
|
|
|
|
|
|
Net deferred tax assets current |
|
$ |
|
|
|
$ |
163 |
|
|
|
|
|
|
|
|
|
Deferred tax assets non-current: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
$ |
691 |
|
|
$ |
405 |
|
Net operating loss carry forwards |
|
|
8,894 |
|
|
|
8,685 |
|
Less: Valuation allowance |
|
|
(9,585 |
) |
|
|
(9,090 |
) |
|
|
|
|
|
|
|
Net deferred tax assets non-current |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2009 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
Deferred tax liability non-current: |
|
|
|
|
|
|
|
|
Acquired intangible asset |
|
$ |
|
|
|
$ |
140 |
|
|
|
|
|
|
|
|
As of December 31, 2010, operating loss carry forwards amounted to $46,883 which will begin
to expire in 2011. The Group determines whether or not a valuation allowance is required at
the level of each taxable entity.
In 2010, Interactive Internet has begun to generate taxable profit due to the newly
introduced Game business. It is expected that this will continue to generate taxable profit
and will realize all deferred tax assets in the future years, accordingly no valuation
allowance is provided for Interactive Internet. The rest of deferred tax assets arise in
companies which are not expected to have any significant taxable income in the foreseeable
future and consequently a full provision has been made in respect of those for the rest of
entities of the Group.
F - 39
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
15. |
|
INCOME TAXES continued |
PRC continued
Reconciliation between the provision for income tax computed by PRC enterprise income tax
rate of 25% to income before income taxes and actual provision for income taxes is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
|
(As restated) |
|
Income before income tax |
|
$ |
7,256 |
|
|
$ |
6,028 |
|
|
$ |
38,116 |
|
Tax provision at PRC enterprise
income tax rate of 25% |
|
|
1,814 |
|
|
|
1,507 |
|
|
|
9,529 |
|
Expenses not deductible for tax purposes |
|
|
1,294 |
|
|
|
153 |
|
|
|
2,428 |
|
Tax exemption and preferential tax rates
granted to PRC entities |
|
|
(5,448 |
) |
|
|
(2,825 |
) |
|
|
(3,629 |
) |
Effect of the different income tax rates
in other jurisdiction |
|
|
2,235 |
|
|
|
2,493 |
|
|
|
1,848 |
|
Changes in valuation allowances |
|
|
12 |
|
|
|
2,314 |
|
|
|
(718 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(93 |
) |
|
$ |
3,642 |
|
|
$ |
9,458 |
|
|
|
|
|
|
|
|
|
|
|
Without the tax exemption and preferential tax rates granted to PRC entities, income tax
expense would have been increased by approximately $6,701, $3,505 and $5,793 for the years
ended December 31, 2008, 2009 and 2010, respectively, representing a decrease in the basic
and diluted earnings per share of $0.01, $0.01 and $0.01, for the years ended December 31,
2008, 2009 and 2010, respectively.
The Group did not identify significant unrecognized tax benefits for the years ended
December 31, 2008, 2009 and 2010. The Group did not incur any interest and penalties related
to potential underpaid income tax expenses and also believed that the adoption of
pronouncement issued by FASB regarding accounting for uncertainty in income taxes did not
have a significant impact on the unrecognized tax benefits within 12 months from December
31, 2010.
Since January 1, 2008, the relevant tax authorities of the Groups subsidiaries, VIEs and
VIEs subsidiary have not conducted a tax examination on the Groups subsidiaries, VIEs and
VIEs subsidiary. In accordance with relevant PRC tax administration laws, tax years from
2006 to 2010 of the Groups PRC subsidiaries, VIEs and VIEs subsidiary remain subject to
tax audits as of December 31, 2010, at the tax authoritys discretion.
F - 40
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
In March 2006, the Group entered into the Agreement with QUALCOMM to establish a 70%-owned
subsidiary, TechSoft Holding, as set out in Note 1. The exercise price for both the Put
Option and the Call Option as set out in Note 1 shall be the higher of, the original
purchase price per share paid by QUALCOMM or the Group, increased at a continuous compounded
growth rate of ten percent (10%) per annum including the date of full payment of the option
price, as well as any declared and unpaid dividends accrued or accruing thereupon up until
the date of redemption; and the amount equivalent to the business valuation performed by an
independent professional valuation company that is mutually agreed upon by QUALCOMM and the
Group, in proportion to QUALCOMMs percentage of shareholding on a fully-diluted as
converted basis. The Put Option was recorded as a liability re-measured at fair value.
As the valuation of the Put Option is based on the valuation of TechSoft Holding, a
non-public company, it requires significant management judgment due to the absence of quoted
market prices, and the lack of observable inputs. As a result, the Group has determined that
the fair value of the Put Option is classified as Level 3 valuation within the fair value
hierarchy under Authoritative pronouncement issued relating fair value measurement (see Note
18).
The fair value of TechSoft Holdings ordinary share is determined using the income approach
valuation methodology that includes discounted cash flows of TechSoft Holding. The
discounted cash flows were based on discrete four-year forecast developed by management for
planning purposes, discounted at weighted average cost of capital of 22%. The fair value of
TechSoft Holdings ordinary shares as of December 31, 2010 is less than the calculated value
and therefore the value of the Put Option is based on the difference between the calculated
value and the fair value of the ordinary shares of TechSoft Holding, having regard to the
probability of QUALCOMM exercising the option.
A reconciliation of the beginning and ending balances of the Put Option measured at fair
value, on a recurring basis, using Level 3 inputs follows:
|
|
|
|
|
Balance at the beginning of 2009 |
|
$ |
1,173 |
|
Change in fair value of the Put Option |
|
|
84 |
|
|
|
|
|
|
Balance at the beginning of 2010 |
|
|
1,257 |
|
Change in fair value of the Put Option |
|
|
123 |
|
|
|
|
|
Balance at the end of 2010 |
|
$ |
1,380 |
|
|
|
|
|
On June 9, 2009, 798 Entertainment, a subsidiary of the Group, issued $10,000 principal
amount of the Convertible Notes
due June 8, 2012,
to the Note Holders. The Convertible Notes were
issued at par and bear interest at a rate of 8% per annum, compounded annually. Interest is
due on the notes maturity date and payable in cash.
F - 41
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
17. |
|
CONVERTIBLE NOTES continued |
The key terms of the Convertible Notes are as follows:
Conversion
The Note Holders have the right, at any time on or before the tenth day before the maturity
date, to convert the outstanding principal amount, or a portion thereof, into that number of
|
(i) |
|
798 Entertainments Class B Ordinary Shares, par value $0.01 per share at the
conversion price of $28.92 per share, or |
|
|
(ii) |
|
The Companys shares, par value $0.00002 per share at the conversion price of
$0.0793 per share. The total number of the Companys shares the Note holders convert
the notes into cannot be more than 129,941,915, subject to adjustment for forward and
reverse stock splits, recapitalization and the like. |
The conversion prices will be adjusted if one of the following conditions occurs:
|
a. |
|
If the Company or 798 Entertainment issues any additional equity security at a
price per share (the New Issuance per share) that is lower than the conversion price
per share then in effect, then the conversion price per share is adjusted to the New
Issuance price per share. |
|
|
b. |
|
Stock splits, combinations and dividends |
However, the conversion price will not be adjusted upwards except in the case of stock
combinations.
The
Convertible Notes will automatically convert into 798 Entertainments Class B Ordinary Shares at the
conversion price then in effect upon the closing of a Qualified Public Offering of 798
Entertainment. A Qualified Public Offering is defined as an initial public offering of 798
Entertainments ordinary shares on an internationally recognized stock exchange outside the
PRC, at a price per share in the public offering that values 798 Entertainment at more than
$200,000 immediately prior to such public offering.
Dividend premium
In the event the 798 Entertainment declares any dividend or other distribution on 798
Entertainment Class B Ordinary Shares or Ordinary Shares, the Note Holders are entitled to
an interest payment (a Dividend Premium), payable at the same time when any such dividend
or distribution is paid by the 798 Entertainment, in an amount equal to which the Note
holders would have received had the convertible notes been converted into the 798
Entertainments Class B Ordinary Shares or then into the 798 Entertainments Ordinary
Shares.
F - 42
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
17. |
|
CONVERTIBLE NOTES continued |
|
|
|
Late charges for due amount of principal and interests |
Nine percent (9%) per annum (accrued daily and compounded annually) from the date unpaid
amount was due until the same is paid in full.
Interest rate reset
The interest rate of the Convertible Notes will reset from 8% to 20%, exclusive of Dividend
Premiums and late charges paid or payable, at the earlier of (i) the occurrence of a default
event or (ii) December 9, 2011 if the Qualified Public Offering has not occurred by such
date. If either of these two conditions occurs, the Note holders may require 798
Entertainment to redeem all or any portion of the Convertible Notes for cash.
If 798 Entertainment fails to pay the redemption price to the Note holders, the Note holders
have the option but not the obligation, to convert all or part of the redemption price into
the Companys Ordinary Shares at a conversion price equal to the lesser of (i) the
conversion price to convert the Convertible Notes to the Companys ordinary share then in
effect, and (ii) the weighted average price of the Companys ordinary shares during the
period beginning on and including the date when the redemption price is due and ending on
and including the date when the Note Holders submit a notice to 798 Entertainment.
The conversion right to the Companys ordinary shares, the dividend premium feature, and the
interest reset feature, are embedded derivatives that are bifurcated for measurement
purposes, and are presented on a combined basis with the Convertible Notes.
The total of the fair value of the derivatives at the issuance date with the amount of
$12,759 and the issuance cost with the amount of $417 resulted in a debt discount totaling
$13,176. The debt discount has exceeded the principle amount of the Convertible Notes by
$3,176, this amount is write off in 2009 as loss on issuance of the Convertible Notes. The
remaining debt discount of $10,000 was amortized into interest
expense over the term of the Convertible Notes using the effective interest rate method. During 2009 and 2010 (till
September 8, 2010, which was the conversion date), the amortized discount of $nil and $1 was
recorded as part of the interest expense in these periods.
F - 43
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
17. |
|
CONVERTIBLE NOTES continued |
As of December 31, 2009 and 2010, the carrying value of the Convertible Notes and the
embedded derivatives consist of the followings:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2010 |
|
|
|
(As restated) |
|
|
|
|
Principal amount of the Convertible Notes |
|
$ |
(10,000 |
) |
|
|
|
|
Unamortized debt discount |
|
|
10,000 |
|
|
|
|
|
Fair value of the embedded derivative in the
Convertible Notes |
|
|
(18,029 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value of the Convertible Notes and
embedded derivative |
|
$ |
(18,029 |
) |
|
|
|
|
|
|
|
|
|
|
|
The initial fair value of these derivatives was $12,759 on the issuance date. The change in
the fair value of derivatives during 2009 and 2010 (till September 8, 2010, which was the
conversion date as described below) was a loss of $5,270, and a gain of $1,280 was recorded
in earnings in both years, respectively.
On September 8, 2010 the Convertible Notes was converted into the Companys ordinary shares
and 798 Entertainments class B ordinary shares by 62.5% and 37.5% of the face value of the
Convertible notes, respectively, upon the choice of the Notes Holders.
The carrying amount of the Convertible Notes as of the conversion date was $16,750, which
comprised of the principal amount of the Convertible Notes $10,000 less the unamortized
discount of $9,999 as of the conversion date and the carrying amounts of the conversion
rights and interest reset features which were carried at their fair values as of the
conversion date for $16,749, was credited to the equity accounts to reflect the ordinary
shares issued by the Company and its subsidiary, 798 Entertainment and no gain or loss was
recognized. As a result of this conversion, 78,814,628 of the Companys ordinary shares with
par value of $0.00002 and 129,668 of 798 Entertainments class B ordinary share with par
value of 0.01 are issued to the Note Holders.
F - 44
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
|
(a) |
|
Assets and liabilities measured at fair value on a recurring basis |
|
(i) |
|
Put Option |
|
|
|
|
The Put Option the Group offered to QUALCOMM as set out in Note 16 was
recorded as a liability at fair value. The Group measured the fair value for
the Put Option with the assistance of an independent valuation firm. |
|
|
|
|
The Put Option was classified as a Level 3 liability because the Group used
unobservable inputs to value it, reflecting the Groups assessment of the
assumptions market participants would use in valuing these derivatives. |
|
|
(ii) |
|
Derivatives embedded in the Convertible Notes |
|
|
|
|
Derivatives embedded in the Convertible Notes as set out in Note 17 were
classified as Level 3 liabilities because the Group used unobservable inputs
to value them, reflecting the Groups assessment of the assumptions market
participants would use in valuing these derivatives. |
|
|
(iii) |
|
Contingent consideration receivable |
|
|
|
|
The contingent consideration receivable as set out in Note 4 is considered as
Level 3 asset because the Group used unobservable inputs, reflecting the
Groups assessment of the assumptions market participants would use in valuing
this asset. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
Quoted price |
|
|
|
|
|
|
|
|
|
|
|
|
in active |
|
|
Significant |
|
|
|
|
|
|
|
|
|
markets |
|
|
other |
|
|
Significant |
|
|
|
|
|
|
for identical |
|
|
observable |
|
|
unobservable |
|
|
|
|
|
|
investments |
|
|
inputs |
|
|
inputs |
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Put Option |
|
$ |
|
|
|
$ |
|
|
|
$ |
1,257 |
|
|
$ |
1,257 |
|
Derivatives related to the
Convertible Notes |
|
$ |
|
|
|
$ |
|
|
|
$ |
18,029 |
|
|
$ |
18,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value |
|
$ |
|
|
|
$ |
|
|
|
$ |
19,286 |
|
|
$ |
19,286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F - 45
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
18. |
|
FAIR VALUE continued |
|
(a) |
|
Assets and liabilities measured at fair value on a recurring basis continued |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
|
Quoted price |
|
|
|
|
|
|
|
|
|
|
|
|
in active |
|
|
Significant |
|
|
|
|
|
|
|
|
|
markets |
|
|
other |
|
|
Significant |
|
|
|
|
|
|
for identical |
|
|
observable |
|
|
unobservable |
|
|
|
|
|
|
investments |
|
|
inputs |
|
|
inputs |
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Asset: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
receivable |
|
$ |
|
|
|
$ |
|
|
|
$ |
89 |
|
|
$ |
89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total asset at fair value |
|
$ |
|
|
|
$ |
|
|
|
$ |
89 |
|
|
$ |
89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Put Option |
|
$ |
|
|
|
$ |
|
|
|
$ |
1,380 |
|
|
$ |
1,380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liability at fair value |
|
$ |
|
|
|
$ |
|
|
|
$ |
1,380 |
|
|
$ |
1,380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the movement of the balances of the Groups financial
asset and liabilities measured at fair value on a recurring basis:
|
|
|
|
|
Asset: |
|
|
|
|
|
|
|
|
|
Balance at January 1, 2009 |
|
|
|
|
Balance at January 1, 2010 |
|
|
|
|
|
|
|
|
Initial recognition of the contingent consideration receivable |
|
$ |
196 |
|
Change in fair value of the contingent consideration receivable |
|
|
(107 |
) |
|
|
|
|
Balance at December 31, 2010 |
|
$ |
89 |
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
Balance at January 1, 2009 |
|
$ |
1,173 |
|
Change in fair value of the Put Option |
|
|
84 |
|
Initial recognition of fair value of the derivatives
embedded in the Convertible Notes |
|
|
12,759 |
|
Change in
fair value of the derivatives embedded in the Convertible Notes |
|
|
5,270 |
|
|
|
|
|
|
Balance at December 31, 2009 |
|
|
19,286 |
|
|
|
|
|
Change in fair value of the Put Option |
|
|
123 |
|
Change in
fair value of the derivatives embedded in the Convertible Notes |
|
|
(1,280 |
) |
Conversion of the Convertible Notes |
|
|
(16,749 |
) |
|
|
|
|
Balance at December 31, 2010 |
|
$ |
1,380 |
|
|
|
|
|
F - 46
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
18. |
|
FAIR VALUE continued |
|
(b) |
|
Assets and liabilities measured at fair value on a nonrecurring basis |
|
|
|
|
The Group acquired Citylead on February 10, 2010. The Group measured the fair value
for the asset acquired, with the assistance of an independent valuation firm, using
discounted cash flow techniques, and the asset was classified as Level 3 asset
because the Group used unobservable inputs to value it reflecting the Groups
assessment of the assumptions market participants would use in valuing these
purchased intangible asset. |
During 2008, 2009, and 2010, the Group recognized compensation expense, net of forfeitures,
of $147, $20 and $1, respectively, for share-based payment awards for which the requisite
service was rendered during the year.
Share option
In March 2005, the Group adopted the 2005 Share Incentive Plan (the Plan) which allows the
Group to offer a variety of incentive awards to employees and directors of the Group. For
the year ended December 31, 2005, options to purchase 40,000,000 ordinary shares were
authorized under the Plan. Under the terms of the Plan, options are generally granted at
prices equal to the fair market value of the Groups shares listed on NASDAQ and expire 10
years from the date of grant. The options vest in accordance with the terms of the agreement
separately entered into by the Group and grantee at the time of the grant.
Under the Plan, the Group granted certain stock options to its employees prior to 2009,
which were all vested as of January 1, 2009. The Group did not recognize share-based
compensation for the stock options granted during the year ended December 31, 2008, 2009 and
2010, respectively.
As of December 31, 2010, there were 131,636 exercisable options. The fair value of option as
of the grant date and the weighted average exercise price was $0.62 and $1.083 respectively
with a remaining contractual life of 4.7 years. No share option was exercised during the
year ended December 31, 2010.
F - 47
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
19. |
|
SHARE-BASED PAYMENT continued |
|
|
|
Nonvested shares |
|
|
|
|
|
|
|
Number of |
|
|
|
nonvested shares |
|
|
|
|
|
|
Unvested at January 1, 2010 |
|
$ |
16,454 |
|
Granted during the year |
|
|
|
|
Vested during the year |
|
|
(16,454 |
) |
Forfeited during the year |
|
|
|
|
|
|
|
|
Unvested at December 31, 2010 |
|
$ |
|
|
|
|
|
|
In July 2006, the Group granted 315,000 nonvested shares to the Chief Financial Officer for
free with a vesting schedule of 3 years under the Plan. The fair value of
nonvested shares as of the grant date was $0.98 per share, based on the closing price of the
Companys share on the grant date. For the nonvested shares with a graded vesting schedule,
the Group recognized compensation cost on a straight-line basis over the requisite service
period for each separately vesting portion of the award. On August 15, 2008, the Chief
Financial Officer resigned and 105,000 of the remaining unvested shares were forfeited. As
of the resignation date, 210,000 nonvested shares granted to the Chief Financial Officer had
vested. The Group recorded share based compensation expense of $36 and $140 related to these
nonvested shares for the years ended December 31, 2007 and 2008, respectively. On July 28,
2009, the Company signed an amendment agreement with the ex-Chief Financial Officer of the
Group, and agreed to grant 105,000 shares to the ex-Chief Financial Officer which vested
immediately, accordingly $17 additional expense was recorded at the grant date.
In August 2007, another 65,818 nonvested shares were granted to an independent director with
25% of the number of nonvested shares, 16,455 vested immediately and the remaining 75%,
49,363 to be vested on August 12, 2008, 2009 and 2010 evenly. The fair value of nonvested
shares as of the grant date was $0.28 per share. The Group recognized share based
compensation expenses of $7, $3 and $1 for these nonvested shares for the years ended
December 31, 2008, 2009 and 2010, respectively.
The intrinsic value of nonvested shares vested for the years ended December 31, 2008, 2009
and 2010 is $33, $20 and $3, respectively.
F - 48
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
The Company has 50,000,000,000,000 ordinary shares authorized with par value of $0.00002 per
share.
As of January 1, 2008, the Company had 649,913,136 shares issued and outstanding.
In
2008, the Company issued 121,454 ordinary shares upon the vesting of
the nonvested shares.
In 2009, the Company issued 121,455 ordinary shares upon the vesting of the nonvested shares.
On September 29, 2008, the Groups Board of Directors approved to repurchase additional ADSs
from the open market, as part of the 2006 share repurchase plan which was approved by
shareholders in 2006. In December 2009, the Group repurchased 61,200 ADSs representing
918,000 ordinary shares from the NASDAQ stock market for treasury stock. The respective
61,200 ADSs were subsequently cancelled by the Group on March 26, 2010.
On February 10, 2010, the Company issued 65,934,066 ordinary shares for the acquisition of
Citylead (Note 4). On September 8, 2010, the Company issued 78,814,628 ordinary shares for
the conversion of the Convertible Notes (Note 17). In addition, the Company also issued
16,454 ordinary shares upon the vesting of nonvested shares in 2010.
21. |
|
OTHER OPERATING INCOME |
Other operating income for year ended December 31, 2008 represented a gain of $2,443
recognized in connection with the reversal of the excess amount of accrued contribution
recorded in previous years pursuant to the government-mandated defined contribution employee
benefit plan upon the verification by the local government agency. For the year ended
December 31, 2010 the other operating income of $1,109 mainly represented rental income
recognized for renting out unoccupied office building space.
F - 49
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
22. |
|
RELATED PARTY TRANSACTIONS |
Techfaith Technology (Shenyang) Ltd. (Techfaith Technology) and De Ming Technology
(Hangzhou) Ltd. (De Ming) (formerly known as Kang Mu Ni Electronics (Hangzhou) Ltd.) are
subsidiaries of Techfaith Electronics Limited, a company established in September 2007, of
which the Groups Founder and CEO holds 43% equity interest.
For the years ended December 31, 2008, 2009 and 2010, purchase of raw materials, mobile
phone products and services from related parties are as follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Techfaith Technology |
|
$ |
17,031 |
|
|
$ |
3,479 |
|
|
$ |
10,662 |
|
De Ming |
|
|
2,373 |
|
|
|
1,154 |
|
|
|
125 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
19,404 |
|
|
$ |
4,633 |
|
|
$ |
10,787 |
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2008, 2009 and 2010, sales of raw materials to related
parties are as follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Techfaith Technology |
|
$ |
18,805 |
|
|
$ |
833 |
|
|
$ |
838 |
|
De Ming |
|
|
|
|
|
|
|
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
18,805 |
|
|
$ |
833 |
|
|
$ |
859 |
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009 and 2010, amounts due from a related party are as follow:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
Trade receivable: |
|
|
|
|
|
|
|
|
Techfaith Technology |
|
$ |
9,941 |
|
|
$ |
8,061 |
|
|
|
|
|
|
|
|
F - 50
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
22. |
|
RELATED PARTY TRANSACTIONS continued |
As of December 31, 2009 and 2010, amounts due to related parties are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2010 |
|
Trade payable: |
|
|
|
|
|
|
|
|
Techfaith Technology |
|
$ |
7 |
|
|
$ |
14 |
|
De Ming |
|
|
259 |
|
|
|
32 |
|
|
|
|
|
|
|
|
Total |
|
$ |
266 |
|
|
$ |
46 |
|
|
|
|
|
|
|
|
23. |
|
OPERATING SEGMENT AND GEOGRAPHIC INFORMATION |
The Groups chief operating decision maker has been identified as the Chief Executive
Officer, who reviews consolidated results when making decisions about allocating resources
and assessing performance of the Group.
As a result of acquisition of Citylead in February 2010, the Group adjusted its segment
reporting since then. The business activities of previously reported handset design segment
and product sales segment are now combined into one segment, named as original developed
products (the ODP) segment. The business activities of QIGI Technology acquired in 2010
are now representing a new segment of the Group, named as brand name phone sales segment.
Prior-year figures have been adjusted retrospectively.
The Group uses gross profit as the measure of each operating segment.
The financial information for each operating segment reflects that information which is
specifically identifiable or which is allocated based on an internal allocation method.
Selected financial information by operating segment1 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
ODP |
|
$ |
208,850 |
|
|
$ |
210,588 |
|
|
$ |
222,549 |
|
Brand name phone sales |
|
|
|
|
|
|
|
|
|
|
38,462 |
|
Game |
|
|
|
|
|
|
488 |
|
|
|
10,866 |
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
208,850 |
|
|
|
211,076 |
|
|
|
271,877 |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
|
|
|
|
|
|
|
|
|
|
ODP |
|
|
(167,685 |
) |
|
|
(172,801 |
) |
|
|
(180,517 |
) |
Brand name phone sales |
|
|
|
|
|
|
|
|
|
|
(22,066 |
) |
Game |
|
|
|
|
|
|
(64 |
) |
|
|
(2,202 |
) |
|
|
|
|
|
|
|
|
|
|
Total cost of revenues |
|
|
(167,685 |
) |
|
|
(172,865 |
) |
|
|
(204,785 |
) |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
41,165 |
|
|
$ |
38,211 |
|
|
$ |
67,092 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
The Groups chief operating decision maker only reviews revenue and cost for
each operating segment. Expenses are not allocated to each segment. |
F - 51
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
23. |
|
OPERATING SEGMENT AND GEOGRAPHIC INFORMATION continued |
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2009 |
|
|
2010 |
|
Assets |
|
|
|
|
|
|
|
|
ODP |
|
$ |
184,863 |
|
|
$ |
208,131 |
|
Brand name phone sales |
|
|
|
|
|
|
31,675 |
|
Game |
|
|
21,574 |
|
|
|
19,703 |
|
Reconciling amounts |
|
|
44,230 |
|
|
|
44,444 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
250,667 |
|
|
$ |
303,953 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciling amounts: |
|
|
|
|
|
|
|
|
Corporate assets |
|
$ |
44,230 |
|
|
$ |
44,444 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenditures for additions to long-lived assets |
|
|
|
|
|
|
|
|
|
|
|
|
ODP |
|
$ |
2,194 |
|
|
$ |
733 |
|
|
$ |
3,254 |
|
Brand name phone sales |
|
|
|
|
|
|
|
|
|
|
|
|
Game |
|
|
|
|
|
|
334 |
|
|
|
953 |
|
Corporate assets |
|
|
12,559 |
|
|
|
288 |
|
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditure |
|
$ |
14,753 |
|
|
$ |
1,355 |
|
|
$ |
4,282 |
|
|
|
|
|
|
|
|
|
|
|
Revenues for the Groups products and services are shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
Net revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Products sales |
|
$ |
189,727 |
|
|
$ |
206,106 |
|
|
$ |
219,037 |
|
Design fees |
|
|
16,863 |
|
|
|
2,335 |
|
|
|
1,752 |
|
Component sales related to design |
|
|
2,260 |
|
|
|
2,147 |
|
|
|
1,760 |
|
|
|
|
|
|
|
|
|
|
|
Revenues related to ODP |
|
|
208,850 |
|
|
|
210,588 |
|
|
|
222,549 |
|
|
|
|
|
|
|
|
|
|
|
Revenue related to Brand name phone sales |
|
|
|
|
|
|
|
|
|
|
38,462 |
|
|
|
|
|
|
|
|
|
|
|
Wireless gaming service |
|
|
|
|
|
|
470 |
|
|
|
5,625 |
|
Motion game device |
|
|
|
|
|
|
|
|
|
|
5,097 |
|
PC online game |
|
|
|
|
|
|
|
|
|
|
103 |
|
Mobile phone game design |
|
|
|
|
|
|
18 |
|
|
|
41 |
|
|
|
|
|
|
|
|
|
|
|
Revenue related to Game |
|
|
|
|
|
|
488 |
|
|
|
10,866 |
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
$ |
208,850 |
|
|
$ |
211,076 |
|
|
$ |
271,877 |
|
|
|
|
|
|
|
|
|
|
|
F - 52
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
23. |
|
OPERATING SEGMENT AND GEOGRAPHIC INFORMATION continued |
|
|
|
Geographic information |
Revenues, classified by the major geographic areas in which the Groups customers are
located (for design contract and game related revenue, based on the address of the customer
who contracted with the Group; for product sales, based on the address to which the Group
ships product), were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from the PRC |
|
$ |
157,411 |
|
|
$ |
192,644 |
|
|
$ |
257,044 |
|
Revenues from countries other than the PRC |
|
|
51,439 |
|
|
|
18,432 |
|
|
|
14,833 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
208,850 |
|
|
$ |
211,076 |
|
|
$ |
271,877 |
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Purchase commitments |
|
|
|
|
The Group uses EMS providers to provide manufacturing services for its products.
During the normal course of business, in order to reduce manufacturing lead times and
ensure adequate component supply, the Group enters into contracts with certain
manufacturers that allow them to procure inventory based on criteria defined by the
Group. As of December 31, 2010, the Group had commitments under non-cancellable
contracts that future minimum purchases are $1,865 in 2011. |
|
|
(b) |
|
Operating lease as lessee |
|
|
|
|
The Group has entered into operating lease agreements principally for its office
spaces in the PRC. These leases expire through 2011. Rental expenses under operating
leases for the years ended December 31, 2008, 2009 and 2010 were $514, $1,152 and
$1,093, respectively. |
|
|
|
|
Future minimum rental lease payments under non-cancellable operating leases
agreements are $279 which will be due in 2011. |
|
|
(c) |
|
Capital commitments |
|
|
|
|
As of December 31, 2010, capital commitments for construction of property and
purchase of plant, machinery and equipment are $3,106 which will be due in 2011. |
F - 53
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
The following tables summarize net revenues and accounts receivable from customers that
accounted for 10% or more of the Groups net revenues and accounts receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
|
|
Year ended December 31, |
|
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A |
|
|
N/A |
|
|
|
N/A |
|
|
|
11.4 |
% |
B |
|
|
N/A |
|
|
|
N/A |
|
|
|
10.9 |
% |
C |
|
|
12.3 |
% |
|
|
N/A |
|
|
|
N/A |
|
D |
|
|
N/A |
|
|
|
14.1 |
% |
|
|
N/A |
|
E |
|
|
N/A |
|
|
|
10.1 |
% |
|
|
N/A |
|
F |
|
|
N/A |
|
|
|
10.0 |
% |
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.3 |
% |
|
|
34.2 |
% |
|
|
22.3 |
% |
|
|
|
|
|
|
|
|
|
|
A small number of customers have historically accounted for a substantial portion of our net
revenue. In 2008, 2009 and 2010, our top three customers collectively accounted for
approximately 28.8%, 34.2% and 30.4%, respectively, of our net revenues.
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
|
As of December 31, |
|
|
|
2009 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
G |
|
|
N/A |
|
|
|
34.5 |
% |
H |
|
|
16.7 |
% |
|
|
12.7 |
% |
I |
|
|
N/A |
|
|
|
10.6 |
% |
J |
|
|
18.3 |
% |
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
35.0 |
% |
|
|
57.8 |
% |
|
|
|
|
|
|
|
F - 54
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
The following table sets forth the computation of basic and diluted net income per share for
the years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
|
(As restated) |
|
Net income attributable to ChinaTechfaith Wireless
Communication Technology Limited (numerator), basic |
|
$ |
8,001 |
|
|
$ |
4,414 |
|
|
$ |
27,840 |
|
Convertible Notes interest |
|
|
|
|
|
|
|
|
|
|
1 |
|
Change in fair value of derivatives embedded in Convertible Notes |
|
|
|
|
|
|
|
|
|
|
(1,280 |
) |
|
|
|
|
|
|
|
|
|
|
Net income attributable to ChinaTechfaith Wireless
Communication Technology Limited (numerator), diluted |
|
$ |
8,001 |
|
|
$ |
4,414 |
|
|
$ |
26,561 |
|
|
|
|
|
|
|
|
|
|
|
Shares (denominator): |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares outstanding |
|
|
649,972,306 |
|
|
|
650,057,866 |
|
|
|
732,784,822 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares from assumed vest of nonvested shares |
|
|
90,006 |
|
|
|
6,054 |
|
|
|
7,080 |
|
Weighted
average shares from the Convertible Notes, if converted |
|
|
|
|
|
|
70,825,200 |
|
|
|
63,051,703 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computing diluted
net income per share |
|
|
650,062,312 |
|
|
|
720,889,120 |
|
|
|
795,843,605 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to ChinaTechfaith Wireless
Communication Technology Limited per share, basic |
|
$ |
0.01 |
|
|
$ |
0.01 |
|
|
$ |
0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to ChinaTechfaith Wireless
Communication Technology Limited per share, diluted |
|
$ |
0.01 |
|
|
$ |
0.01 |
|
|
$ |
0.03 |
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008, 2009 and 2010, the Group had share options outstanding equivalents
to 131,636 ordinary shares that could have potentially diluted basic income per share in the
future, but which were excluded in the computation of diluted income per share in the years
presented, as their effect would have been anti-dilutive.
In 2009, the Convertible Notes could have potentially diluted basic income per share in the
future, but which were excluded in the computation of diluted income per share in 2009, as
its effect would have been anti-dilutive. Accordingly, the change in fair value of
derivatives embedded in the Convertible Notes was not considered in calculating the net
income attributable to China Techfaith Wireless Communication Technology Limited used for
the calculation of diluted net income per share in 2009.
F - 55
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
27. |
|
EMPLOYEE BENEFIT PLAN |
Full time employees of the Group located in the PRC participate in a government-mandated
defined contribution plan pursuant to which certain pension benefits, medical care,
unemployment insurance, employee housing fund and other welfare benefits are provided to
employees. The Group accrues for these benefits based on certain percentages of the
employees salaries.
The
total provisions for such employee benefits were $4,511, $2,244 and $2,505 for the years
ended December 31, 2008, 2009 and 2010, respectively.
28. |
|
STATUTORY RESERVES AND RESTRICTED NET ASSETS |
As stipulated by the relevant law and regulations in the PRC, the Companys subsidiaries,
VIEs and VIEs subsidiary in the PRC are required to maintain non-distributable statutory
surplus reserve. Appropriations to the statutory surplus reserve are required to be made at
not less than 10% of profit after taxes as reported in these entities statutory financial
statements prepared under the accounting principles generally
accepted in the PRC (the PRC GAAP). Once
appropriated, these amounts are not available for future distribution to owners or
shareholders. Once the general reserve is accumulated to 50% of these entities registered
capital, these entities can choose not to provide more reserves. The statutory reserve may
be applied against prior year losses, if any, and may be used for general business expansion
and production and an increase in registered capital of these entities. Amounts contributed
to the statutory reserve were $10,993 and $16,679 as of December 31, 2009 and 2010,
respectively.
As a result of PRC laws and regulations, which require that distributions by PRC entities can
only be paid out of distributable profits computed in accordance with PRC GAAP, the PRC
entities are restricted from transferring a portion of their net assets to the Group. Amounts
restricted include paid-in capital and the statutory reserves of the Companys PRC
subsidiaries, VIEs and VIEs subsidiary. As of December 31, 2010, the aggregate amounts of
capital and statutory reserves restricted which represented the amount of net assets of the
relevant subsidiaries, VIEs and VIEs subsidiary in the Group not available for distribution
was $120,370.
F - 56
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
29. |
|
NONCONTROLLING INTERESTS |
Techsoft Holding and its subsidiary
On March 17, 2006, the Group and QUALCOMM established TechSoft Holding, which engaged in the
business of developing software applications for wireless communication devices. The Group
and QUALCOMM hold 70% and 30% of TechSoft Holdings share capital, respectively.
798 Entertainment, its subsidiaries and VIE
In July 2009, 798 Entertainment, a wholly owned subsidiary of the Group, issued 345,722
Class B Ordinary Shares to Infiniti Capital Limited (an independent third party), for
$10,000 cash at an issuance price of $28.92 per share (Base Price), with par value of
$0.01 per share. The Group incurred legal costs of $162 in relation to the issuance of these
Class B Ordinary Shares. Therefore the net proceeds were $9,838.
These Class B Ordinary Shares are convertible into the 798 Entertainments Ordinary Shares
at the option of Infiniti Capital Limited. The conversion price is initially set to be the
Base Price and subject to adjustment.
In addition to the standard anti-dilution adjustment, the conversion price will also be
adjusted down if the audit net income of 798 Entertainment in the twelve calendar months
ending June 30, 2010, 2011 and 2012 is lower than $15,000, $30,000 and $45,000,
respectively.
The Class B Ordinary Share will be automatically converted (based on the then-effective
conversion price) into 798 Entertainments Ordinary Shares immediately prior to and
conditional upon the closing of a Qualified Public Offering of 798 Entertainment.
No dividend or distribution shall be declared, paid, set aside or made with respect to 798
Entertainments ordinary shares at any time unless a distribution is likewise declared, paid
set aside or made, respectively, at the same time with respect to each outstanding 798
Entertainments Class B Ordinary Share as if these Class B Ordinary Shares had been
converted into 798 Entertainments ordinary shares.
After this issuance, the Group retained its control of 798 Entertainment, but reduced its
share ownership in 798 Entertainment from 100% to 74.3%. This transaction was accounted for
as an equity transaction. Therefore, no gain or loss is recognized in consolidated net
income or comprehensive income. The initial carrying amount of the noncontrolling interest,
$2,356, is calculated as the net assets of the investee, 798 Entertainment, times the
noncontrollings percentage, 25.7%. The difference between the proceeds received, $9,838,
and the initial carrying value of the noncontrolling interest, $2,356, was recognized as an
increase in additional paid-in capital attributable to the Group.
F - 57
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
29. |
|
NONCONTROLLING INTERESTS continued |
798 Entertainment, its subsidiaries and VIE continued
On September 8, 2010, the Note Holders of Convertible Notes issued by 798 Entertainment have
converted 37.5% of the Convertible Notes face value to class B ordinary shares of 798
Entertainment at the predetermined conversion price of $28.92, and 129,668 class B ordinary
shares were issued to the Note Holders with par value of $0.01. Upon this conversion of the
Convertible Notes, the Group retained its control of 798 Entertainment, but further redued
its share ownership in 798 Entertainment from 74.3% to 67.8%. This transaction was accounted
for as an equity transaction, therefore, no gain or loss is recognized in consolidated net
income or comprehensive income. The initial carrying amount of the noncontrolling interest,
$3,546, is calculated as the net assets of the investee, 798 Entertainment, times the
noncontrollings percentage, 32.2%, then less the value of the noncontrolling interest just
before the conversion of Convertible Notes.
The carrying amount of accumulated other comprehensive income of 798 Entertainment was
adjusted to reflect the change in the ownership interest of 798 Entertainment through a
corresponding credit to additional paid -in capital attributable to the Group.
Issuance of share option
On April 21, 2011, the Group granted 1,800,000 share options to its director, independent
directors and an external consultant at the exercise price of $0.272 per share. 50% of these
share options will be vested on the grant date and the remaining will be vested on April 21,
2012. The Group is in the progress of evaluating the grant date fair value of the options.
Establishment of new subsidiaries
In April, 2011, Techfaith Hangzhou, Techfaith Intelligent Handset Beijing and Beijing E-town
International Investment and Development Co Ltd (BEIID) entered into an agreement to set up
a company to develop a mobile phone production line in Beijing. Techfaith Hangzhou and
Techfaith Intelligent Handset Beijing will hold 49% and 11% of equity
interest of the company, respectively and BEIID will hold 40% of
equity interest of the company.
In May, 2011, Techfaith BVI and Administration Committee of Shenyang Puhe New Town (PuHe)
entered into an agreement to set up a company to develop a mobile phone research facility and
a production line in Shenyang. Techfaith BVI will hold 83.3% of equity
interest of the company and
PuHe will hold 16.7% of equity
interest of the company.
F - 58
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
ADDITIONAL INFORMATION SCHEDULE 1
CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
CONDENSED BALANCE SHEETS
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
|
|
|
|
|
|
|
|
|
|
|
Years ended |
|
|
|
December 31, |
|
|
|
2009 |
|
|
2010 |
|
|
|
(As restated) |
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
649 |
|
|
$ |
73 |
|
Amounts due from subsidiaries |
|
|
100,840 |
|
|
|
107,030 |
|
Prepaid expenses and other current assets |
|
|
65 |
|
|
|
17 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
101,554 |
|
|
|
107,120 |
|
|
|
|
|
|
|
|
|
Intangible assets |
|
|
6 |
|
|
|
6 |
|
Investment in subsidiaries |
|
|
101,978 |
|
|
|
157,749 |
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
203,538 |
|
|
$ |
264,875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accrued expenses and other current liabilities |
|
$ |
1,268 |
|
|
$ |
1,490 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
1,268 |
|
|
|
1,490 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity: |
|
|
|
|
|
|
|
|
Ordinary shares of par value $0.00002: |
|
|
|
|
|
|
|
|
50,000,000,000,000 shares authorized; shares issued and
outstanding, 650,156,045 in 2009 and 794,003,193 in 2010 |
|
|
13 |
|
|
|
16 |
|
Additional paid-in capital |
|
|
113,657 |
|
|
|
139,495 |
|
Treasury stock, at cost (918,000 and nil shares
as of December 31, 2009 and 2010, respectively) |
|
|
(199 |
) |
|
|
|
|
Accumulated other comprehensive income |
|
|
23,863 |
|
|
|
31,098 |
|
Retained earnings |
|
|
64,936 |
|
|
|
92,776 |
|
|
|
|
|
|
|
|
Total equity |
|
|
202,270 |
|
|
|
263,385 |
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND EQUITY |
|
$ |
203,538 |
|
|
$ |
264,875 |
|
|
|
|
|
|
|
|
F - 59
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
ADDITIONAL INFORMATION SCHEDULE 1
CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY (CONTINUED)
CONDENSED STATEMENTS OF OPERATIONS
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
|
(As restated) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
(250 |
) |
|
|
(84 |
) |
|
|
(177 |
) |
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
(250 |
) |
|
|
(84 |
) |
|
|
(177 |
) |
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(250 |
) |
|
|
(84 |
) |
|
|
(177 |
) |
Interest income |
|
|
346 |
|
|
|
1 |
|
|
|
|
|
Equity in earnings of subsidiaries |
|
|
8,760 |
|
|
|
4,581 |
|
|
|
28,247 |
|
Change in
fair value of the Put Option |
|
|
(855 |
) |
|
|
(84 |
) |
|
|
(123 |
) |
Change in fair value of contingent
acquisition consideration |
|
|
|
|
|
|
|
|
|
|
(107 |
) |
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
8,001 |
|
|
|
4,414 |
|
|
|
27,840 |
|
Income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
8,001 |
|
|
$ |
4,414 |
|
|
$ |
27,840 |
|
|
|
|
|
|
|
|
|
|
|
F - 60
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
ADDITIONAL INFORMATION SCHEDULE 1
CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY (CONTINUED)
STATEMENTS OF CHANGES IN EQUITY AND COMPREHENSIVE INCOME
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
other |
|
|
|
|
|
|
share |
|
|
Com- |
|
|
|
Ordinary shares |
|
|
paid-in |
|
|
Treasury |
|
|
comprehensive |
|
|
Retained |
|
|
holders |
|
|
prehensive |
|
|
|
Number |
|
|
Amount |
|
|
capital |
|
|
stock |
|
|
income |
|
|
earnings |
|
|
equity |
|
|
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2008 |
|
|
649,913,136 |
|
|
$ |
13 |
|
|
$ |
110,327 |
|
|
$ |
(4,628 |
) |
|
$ |
13,629 |
|
|
$ |
52,521 |
|
|
$ |
171,862 |
|
|
|
|
|
Cancellation of treasury stock |
|
|
|
|
|
|
|
|
|
|
(4,628 |
) |
|
|
4,628 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,466 |
|
|
|
|
|
|
|
10,466 |
|
|
$ |
10,466 |
|
Share-based compensation |
|
|
121,454 |
|
|
|
|
|
|
|
147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
147 |
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,001 |
|
|
|
8,001 |
|
|
|
8,001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
|
650,034,590 |
|
|
|
13 |
|
|
|
105,846 |
|
|
|
|
|
|
|
24,095 |
|
|
|
60,522 |
|
|
|
190,476 |
|
|
$ |
18,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of ordinary shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(199 |
) |
|
|
|
|
|
|
|
|
|
|
(199 |
) |
|
|
|
|
Foreign currency translation
adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77 |
|
|
|
|
|
|
|
77 |
|
|
$ |
77 |
|
Share-based compensation |
|
|
121,455 |
|
|
|
|
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20 |
|
|
|
|
|
Capital contribution by a
noncontrolling shareholder |
|
|
|
|
|
|
|
|
|
|
7,791 |
|
|
|
|
|
|
|
(309 |
) |
|
|
|
|
|
|
7,482 |
|
|
|
|
|
Net income (as restated) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,414 |
|
|
|
4,414 |
|
|
|
4,414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December
31, 2009 (as restated) |
|
|
650,156,045 |
|
|
|
13 |
|
|
|
113,657 |
|
|
|
(199 |
) |
|
|
23,863 |
|
|
|
64,936 |
|
|
|
202,270 |
|
|
$ |
4,491 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issue of ordinary shares for
acquisition of Citylead |
|
|
65,934,066 |
|
|
|
1 |
|
|
|
12,834 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,835 |
|
|
|
|
|
Cancellation of treasury stock |
|
|
(918,000 |
) |
|
|
|
|
|
|
(199 |
) |
|
|
199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of the Convertible Notes |
|
|
78,814,628 |
|
|
|
2 |
|
|
|
13,202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,204 |
|
|
|
|
|
Foreign currency translation
adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,235 |
|
|
|
|
|
|
|
7,235 |
|
|
$ |
7,235 |
|
Share-based compensation |
|
|
16,454 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,840 |
|
|
|
27,840 |
|
|
|
27,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010 |
|
|
794,003,193 |
|
|
$ |
16 |
|
|
$ |
139,495 |
|
|
|
|
|
|
$ |
31,098 |
|
|
$ |
92,776 |
|
|
$ |
263,385 |
|
|
$ |
35,075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F - 61
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
ADDITIONAL INFORMATION SCHEDULE 1
CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands of U.S. dollars, except share and per share data and unless otherwise stated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
|
(As restated) |
|
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
8,001 |
|
|
$ |
4,414 |
|
|
$ |
27,840 |
|
Adjustments to reconcile net income
to net cash used in operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation |
|
|
147 |
|
|
|
20 |
|
|
|
1 |
|
Change in
fair value of the Put Option |
|
|
855 |
|
|
|
84 |
|
|
|
123 |
|
Gain on investment in subsidiaries, VIEs
and VIEs subsidiary |
|
|
(8,768 |
) |
|
|
(4,598 |
) |
|
|
(21,997 |
) |
Change in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Amounts due from subsidiaries |
|
|
(17,646 |
) |
|
|
(4,780 |
) |
|
|
(6,190 |
) |
Prepaid expenses and other current assets |
|
|
28 |
|
|
|
71 |
|
|
|
48 |
|
Accrued expenses and other current liabilities |
|
|
6 |
|
|
|
4 |
|
|
|
99 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(17,377 |
) |
|
|
(4,785 |
) |
|
|
(76 |
) |
|
|
|
|
|
|
|
|
|
|
Investing activity |
|
|
|
|
|
|
|
|
|
|
|
|
Cash consideration paid for business
acquisition of Citylead |
|
|
|
|
|
|
|
|
|
|
(500 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activity |
|
|
|
|
|
|
|
|
|
|
(500 |
) |
|
|
|
|
|
|
|
|
|
|
Financing activity |
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of ordinary shares from market |
|
|
|
|
|
|
(199 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activity |
|
|
|
|
|
|
(199 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(17,377 |
) |
|
|
(4,984 |
) |
|
|
(576 |
) |
Cash and cash equivalents at the beginning
of the year |
|
|
23,010 |
|
|
|
5,633 |
|
|
|
649 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of the year |
|
$ |
5,633 |
|
|
$ |
649 |
|
|
$ |
73 |
|
|
|
|
|
|
|
|
|
|
|
F - 62
CHINA TECHFAITH WIRELESS
COMMUNICATION TECHNOLOGY LIMITED
ADDITIONAL INFORMATION SCHEDULE 1
Note:
The Condensed Financial Information of the Company only has been prepared using the same
accounting policies as set out in the Companys consolidated financial statements except
that the Company has used equity method to account for its investment in its subsidiaries
and variable interest entities.
2. |
|
INVESTMENTS IN SUBSIDIARIES AND VARIABLE INTEREST ENTITIES |
The Company and its subsidiaries and its variable interest entities are included in the
consolidated financial statements where the inter-company balances and transactions are
eliminated upon consolidation. For the purpose of the Companys stand-alone financial
statements, its investments in subsidiaries and variable interest entities are reported
using the equity method of accounting. The Companys share of income and losses from its
subsidiaries and variable interest entities is reported as earnings from subsidiaries and
variable interest entities in the accompanying condensed financial information of parent
company.
The Company is a tax exempted company incorporated in the Cayman Islands.
F - 63