##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 20-F
 o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
 OR
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended: December 31, 2009
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 OR
 o
    
    SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Date of event requiring this shell company report
 For the transition period from  to
 Commission file number: 1-33430
 QIAO XING MOBILE
COMMUNICATION CO., LTD.
  British Virgin Islands
 10th Floor CEC Building, 6 Zhongguancun South Street, Beijing 100086, Peoples Republic of China
  Title of each class
    
    Exchange on which registeredOrdinary Shares, without par value
    
    New York Stock Exchange, Inc.
 Securities registered or to be registered pursuant to Section 12(g) of the Act: None
 Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
 Number of outstanding shares of each of the issuers classes of capital or common stock as of December 31, 2009:
  Yes o
    
    No þ
  Yes o
    
    No þ
  Yes þ
    
    No o
  Yes o
    
    No o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
  þ
 o
 o
  Item 17 o
    
    Item 18 þ
  Yes o
    
    No þ




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##### 



TABLE OF CONTENTS
 INTRODUCTION
    
    
    1FORWARD-LOOKING STATEMENTS
    
    
    2PART IItem 1. Identity of Directors, Senior Management and Advisers
    
    
    3Item 2. Offer Statistics and Expected Timetable
    
    
    3Item 3. Key Information
    
    
    3Item 4. Information on the Company
    
    19Item 4A. Unresolved Staff Comments
    
    31Item 5. Operating and Financial Review and Prospects
    
    31Item 6. Directors, Senior Management and Employees
    
    46Item 7. Major Shareholders and Related Party Transactions
    
    52Item 8. Financial Information
    
    54Item 9. The Offer and Listing
    
    55Item 10. Additional Information
    
    55Item 11. Quantitative and Qualitative Disclosures About Market Risk
    
    59Item 12. Description of Securities Other than Equity Securities
    
    60PART IIItem 13. Defaults, Dividend Arrearages and Delinquencies
    
    61Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    61Item 15T. Controls and Procedures
    
    61Item 16A. Audit Committee Financial Expert
    
    61Item 16B. Code of Ethics
    
    61Item 16C. Principal Accountant Fees and Services
    
    62Item 16D. Exemptions from The Listing Standards for Audit Committees
    
    62Item 16E. Purchases of Equity Securities by The Issuer and Affiliated Purchasers
    
    62Item 16F. Change in Registrants Certifying Accountant
    
    62Item 16G. Corporate Governance
    
    63PART IIIItem 17. Financial Statements
    
    64Item 18. Financial Statements
    
    64Item 19. Exhibits
    
    64EX-8.1 SUBSIDIARIES OF THE REGISTRANTEX-12.1 CERTIFICATION OF CEOEX-12.2 CERTIFICATION OF CFOEX-13.1 CERTIFICATION OF CFO AND CEOEX-15.1 CONSENT OF CROWE HORWATH LLP, DATED JUNE 30, 2010EX-15.2 CONSENT OF KPMG, DATED JUNE 30, 2010EX-15.3 LETTER OF KPMG TO THE SECURITIES AND EXCHANGE COMMISSION, DATED JUNE 30, 2010




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##### Table of Contents



INTRODUCTION
    
    
    3G are to the third generation of telecommunication hardware standards and general
technology for mobile networking that provides increased bandwidth and allows a mobile device
user to access a wide variety of services, such as multimedia;
    
    CECT are to CEC Telecom Co., Ltd., our principal operating subsidiary in China;
    
    China or the PRC are to the Peoples Republic of China, excluding, for the purpose of
this annual report only, Taiwan and the special administrative regions of Hong Kong and Macau;
    
    CDMA are to Code Division Multiple Access, a method for transmitting simultaneous encoded
signals over a shared portion of the spectrum. The foremost application of CDMA is digital
cellular phone technology;
    
    EDGE are to Enhanced Data GSM Environment, a faster version of the GSM wireless service
designed to deliver data at rates up to 384 Kbps;
    
    EMS are to electronic manufacturing services, a general term used to describe the
services provided by companies that design, test, manufacture, distribute and provide return
and repair services for electronic components and assemblies for original equipment
manufacturers;
    
    GSM are to Global System for Mobile Communications, a digital cellular phone technology
based on time division multiple access;
    
    GPS are to Global Positioning System, a global navigation satellite system often used for
navigation purposes;
    
    MIIT are to China Ministry of Industry and Information Technology;
    
    RMB and Renminbi are to the legal currency of China;
    
    SIM are to Subscriber Identity Module, the smart card used in cellular phones to securely
store the key that is used to identify the mobile phone service subscriber;
    
    SMT are to Surface Mount Technology, a space saving technique whereby special leadless
components are soldered onto the surface of a printed circuit board;
    
    TD-SCDMA are to Time Division-Synchronous Code Division Multiple Access, a 3G wireless
standard that supports data transmission at speeds up to 2 Mbps. The standard combines time
division multiple access with an adaptive, synchronous-mode code division multiple access
component;
    
    US$, $, and U.S. dollars are to the legal currency of the United States;
    
    WCDMA are to Wideband Code Division Multiple Access, a 3G wireless standard which
utilizes one 5 MHz channel for both voice and data, initially offering data speeds up to 384
Kbps; and
    
    We, us, our company and our are to Qiao Xing Mobile Communication Co., Ltd., its
predecessor entities and its consolidated subsidiaries, unless the context indicates
otherwise.
   1




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##### Table of Contents



FORWARD-LOOKING STATEMENTS
   
    
    our expectations regarding the market for mobile handsets;
    
    our expectations regarding the continued growth of the mobile communications industry;
    
    our expectations with respect to advancements in our technologies;
    
    our beliefs regarding the competitiveness of our mobile handset products;
    
    our expectations regarding our manufacturing capacity;
    
    our expectations with respect to revenue growth and our ability to achieve profitability;
    
    our future business development, results of operations and financial condition; and
    
    competition from other manufacturers of mobile handsets.
   2




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##### Table of Contents



PART I
 
 ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
  
 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
  
 ITEM 3. KEY INFORMATION
 A. Selected Financial Data
   (Old Basis)
    
    
    
    (New Basis)January 1,
    
    
    
    NovemberYear ended
    
    
    2006 to
    
    
    
    30, 2006 toConsolidated statement of operations data
    
    December
    
    
    November
    
    
    
    December
    
    
    Year ended December 31,(Amounts in thousands, except per share data)
    
    31, 2005
    
    
    30, 2006
    
    
    
    31, 2006
    
    
    2007
    
    
    2008
    
    
    2009(RMB)
    
    
    (RMB)
    
    
    
    (RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    ($)Revenues
    
    
    1,864,125
    
    
    
    2,281,198
    
    
    
    
    256,013
    
    
    
    3,141,094
    
    
    
    2,153,873
    
    
    
    1,632,912
    
    
    
    239,223Gross profit
    
    
    337,747
    
    
    
    437,871
    
    
    
    
    37,131
    
    
    
    885,250
    
    
    
    866,777
    
    
    
    251,317
    
    
    
    36,818In-process research and development
    
    
    
    
    
    
    
    
    
    
    
    (41,739
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of other intangible assets
    
    
    (11,880
    )
    
    
    (10,890
    )
    
    
    
    (4,288
    )
    
    
    (32,280
    )
    
    
    (11,727
    )
    
    
    (4,733
    )
    
    
    (693
    )Impairment of assets held for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,957
    )
    
    
    (873
    )Impairment of other intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,235
    )
    
    
    (13,600
    )
    
    
    (1,992
    )Operating income (loss)
    
    
    273,890
    
    
    
    379,917
    
    
    
    
    (13,934
    )
    
    
    729,017
    
    
    
    608,791
    
    
    
    7,406
    
    
    
    1,086Interest expense
    
    
    (32,332
    )
    
    
    (27,115
    )
    
    
    
    (2,213
    )
    
    
    (47,034
    )
    
    
    (165,506
    )
    
    
    (326,512
    )
    
    
    (47,834
    )Gain (loss) on remeasurement of embedded derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    144,939
    
    
    
    (87,935
    )
    
    
    (12,883
    )Loss on remeasurement of warrant liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,219
    )
    
    
    (1,058
    )(Loss) gain on extinguishment of convertible debts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,634
    )
    
    
    159,326
    
    
    
    23,341Gain on disposal of subsidiaries
    
    
    10,307
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,269
    
    
    
    
    
    
    
    Impairment of investment at cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,803
    )
    
    
    (41
    )Income (loss) before income tax expense and extraordinary items
    
    
    251,518
    
    
    
    371,607
    
    
    
    
    (13,435
    )
    
    
    711,251
    
    
    
    595,422
    
    
    
    (238,357
    )
    
    
    (34,919
    )Income tax expense
    
    
    (16,719
    )
    
    
    (55,991
    )
    
    
    
    (4,251
    )
    
    
    (113,377
    )
    
    
    (155,717
    )
    
    
    (11,632
    )
    
    
    (1,704
    )Income (loss) before extraordinary items
    
    
    234,799
    
    
    
    315,616
    
    
    
    
    (17,686
    )
    
    
    597,874
    
    
    
    439,705
    
    
    
    (249,989
    )
    
    
    (36,623
    )Extraordinary items: Gains on acquisitions of additional equity
interests in CECT, net of nil tax
    
    
    48,157
    
    
    
    17,796
    
    
    
    
    
    
    
    
    28,689
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)(1)
    
    
    282,956
    
    
    
    333,412
    
    
    
    
    (17,686
    )
    
    
    626,563
    
    
    
    439,705
    
    
    
    (249,989
    )
    
    
    (36,623
    )Net income attributable to noncontrolling interests
    
    
    (52,349
    )
    
    
    (27,260
    )
    
    
    
    (1,799
    )
    
    
    (33,074
    )
    
    
    (15,901
    )
    
    
    (380
    )
    
    
    (56
    )Net income (loss) attributable to holders of ordinary shares
    
    
    230,607
    
    
    
    306,152
    
    
    
    
    (19,485
    )
    
    
    593,489
    
    
    
    423,804
    
    
    
    (250,369
    )
    
    
    (36,679
    )Earnings (loss) per share before extraordinary gains(2) Basic
    
    
    4.56
    
    
    
    7.21
    
    
    
    
    (0.49
    )
    
    
    11.69
    
    
    
    7.52
    
    
    
    (5.21
    )
    
    
    (0.76
    ) Diluted
    
    
    4.56
    
    
    
    7.21
    
    
    
    
    (0.49
    )
    
    
    11.69
    
    
    
    6.99
    
    
    
    (5.21
    )
    
    
    (0.76
    )Earnings (loss) per share(1)(2) Basic
    
    
    5.77
    
    
    
    7.65
    
    
    
    
    (0.49
    )
    
    
    12.28
    
    
    
    7.52
    
    
    
    (5.21
    )
    
    
    (0.76
    ) Diluted
    
    
    5.77
    
    
    
    7.65
    
    
    
    
    (0.49
    )
    
    
    12.28
    
    
    
    6.99
    
    
    
    (5.21
    )
    
    
    (0.76
    )Weighted average number of shares outstanding Basic
    
    
    40,000
    
    
    
    40,000
    
    
    
    
    40,000
    
    
    
    48,322
    
    
    
    49,216
    
    
    
    48,034
    
    
    
    48,034 Diluted
    
    
    40,000
    
    
    
    40,000
    
    
    
    
    40,000
    
    
    
    48,322
    
    
    
    56,386
    
    
    
    48,034
    
    
    
    48,034
  3




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##### Table of Contents



(Old Basis)
    
    
    
    (New Basis)Consolidated balance sheet data
    
    December
    
    
    November
    
    
    
    December 31,(Amounts in thousands)
    
    31, 2005
    
    
    30, 2006
    
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009(RMB)
    
    
    (RMB)
    
    
    
    (RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    ($)Cash
    
    
    379,377
    
    
    
    713,099
    
    
    
    
    762,086
    
    
    
    2,729,982
    
    
    
    2,907,148
    
    
    
    3,129,070
    
    
    
    458,411Accounts receivable, net
    
    
    513,035
    
    
    
    407,610
    
    
    
    
    546,893
    
    
    
    418,564
    
    
    
    462,282
    
    
    
    114,689
    
    
    
    16,802Prepayments to suppliers
    
    
    232,189
    
    
    
    145,652
    
    
    
    
    232,008
    
    
    
    155,993
    
    
    
    363,907
    
    
    
    181,550
    
    
    
    26,597Total current assets
    
    
    1,678,800
    
    
    
    1,684,197
    
    
    
    
    1,893,910
    
    
    
    3,601,182
    
    
    
    4,177,000
    
    
    
    3,989,431
    
    
    
    584,455Total assets
    
    
    1,798,408
    
    
    
    1,985,147
    
    
    
    
    2,336,152
    
    
    
    3,994,102
    
    
    
    4,522,920
    
    
    
    4,136,593
    
    
    
    606,014Short-term borrowings
    
    
    639,972
    
    
    
    610,314
    
    
    
    
    602,790
    
    
    
    983,904
    
    
    
    983,950
    
    
    
    884,708
    
    
    
    129,610Accounts payable
    
    
    312,806
    
    
    
    177,609
    
    
    
    
    165,326
    
    
    
    107,990
    
    
    
    52,047
    
    
    
    60,751
    
    
    
    8,900Embedded derivative liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    124,130
    
    
    
    39,978
    
    
    
    5,857Convertible notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    206,211
    
    
    
    112,162
    
    
    
    16,432Total current liabilities
    
    
    1,156,072
    
    
    
    1,026,702
    
    
    
    
    1,207,228
    
    
    
    1,239,764
    
    
    
    1,515,747
    
    
    
    1,211,067
    
    
    
    177,421Total liabilities
    
    
    1,161,491
    
    
    
    1,030,413
    
    
    
    
    1,218,968
    
    
    
    1,245,325
    
    
    
    1,516,067
    
    
    
    1,233,697
    
    
    
    180,737Total shareholders equity
    
    
    569,963
    
    
    
    879,637
    
    
    
    
    1,040,288
    
    
    
    2,670,542
    
    
    
    2,914,788
    
    
    
    2,810,451
    
    
    
    411,734
 (Old Basis)
    
    
    
    (New Basis)January 1,
    
    
    
    NovemberYear ended
    
    
    2006 to
    
    
    
    30, 2006 toConsolidated cash flow data
    
    December
    
    
    November
    
    
    
    December
    
    
    Year ended December 31,(Amounts in thousands)
    
    31, 2005
    
    
    30, 2006
    
    
    
    31, 2006
    
    
    2007
    
    
    2008
    
    
    2009(RMB)
    
    
    (RMB)
    
    
    
    (RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    ($)Net cash provided by (used in) operating activities
    
    
    110,970
    
    
    
    513,378
    
    
    
    
    (215,111
    )
    
    
    855,524
    
    
    
    110,106
    
    
    
    602,369
    
    
    
    88,248Net cash provided by (used in) investing activities
    
    
    18,386
    
    
    
    (249,317
    )
    
    
    
    63,431
    
    
    
    23,016
    
    
    
    (57,663
    )
    
    
    (58,529
    )
    
    
    (8,575
    )Net cash provided by (used in) financing activities
    
    
    168,413
    
    
    
    69,661
    
    
    
    
    200,667
    
    
    
    1,117,327
    
    
    
    143,738
    
    
    
    (321,981
    )
    
    
    (47,170
    )
 Year ended December 31,Other selected operating data(3)
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009Mobile handsets shipped (in thousands of units)
    
    
    1,730
    
    
    
    2,262
    
    
    
    3,816
    
    
    
    2,714
    
    
    
    2,123Average mobile handset selling price (RMB)(4)
    
    
    1,012
    
    
    
    1,094
    
    
    
    816
    
    
    
    788
    
    
    
    735
 
 (1)
    
    Our PRC operating subsidiary, CECT, enjoys certain preferential tax rates and holidays
under local government policies. See Item 5. Operating and financial review and
prospectsTaxation and note 14 to our audited consolidated financial statements included
elsewhere in this annual report. Without the tax holidays, our net income (loss) and basic and
diluted earnings (loss) per share for the following periods would have been reduced or
increased as follows: (Old Basis)
    
    
    
    (New Basis)January 1,
    
    
    
    NovemberYear ended
    
    
    2006 to
    
    
    
    30, 2006 toDecember
    
    
    November
    
    
    
    December
    
    
    Year ended December 31,(Amounts in thousands)
    
    31, 2005
    
    
    30, 2006
    
    
    
    31, 2006
    
    
    2007
    
    
    2008
    
    
    2009(RMB)
    
    
    (RMB)
    
    
    
    (RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    ($)(Reduction in net income by) / increase in net loss by
    
    
    (24,017
    )
    
    
    (1,147
    )
    
    
    
    1
    
    
    
    (1,056
    )
    
    
    
    
    
    
    
    
    
    
    Reduction in basic and diluted earnings per share by (2)
    
    
    (0.61
    )
    
    
    (0.02
    )
    
    
    
    
    
    
    
    (0.02
    )
    
    
    
    
    
    
    
    
    
    
    
 (2)
    
    Basic and diluted earnings (loss) per share data reflects on a retroactive basis a 40-for-one
share split that became effective on April 13, 2007. See note 17 to our audited consolidated
financial statements included elsewhere in this annual report.(3)
    
    Other selected operating data is derived from our operating records.(4)
    
    The average mobile handset selling price for handsets in a given period is calculated by
dividing revenue from handsets by unit sales volume during the same period.  4




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##### Table of Contents



Renminbi per U.S. dollar certified exchange ratePeriod end
    
    
    Average(1)
    
    
    Low
    
    
    High2005
    
    
    8.0702
    
    
    
    8.1826
    
    
    
    8.0702
    
    
    
    8.27652006
    
    
    7.8041
    
    
    
    7.9579
    
    
    
    7.8041
    
    
    
    8.07022007
    
    
    7.2946
    
    
    
    7.5806
    
    
    
    7.2946
    
    
    
    7.81272008
    
    
    6.8225
    
    
    
    6.9193
    
    
    
    6.7800
    
    
    
    7.29462009
    
    
    6.8259
    
    
    
    6.8295
    
    
    
    6.8176
    
    
    
    6.8470December
    
    
    6.8259
    
    
    
    6.8275
    
    
    
    6.8244
    
    
    
    6.82992010January
    
    
    6.8268
    
    
    
    6.8269
    
    
    
    6.8258
    
    
    
    6.8295February
    
    
    6.8258
    
    
    
    6.8285
    
    
    
    6.8258
    
    
    
    6.8330March
    
    
    6.8258
    
    
    
    6.8262
    
    
    
    6.8254
    
    
    
    6.8270April
    
    
    6.8247
    
    
    
    6.8256
    
    
    
    6.8229
    
    
    
    6.8275May
    
    
    6.8305
    
    
    
    6.8275
    
    
    
    6.8245
    
    
    
    6.8310June (through June 18, 2010)
    
    
    6.8267
    
    
    
    6.8298
    
    
    
    6.8267
    
    
    
    6.8323
 
 Source:
    
    For the period from January 1, 2005 to December 31, 2008, the exchange rates were the
noon buying rates in New York City for cable transfers as certified for customs purposes by
the Federal Reserve Bank of New York and for the period subsequent to and including January
5, 2009, the exchange rates were the certified exchange rates as published by the Federal
Reserve Board of the United States. Effective January 1, 2009, the Federal Reserve Bank of
New York discontinued publication of foreign exchange rates certified for customs purposes
and effective January 5, 2009, the Federal Reserve Board of the United States reinstituted
the publication of the daily exchange rate data in a weekly version of the H.10 release.(1)
    
    Annual averages are calculated from month-end rates. Monthly averages are calculated using
the average of the daily rates during the relevant period. B. Capitalization and Indebtedness
  C. Reasons for the Offer and Use of Proceeds
  D. Risk Factors
 Risks Related to Our Business
 Any recurrence of the global financial crisis and economic downturn similar to that occurred in
2008 and early 2009 could materially and adversely affect our business, financial condition,
results of operation and prospects.
   5




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##### Table of Contents



Evaluating our business and prospects may be difficult and our past results may not be indicative
of our future performance.
   If we cannot keep pace with market changes and produce mobile handsets with new technologies and
features in a timely and cost-efficient manner to meet our customers requirements and preferences,
the growth and success of our business will be materially adversely affected.
    
    
    the perceived advantages of our new products over existing competing products;
    
    our ability to attract mobile handset users who are currently using products of our
competitors;
    
    product cost relative to performance; and
    
    the level of customer service available to support new products.
   Competition in our industry is intense. Our failure to maintain or improve our market position and
respond successfully to changes in the competitive landscape may have a material adverse impact on
our business and results of operations.
   6




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Our sales, results of operations and reputation could be materially adversely affected if we fail
to efficiently manage our manufacturing operations without interruption, or fail to ensure that our
products meet the expectations of our distributors and our end-user customers and are delivered on
time.
  Our operations could be materially adversely affected if we fail to manage effectively our
relationships with, or lose the services of, our third-party manufacturers or other third-party
service providers.
  We rely on independent mobile handset designers in China for certain software and hardware designs
used in our production. If these or other mobile handset designers terminate their business
relationships with us, or are otherwise unable to provide us with designs suitable for our
products, or if we fail to enhance our in-house research and development activities to compensate
for our inability to obtain designs suitable for our products from these handset designers, our
business and our results of operations could be materially adversely affected.
   7




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##### Table of Contents



Our results of operations, particularly our profitability, may be materially adversely affected if
we do not successfully manage price erosion and are not able to manage costs related to our
products and operations.
  We rely primarily on our distributors for marketing our products at the provincial and local levels
and for after-sales support of our products. Because we have limited influence over our
distributors, we cannot be certain that their marketing and after-sale support of our products will
be adequate or will not harm our brand and reputation. Moreover, if we fail to timely identify
additional or replacement distributors upon the loss of one or more of our distributors, or if we
are unable to successfully manage our distribution network, or if we are unable to collect payments
from our distributors on a timely basis, our operating results may suffer.
   
    
    reduction, delay or cancellation of orders from one or more of our distributors;
    
    selection by one or more of our distributors of our competitors products;
    
    failure to timely identify additional or replacement distributors upon the loss of one or
more of our distributors; and
    
    failure of any of our distributors to make timely payment for our products.
     8




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##### Table of Contents



If we fail to source a sufficient quantity of high-quality components used in our products at
reasonable costs from our suppliers, our competitive position, reputation and business could
suffer. Our dependence on suppliers for certain types of components could jeopardize our production
activities and increase our cost of sales.
    We maintain inventories of raw materials, components and handsets, and our inventories may become
obsolete.
  We may require additional capital and we may not be able to obtain it on acceptable terms or at
all.
  
    
    investors perception of, and demand for, securities of China-based mobile handset
companies;
    
    conditions of the U.S. and other capital markets in which we may seek to raise funds;
    
    our future results of operations, financial condition and cash flows;
    
    PRC governmental regulation of foreign investment in the telecommunications industry;
    
    economic, political and other conditions in China; and
    
    PRC governmental policies relating to foreign currency borrowings.
   9




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##### Table of Contents



Our past brand-sharing practices may result in negative publicity and may even lead to
investigations or penalties by relevant PRC regulatory authorities, which could have a material
adverse impact on our reputation and business.
   Our operating results are difficult to predict and may fluctuate significantly from period to
period in the future.
  We must develop or otherwise acquire complex, evolving technologies to use in our business and meet
market demand. Our failure to develop or otherwise acquire these complex technologies, or to
successfully commercialize such technologies as new advanced products that meet customer demand on
a timely basis, will have a material adverse effect on our business, our ability to meet our
targets and our results of operations.
    We rely on a number of technologies licensed from third parties and the loss of some or all of
these licenses or failure to renew them on a timely basis could interrupt our production and have a
material adverse impact on our business.
  We have not applied for patents or registered copyrights for most of our intellectual property and
our failure to adequately protect our intellectual property rights may undermine our competitive
position, and litigation to protect our intellectual property rights may be costly.
   10




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We may be exposed to infringement or misappropriation claims by third parties, which, if determined
adversely against us, could disrupt our business and subject us to significant liability to third
parties, as well as have a material adverse effect on our financial condition and results of
operations.
      
    
    pay damage awards;
    
    seek licenses from third parties;
    
    pay additional ongoing royalties, which could decrease our profit margins;
    
    redesign our products; or
    
    be restricted by injunctions,
   11




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It may become more difficult to maintain our quality standards, and problems with product quality
or product performance could result in a decrease in customers and revenue, unexpected expenses and
loss of market share. Product liability claims against us could result in adverse publicity and
potentially significant monetary damages.
    Our sales and profitability depend on the continued growth of the mobile telecommunications
industry, especially in China, and if the mobile telecommunications industry does not grow as we
expect or grows at a slower speed than we expect, our sales and profitability may be materially
adversely affected.
    Changes in the regulatory environment for telecommunications systems and services, especially in
China, could negatively impact our business.
    12




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##### Table of Contents



Any environmental claims or failure to comply with any present or future environmental regulations
may require us to spend additional funds and may materially adversely affect our financial
condition and results of operations.
  We do not carry any business interruption insurance or third-party liability insurance for our
manufacturing facilities.
  Labor laws in the PRC may adversely affect our results of operations.
  The dividends we receive from CECT and our global income may be subject to PRC tax under the new
PRC Enterprise Income Tax Law, which would have a material adverse effect on our results of
operations. In addition, our foreign corporate holders of ordinary shares may be subject to a PRC
withholding tax upon the dividends payable by us and upon gains realized on the sale of our
ordinary shares, if we are classified as a PRC resident enterprise.
    We depend on our key personnel, and our business and growth may be severely disrupted if we lose
their services. We may also have difficulty attracting and retaining qualified management and
research and development personnel.
   13




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##### Table of Contents



Fluctuations in exchange rates could adversely affect our business.
    We believe that we were a passive foreign investment company for U.S. federal income tax purposes
for our taxable year that ended December 31, 2009 and we may continue to be a passive foreign
investment company in the current and future taxable years, which could result in adverse U.S.
federal income tax consequences to U.S. investors.
      14




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If we fail to maintain an effective system of internal control over financial reporting, our
ability to accurately and timely report our financial results or prevent fraud may be adversely
affected. In addition, investor confidence and the market price of our ordinary shares may be
adversely impacted if we or our independent registered public accounting firm conclude that our
internal control over financial reporting is not effective, in accordance with the requirements of
Section 404 of the Sarbanes-Oxley Act of 2002.
   Compliance with new rules and regulations applicable to companies publicly listed in the United
States is costly and complex and any failure by us to comply with these requirements on an ongoing
basis could negatively affect investor confidence in us and cause the market price of our ordinary
shares to decrease.
  Risks Related to our Relationship with XING
 Our parent company has substantial control over us, and one of the existing shareholders of our
parent company has substantial control over our parent company and us. The interests of our parent
company and its controlling shareholder/shareholders may not be aligned with the interests of our
other shareholders.
    15




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##### Table of Contents



As a controlled company, we are exempt from certain NYSE corporate governance requirements, which
may result in our independent directors not having as much influence as they would if we were not a
controlled company.
  
    
    our compensation committee must be composed entirely of independent directors; and
    
    our nomination committee must be composed entirely of independent directors.
  Risks Related to Doing Business in China
 Adverse changes in political and economic policies of the PRC government could have a material
adverse effect on the overall economic growth of China, which could reduce the demand for our
products and materially adversely affect our competitive position.
  
    
    the higher level of government involvement;
    
    the early stage of development of the market-oriented sector of the economy;
    
    the rapid growth rate;
    
    the higher level of control over foreign exchange; and
    
    the allocation of resources.
    Uncertainties with respect to the PRC legal system could limit the legal protections available to
you and us.
   16




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##### Table of Contents



We rely principally on dividends and other distributions on equity paid by our operating subsidiary
to fund our cash and financing requirements, but such dividends and other distributions are subject
to restrictions under PRC law. Limitations on the ability of our operating subsidiary to pay
dividends or other distributions to us could have a material adverse effect on our ability to grow,
make investments or acquisitions, pay dividends to you, and otherwise fund and conduct our
business.
  Restrictions on currency exchange may limit our ability to receive and use our revenues
effectively.
   Recent PRC regulations relating to the establishment of offshore special purpose companies by PRC
residents may subject our PRC resident shareholders to personal liability and limit our ability to
acquire PRC companies or to inject capital into our PRC subsidiary, limit our PRC subsidiarys
ability to distribute profits to us, or otherwise materially and adversely affect us.
    17




---



##### Table of Contents



We face risks related to health epidemics and other outbreaks.
  Risks Related to Investment in our Shares
 The market price for our ordinary shares may be highly volatile.
  
    
    announcements of technological or competitive developments;
    
    regulatory developments in our target markets affecting us, our customers or our
competitors;
    
    announcements regarding intellectual property infringement litigation involving us or other
mobile handset manufacturers or the issuance of patents to us or our competitors;
    
    actual or anticipated fluctuations in our quarterly operating results;
    
    changes in financial estimates by securities research analysts;
    
    changes in the economic performance or market valuations of other mobile handset companies;
    
    additions or departures of our directors, executive officers and key research personnel;
and
    
    release or expiry of lock-up or other transfer restrictions on our outstanding ordinary shares.
   18




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##### Table of Contents



Substantial future sales or perceived sales of our ordinary shares in the public market could cause
the price of our ordinary shares to decline.
   Our articles of association contain anti-takeover provisions that could have a material adverse
effect on the rights of holders of our ordinary shares.
  Your right to participate in any future rights offerings may be limited, which may cause dilution
to your holdings.
  Certain judgments obtained against us by our shareholders may not be enforceable.
  Since we are a British Virgin Islands company, the rights of our shareholders may be more limited
than those of shareholders of a company organized in the United States.
   
 ITEM 4. INFORMATION ON THE COMPANY
 A. History and Development of the Company
   19




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##### Table of Contents




    
    the Notes are unsecured and mature on May 15, 2011;
    
    the Notes bear interest at a rate of 4.0% per annum, payable in cash in arrears on a
calendar semi-annual basis beginning June 30, 2008;
    
    the Notes are convertible at the holders option into our ordinary shares at an initial
conversion price of $7.43 per ordinary share (which represents a 10% premium to the arithmetic
average of the daily volume-weighted average price (VWAP) of our ordinary shares during the
five trading day period ending on the day immediately prior to the date of execution of the
SPA), subject to adjustments as provided for in the Notes;
    
    the conversion price for our ordinary shares is subject to reset if the average of the
daily VWAP of our ordinary shares for the five consecutive trading days ending on each
three-month anniversary of the issuance date of the Notes until maturity (each a Reset Date)
is less than $6.76. In that event, the conversion price is reset to a price equal to 92.5% of
the arithmetic average of the daily VWAP of our common stock for the five trading days ending
on the applicable Reset Date. In no event will the conversion price be reset to a price less
than $4.05 per share. The conversion price of the Notes was reset to $4.05 per share on
November 15, 2008;
    
    the Notes cannot be converted if, after giving effect to such conversion, the holders of
the Notes (together with their affiliates) would beneficially own in excess of 9.99% of our
ordinary shares outstanding immediately after giving effect to the conversion;
    
    the Notes require an automatic re-pricing of the conversion price if we make certain sales
of our ordinary shares or ordinary share equivalents in a capital-raising transaction at a
price below the conversion price;
    
    the holders of the Notes can require us to redeem the Notes at any time on or after the 18
month anniversary of the issuance date of the Notes in an amount equal to the sum of (a) the
outstanding principal of the Notes, and (b) the accrued and unpaid interest thereon;
    
    in the event of a default, change of control and certain other fundamental transactions,
the holders of the Notes have the right to require us to redeem all or any portion of the
Notes at a price equal to the greater of (i) the amount to be redeemed multiplied by a
redemption premium of 125% and (ii) the amount to be redeemed multiplied by the quotient
determined by dividing the closing bid price of our ordinary shares on the date immediately
preceding such event by the conversion price of the Notes;
    
    all principal, interest, late charges and other amounts due under the Notes that are
payable in cash shall be settled in U.S. dollars in an amount equal to the applicable U.S.
dollar cash payment due under the terms of the Notes multiplied by 6.99 and divided by the
exchange rate of one U.S. dollar to Renminbi on the date such payment is due; and
    
    we are required under the terms of a Registration Rights Agreement entered into
concurrently with the SPA to file with the SEC a registration statement to register the
ordinary shares issuable upon the conversion of the Notes and the exercise of the Warrants to
permit the resale of such ordinary shares to the public. The registration statement was filed
by the Company on June 27, 2008 and was declared effective by the SEC on July 11, 2008.
  
    
    each Warrant is exercisable to purchase one ordinary share;
    
    the initial exercise price of each Warrant is $8.91 per share, subject to adjustments as
provided for in the Warrant;
    
    the Warrants are exercisable at any time during a period of five years from May 15, 2008,
the date of issuance;
    
    the Warrants contain a cashless exercise feature if the registration statement covering
the shares underlying the Warrants is not available for the resale of the ordinary shares upon
the exercise of the Warrants;
    
    the Warrants contain certain limitations on the exercise thereof in the event that the
holder would beneficially own in excess of 9.99% of our ordinary shares outstanding
immediately after giving effect to such exercise; and
    
    the Warrants require an automatic re-pricing of the exercise price if we make certain sales
of our ordinary shares or ordinary share equivalents in a capital-raising transaction at a
price below the exercise price of the Warrants.
  20




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21




---



##### Table of Contents



B. Business Overview
      PRC Mobile Handset Industry
     Growing affordability of mobile handsets
  Continuing growth increasingly driven by replacement demand
  Increasing demand for differentiated mobile handsets with more functions and personalized features
   22




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##### Table of Contents



Continual evolution of wireless network technologies
  Highly competitive market
  Increasing presence of mobile telecommunication operators and large electronic retailers in handset
distribution
   Our Products
 
   Date ofcommercialModel
    
    Key features
    
    launchC6000V
    
    Metal shell; dual camera; 2.8 inch screen
    
    January 2009VEVA U600
    
    Metal shell; corrosion resistant (alumina coat)
    
    January 2009VEVA S80
    
    Luxury series with embedded crystals; ultra-long standby battery; dual SIM cards;
arc slider design; EDGE technology
    
    April 2009VEVA V5
    
    Luxury series with embedded crystals; touch lens; ultra-long standby battery; IPTV
    
    April 2009VEVA S90
    
    Luxury series with embedded crystals; ultra-long standby battery; digital TV; GPS
function; multi-touch function
    
    May 2009VEVA U9
    
    Luxury series with embedded crystals; slider design; FM radio; bluetooth technology
    
    May 2009VEVA V6
    
    Luxury series with embedded crystals; double-sided cameras; GPS function
    
    May 2009VEVA U58
    
    Luxury series with embedded crystals; double QVGA screen; dual SIM cards
    
    July 2009
  23




---



##### Table of Contents



Date ofcommercialModel
    
    Key features
    
    launchVEVA U88
    
    Luxury series with embedded crystals; dual SIM cards; touch screen
    
    July 2009VEVA W300
    
    Luxury series watch phone with embedded crystals; FM radio; SMS chat
    
    July 2009VEVA W500
    
    Ceramic casing watch phone; FM radio; SMS chat
    
    July 2009VEVA U66
    
    Luxury series with embedded crystals; dual SIM cards; LV leather sheath; touch screen
    
    September 2009T3
    
    3G mobile handsets based on TD-SCDMA technology
    
    September 2009C3
    
    FM radio; CDMA; ultra-long standby battery
    
    October 2009
  For the year ended December 31,2007
    
    
    2008
    
    
    2009Product
    
    Revenue
    
    
    Percentage
    
    
    Rank
    
    
    Revenue
    
    
    Percentage
    
    
    Rank
    
    
    Revenue
    
    
    Percentage
    
    
    Rank(RMB)
    
    
    
    
    
    
    
    
    
    
    (RMB)
    
    
    
    
    
    
    
    
    
    
    (RMB)(Amounts in thousands, except percentages)VEVA S90
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    343,150
    
    
    
    22.0
    %
    
    
    1VEVA S80
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    273,775
    
    
    
    17.6
    %
    
    
    2VEVA S50
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    195,020
    
    
    
    12.5
    %
    
    
    3VEVA S70
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    164,861
    
    
    
    10.6
    %
    
    
    4VEVA V6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    115,509
    
    
    
    7.4
    %
    
    
    5VEVA S60
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    633,328
    
    
    
    29.6
    %
    
    
    1
    
    
    
    
    
    
    
    VEVA S70
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    262,688
    
    
    
    12.3
    %
    
    
    2
    
    
    
    
    
    
    
    W100
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    234,443
    
    
    
    11.0
    %
    
    
    3
    
    
    
    
    
    
    
    C3100
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    182,521
    
    
    
    8.5
    %
    
    
    4
    
    
    
    
    
    
    
    VEVA S50
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150,298
    
    
    
    7.0
    %
    
    
    5
    
    
    
    
    
    
    
    C1000
    
    
    623,495
    
    
    
    19.8
    %
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    C1000+
    
    
    332,318
    
    
    
    10.6
    %
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    T100
    
    
    321,903
    
    
    
    10.2
    %
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    C2000
    
    
    320,147
    
    
    
    10.2
    %
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    C6000
    
    
    264,099
    
    
    
    8.4
    %
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 Research and Development
        24




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##### Table of Contents



Manufacturing
 Manufacturing facilities
    Raw materials and components
      Production management
   25




---



##### Table of Contents



Manufacturing process
  
 Quality control and certifications
   Distribution and Marketing
 Distribution network
    Marketing
   26




---



##### Table of Contents



Pricing
   After-Sales Services
  Intellectual Property and Proprietary Rights
     Technology Licenses and Agreements
    27




---



##### Table of Contents



Competition
      Environmental Matters
  Employees
  As of December 31,Functions
    
    2007
    
    
    2008
    
    
    2009Manufacturing and engineering
    
    
    516
    
    
    
    373
    
    
    
    378General and administration
    
    
    66
    
    
    
    66
    
    
    
    47Marketing and sales
    
    
    44
    
    
    
    85
    
    
    
    42Research and development
    
    
    162
    
    
    
    168
    
    
    
    133
     28




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##### Table of Contents



Insurance
  Our Principal Facilities
   Regulations
  Chinese Regulatory Framework for the Telecommunications Industry
 Overview
   
    
    Formulating and enforcing industry policies, regulations and technology standards;
    
    Granting network access licenses for telecommunications equipment;
    
    Supervising the quality and the operation of telecommunications equipment connected to
public telecommunication networks; and
    
    Together with other relevant regulatory authorities, formulating the macro-planning of
mobile telecommunications equipment production.
   MIIT license
    29




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##### Table of Contents



NDRC approval
     Environmental Regulations
  C. Organizational Structure
  D. Property, Machinery and Equipment
   30




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##### Table of Contents



ITEM 4A. UNRESOLVED STAFF COMMENTS
  
 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
 The following discussion of our financial condition and results of operations is based upon and
should be read in conjunction with our consolidated financial statements and related notes included
elsewhere in this annual report. This discussion contains forward-looking statements that involve
risks and uncertainties. Actual results could differ materially from those projected in the
forward-looking statements. In evaluating our business, you should carefully consider the
information provided under Item 3. Key InformationD. Risk factors.
 Overview
   Key Factors Affecting Our Financial Performance
  
    
    Industry growth;
    
    Competition and market position;
    
    Product offerings and pricing;
    
    Cost management; and
    
    Working capital management.
 Industry growth
    Competition and market position
     31




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##### Table of Contents



Product offerings and pricing
    Cost management
  Working capital management
  Financial Impact of Our Corporate History
  
    
    In 2005, we acquired an additional 25.0% equity interest in CECT for aggregate
consideration of RMB75.0 million, including, among other components, the transfer of a 90.0%
equity interest in Beijing Jinxin Hengtong Technology Company Limited, or BJHTCL, and a 3.9%
equity interest in China Electronics Financial Co., Ltd., both of which were originally held
through CECT. This transaction resulted in an extraordinary gain of RMB48.2 million on the
acquisition of additional equity interest in CECT and a gain of RMB10.3 million on the
disposal of BJHTCL.
    
    In July 2006, we made an additional capital contribution of $18.8 million (equivalent to
RMB149.6 million) into CECT. As the minority CECT shareholder did not make a corresponding
additional capital contribution, our ownership interest in CECT increased by 3.4% to 93.4%.
The transaction resulted in an extraordinary gain of RMB17.8 million.
    
    In June 2007, we made another capital contribution of $50 million (equivalent to RMB380.4
million) into CECT. As the minority CECT shareholder did not make a corresponding additional
capital contribution, our ownership interest in CECT increased by 3.14% to 96.6%. The
transaction resulted in an extraordinary gain of RMB28.7 million.
    
    In May 2008, we issued the $70,000,000 Notes in exchange for a combination of 6,966,666 of
our ordinary shares that were owned by the Investors of the Notes, valued at approximately
$48,349,000, and cash of $21,651,000. For the year ended December 31, 2008, the Notes resulted
in interest expense of RMB92.9 million, gain on revaluation of the derivative instruments
embedded in the Notes of RMB144.9 million and an exchange loss of RMB11.5 million that arose
from the revaluation of the Notes. For the year ended December 31, 2009, the Notes resulted in
interest expense of RMB276.1 million ($40.5 million), loss on revaluation of the derivative
instruments embedded in the Notes of RMB87.9 million ($12.9 million), loss on revaluation of
the Warrants of RMB7.2 million ($1.1 million) and an exchange gain of RMB0.4 million ($0.1
million) that arose from the revaluation of the Notes.
  32




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##### Table of Contents




    
    In August 2008, the holders of the Notes exercised the option to convert $8,251,000 of the
principal amount of the Notes and accrued interest thereon of $46,000 into 1,511,397 of our
ordinary shares at a conversion price of $5.49 per share, resulting in a loss on
extinguishment of the convertible debts of RMB10.6 million ($1.6 million).
    
    In November and December 2009, the holders of the Notes exercised the option to require us
to redeem $30,706,000 of the principal amount of the Notes and to convert $16,073,000 of the
principal amount of the Notes and accrued interest thereon of $590,000 into 4,114,286 of our
ordinary shares at a conversion price of $4.05 per share, resulting in a gain on
extinguishment of the convertible debts of RMB159.3 million ($23.3 million).
    Revenue
   Year ended December 31,2007
    
    
    2008
    
    
    2009Percentage
    
    
    
    
    
    
    Percentage
    
    
    
    
    
    
    
    
    
    
    Percentage(Amounts in thousands, except percentages)
    
    Amount
    
    
    of revenue
    
    
    Amount
    
    
    of revenue
    
    
    Amount
    
    
    of revenue(RMB)
    
    
    
    
    
    
    (RMB)
    
    
    
    
    
    
    (RMB)
    
    
    ($)Revenues:Handsets and accessories
    
    
    3,113,756
    
    
    
    99.1
    %
    
    
    2,140,346
    
    
    
    99.4
    %
    
    
    1,624,270
    
    
    
    237,957
    
    
    
    99.5
    %Services and others
    
    
    27,338
    
    
    
    0.9
    %
    
    
    13,527
    
    
    
    0.6
    %
    
    
    8,642
    
    
    
    1,266
    
    
    
    0.5
    %Total
    
    
    3,141,094
    
    
    
    100.0
    %
    
    
    2,153,873
    
    
    
    100.0
    %
    
    
    1,632,912
    
    
    
    239,223
    
    
    
    100.0
    %
    33




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##### Table of Contents



Cost of Goods Sold and Operating Expenses
  Year ended December 31,2007
    
    
    2008
    
    
    2009Percentage
    
    
    
    
    
    
    Percentage
    
    
    
    
    
    
    
    
    
    
    Percentage(Amounts in thousands, except percentages)
    
    Amount
    
    
    of revenue
    
    
    Amount
    
    
    of revenue
    
    
    Amount
    
    
    of revenue(RMB)
    
    
    
    
    
    
    (RMB)
    
    
    
    
    
    
    (RMB)
    
    
    ($)Cost of goods sold
    
    
    2,255,844
    
    
    
    71.8
    %
    
    
    1,287,096
    
    
    
    59.8
    %
    
    
    1,381,595
    
    
    
    202,405
    
    
    
    84.6
    %Operating expenses:Selling and distribution
    
    
    36,322
    
    
    
    1.2
    %
    
    
    146,551
    
    
    
    6.8
    %
    
    
    109,598
    
    
    
    16,056
    
    
    
    6.7
    %General and administrative
    
    
    69,032
    
    
    
    2.2
    %
    
    
    44,231
    
    
    
    2.1
    %
    
    
    73,619
    
    
    
    10,785
    
    
    
    4.5
    %Research and development
    
    
    18,599
    
    
    
    0.6
    %
    
    
    29,242
    
    
    
    1.4
    %
    
    
    36,404
    
    
    
    5,333
    
    
    
    2.2
    %Amortization of other intangible assets
    
    
    32,280
    
    
    
    1.0
    %
    
    
    11,727
    
    
    
    0.5
    %
    
    
    4,733
    
    
    
    693
    
    
    
    0.3
    %Impairment of assets held for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,957
    
    
    
    873
    
    
    
    0.4
    %Impairment of other intangible assets
    
    
    
    
    
    
    
    
    
    
    26,235
    
    
    
    1.2
    %
    
    
    13,600
    
    
    
    1,992
    
    
    
    0.8
    %Total operating expenses
    
    
    156,233
    
    
    
    5.0
    %
    
    
    257,986
    
    
    
    12.0
    %
    
    
    243,911
    
    
    
    35,732
    
    
    
    14.9
    %
 Cost of goods sold
  Year ended December 31,2007
    
    
    2008
    
    
    2009Sales
    
    
    
    
    
    
    Sales
    
    
    
    
    
    
    Sales(Amounts in thousands, except units)
    
    volume
    
    
    Revenue
    
    
    volume
    
    
    Revenue
    
    
    volume
    
    
    Revenue(Unit)
    
    
    (RMB)
    
    
    (Unit)
    
    
    (RMB)
    
    
    (Unit)
    
    
    (RMB)Manufactured in Huizhou facility
    
    
    549,547
    
    
    
    416,707
    
    
    
    714,199
    
    
    
    389,348
    
    
    
    207,248
    
    
    
    69,514Outsourced from EMS providers
    
    
    3,266,751
    
    
    
    2,697,037
    
    
    
    1,999,756
    
    
    
    1,748,879
    
    
    
    1,916,222
    
    
    
    1,490,577Total
    
    
    3,816,298
    
    
    
    3,113,744
    
    
    
    2,713,955
    
    
    
    2,138,227
    
    
    
    2,123,470
    
    
    
    1,560,091
   Operating expenses
 Selling and distribution expenses
   34




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##### Table of Contents



General and administrative expenses
   Research and development expenses
   Amortization of other intangible assets
  Impairment of assets held for sale
  Impairment of other intangible assets
  Share-based compensation expense
     35




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##### Table of Contents



Taxation
 Taxation in the British Virgin Islands
   PRC enterprise income tax
    Critical Accounting Policies and Estimates
  Obligations for price guarantees
   36




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##### Table of Contents



Year ended December 31,(Amounts in thousands)
    
    2007
    
    
    2008
    
    
    2009(RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    ($)Balance at beginning of year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Provision  reported as a reduction of revenue
    
    
    2,943
    
    
    
    91
    
    
    
    118
    
    
    
    17Utilization
    
    
    (2,943
    
    
    
    (91
    )
    
    
    (118
    )
    
    
    (17
    )Balance at end of year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
  Obligations for product warranties
  Year ended December 31,(Amounts in thousands)
    
    2007
    
    
    2008
    
    
    2009(RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    ($)Balance at beginning of year
    
    
    6,809
    
    
    
    8,097
    
    
    
    5,029
    
    
    
    737Provision
    
    
    14,960
    
    
    
    7,485
    
    
    
    2,830
    
    
    
    415Utilization
    
    
    (13,672
    
    
    
    (10,553
    )
    
    
    (5,936
    )
    
    
    (870
    )Balance at end of year
    
    
    8,097
    
    
    
    5,029
    
    
    
    1,923
    
    
    
    282
  Collectibility of accounts receivable
  Year ended December 31,(Amounts in thousands)
    
    2007
    
    
    2008
    
    
    2009(RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    ($)Balance at beginning of year
    
    
    2,045
    
    
    
    5,429
    
    
    
    6,043
    
    
    
    885Bad debt expense
    
    
    3,384
    
    
    
    1,277
    
    
    
    12,938
    
    
    
    1,896Bad debt recovery
    
    
    
    
    
    
    (595
    )
    
    
    (540
    )
    
    
    (79
    )Bad debt write-off
    
    
    
    
    
    
    (68
    )
    
    
    
    
    
    
    Balance at end of year
    
    
    5,429
    
    
    
    6,043
    
    
    
    18,441
    
    
    
    2,702
    37




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##### Table of Contents



Inventories
   Recoverability of the carrying amount of goodwill
   CECT brand name
   Impairment of long-lived assets
    38




---



##### Table of Contents



Depreciation and amortization of long-lived assets
   Valuation of the Embedded Derivatives
   Recent Accounting Pronouncements
      39




---



##### Table of Contents



A. Operating Results
  Consolidated statements of operations data
    
    Year ended December 31,(Amounts in thousands)
    
    2007
    
    
    2008
    
    
    2009(RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    ($)Revenues
    
    
    3,141,094
    
    
    
    2,153,873
    
    
    
    1,632,912
    
    
    
    239,223Cost of goods sold
    
    
    (2,255,844
    )
    
    
    (1,287,096
    )
    
    
    (1,381,595
    )
    
    
    (202,405
    )Gross profit
    
    
    885,250
    
    
    
    866,777
    
    
    
    251,317
    
    
    
    36,818Operating expenses:Selling and distribution
    
    
    (36,322
    )
    
    
    (146,551
    )
    
    
    (109,598
    )
    
    
    (16,056
    )General and administrative
    
    
    (69,032
    )
    
    
    (44,231
    )
    
    
    (73,619
    )
    
    
    (10,785
    )Research and development
    
    
    (18,599
    )
    
    
    (29,242
    )
    
    
    (36,404
    )
    
    
    (5,333
    )Amortization of other intangible assets
    
    
    (32,280
    )
    
    
    (11,727
    )
    
    
    (4,733
    )
    
    
    (693
    )Impairment of assets held for sale
    
    
    
    
    
    
    
    
    
    
    (5,957
    )
    
    
    (873
    )Impairment of other intangible assets
    
    
    
    
    
    
    (26,235
    )
    
    
    (13,600
    )
    
    
    (1,992
    )Operating income
    
    
    729,017
    
    
    
    608,791
    
    
    
    7,406
    
    
    
    1,086Interest income
    
    
    16,373
    
    
    
    24,405
    
    
    
    18,850
    
    
    
    2,762Interest expense
    
    
    (47,034
    )
    
    
    (165,506
    )
    
    
    (326,512
    )
    
    
    (47,834
    )Foreign currency exchange gain (loss), net
    
    
    12,022
    
    
    
    (5,142
    )
    
    
    352
    
    
    
    52Gain (loss) on remeasurement of embedded derivatives
    
    
    
    
    
    
    144,939
    
    
    
    (87,935
    )
    
    
    (12,883
    )Loss on remeasurement of warrant liability
    
    
    
    
    
    
    
    
    
    
    (7,219
    )
    
    
    (1,058
    )(Loss) gain on extinguishment of convertible debts
    
    
    
    
    
    
    (10,634
    )
    
    
    159,326
    
    
    
    23,341Impairment of investment at cost
    
    
    
    
    
    
    
    
    
    
    (2,803
    )
    
    
    (411
    )Gain on disposal of subsidiaries
    
    
    
    
    
    
    2,269
    
    
    
    
    
    
    
    Other income (loss), net
    
    
    873
    
    
    
    (3,700
    )
    
    
    178
    
    
    
    26Income (loss) before income tax expense and extraordinary items
    
    
    711,251
    
    
    
    595,422
    
    
    
    (238,357
    )
    
    
    (34,919
    )Income tax expense
    
    
    (113,377
    )
    
    
    (155,717
    )
    
    
    (11,632
    )
    
    
    (1,704
    )Income (loss) before extraordinary items
    
    
    597,874
    
    
    
    439,705
    
    
    
    (249,989
    )
    
    
    (36,623
    )Extraordinary items:Gains on acquisitions of additional equity interests in CECT, net of nil tax
    
    
    28,689
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    
    626,563
    
    
    
    439,705
    
    
    
    (249,989
    )
    
    
    (36,623
    )Net income attributable to noncontrolling interests
    
    
    (33,074
    )
    
    
    (15,901
    )
    
    
    (380
    )
    
    
    (56
    )Net income (loss) attributable to holders of ordinary shares
    
    
    593,489
    
    
    
    423,804
    
    
    
    (250,369
    )
    
    
    (36,679
    )
 Period-to-Period Comparisons of Historical Financial Data
 Revenue
 2009 compared to 2008
   2008 compared to 2007
   40




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##### Table of Contents



Cost of goods sold
 2009 compared to 2008
  2008 compared to 2007
  Gross profit and gross margin
 2009 compared to 2008
  2008 compared to 2007
  Operating expenses
 2009 compared to 2008
  2008 compared to 2007
   41




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##### Table of Contents



Selling and distribution expenses
 2009 compared to 2008
   2008 compared to 2007
   General and administrative expenses
 2009 compared to 2008
   2008 compared to 2007
   Research and development expenses
 2009 compared to 2008
   2008 compared to 2007
   Amortization of other intangible assets
  Impairment of assets held for sale
   42




---



##### Table of Contents



Impairment of other intangible assets
  Operating income
  Interest income, interest expenses, foreign currency exchange gain, net, and other income, net
 2009 compared to 2008
  2008 compared to 2007
  Gain (loss) on remeasurement of embedded derivatives
  Loss on remeasurement of warrant liability
  (Loss) gain on extinguishment of convertible debts
   Impairment of investment at cost
  Gain on disposal of subsidiaries
   43




---



##### Table of Contents



Income tax expense
  Extraordinary items: Gains on acquisitions of additional equity interests in CECT, net of nil tax
  Net income attributable to noncontrolling interests
  Net income attributable to holders of ordinary shares
  Inflation
  B. Liquidity and Capital Resources
 Liquidity
     Year ended December 31,(Amounts in thousands)
    
    2007
    
    
    2008
    
    
    2009(RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    ($)Net cash provided by (used in) operating activities
    
    
    855,524
    
    
    
    110,106
    
    
    
    602,369
    
    
    
    88,248Net cash provided by (used in) investing activities
    
    
    23,016
    
    
    
    (57,663
    )
    
    
    (58,529
    )
    
    
    (8,575
    )Net cash provided by (used in) financing activities
    
    
    1,117,327
    
    
    
    143,738
    
    
    
    (321,981
    )
    
    
    (47,170
    )
 Net cash provided by (used in) operating activities
    44




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##### Table of Contents



Net cash provided by (used in) investing activities
  Net cash provided by (used in) financing activities
  Capital resources
  Capital expenditures
  C. Research, Development, Patents and Licenses, Etc.
   45




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##### Table of Contents



D. Trend Information
  E. Off-Balance Sheet Arrangements
   F. Tabular Disclosure of Contractual Obligations
  Due by PeriodLess than
    
    
    1 to
    
    
    3 to
    
    
    More thanTotal
    
    
    1 year
    
    
    3 years
    
    
    5 years
    
    
    5 years(amounts in thousands of Renminbi)Purchase obligations relating to raw materials and components
    
    
    60,740
    
    
    
    60,740
    
    
    
    
    
    
    
    
    
    
    
    Operating lease commitments
    
    
    7,393
    
    
    
    6,448
    
    
    
    945
    
    
    
    
    
    
    
    Total
    
    
    68,133
    
    
    
    67,188
    
    
    
    945
    
    
    
    
    
    
    
    
 G. Safe Harbor
  
 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 A. Directors and Senior Management
  Name
    
    Age
    
    Position/TitleZhi Yang Wu
    
    36
    
    Chairman and DirectorRui Lin Wu
    
    57
    
    Vice Chairman and DirectorZacky Sun
    
    47
    
    Independent DirectorXin Zhang
    
    45
    
    Independent DirectorPei De Lou
    
    48
    
    Independent DirectorDavid Li
    
    40
    
    Chief Executive OfficerKok Seong Tan
    
    38
    
    Chief Financial Officer and Principal Accounting Officer
 Directors
     46




---



##### Table of Contents



Executive officers
   B. Compensation
 Cash Compensation of Directors and Executive Officers
  Equity Incentive Plan
  Administration
   47




---



##### Table of Contents



Options
   Change of control
  Amendment and termination of plan and awards
     Ordinary shares
    
    
    Exerciseunderlying
    
    
    priceName
    
    options granted
    
    
    ($/Share)
    
    
    Grant date
    
    
    Expiration dateOther(1)
    
    
    1,200,000
    
    
    
    18.00
    
    
    March 19, 2007
    
    
    March 18, 2011
 
 (1)
    
    Consists of one consultant that is not our director or executive officer.  UnvestedrestrictedName
    
    shares
    
    
    Grant date
    
    
    Vesting dateZhi Yang Wu
    
    
    242,981
    
    
    December 4, 2009
    
    
    April 1, 2011242,981
    
    
December 4, 2009
    
    
    April 1, 2012David Li
    
    
    23,326
    
    
December 4, 2009
    
    
    April 1, 201123,326
    
    
December 4, 2009
    
    
    April 1, 2012Others (1)
    
    
    65,084
    
    
December 4, 2009
    
    
    April 1, 201165,084
    
    
December 4, 2009
    
    
    April 1, 2012
 
 (1)
    
    Consists of employees that are not our directors or executive officers.  48




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##### Table of Contents



Employment Agreements
  C. Board Practices
 Board Composition
   
    
    the establishment of a compensation committee composed entirely of independent directors;
and
    
    the establishment of a nomination committee composed entirely of independent directors.
 Board Committees
  Audit committee
  
    
    the appointment, re-appointment, evaluation, compensation, oversight and termination of the
work of our independent auditor (including resolution of disagreements between management and
the independent auditor regarding financial reporting);
    
    ensuring that it receives from our independent auditor a formal written statement attesting
to the auditors independence and describing all relationships between the independent auditor
and us;
    
    pre-approving any audit and non-audit services, including tax services, to be provided by
our independent auditor in accordance with NYSE rules;
    
    reviewing and discussing our annual audited financial statements and quarterly financial
statements with management and our independent auditor;
    
    reviewing and discussing with our independent auditor all critical accounting policies and
practices to be used by us in preparing our financial statements, all alternative treatments
of financial information within U.S. GAAP, and other material communications between our
independent auditor and management;
    
    reviewing and discussing our policies with respect to risk assessment and risk management;
    
    reviewing and discussing, with management and counsel, any legal matters that may have a
material impact on us and any material reports or inquiries from regulatory or governmental
agencies;
    
    establishing procedures for the receipt, retention and treatment of complaints regarding
accounting, internal accounting controls, auditing matters or potential violations of law, and
the confidential, anonymous submission by our employees of concerns regarding questionable
accounting or auditing matters or potential violations of law;
    
    annually reviewing the independent auditors report describing the auditing firms internal
quality control procedures, any material issues raised by the most recent internal quality
control review, or peer review of the independent auditors and all relationships between the
independent auditors and us;
  49




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##### Table of Contents




    
    setting hiring policies for employees or former employees of the independent auditors;
    
    reviewing reports prepared by management or the independent auditors relating to
significant financial reporting issues and judgments;
    
    reviewing major issues as to the adequacy of our internal controls and any special audit
steps adopted in light of material control deficiencies;
    
    annually reviewing and reassessing the adequacy of our audit committee charter;
    
    meeting separately and periodically with management, the internal auditors and the
independent auditors and reporting regularly to the full board of directors; and
    
    reviewing and approving policies and procedures with respect to proposed transactions
between us and our related parties, and approving in advance all proposed related-party
transactions as defined in Item 404 of Regulation S-K promulgated by the SEC.
 Nominating and corporate governance committee
   
    
    identifying and recommending to the board nominees for election or re-election to the
board, or for appointment to fill any vacancy;
    
    reviewing annually with the board the current composition of the board in light of the
characteristics of independence, age, skills, experience and availability of service to us;
    
    reviewing the continued board membership of a director upon a significant change in such
directors principal occupation;
    
    identifying and recommending to the board the names of directors to serve as members of the
audit committee and the compensation committee, as well as the nominating and corporate
governance committee itself;
    
    advising the board periodically with respect to significant developments in the law and
practice of corporate governance as well as our compliance with applicable laws and
regulations, and making recommendations to the board on all matters of corporate governance
and on any corrective action to be taken;
    
    establishing criteria and processes for, and leading the board and each committee of the
board in, its annual performance self-evaluation;
    
    monitoring compliance with our code of business conduct and ethics, including reviewing the
adequacy and effectiveness of our procedures to ensure proper compliance; and
    
    ensuring that the composition of the board facilitates our ability to maintain our status
as a foreign private issuer.
 Compensation committee
   
    
    approving and overseeing the total compensation package for our executives;
    
    reviewing and making recommendations to the board with respect to the compensation of our
directors and officers;
    
    reviewing and approving corporate goals and objectives relevant to the compensation of our
chief executive officer, evaluating the performance of our chief executive officer in light of
those goals and objectives, and setting the compensation, including any bonus compensation, of
our chief executive officer based on this evaluation;
    
    reviewing the results of, and procedures for, the evaluation of the performance of other
executive officers, including any bonus compensation;
    
    reviewing periodically and making recommendations to the board regarding any long-term
incentive compensation or equity plans, programs or similar arrangements, administering these
plans and reviewing and determining share-based compensation for our directors and officers;
  50




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##### Table of Contents




    
    reviewing and making recommendations to the board regarding all new employment, consulting,
retirement and severance agreements and arrangements proposed for our executives; and
    
    selecting peer groups of companies to be used for purposes of determining competitive
compensation packages.
 Duties of Directors
   
    
    convening shareholders annual general meetings and reporting its work to shareholders at
such meetings;
    
    declaring dividends and distributions;
    
    appointing officers and determining the term of office of the officers;
    
    exercising the borrowing powers of our company and mortgaging the property of our company;
and
    
    approving the transfer of shares in our company, including the registering of such shares
in our share register.
 Interested Transactions
  Remuneration and Borrowing
  Qualification
  Terms of Directors and Executive Officers
  Limitation on Liability and Indemnification Matters
   D. Employees
   51




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##### Table of Contents



E. Share Ownership
  
    
    each of our current directors and executive officers; and
 
    
    each person known to us to own beneficially more than 5.0% of our shares.
 Shares beneficially owned(1)(2)(3)Number
    
    
    PercentageDirectors and executive officers:Zhi Yang Wu(4)
    
    
    32,948,380
    
    
    
    61.8
    %Rui Lin Wu(5)
    
    
    32,200,000
    
    
    
    60.7
    %David Li
    
    
    *
    
    
    
    *Kok Seong Tan
    
    
    *
    
    
    
    *All Directors and Executive Officers as a Group
    
    
    33,277,589
    
    
    
    62.8
    %Principal shareholder:Qiao Xing Universal Resources, Inc.(6)
    
    
    32,200,000
    
    
    
    60.7
    %
 
 *
    
    Less than 1%.(1)
    
    Beneficial ownership is determined in accordance with the rules of the SEC and includes
voting or investment power with respect to the ordinary shares.(2)
    
    The percentage of beneficial ownership of each listed person is based on 53,016,292 ordinary
shares outstanding as of May 31, 2010 and any ordinary shares underlying share options
exercisable by such person within 60 days of the date of this annual report but excludes
ordinary shares underlying options held by any other person.(3)
    
    As of May 31, 2010, the outstanding amount of the Notes was approximately $16.4 million.
Given that the conversion price of the Notes was reset to $4.05 per share on November 15,
2008, the outstanding Notes could be converted into approximately 4,057,254 ordinary shares of
our company.(4)
    
    Includes 748,380 ordinary shares held by Mr. Zhi Yang Wu and 32,200,000 ordinary shares held
by Xing. Mr. Zhi Yang Wu is the vice chairman of Xing. Excluding equity interest owned by his
brother, Mr. Zhi Jian Wu Li, and his father, Mr. Rui Ling Wu, he does not own any equity
interest in Xing. Mr. Zhi Yang Wu disclaims ownership of the ordinary shares held by Xing
except to the extent of his pecuniary interest therein.(5)
    
    Includes 32,200,000 ordinary shares held by Xing. Mr. Rui Lin Wu is the chairman and chief
executive officer of Xing. Mr. Zhi Jian Wu Li, brother of our chairman and son of our vice
chairman, owned an aggregate of 7.4% equity interest in Xing through Qiao Xing Trust and Wu
Holdings Ltd. as of May 13, 2010. Mr. Ru Lin Wu also owned 34.7% equity interest in Xing as of
May 31, 2010. Mr. Rui Lin Wu disclaims ownership of the ordinary shares held by Xing except to
the extent of his pecuniary interest therein.(6)
    
    Xing is a British Virgin Islands company currently listed on the Nasdaq Global Market.
Mr. Zhi Jian Wu Li, brother of our chairman and son of our vice chairman, owned an aggregate
of 7.4% equity interest in Xing through Qiao Xing Trust and Wu Holdings Ltd. as of May 31,
2010. Mr. Ru Lin Wu also owned a 34.7% equity interest in Xing as of May 31, 2010. The address
of Xing is Qiao Xing Science Technological & Industrial Zone, Tangquan, Huizhou, Guangdong,
516023, Peoples Republic of China.   
 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 A. Major Shareholders
  B. Related Party Transactions
 Equity Incentive Plan
  Service Transactions
   52




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##### Table of Contents



Convertible Notes Held by Xing
  Cash Advances To and From Related Parties
    Arrangements in Connection with the Senior Convertible Notes Issued by Xing
  Guarantees and Pledges
   53




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##### Table of Contents



Non-Competition Arrangement
  Transfer of Trademark Application Rights
  C. Interests of Experts and Counsel
  
 ITEM 8. FINANCIAL INFORMATION
 A. Consolidated Statements and Other Financial Information
  Legal Proceedings
  Dividend Policy
   B. Significant Changes
   54




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##### Table of Contents



ITEM 9. THE OFFER AND LISTING
 A. Offering and Listing Details
  Trading priceHigh
    
    
    Low($)
    
    
    ($)Annual highs and lows:Year ended December 31, 2007 (from May 3, 2007)
    
    
    15.48
    
    
    
    6.76Year ended December 31, 2008
    
    
    8.89
    
    
    
    1.56Year ended December 31, 2009
    
    
    5.24
    
    
    
    1.32Quarterly highs and lows:First quarter 2008
    
    
    8.89
    
    
    
    5.50Second quarter 2008
    
    
    7.88
    
    
    
    4.78Third quarter 2008
    
    
    6.47
    
    
    
    2.79Fourth quarter 2008
    
    
    3.40
    
    
    
    1.56First quarter 2009
    
    
    2.95
    
    
    
    1.32Second quarter 2009
    
    
    4.33
    
    
    
    2.00Third quarter 2009
    
    
    3.58
    
    
    
    2.52Fourth quarter 2009
    
    
    5.24
    
    
    
    2.75First quarter 2010
    
    
    3.91
    
    
    
    2.05Monthly highs and lows:December 2009
    
    
    5.20
    
    
    
    3.51January 2010
    
    
    3.91
    
    
    
    2.45February 2010
    
    
    2.69
    
    
    
    2.25March 2010
    
    
    2.72
    
    
    
    2.05April 2010
    
    
    3.14
    
    
    
    2.26May 2010
    
    
    2.76
    
    
    
    2.10June 2010 (through June 18, 2010)
    
    
    2.74
    
    
    
    2.35
 B. Plan of Distribution
  C. Markets
  D. Selling Shareholders
  E. Dilution
  F. Expenses of the Issue
  
 ITEM 10. ADDITIONAL INFORMATION
 A. Share Capital
  B. Memorandum and Articles of Association
   55




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C. Material Contracts
  D. Exchange Controls
   E. Taxation
 British Virgin Islands Taxation
   U.S. Federal Income Taxation
   
    
    banks;
 
    
    certain financial institutions;
 
    
    insurance companies;
 
    
    broker dealers;
 
    
    U.S. expatriates;
 
    
    traders that elect to mark-to-market;
 
    
    tax-exempt entities;
 
    
    persons that have a functional currency other than the U.S. dollar;
 
    
    persons liable for alternative minimum tax;
 
    
    persons holding an ordinary share as part of a straddle, hedging, conversion or integrated
transaction; or
 
    
    persons that actually or constructively own 10% or more of our voting stock.
  56




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PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR TAX ADVISORS ABOUT THE APPLICATION OF THE U.S.
FEDERAL INCOME TAX RULES TO THEIR PARTICULAR CIRCUMSTANCES AS WELL AS THE STATE, LOCAL AND FOREIGN
TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF ORDINARY SHARES.
  
    
    an individual citizen or resident of the United States as determined for U.S. federal
income tax purposes;
 
    
    a corporation (or other entity taxable as a corporation for U.S. federal income
tax purposes) organized under the laws of the United States, any state thereof or the District
of Columbia;
 
    
    an estate whose income is subject to U.S. federal income taxation regardless of
its source; or
 
    
    a trust that (1) is subject to the primary supervision of a court within the
United States and one or more U.S. persons have the authority to control all substantial
decisions of the trust or (2) was in existence on August 20, 1996, was treated as a U.S.
person under the Internal Revenue Code on the previous day and has a valid election in effect
under applicable U.S. Treasury regulations to be treated as a U.S. person.
  Taxation of dividends and other distributions on the ordinary shares
      Taxation of disposition of ordinary shares
   Passive foreign investment company
 .
  
    
    at least 75% of its gross income is passive income, or
 
    
    at least 50% of the average quarterly value of its assets during a taxable year
is derived from assets that produce, or that are held for the production of, passive income.
   57




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
    
    the excess distribution or gain will be allocated ratably on a daily basis over your
holding period for the ordinary shares,
 
    
    the amount allocated to the current taxable year, and any taxable year prior to the first
taxable year in which we became a PFIC, will be treated as ordinary income, and
 
    
    the amount allocated to each other year will be subject to the highest tax rate in effect
for that year and the interest charge applicable to underpayments of tax will be imposed on
the resulting tax attributable to each such year.
      Information reporting and backup withholding
    58




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Recent legislative developments
  F. Dividends and Paying Agents
  G. Statement by Experts
  H. Documents on Display
    I. Subsidiary Information
  
 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Foreign Currency Exchange Risk
    59




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Interest Rate Risk
  
 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
   60




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PART II
 
 ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
  
 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
  
 ITEM 15T. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
   Managements Report on Internal Control over Financial Reporting
    Changes in Internal Control over Financial Reporting
  
 ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
  
 ITEM 16B. CODE OF ETHICS
   61




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ITEM 16C.  PRINCIPAL ACCOUNTANT FEES AND SERVICES
  Year ended December 31,(Amounts in thousands)

    
    2008(1)
    
    
    2009(2)(RMB)
    
    
    (RMB)
    
    
    ($)Audit fees
    
    
    1,354
    
    
    
    1,288
    
    
    
    189Audit-related fees
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    The audit fees billed by KPMG, our prior independent registered public accounting firm, in
connection with the re-issuance of their audit report on our financial statements for the
period from January 1, 2006 through November 30, 2006, the period from November 30, 2006 to
December 31, 2006 and the year ended December 31, 2007 was $48,000. The audit fees billed by
Crowe Horwath LLP, our independent registered public accounting firm, in connection with the
audit of our financial statements for the year ended December 31, 2008 was $150,000.(2)
    
    The audit fees billed by KPMG, our prior independent registered public accounting firm, in
connection with the re-issuance of their audit report on our financial statements for the year
ended December 31, 2007 was $39,000. The audit fees billed by Crowe Horwath LLP, our
independent registered public accounting firm, in connection with the audit of our financial
statements for the year ended December 31, 2009 was $150,000.  
 ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
  
 ITEM 16E.  PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
   
 ITEM 16F. CHANGE IN REGISTRANTS CERTIFYING ACCOUNTANT
        62




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ITEM 16G. CORPORATE GOVERNANCE
  
    
    As a controlled company as defined under Section 303A of the NYSE Listed Company Manual,
we are exempt from certain corporate governance requirements. Relying on this exemption, Mr.
Zhi Yang Wu, who does not satisfy the independence requirements of Section 303A of the NYSE
Listed Company Manual, serves as a member of our nominating and corporate governance committee
and compensation committee;
 
    
    We do not have formal corporate governance guidelines similar to those required for U.S.
domestic companies; and
 
    
    Our non-management directors do not schedule regular executive sessions similar to those
followed by U.S. domestic companies.
  63




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PART III
 
 ITEM 17. FINANCIAL STATEMENTS
  
 ITEM 18. FINANCIAL STATEMENTS
  
 ITEM 19. EXHIBITS
 ExhibitNumber
    
    Description1.1
    
    
    Amended and Restated Memorandum of Association(1)1.2
    
    
    Second Amended and Restated Memorandum and Articles of Association of the Registrant(1)4.1
    
    
    Equity Incentive Plan(1)4.2
    
    
    Form of Employment Agreement between the Registrant and a Senior Executive Officer of the Registrant(1)4.3
    
    
    Software License Agreement, dated October 8, 2005(1), which was renewed on March 10, 2008(2)4.4
    
    
    Non-Competition Agreement(1)4.5
    
    
    Technology Licenses Agreement, dated June 13, 2007(2)4.6
    
    
    Securities Purchase Agreement, dated May 15, 2008(3)4.7
    
    
    Registration Rights Agreement, dated May 15, 2008(3)8.1
    
    
    Subsidiaries of the Registrant12.1
    
    
    Certification of Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 200212.2
    
    
    Certification of Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 200213.1
    
    
    Certification of Chief Executive Officer and Chief Financial Officer required by 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200215.1
    
    
    Consent of Crowe Horwath LLP, dated June 30, 201015.2
    
    
    Consent of KPMG, dated June 30, 201015.3
    
    
    Letter of KPMG to the SEC, dated June 30, 2010
 
 (1)
    
    Incorporated by reference from the Registrants F-1 registration statement (File No.
333-142162), as amended, first filed with the SEC on April 17, 2007.(2)
    
    Incorporated by reference from the Registrants annual report on Form 20-F for the year ended
December 31, 2007 (File Na 1-33430) filed with the SEC on June 26, 2008.(3)
    
    Incorporated by reference from the Registrants 6-K furnished on May 19, 2008.  64




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SIGNATURE
  QIAO XING MOBILE COMMUNICATION CO., LTD.Date: June 30, 2010
    By:
    /s/ Zhi Yang WuName:
    Zhi Yang WuTitle:
    Chairman  65




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 PageReport of Independent Registered Public Accounting Firm  Crowe Horwath LLP
    
    
    F-2Report of Independent Registered Public Accounting Firm  KPMG
    
    
    F-3Consolidated Balance Sheets as of December 31, 2008 and 2009
    
    
    F-4Consolidated Statements of Operations for the Years Ended December 31, 2007, 2008 and 2009
    
    
    F-5Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2007, 2008 and 2009
    
    
    F-6Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 2008 and 2009
    
    
    F-7Consolidated Statements of Equity for the Years Ended December 31, 2007, 2008 and 2009
    
    
    F-9Notes to the Consolidated Financial Statements
    
    
    F-10
  F-1




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
        
  F-2




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
       
  F-3




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QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 (amounts in thousands, except share and per share data
 December 31,2008
    
    
    2009RMB
    
    
    RMB
    
    
    US$AssetsCurrent assets:Cash
    
    
    2,907,148
    
    
    
    3,129,070
    
    
    
    458,411Restricted cash
    
    
    136,299
    
    
    
    251,720
    
    
    
    36,877Accounts receivable, net
    
    
    462,282
    
    
    
    114,689
    
    
    
    16,802Bills receivable
    
    
    43,516
    
    
    
    
    
    
    
    Inventories
    
    
    183,169
    
    
    
    97,146
    
    
    
    14,232Prepayments to suppliers
    
    
    363,907
    
    
    
    181,550
    
    
    
    26,597Prepaid expenses and other current assets
    
    
    38,996
    
    
    
    36,007
    
    
    
    5,275Assets held for sale
    
    
    
    
    
    
    163,000
    
    
    
    23,880Deferred income taxes
    
    
    6,994
    
    
    
    16,249
    
    
    
    2,381Deferred debt issuance costs, net
    
    
    34,689
    
    
    
    
    
    
    
    Total current assets
    
    
    4,177,000
    
    
    
    3,989,431
    
    
    
    584,455Property, machinery and equipment, net
    
    
    167,233
    
    
    
    23,708
    
    
    
    3,473Land use rights
    
    
    35,304
    
    
    
    
    
    
    
    Equity investment, at cost
    
    
    7,803
    
    
    
    5,000
    
    
    
    733Goodwill
    
    
    112,814
    
    
    
    112,814
    
    
    
    16,527Other intangible assets, net
    
    
    22,766
    
    
    
    4,433
    
    
    
    649Deferred income taxes
    
    
    
    
    
    
    1,207
    
    
    
    177Total assets
    
    
    4,522,920
    
    
    
    4,136,593
    
    
    
    606,014Liabilities, noncontrolling interests and shareholders equityCurrent liabilities:Short-term borrowings
    
    
    983,950
    
    
    
    884,708
    
    
    
    129,610Accounts payable
    
    
    52,047
    
    
    
    60,751
    
    
    
    8,900Prepayments from customers
    
    
    42,551
    
    
    
    16,370
    
    
    
    2,398Accrued liabilities
    
    
    50,014
    
    
    
    34,590
    
    
    
    5,067Amounts due to related parties
    
    
    11,155
    
    
    
    5,568
    
    
    
    816Other payables and current liabilities
    
    
    7,227
    
    
    
    56,933
    
    
    
    8,341Income taxes payable
    
    
    38,462
    
    
    
    
    
    
    
    Embedded derivative liability
    
    
    124,130
    
    
    
    39,978
    
    
    
    5,857Convertible notes
    
    
    206,211
    
    
    
    112,162
    
    
    
    16,432Total current liabilities
    
    
    1,515,747
    
    
    
    1,211,067
    
    
    
    177,421Warrant liability
    
    
    
    
    
    
    22,637
    
    
    
    3,316Deferred income taxes
    
    
    320
    
    
    
    
    
    
    
    Total liabilities
    
    
    1,516,067
    
    
    
    1,233,697
    
    
    
    180,737Commitments and contingenciesEquity:Ordinary shares:Par value: noneAuthorized: UnlimitedIssued and outstanding: 52,684,901 and 47,609,731 shares, respectively
    
    
    1,064,421
    
    
    
    1,191,071
    
    
    
    174,493Additional paid-in capital
    
    
    883,410
    
    
    
    848,320
    
    
    
    124,280Retained earnings
    
    
    997,808
    
    
    
    800,597
    
    
    
    117,288Accumulated other comprehensive loss
    
    
    (30,851
    )
    
    
    (29,537
    )
    
    
    (4,327
    )Total shareholders equity
    
    
    2,914,788
    
    
    
    2,810,451
    
    
    
    411,734Noncontrolling interests
    
    
    92,065
    
    
    
    92,445
    
    
    
    13,543Total equity
    
    
    3,006,853
    
    
    
    2,902,896
    
    
    
    425,277Total liabilities and equity
    
    
    4,522,920
    
    
    
    4,136,593
    
    
    
    606,014
   F-4




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QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (amounts in thousands, except share and per share data)
 Year ended December 31,2007
    
    
    2008
    
    
    2009RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Revenues:External parties
    
    
    3,127,780
    
    
    
    2,147,300
    
    
    
    1,631,541
    
    
    
    239,022Related parties
    
    
    13,314
    
    
    
    6,573
    
    
    
    1,371
    
    
    
    201Total revenues
    
    
    3,141,094
    
    
    
    2,153,873
    
    
    
    1,632,912
    
    
    
    239,223Cost of goods sold
    
    
    (2,255,844
    )
    
    
    (1,287,096
    )
    
    
    (1,381,595
    )
    
    
    (202,405
    )Gross profit
    
    
    885,250
    
    
    
    866,777
    
    
    
    251,317
    
    
    
    36,818Operating expenses:Selling and distribution
    
    
    (36,322
    )
    
    
    (146,551
    )
    
    
    (109,598
    )
    
    
    (16,056
    )General and administrative
    
    
    (69,032
    )
    
    
    (44,231
    )
    
    
    (73,619
    )
    
    
    (10,785
    )Research and development
    
    
    (18,599
    )
    
    
    (29,242
    )
    
    
    (36,404
    )
    
    
    (5,333
    )Amortization of other intangible assets
    
    
    (32,280
    )
    
    
    (11,727
    )
    
    
    (4,733
    )
    
    
    (693
    )Impairment of assets held for sale
    
    
    
    
    
    
    
    
    
    
    (5,957
    )
    
    
    (873
    )Impairment of other intangible assets
    
    
    
    
    
    
    (26,235
    )
    
    
    (13,600
    )
    
    
    (1,992
    )Operating income
    
    
    729,017
    
    
    
    608,791
    
    
    
    7,406
    
    
    
    1,086Other income (expense):Interest income
    
    
    16,373
    
    
    
    24,405
    
    
    
    18,850
    
    
    
    2,762Interest expense
    
    
    (47,034
    )
    
    
    (165,506
    )
    
    
    (326,512
    )
    
    
    (47,834
    )Foreign currency exchange gain (loss), net
    
    
    12,022
    
    
    
    (5,142
    )
    
    
    352
    
    
    
    52Gain (loss) on remeasurement of embedded derivatives
    
    
    
    
    
    
    144,939
    
    
    
    (87,935
    )
    
    
    (12,883
    )Loss on remeasurement of warrant liability
    
    
    
    
    
    
    
    
    
    
    (7,219
    )
    
    
    (1,058
    )(Loss) gain on extinguishment of convertible debts
    
    
    
    
    
    
    (10,634
    )
    
    
    159,326
    
    
    
    23,341Impairment of investment at cost
    
    
    
    
    
    
    
    
    
    
    (2,803
    )
    
    
    (411
    )Gain on disposal of subsidiaries
    
    
    
    
    
    
    2,269
    
    
    
    
    
    
    
    Other income (loss), net
    
    
    873
    
    
    
    (3,700
    )
    
    
    178
    
    
    
    26Income (loss) before income tax
expense and extraordinary item
    
    
    711,251
    
    
    
    595,422
    
    
    
    (238,357
    )
    
    
    (34,919
    )Income tax expense
    
    
    (113,377
    )
    
    
    (155,717
    )
    
    
    (11,632
    )
    
    
    (1,704
    )Income (loss) before extraordinary item
    
    
    597,874
    
    
    
    439,705
    
    
    
    (249,989
    )
    
    
    (36,623
    )Extraordinary item:Gain on acquisition of additional
equity interests in CECT, net of nil tax
    
    
    28,689
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    
    626,563
    
    
    
    439,705
    
    
    
    (249,989
    )
    
    
    (36,623
    )Net income attributable to noncontrolling interests
    
    
    (33,074
    )
    
    
    (15,901
    )
    
    
    (380
    )
    
    
    (56
    )Net income(loss) attributable to holders of ordinary shares
    
    
    593,489
    
    
    
    423,804
    
    
    
    (250,369
    )
    
    
    (36,679
    )Basic earnings (loss) per ordinary share:Earnings (loss) before extraordinary item
    
    
    11.69
    
    
    
    7.52
    
    
    
    (5.21
    )
    
    
    (0.76
    )Extraordinary gain
    
    
    0.59
    
    
    
    
    
    
    
    
    
    
    
    Earnings (loss) per share
    
    
    12.28
    
    
    
    7.52
    
    
    
    (5.21
    )
    
    
    (0.76
    )Diluted earnings (loss) per ordinary share:Earnings (loss) before extraordinary item
    
    
    11.69
    
    
    
    6.99
    
    
    
    (5.21
    )
    
    
    (0.76
    )Extraordinary gain
    
    
    0.59
    
    
    
    
    
    
    
    
    
    
    
    Earnings (loss) per share
    
    
    12.28
    
    
    
    6.99
    
    
    
    (5.21
    )
    
    
    (0.76
    )
   F-5




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 (amounts in thousands)
 Year ended December 31,2007
    
    
    2008
    
    
    2009RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Net income (loss)
    
    
    626,563
    
    
    
    439,705
    
    
    
    (249,989
    )
    
    
    (36,623
    )Foreign currency translation adjustments
    
    
    (23,080
    )
    
    
    (7,771
    )
    
    
    (126
    )
    
    
    (18
    )Comprehensive income (loss)
    
    
    603,483
    
    
    
    431,934
    
    
    
    (250,115
    )
    
    
    (36,641
    )Comprehensive income attributable to noncontrolling interests
    
    
    (33,074
    )
    
    
    (15,901
    )
    
    
    (380
    )
    
    
    (56
    )Comprehensive income (loss) attributable to holders of ordinary shares
    
    
    570,409
    
    
    
    416,033
    
    
    
    (250,495
    )
    
    
    (36,697
    )
   F-6




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (amounts in thousands)
 Year ended December 31,2007
    
    
    2008
    
    
    2009RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Cash flows from operating activities:Net income (loss)
    
    
    626,563
    
    
    
    439,705
    
    
    
    (249,989
    )
    
    
    (36,623
    )Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:Depreciation
    
    
    10,754
    
    
    
    11,957
    
    
    
    10,607
    
    
    
    1,554Amortization of land use rights
    
    
    817
    
    
    
    802
    
    
    
    803
    
    
    
    118Amortization of other intangible assets
    
    
    32,280
    
    
    
    11,727
    
    
    
    4,733
    
    
    
    693Impairment of assets held for sale
    
    
    
    
    
    
    
    
    
    
    5,957
    
    
    
    873Impairment of other intangible assets
    
    
    
    
    
    
    26,235
    
    
    
    13,600
    
    
    
    1,992Impairment of investment at cost
    
    
    
    
    
    
    
    
    
    
    2,803
    
    
    
    411Bad debt expense
    
    
    3,384
    
    
    
    682
    
    
    
    12,938
    
    
    
    1,816Inventory write-downs
    
    
    11,068
    
    
    
    6,650
    
    
    
    18,016
    
    
    
    2,639Foreign currency exchange gain (loss), net
    
    
    (12,290
    )
    
    
    5,142
    
    
    
    (352
    )
    
    
    (52
    )(Gain) loss on disposal of property, machinery and equipment
    
    
    57
    
    
    
    (15
    )
    
    
    162
    
    
    
    24Accretion of discount on convertible notes
    
    
    
    
    
    
    70,512
    
    
    
    225,634
    
    
    
    33,056Amortization of deferred debt issuance costs
    
    
    
    
    
    
    10,851
    
    
    
    34,723
    
    
    
    5,087(Gain) loss on remeasurement of embedded derivatives
    
    
    
    
    
    
    (144,939
    )
    
    
    87,935
    
    
    
    12,883Loss on remeasurement of warrant liability
    
    
    
    
    
    
    
    
    
    
    7,219
    
    
    
    1,058Loss (gain) on extinguishment of convertible debts
    
    
    
    
    
    
    10,634
    
    
    
    (159,326
    )
    
    
    (23,341
    )Accrued interest settled through the issuance of ordinary shares on the conversion of convertible notes
    
    
    
    
    
    
    316
    
    
    
    4,028
    
    
    
    590Gain on disposal of subsidiaries
    
    
    
    
    
    
    (2,269
    )
    
    
    
    
    
    
    Deferred income taxes
    
    
    (6,237
    )
    
    
    (6,550
    )
    
    
    (10,782
    )
    
    
    (1,580
    )Share-based compensation
    
    
    38,626
    
    
    
    14,668
    
    
    
    34,922
    
    
    
    5,116Extraordinary gains on acquisitions of
additional equity interests in CECT,
net of nil tax
    
    
    (28,689
    )
    
    
    
    
    
    
    
    
    
    
    Changes in operating assets and
liabilities:Accounts receivable
    
    
    124,945
    
    
    
    (53,844
    )
    
    
    334,655
    
    
    
    49,106Bills receivable
    
    
    27,635
    
    
    
    (43,516
    )
    
    
    43,516
    
    
    
    6,375Inventories
    
    
    (24,012
    )
    
    
    (15,527
    )
    
    
    68,007
    
    
    
    9,963Prepayments to suppliers
    
    
    71,909
    
    
    
    (195,018
    )
    
    
    189,820
    
    
    
    27,809Prepaid expenses and other current assets
    
    
    18,898
    
    
    
    (13,684
    )
    
    
    (6,603
    )
    
    
    (967
    )Accounts payable
    
    
    (57,336
    )
    
    
    (50,844
    )
    
    
    8,704
    
    
    
    1,275Prepayments from customers
    
    
    (10,804
    )
    
    
    37,966
    
    
    
    (26,181
    )
    
    
    (3,836
    )Accrued liabilities
    
    
    6,041
    
    
    
    9,213
    
    
    
    (15,424
    )
    
    
    (2,260
    )Other payables and current liabilities
    
    
    6,136
    
    
    
    (20,488
    )
    
    
    706
    
    
    
    104Income taxes payable
    
    
    15,779
    
    
    
    (260
    )
    
    
    (38,462
    )
    
    
    (5,635
    )Net cash provided by operating activities
    
    
    855,524
    
    
    
    110,106
    
    
    
    602,369
    
    
    
    88,248
  F-7




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(amounts in thousands)
 Year ended December 31,2007
    
    
    2008
    
    
    2009RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Cash flows from investing activities:Purchase of property, machinery and equipment
    
    
    (1,944
    )
    
    
    (14,895
    )
    
    
    (912
    )
    
    
    (134
    )Deposit received for sale of land and building
    
    
    
    
    
    
    
    
    
    
    49,000
    
    
    
    7,179Restricted cash related to new bank borrowings
    
    
    (222,870
    )
    
    
    (108,858
    )
    
    
    (206,891
    )
    
    
    (30,310
    )Release of restricted cash upon repayment of bank borrowings
    
    
    247,788
    
    
    
    66,943
    
    
    
    91,470
    
    
    
    13,400Net cash (outflow) inflow on disposal of subsidiaries
    
    
    
    
    
    
    (1,162
    )
    
    
    8,764
    
    
    
    1,284Proceeds from disposal of property, machinery and equipment
    
    
    42
    
    
    
    309
    
    
    
    40
    
    
    
    6Net cash provided by (used in) investing activities
    
    
    23,016
    
    
    
    (57,663
    )
    
    
    (58,529
    )
    
    
    (8,575
    )Cash flows from financing activities:Net proceeds from issuance of common stock
    
    
    1,026,611
    
    
    
    
    
    
    
    
    
    
    
    Net proceeds from issuance of convertible notes
    
    
    
    
    
    
    128,887
    
    
    
    
    
    
    
    Redemption of convertible notes
    
    
    
    
    
    
    
    
    
    
    (209,700
    )
    
    
    (30,721
    )Capital contributed by a minority shareholder of a subsidiary
    
    
    2,100
    
    
    
    
    
    
    
    
    
    
    
    Proceeds received from exercise of share options
    
    
    30,911
    
    
    
    
    
    
    
    
    
    
    
    Proceeds from short-term borrowings
    
    
    1,496,963
    
    
    
    1,650,123
    
    
    
    1,418,588
    
    
    
    207,824Repayments of short-term borrowings
    
    
    (1,108,831
    )
    
    
    (1,643,314
    )
    
    
    (1,517,830
    )
    
    
    (222,363
    )Proceeds from borrowings from Xing or from related parties on behalf of Xing
    
    
    396,998
    
    
    
    57,681
    
    
    
    43,871
    
    
    
    6,427Repayments of borrowings from Xing or from related parties on behalf of Xing
    
    
    (727,425
    )
    
    
    (49,639
    )
    
    
    (56,910
    )
    
    
    (8,337
    )Net cash provided by (used in ) financing activities
    
    
    1,117,327
    
    
    
    143,738
    
    
    
    (321,981
    )
    
    
    (47,170
    )Effect of foreign exchange rate changes
    
    
    (27,971
    )
    
    
    (19,015
    )
    
    
    63
    
    
    
    9Net increase in cash
    
    
    1,967,896
    
    
    
    177,166
    
    
    
    221,922
    
    
    
    32,512Cash, beginning of year
    
    
    762,086
    
    
    
    2,729,982
    
    
    
    2,907,148
    
    
    
    425,899Cash, end of year
    
    
    2,729,982
    
    
    
    2,907,148
    
    
    
    3,129,070
    
    
    
    458,411Supplemental disclosure of cash flow
information:Interest paid
    
    
    45,576
    
    
    
    77,622
    
    
    
    71,672
    
    
    
    10,500Income tax paid
    
    
    103,835
    
    
    
    162,527
    
    
    
    90,031
    
    
    
    13,190Share issuance costs in the form of share-based payment
    
    
    12,859
    
    
    
    
    
    
    
    
    
    
    
    Warrant issuance costs in the form of share-based payment
    
    
    
    
    
    
    2,500
    
    
    
    
    
    
    
    Convertible note issuance costs in the form of share-based payment
    
    
    
    
    
    
    31,451
    
    
    
    
    
    
    
    Ordinary shares repurchased through the issuance of convertible notes
    
    
    
    
    
    
    338,165
    
    
    
    
    
    
    
    Ordinary shares issued on partial conversion of convertible notes
    
    
    
    
    
    
    55,054
    
    
    
    126,650
    
    
    
    18,555
    F-8




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF EQUITY
 (amounts in thousands, except share data)
 Retained
    
    
    AccumulatedOrdinary shares
    
    
    Additional
    
    
    earnings
    
    
    other
    
    
    TotalNumber
    
    
    
    
    
    
    paid-in
    
    
    (accumulated
    
    
    comprehensive
    
    
    shareholders
    
    
    Noncontrolling
    
    
    Totalof shares
    
    
    Amount
    
    
    capital
    
    
    deficit)
    
    
    loss
    
    
    equity
    
    
    interests
    
    
    equityRMB
    
    
    RMB
    
    
    RMB
    
    
    RMB
    
    
    RMB
    
    
    RMB
    
    
    RMBBalance as of January 1, 2007
    
    
    40,000,000
    
    
    
    83
    
    
    
    1,059,690
    
    
    
    (19,485
    )
    
    
    
    
    
    
    1,040,288
    
    
    
    76,896
    
    
    
    1,117,184Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    593,489
    
    
    
    
    
    
    
    593,489
    
    
    
    33,074
    
    
    
    626,563Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23,080
    )
    
    
    (23,080
    )
    
    
    
    
    
    
    (23,080
    )Transfer of additional paid-in capital to share capital
    
    
    
    
    
    
    308,283
    
    
    
    (308,283
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of ordinary shares
    
    
    12,500,000
    
    
    
    1,021,219
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,021,219
    
    
    
    
    
    
    
    1,021,219Share-based compensation:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    - options granted to a director and employees
    
    
    
    
    
    
    
    
    
    
    38,626
    
    
    
    
    
    
    
    
    
    
    
    38,626
    
    
    
    
    
    
    
    38,626- options granted to a consultant as ordinary share issuance cost
    
    
    
    
    
    
    (12,859
    )
    
    
    12,859
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Noncontrolling interests upon formation of a subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,100
    
    
    
    2,100Noncontrolling derecognized upon acquisition of additional equity interests in CECT
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (33,835
    )
    
    
    (33,835
    )Balance as of December 31, 2007
    
    
    52,500,000
    
    
    
    1,316,726
    
    
    
    802,892
    
    
    
    574,004
    
    
    
    (23,080
    )
    
    
    2,670,542
    
    
    
    78,235
    
    
    
    2,748,777Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    423,804
    
    
    
    
    
    
    
    423,804
    
    
    
    15,901
    
    
    
    439,705Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,771
    )
    
    
    (7,771
    )
    
    
    
    
    
    
    (7,771
    )Issuance of ordinary shares
    
    
    2,076,397
    
    
    
    85,860
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    85,860
    
    
    
    
    
    
    
    85,860Cancellation of ordinary shares
    
    
    (6,966,666
    )
    
    
    (338,165
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (338,165
    )
    
    
    
    
    
    
    (338,165
    )Issuance of stock purchase warrants to convertible note investors and external
consultants
    
    
    
    
    
    
    
    
    
    
    70,012
    
    
    
    
    
    
    
    
    
    
    
    70,012
    
    
    
    
    
    
    
    70,012Warrant issuance costs
    
    
    
    
    
    
    
    
    
    
    (4,162
    )
    
    
    
    
    
    
    
    
    
    
    (4,162
    )
    
    
    
    
    
    
    (4,162
    )Share-based compensation
    
    
    
    
    
    
    
    
    
    
    14,668
    
    
    
    
    
    
    
    
    
    
    
    14,668
    
    
    
    
    
    
    
    14,668Noncontrolling interests derecognized upon disposal of a subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,071
    )
    
    
    (2,071
    )Balance as of December 31, 2008
    
    
    47,609,731
    
    
    
    1,064,421
    
    
    
    883,410
    
    
    
    997,808
    
    
    
    (30,851
    )
    
    
    2,914,788
    
    
    
    92,065
    
    
    
    3,006,853Effect of change in accounting principle (Note 12)
    
    
    
    
    
    
    
    
    
    
    (70,012
    )
    
    
    53,158
    
    
    
    1,440
    
    
    
    (15,414
    )
    
    
    
    
    
    
    (15,414
    )Balance as of December 31, 2008 as adjusted
    
    
    47,609,731
    
    
    
    1,064,421
    
    
    
    813,398
    
    
    
    1,050,966
    
    
    
    (29,411
    )
    
    
    2,899,374
    
    
    
    92,065
    
    
    
    2,991,439Net (loss) income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (250,369
    )
    
    
    
    
    
    
    (250,369
    )
    
    
    380
    
    
    
    (249,989
    )Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (126
    )
    
    
    (126
    )
    
    
    
    
    
    
    (126
    )Issuance of ordinary shares
    
    
    5,075,170
    
    
    
    126,650
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    126,650
    
    
    
    
    
    
    
    126,650Share-based compensation
    
    
    
    
    
    
    
    
    
    
    34,922
    
    
    
    
    
    
    
    
    
    
    
    34,922
    
    
    
    
    
    
    
    34,922Balance as of December 31, 2009
    
    
    52,684,901
    
    
    
    1,191,071
    
    
    
    848,320
    
    
    
    800,597
    
    
    
    (29,537
    )
    
    
    2,810,451
    
    
    
    92,445
    
    
    
    2,902,896US$
    
    
    
    
    
    
    174,493
    
    
    
    124,280
    
    
    
    117,288
    
    
    
    (4,327
    )
    
    
    411,734
    
    
    
    13,543
    
    
    
    425,277
   F-9




---



##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 (amounts in thousands, except share and per share data)
 1
    
    Principal activities, organization and significant concentrations and risks(a)
    
    Principal activitiesQiao Xing Mobile Communication Co., Ltd. (the Company) and its subsidiaries (collectively,
the Group) are principally engaged in the production and sale of mobile phones and
accessories in the Peoples Republic of China (the PRC).(b)
    
    OrganizationThe Company was incorporated in the British Virgin Islands (the BVI) on January 31, 2002.
The Company listed its ordinary shares on the New York Stock Exchange (the NYSE) under the
symbol QXM on May 3, 2007. On May 8, 2007, the Company and certain selling shareholders
completed an initial public offering (the IPO) of 13,333,334 ordinary shares. The IPO, which
was priced at US$12 per share, consisted of 12,500,000 new ordinary shares issued by the
Company and 833,334 ordinary shares offered by the selling shareholders.As of December 31, 2009, the Company was 61.1% owned by Qiao Xing Universal Resources, Inc.
(Xing), a company listed on the Nasdaq National Market.Details of the Groups subsidiaries are as follows:
 Percentage of equity interestattributable to the GroupPlace of
    
    
    as of December 31,Name of subsidiary
    
    Note
    
    
    incorporation
    
    
    2008
    
    
    2009CEC Telecom Co., Ltd. (CECT)
    
    
    
    
    
    PRC
    
    
    96.6
    %
    
    
    96.6
    %Beijing VEVA Technology Co., Ltd. (BVT)
    
    
    (i)
    
    
    PRC
    
    
    
    
    
    
    96.6
    %
 (i)
    
    BVT was incorporated in March 2009 and is owned 100% by CECT.
 (c)
    
    Significant concentrations and risksThe Group is subject to, among others, the following significant concentrations and risks:CountryAs substantially all of the Groups operations are conducted in the PRC, the Group is subject
to special considerations and significant risks not typically associated with companies
operating in North America and Western Europe. These include risks associated with, among
others, the political, economic and legal environments and foreign currency exchange. The
Groups results may be adversely affected by changes in the political and social conditions in
the PRC, and by changes in governmental policies with respect to laws and regulations,
anti-inflationary measures, foreign currency exchange and remittance abroad, and rates and
methods of taxation, among other things.Revenue concentrationsIndividual customers accounting for more than 10% of the Groups revenue for the years ended
December 31, 2007, 2008 and 2009, are as follows:
 Year ended December 31,2007
    
    
    2008
    
    
    2009Beijing Jiasheng Ruitong Electronics Co., Ltd.
    
    
    
    
    
    
    12
    %
    
    
    18
    %Beijing U-life International Technology Co., Ltd.
    
    
    
    
    
    
    53
    %
    
    
    17
    %Shenzhen Laidi Technical Co., Ltd.
    
    
    12
    %
    
    
    
    
    
    
    16
    %Shenzhen Siecom Communication Technology
Development Co., Ltd.
    
    
    12
    %
    
    
    
    
    
    
    20
    %Beijing Jiusheng Aoxiang Technology Co., Ltd.
    
    
    
    
    
    
    
    
    
    
    15
    %Beijing Beidou Communication & Equipment Co., Ltd.
    
    
    12
    %
    
    
    
    
    
    
    Total
    
    
    36
    %
    
    
    65
    %
    
    
    86
    %
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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 (amounts in thousands, except share and per share data)
 As of December 31, 2008 and 2009, the Groups five largest accounts receivable accounted for
approximately 67% and 82%, respectively, of the Groups total accounts receivable.Concentrations of cash balances held at financial institutionsAs of December 31, 2008 and 2009, cash of RMB2,904,187 and RMB3,118,231 (US$456,823),
respectively, was held in uninsured accounts at major financial institutions located in the
PRC, and cash of RMB2,961 and RMB10,839 (US$1,588), respectively, was held in uninsured
accounts at major financial institutions located in the Hong Kong Special Administrative
Region (the HK SAR). Further, as of December 31, 2008 and 2009, the Companys cash balance
included U.S. dollar denominated bank deposits of US$5,196 and US$246 (equivalent to RMB35,450
and RMB1,678), respectively, in uninsured accounts at major institutions located in the PRC,
and US$429 and US$1,558 (equivalent to RMB2,928 and RMB10,638), respectively, in uninsured
accounts at major financial institutions located in the HK SAR. Management believes that these
major financial institutions are of high credit quality.TechnologyThe Group is developing products which incorporate complex and evolving technologies that
require substantial expenditures and resources. These new products may fail to be accepted at
the rates or levels the Group anticipates and the Group may fail to realize the expected
benefits from its investments in these new technologies. Further, the Group may experience
greater variability in its operating results than in the past, particularly depending on the
general economic conditions and the pace of development and acceptance of new technologies.
Changes in the communication industry are expected to increase competition and change the
competitive landscape and may adversely affect the Groups operating results.SuppliersThe Group purchases materials and components from various suppliers in the PRC. The Group
believes that there are a number of suppliers in the PRC with the ability to consistently
supply materials and components that meet the Groups quality standards and requirements. In
the event that a major supplier ceases to sell to the Group, the Group believes that it could
shift to other suppliers without incurring undue costs or revenue loss.2
    
    Summary of significant accounting policies(a)
    
    Basis of presentationThe Groups consolidated financial statements are presented in accordance with accounting
principles generally accepted in the United States of America (U.S. GAAP).Prior to November 30, 2006, the Company was 80% owned by Xing. The Company became a wholly
owned subsidiary of Xing on November 30, 2006 when Xing acquired the remaining 20% equity
interest in the Company from Galbo Enterprise Limited (Galbo). Xings acquisition of the
20% minority interest in the Company has been accounted for by Xing using the purchase method.
Accordingly, the purchase accounting adjustments as a result of Xings acquisition of the 20%
minority interest in the Company have been pushed-down and reflected in the accompanying
financial statements.(b)
    
    Principles of consolidationThe consolidated financial statements include the financial statements of the Company and its
majority-owned subsidiaries. All significant inter-company balances and transactions have
been eliminated upon consolidation.(c)
    
    Cash, restricted cash and related party cash management arrangementCash consists of cash on hand and interest-bearing deposits placed with banks.Cash that is restricted as to withdrawal for use or pledged as security is disclosed
separately on the face of the consolidated balance sheet, and is not included in cash in the
consolidated statements of cash flows. Restricted cash of RMB136,299 and RMB251,720
(US$36,877) as of December 31, 2008 and 2009, respectively, represents pledged deposits for
securing short-term bank borrowings.The Group participates in a cash management arrangement at the direction and discretion of
Xing. Consequently, the Group periodically both transfers cash to and receives cash from
certain related parties. These cash flows are unrelated to the production and delivery of the
Groups products and services and are not derived from transactions or other events that enter
into the determination of the Groups net income (loss). For purposes of the consolidated
statements of cash flows, the cash inflows and outflows under this related party financing
arrangement are presented under cash flows from financing activities.
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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 (amounts in thousands, except share and per share data)
 (d)
    
    Accounts and bills receivablesAccounts receivable are recorded at invoiced amount net of deductions for trade discounts.
The Group maintains an allowance for doubtful accounts for estimated losses resulting from the
inability of its customers to make required payments. The Group determines the allowance for
doubtful accounts based on the age of the accounts receivable balance, the customers payment
history and its current credit-worthiness and current economic trends. Account balances are
charged off against the allowance after all means of collection have been exhausted and the
potential for recovery is considered remote. The Group does not have any off-balance-sheet
credit exposure related to its customers. The Group does not
typically charge interest on the accounts receivable.To reduce the Groups credit risk, the Group has required certain customers to pay for the
sale of the Groups products by bills receivable. Bills receivable represents interest-free
short-term notes receivable issued by a financial institution that entitles the Group to
receive the full face amount from the financial institution at a stated maturity date, which
is within one year from the date of issuance.In certain circumstances, the Group has sold, with recourse, bills receivables to banks. The
recourse obligation represents the amount the Group would be obligated to repay to the extent
that the issuing financial institution does not make payment upon maturity. Because the
discounted bills receivables have not been legally isolated from the Group, the discounted
bills receivables sold with recourse have been accounted for as short-term secured borrowings
until the bills receivable are paid. Upon payment of bills receivable, the discounted bills
receivables and related short-term secured borrowings are derecognized. Historically, the
Group has experienced no losses on bills receivable. As of December 31, 2008 and 2009,
discounted bills of RMB40,000 and nil, respectively, are included in short-term borrowings.(e)
    
    InventoriesInventories are stated at the lower of cost or market value. Cost is determined using the
first-in, first-out method. Costs of finished goods are composed of direct materials, direct
labor and an attributable portion of manufacturing overhead based on normal operating
capacity. Adjustments are recorded to write-down damaged, obsolete and slow-moving items to
their estimated net residual value based on the ageing of the inventories, current and
expected future market trends and conditions, and the physical condition of the inventory.(f)
    
    Prepayments to suppliersAdvance payments for purchases of raw materials are included in prepayments to suppliers and
represent cash deposits paid to vendors for future purchases. The Group is required to make
advance payments for certain new suppliers. Advanced payments are unsecured, non-interest
bearing and expected to be utilized within one year.The outstanding balance of prepayments to suppliers is reduced and reclassified to
inventories when inventory is received and passes quality inspection based on the terms of
the purchase order. Such reclassifications of RMB1,909,685, RMB1,492,267 and RMB1,591,867
(US$233,210) for the years ended December 31, 2007, 2008 and 2009, respectively, are not
reflected as cash outflows from operating activities.(g)
    
    Property, machinery and equipmentProperty, machinery and equipment are stated at cost less accumulated depreciation and
impairment. Property, machinery and equipment acquired in a purchase business combination and
upon acquisitions of noncontrolling interest are initially recorded based on a purchase price
allocation. In addition, as a result of the application of push-down accounting (Note 2(a)),
the Groups property, machinery and equipment have been adjusted to a new cost basis, which
reflects Xings original 80% interest at depreciated cost and Xings 20% acquired interest at
fair value as of November 30, 2006.Major expenditures for betterments and renewals are capitalized. All ordinary repair and
maintenance costs are expensed as incurred. Depreciation on property, machinery and equipment
is provided using the straight-line method (after taking into account their respective
estimated residual values) over the following estimated useful lives:
 Buildings and improvements
    
    5  30 yearsMachinery and equipment
    
    5  12 yearsFurniture and office equipment
    
    5  10 yearsMotor vehicles
    
    5  8 years
  F-12




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 (amounts in thousands, except share and per share data)
 Depreciation of property, machinery and equipment attributable to manufacturing activities is
capitalized as part of inventory and expensed to cost of goods sold when the inventory is
sold. Depreciation related to abnormal amounts from idle capacity is charged to cost of goods
sold in the period. When items are retired or otherwise disposed of, income is charged or
credited for the difference between the net book value and proceeds received thereon. Assets
to be disposed of are separately presented on the consolidated balance sheet and reported at
the lower of their carrying amount or fair value less costs to sell, and are no longer
depreciated.(h)
    
    Land use rightsLand use rights represent the exclusive right to occupy and use a piece of land in the PRC
during the contractual period of the rights. Land use rights are carried at cost, subject to
adjustments resulting from the effects of purchase accounting and push-down accounting, and
are charged to expense on a straight-line basis over 50 years, the contractual period of the
rights.(i)
    
    Goodwill and other intangible assetsGoodwill represents the excess of the cost of an acquisition over the fair value of net assets
acquired. Goodwill is not amortized, but is instead tested for impairment at least annually.Acquired intangible assets are recognized if it satisfies either the contractual-legal or
separability criterion specified under U.S. GAAP. Such intangible assets are initially
measured and recorded at fair value. As a result of the application of push-down accounting,
other intangible assets have been adjusted to a new cost basis, which reflects Xings original
80% interest at amortized cost and the 20% acquired interest at fair value as of November 30,
2006.Intangible assets with determinable useful lives are amortized as follows:
 Customer relationships
    
    3  5 yearsCompleted technology
    
    1.8  5 yearsCore technology
    
    4  5 yearsBacklog
    
    4  5 monthsLicenses
    
    5 years
 Management has determined that the Groups CECT brand name held by its subsidiary, CECT,
does not have a determinable useful life. Consequently, the carrying amount of this brand
name is not amortized but is tested for impairment annually or more frequently if events or
changes in circumstances indicate that the assets might be impaired. Such impairment test
consists of a comparison of the fair value of the brand name with its carrying amount, and an
impairment loss is recognized if and when the carrying amount of the brand name exceeds its
fair value.(j)
    
    Impairment of long-lived assetsLong-lived assets with determinable useful lives, such as property, machinery and equipment
and amortizable intangible assets, are tested for impairment if events or changes in
circumstances indicate that the asset might be impaired. Recoverability of such assets to be
held and used is measured by a comparison of the carrying amount of the asset to the estimated
undiscounted future cash flows expected to be generated by the asset. If the carrying amount
of an asset exceeds its estimated future undiscounted cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the fair value of
the asset.Goodwill and the CECT brand name which are not subject to amortization are tested annually for
impairment, and are tested for impairment more frequently if events and circumstances indicate
that the asset might be impaired. An impairment loss would be recognized on the CECT brand
name to the extent that the carrying amount of the CECT brand name exceeds its fair value.
For goodwill, the impairment determination is made at the reporting unit level and consists of
two steps. In the first step, the Company determines the fair value of its reporting unit and
compares it to its carrying amount, including goodwill. Second, if the carrying amount of the
reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the
carrying amount of the reporting units goodwill over the implied fair value of that goodwill.
The implied fair value of goodwill is determined by allocating the fair value of the
reporting unit in a manner similar to a purchase price allocation. The residual fair value
after this allocation is the implied fair value of the reporting unit goodwill. Management
has determined that CECT is the reporting unit for testing goodwill impairment. The fair
value of the CECT is determined based on the market approach, under which the fair value is
estimated based on market multiples of earnings for comparable companies.
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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
 (k)
    
    Revenue recognitionThe Group derives revenues principally from the sales of mobile phones and accessories in the
PRC, and to a lesser extent the rendering of technical, processing and other related services.Sales of mobile phones and accessoriesSales represent the invoiced amount, net of discounts, returns, volume rebates and price
guarantees granted to customers. The Group recognizes revenue when products are received by
the customers at the location designated by the customer and the customer takes ownership and
assumes risk of loss, collection of the relevant receivable is probable, persuasive evidence
of an arrangement exists and the selling price is fixed or determinable.The Group recognizes a liability for price guarantees, which generally cover a period of
between three to four months, based on managements estimates of future price reductions and
the level of unsold inventories held by customers at the dates of expected price adjustments.
Price guarantees reported as a reduction of revenues amounted to RMB2,943, RMB91 and RMB118
(US$17) for the years ended December 31, 2007, 2008 and 2009, respectively.In the PRC, value-added-tax (VAT) at a rate of 17% of invoiced amount is collected on behalf
of the PRC tax authorities. Revenue is recorded net of VAT. VAT collected from customers is
offset against VAT paid for purchases and is recorded as a liability on the consolidated
balance sheet until paid.Provision of servicesRevenues from the provision of technical, processing and other related services are recognized
in the period when performance of the service is completed as agreed to in each written
service agreement, the fee is fixed or determinable, and collection of relevant receivable is
reasonably assured.(l)
    
    Product warrantiesThe Group provides a one year warranty to customers that its products will meet the functionality
standards agreed to in each sales arrangement. The Group provides for the estimated warranty
costs under these guarantees based upon historical experience and managements estimate of the
level of future claims, and accrues for specific items at the time their existence is known
and the amounts are estimable. Provisions of product warranty costs, which are charged to
cost of goods sold, are analyzed as follows:
 Year ended December 31,2007
    
    
    2008
    
    
    2009RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Balance at beginning of year
    
    
    6,809
    
    
    
    8,097
    
    
    
    5,029
    
    
    
    737Provision
    
    
    14,960
    
    
    
    7,485
    
    
    
    2,830
    
    
    
    415Utilization
    
    
    (13,672
    )
    
    
    (10,553
    )
    
    
    (5,936
    )
    
    
    (870
    )Balance at end of year
    
    
    8,097
    
    
    
    5,029
    
    
    
    1,923
    
    
    
    282
 (m)
    
    Research and development costs, advertising costs, and shipping and handling costsResearch and development costs are expenses as incurred.Adverting costs are charged to selling and distribution expenses when incurred. Advertising
costs amounted to RMB26,445, RMB137,166 and RMB92,212 (US$13,509) for the years ended December
31, 2007, 2008 and 2009, respectively.The costs of shipping and distributing products are included in cost of sales.(n)
    
    Retirement and other postretirement benefitsPursuant to relevant PRC regulations, the Groups subsidiaries are required to make
contributions to various defined contribution plans organized by the PRC government. The
contributions are made for each qualifying PRC employee at 20% of a standard salary base as
determined by the PRC governmental authority. Contributions to the defined contribution plans
are charged to expense as the service is provided. For the years ended December 31, 2007,
2008 and 2009, contributions to the defined contribution plans were RMB624, RMB2,228 and
RMB3,165 (US$464), respectively. The Group has no other obligation for the payment of
employee benefits associated with these plans beyond the contributions described above.
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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
 (o)
    
    Share-based paymentsCompensation cost related to share options or similar equity instruments are measured at fair
value as of the date of the award and recognized over the requisite service period, which is
generally the same as the vesting period. When no future services are required to be
performed by the employee in exchange for the reward, and if such award does not contain a
performance or market condition, the cost of the award (as measured based on the grant-date
fair value) is expensed on the grant date.(p)
    
    Income taxesIncome taxes are accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between
the financial statements carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates or laws is recognized
in the statement of operations in the period that the change in tax rates or tax laws is
enacted. Interest and penalties related to unrecognized tax benefits, if and when required,
are classified as part of income tax expense in the statement of operations.(q)
    
    Foreign currency transactionsThe reporting currency of the Group is Renminbi (RMB).Through May 2, 2007, the Companys functional currency was RMB. Effective May 3, 2007, the
Company changed its functional currency to United States dollars (U.S. dollar or US$) due
to the significant changes in the Companys economic facts and circumstances upon the
completion of the Companys listing on the NYSE, which resulted in the Companys financing
activity being predominately denominated in and expected to continue to be predominately
denominated in U.S. dollar. The corresponding adjustment attributable to current-rate
translation of non-monetary assets as of the date of the change was immaterial and has been
recorded as accumulated other comprehensive loss, a separate component within shareholders
equity.The functional currency of all other companies within the Group is the RMB. Monetary assets
and liabilities which are denominated in currencies other than RMB are translated into RMB
using the applicable exchange rates quoted by the Peoples Bank of China (the PBOC) at each
balance sheet date. Transactions of the Company through May 2, 2007 and of all other
companies within the Group denominated in currencies other than RMB are translated into RMB at
the exchange rates quoted by the PBOC prevailing at the dates of transactions. Foreign
exchange gains or losses resulting from the settlement of foreign currency transactions and
from the translation at each period of assets and liabilities denominated in foreign
currencies are recorded as foreign currency exchange gain, net in the consolidated statements
of operations.Effective from May 3, 2007, assets and liabilities of the Company are translated into RMB
using the exchange rate as of the balance sheet date. Income and expenses are translated at
the average exchange rate prevailing during the reporting period. The gains and losses
resulting from translation of financial statements of the Company are recorded as accumulated
other comprehensive loss, a separate component within shareholders equity.RMB is not freely convertible into foreign currencies. All foreign exchange transactions
involving RMB must take place either through the PBOC or other institutions authorized to buy
and sell foreign currency. The exchange rate adopted for foreign exchange transactions are
the rates of exchange quoted by the PBOC which are determined largely by supply and demand.For the convenience of readers, certain 2009 RMB amounts included in the accompanying
consolidated financial statements have been translated into U.S. dollars at the rate of
US$1.00 = RMB6.8259, being the noon buy rate for U.S. dollars in effect on December 31, 2009
in the City of New York for cable transfer in RMB per U.S. dollar as certified for custom
purposes by the Federal Reserve Bank. No representation is made that RMB amounts could have
been, or could be, converted into U.S. dollars at that rate or at any other certain rate on
December 31, 2009, or at any other date.(r)
    
    Earnings (loss) per shareBasic earnings (loss) per share is computed using the two-class method by dividing net
income allocated to ordinary shareholders by the weighted average number of ordinary shares
outstanding during the year/period. Diluted earnings per share is calculated by dividing net
income by the weighted average number of ordinary and dilutive ordinary shares equivalents
outstanding during the year/period. Potential dilutive securities are not included in the
calculation of diluted earnings (loss) per share if the impact is anti-dilutive.
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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
 (s)
    
    Use of estimatesThe preparation of the consolidated financial statements in accordance with U.S. GAAP requires
management of the Group to make a number of estimates and assumptions relating to the reported
amounts of assets and liabilities and the disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Significant items subject to estimates and assumptions
in the Groups consolidated financial statements include determining the fair values of assets
and liabilities acquired in business combinations and purchase of additional equity interests
in CECT from the noncontrolling interest holder, the estimated useful lives of property,
machinery and equipment and intangible assets with determinable lives, recoverability of the
carrying values of property, machinery and equipment, goodwill and other intangible assets,
the fair value of share-based payments, the fair values of conversion options and other
derivatives embedded in convertible notes, the fair value of ordinary share warrants granted
in connection with the issuance of the convertible notes, allowances for doubtful receivables,
realizable value of inventories, and deferred income tax assets, warranty obligations and
price guarantees. Actual result could differ from those estimates.(t)
    
    Segment informationThe Group uses the management approach in determining reportable operating segments. The
management approach considers the internal organization and reporting used by the Groups
chief operating decision maker for making operating decisions and assessing performance as the
source for determining the Groups operating segments. Management, including the chief
operating decision maker, reviews operating results solely by monthly revenue and operating
results of CECT, the operating subsidiary in the PRC. As such, management has determined that
CECT is the Groups only operating segment. As the Groups operations and customers are
principally all located in the PRC, no geographic information has been presented.(u)
    
    ContingenciesIn the normal course of business, the Group is subject to contingencies, including legal
proceedings and claims arising out of the business that relate to a wide range of matters.
The Group recognizes a liability for such contingency if it determines it is probable that a
loss has occurred and a reasonable estimate of the loss can be made. The Group may consider
many factors in making these assessments including past history and the specifics of each
matter. As the Group has not become aware of any claims since operations commenced, the Group
has not recognized a liability for any claims.(v)
    
    ReclassificationsOn January 1, 2009, the Group adopted new accounting standard for noncontrolling interests in
consolidated financial statements. A noncontrolling interest in a subsidiary of the Group
represents the portion of the equity (net assets) in the subsidiary not directly or indirectly
attributable to the Group. This pronouncement requires noncontrolling interests to be
presented as a separate component of equity in the consolidated balance sheet and modifies the
presentation by requiring earnings and other comprehensive income to be attributed to
controlling and noncontrolling interests. The presentation regarding noncontrolling interests
has been retrospectively applied for all the periods presented in the consolidated financial
statements.As a result of the adoption of this accounting standard, the Group retrospectively (1)
reclassified RMB92,065 of minority interests to noncontrolling
interests as a component of equity as of December 31, 2008, and
(2) presented RMB33,074 and RMB15,901 of minority interests, previously deducted from net
income for the years ended December 31, 2007 and 2008, respectively, as an adjustment to net
income to arrive at net income attributable to holders of ordinary shares of the Company in
the consolidated statements of operations.(w)
    
    Recently issued accounting standardsIn June 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) No. 2009-17 (ASU 2009-17), which amends guidance regarding consolidation of
variable interest entities to address the elimination of the concept of a qualifying special
purpose entity. It replaces the quantitative-based risks and rewards calculation for
determining which enterprise has a controlling financial interest in a variable interest
entity with an approach focused on identifying which enterprise has the power to direct the
activities of the variable interest entity, and the obligation to absorb losses of the entity
or the right to receive benefits from the entity. Additionally, it requires any enterprise
that holds a variable interest in a variable interest entity to provide enhanced disclosures
that will provide users of financial statements with more transparent information about an
enterprises involvement in a variable interest entity. It is effective for interim and annual
reporting periods beginning after November 30, 2009. The adoption is not expected to have a
material impact on the Groups consolidated financial statements.
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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
 In October 2009, the FASB issued ASU No. 2009-13 (ASU 2009-13), regarding revenue
arrangements with multiple deliverables. These updates addresses how to determine whether an
arrangement involving multiple deliverables contains more than one unit of accounting, and how
the arrangement consideration should be allocated among the separate units of accounting.
These updates are effective for fiscal years beginning after June 15, 2010 and to be applied
retrospectively or prospectively for new or materially modified arrangements. In addition,
early adoption is permitted. The adoption is not expected to have a material impact on the
Groups consolidated financial statements.(w)
    
    Recently issued accounting standards (continued)In October 2009, the FASB issued ASU No. 2009-14 (ASU 2009-14), to exclude all tangible
products containing both software and non-software components that function together to
deliver the products essential functionality with respect to
certain revenue arrangements that include software elements. The effective date for revenue arrangements
entered into or materially modified in fiscal years beginning on or after June 15, 2010 and is
to be applied on a prospective basis. Early application is permitted as of the beginning of an
entitys fiscal year. The adoption is not expected to have a material impact on the Groups
consolidated financial statements.In January 2010, the FASB issued ASU No. 2010-06 (ASU 2010-06), which requires a number of
additional disclosures regarding (1) the different classes of assets and liabilities measured
at fair value, (2) the valuation techniques and inputs used, (3) the activity in Level 3 fair
value measurements, and (4) the transfers between Levels 1, 2, and 3. The new disclosures and
clarifications of existing disclosures are effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosures about purchases, sales,
issuances, and settlements in the roll forward of activity in Level 3 fair value measurements.
Those disclosures are effective for fiscal years beginning after December 15, 2010, and for
interim periods within those fiscal years. The adoption is not expected to have a material
impact on the Groups consolidated financial statements.
 3
    
    Acquisitions
 On June 30, 2007, the Company injected additional capital of US$50,000 (RMB380,425) into CECT
in the form of cash. The noncontrolling shareholder did not participate in the capital injection
and as a result, the Companys equity interest in CECT increased from 93.41% to 96.55%.The Company accounted for the above step-up acquisition of the equity interests in CECT using
the purchase method. This method requires the acquisition cost to be allocated to the assets
acquired, including separately identifiable intangible assets, and liabilities assumed, based
on a pro-rata share of their estimated fair values. The Company makes estimates and judgments
in determining the fair value of the assets acquired and liabilities assumed based on
independent appraisal reports as well as its experience in the valuation of similar assets and
liabilities. If different judgments or assumptions were used, the amounts assigned to the
individual acquired assets or liabilities could be materially different. For the Groups
acquisition, the fair value of the underlying net assets, representing the Companys
additional equity interest acquired in CECT, exceeded the Companys purchase price, giving
rise to negative goodwill. Such negative goodwill was first allocated to reduce the purchase
price allocated to certain assets. The remaining unallocated negative goodwill has been
recognized as an extraordinary gain in the consolidated statements of operations in the year
of acquisition.
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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
 The following table summarizes the purchase price allocated to the fair value of the Companys
share of the net assets acquired at the acquisition date:
 June 30,2007RMBConsideration:Total cash consideration
    
    
    380,425Less: Ownership interest in cash consideration
    
    
    (367,295
    )Net cash consideration
    
    
    13,130Fair value of assets acquired:Property, machinery and equipment
    
    
    5,929Land use rights
    
    
    1,222Other tangible assets and liabilities acquired
    
    
    41,819In-process research and development
    
    
    7,981Other intangible assets
    
    
    16,009Fair value of net assets acquired
    
    
    72,960Negative goodwill
    
    
    59,830Allocation of negative goodwill:Property, machinery and equipment
    
    
    (5,929
    )Land use rights
    
    
    (1,222
    )In-process research and development
    
    
    (7,981
    )Other intangible assets
    
    
    (16,009
    )Negative goodwill allocated to fair value of
long-term assets
    
    
    (31,141
    )Extraordinary item  gain on
acquisition of additional
equity interest in CECT
    
    
    28,689
 4
    
    Disposals
 The Group disposed of its interests in two subsidiaries, Beijing CECT Yitong Technology Co.,
Ltd. (BCYT) and Huizhou CEC Telecom Co., Ltd. (HCECT), during the year ended December 31,
2008. The condensed historical balances of the subsidiaries assets and liabilities that were
disposed of consisted of:
 BCYT
    
    
    HCECT
    
    
    TotalRMB
    
    
    RMB
    
    
    RMBCash
    
    
    924
    
    
    
    238
    
    
    
    1,162Other current assets
    
    
    20,866
    
    
    
    14,616
    
    
    
    35,482Property, machinery and equipment
    
    
    
    
    
    
    10,876
    
    
    
    10,876Current liabilities
    
    
    
    
    
    
    (5,808
    )
    
    
    (5,808
    )Noncontrolling interests
    
    
    (2,071
    )
    
    
    
    
    
    
    (2,071
    )Net assets disposed of
    
    
    19,719
    
    
    
    19,922
    
    
    
    39,641
 The gain on disposal of subsidiaries reflected in the consolidated statement of operations for
the year ended December 31, 2008 is calculated as follows:
 BCYT
    
    
    HCECT
    
    
    TotalRMB
    
    
    RMB
    
    
    RMBConsideration
    
    
    20,000
    
    
    
    21,910
    
    
    
    41,910Net assets disposed of
    
    
    (19,719
    )
    
    
    (19,922
    )
    
    
    (39,641
    )Gain on disposal
    
    
    281
    
    
    
    1,988
    
    
    
    2,269
  F-18




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
 The net cash outflow in respect of the disposal of subsidiaries during the year ended December
31, 2008 is as follows:
 BCYT
    
    
    HCECT
    
    
    TotalRMB
    
    
    RMB
    
    
    RMBConsideration
    
    
    20,000
    
    
    
    21,910
    
    
    
    41,910Cash disposed of
    
    
    (924
    )
    
    
    (238
    )
    
    
    (1,162
    )Consideration paid for through set-off of
payables
    
    
    (20,000
    )
    
    
    (13,146
    )
    
    
    (33,146
    )Unpaid consideration as at December 31, 2008
    
    
    
    
    
    
    (8,764
    )
    
    
    (8,764
    )Net cash outflow
    
    
    (924
    )
    
    
    (238
    )
    
    
    (1,162
    )
 The unpaid consideration of RMB8,764 relating to the disposal of HCECT that was outstanding as
of December 31, 2008 was fully repaid during the year ended December 31, 2009.
 5
    
    Accounts receivable, net
 Accounts receivable, net consists of the following:
 December 31,2008
    
    
    2009RMB
    
    
    RMB
    
    
    US$Accounts receivable
    
    
    468,325
    
    
    
    133,130
    
    
    
    19,504Less: Allowance for doubtful accounts
    
    
    (6,043
    )
    
    
    (18,441
    )
    
    
    (2,702
    )Accounts receivable, net
    
    
    462,282
    
    
    
    114,689
    
    
    
    16,802
 The following table presents the movement of the allowance for doubtful accounts:
 Year ended December 31,2007
    
    
    2008
    
    
    2009RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Balance at beginning of year
    
    
    2,045
    
    
    
    5,429
    
    
    
    6,043
    
    
    
    885Bad debt expense
    
    
    3,384
    
    
    
    1,277
    
    
    
    12,938
    
    
    
    1,896Bad debt recovery
    
    
    
    
    
    
    (595
    )
    
    
    (540
    )
    
    
    (79
    )Bad debt write-off
    
    
    
    
    
    
    (68
    )
    
    
    
    
    
    
    Balance at end of year
    
    
    5,429
    
    
    
    6,043
    
    
    
    18,441
    
    
    
    2,702
 The Group has a credit policy in place and the exposure to credit risk is monitored on an
ongoing basis. Credit evaluations are performed on all customers requiring credit over a
certain amount. These receivables are due within 30 to 90 days from the date of billing.
Normally, the Group does not obtain collateral from customers.
 6
    
    Inventories
 Inventories by category consist of the following:
 December 31,2008
    
    
    2009RMB
    
    
    RMB
    
    
    US$Raw materials
    
    
    116,195
    
    
    
    77,296
    
    
    
    11,324Finished goods
    
    
    66,974
    
    
    
    19,850
    
    
    
    2,908Total inventories
    
    
    183,169
    
    
    
    97,146
    
    
    
    14,232
 Inventories write-downs of RMB11,068, RMB6,650 and RMB18,016 (US$2,639) were charged to cost
of goods sold during the years ended December 31, 2007, 2008 and 2009, respectively.
  F-19




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
 7
    
    Assets held for sale
 In November 2009, the Group entered into an agreement for the sale of a property and the
associated land use rights to a third party for a total consideration of RMB163,000
(US$23,880). A deposit of RMB49,000 (US$7,179) was received from the purchaser, the amount of
which has been included in other payables and current liabilities as of December 31, 2009. The
sale transaction was subsequently completed in the second quarter of 2010. As of December 31,
2009, the land and property have been reclassified from non-current assets to current assets
as assets held for sale. In addition, an impairment charge of RMB5,957 (US$873) was made
during the year ended December 31, 2009 to write down the value of the assets to their fair
value which was estimated based on the expected sales proceeds less costs to sell.
 8
    
    Property, machinery and equipment, net
 Property, machinery and equipment consist of the following:
 December 31,2008
    
    
    2009RMB
    
    
    RMB
    
    
    US$Buildings and improvements
    
    
    148,956
    
    
    
    554
    
    
    
    81Machinery and equipment
    
    
    32,554
    
    
    
    32,378
    
    
    
    4,744Furniture and office equipment
    
    
    2,407
    
    
    
    2,916
    
    
    
    427Motor vehicles
    
    
    3,483
    
    
    
    3,483
    
    
    
    510Total property, machinery, and equipment
    
    
    187,400
    
    
    
    39,331
    
    
    
    5,762Less: accumulated depreciation
    
    
    (20,167
    )
    
    
    (15,623
    )
    
    
    (2,289
    )Property, machinery, and equipment, net
    
    
    167,233
    
    
    
    23,708
    
    
    
    3,473
 All the Groups property, machinery and equipment are located in the PRC.Depreciation charge was allocated to the following expenses items:
 Year ended December 31,2007
    
    
    2008
    
    
    2009RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Cost of goods sold
    
    
    9,192
    
    
    
    10,134
    
    
    
    8,512
    
    
    
    1,247Selling and distribution expenses
    
    
    6
    
    
    
    4
    
    
    
    6
    
    
    
    1General and administrative expenses
    
    
    1,556
    
    
    
    1,819
    
    
    
    2,089
    
    
    
    306Total
    
    
    10,754
    
    
    
    11,957
    
    
    
    10,607
    
    
    
    1,554
 9
    
    Goodwill
 On February 8, 2003, the Company completed the acquisition of its initial 65% equity interest
in CECT which resulted in the recognition of goodwill of RMB23,393. Such historical goodwill
was subsequently adjusted to RMB18,714 to reflect the effects of the application of push-down
accounting on November 30, 2006 (Note 2(a)). Goodwill also includes RMB94,100, which arose
from Xings acquisition of the remaining 20% interest in the Company, which upon application
of push-down accounting was recognized on the Companys consolidated financial statements.The impairment tests conducted by the Group on goodwill for the years ended December 31, 2007,
2008 and 2009 did not result in any impairment charges.
  F-20




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
 10
    
    Other intangible assets, netIntangible assets, which arose from the acquisition of the Groups initial 65% equity interest
in CECT on February 8, 2003, and from the push-down accounting adjustments on November 30,
2006 upon Xings acquisition of an additional 20% equity interest in the Company (as discussed
in Note 2(a)), comprise the following components:
 December 31, 2008Gross
    
    
    
    
    
    
    
    
    
    
    Othercarrying
    
    
    Accumulated
    
    
    Accumulated
    
    
    intangiblesamount
    
    
    amortization
    
    
    impairment
    
    
    assets, netRMB
    
    
    RMB
    
    
    RMB
    
    
    RMBCECT brand
    
    
    39,835
    
    
    
    
    
    
    
    (26,235
    )
    
    
    13,600Customer relationships
    
    
    5,418
    
    
    
    (5,118
    )
    
    
    
    
    
    
    300Completed technology
    
    
    16,950
    
    
    
    (16,950
    )
    
    
    
    
    
    
    Core technology
    
    
    24,193
    
    
    
    (15,327
    )
    
    
    
    
    
    
    8,866Backlog
    
    
    9,175
    
    
    
    (9,175
    )
    
    
    
    
    
    
    Licenses
    
    
    1,725
    
    
    
    (1,725
    )
    
    
    
    
    
    
    Total
    
    
    97,296
    
    
    
    (48,295
    )
    
    
    (26,235
    )
    
    
    22,766
 December 31, 2009Grosscarrying
    
    
    Accumulated
    
    
    Accumulatedamount
    
    
    amortization
    
    
    impairment
    
    
    Other intangible assets, netRMB
    
    
    RMB
    
    
    RMB
    
    
    RMB
    
    
    US$CECT brand
    
    
    39,835
    
    
    
    
    
    
    
    (39,835
    )
    
    
    
    
    
    
    Customer relationships
    
    
    5,418
    
    
    
    (5,418
    )
    
    
    
    
    
    
    
    
    
    
    Completed technology
    
    
    16,950
    
    
    
    (16,950
    )
    
    
    
    
    
    
    
    
    
    
    Core technology
    
    
    24,193
    
    
    
    (19,760
    )
    
    
    
    
    
    
    4,433
    
    
    
    649Backlog
    
    
    9,175
    
    
    
    (9,175
    )
    
    
    
    
    
    
    
    
    
    
    Licenses
    
    
    1,725
    
    
    
    (1,725
    )
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    97,296
    
    
    
    (53,028
    )
    
    
    (39,835
    )
    
    
    4,433
    
    
    
    649
 The fair value of the CECT brand name was estimated using the Relief-from-Royalty Method, a
discounted cash flow approach which brings into play, in the case of CECT, a single set of
estimated cash flows and a discount rate commensurate with the risk. The cash flow
contribution from the brand name comes from savings in royalty that CECT would have to pay to
a third party for the use of its brand name if CECT had not had the right to use it but
nevertheless had wanted its products to have a recognized brand. The cash flow contribution
of the CECT brand name is linked to the cash inflow from the sales revenue of CECT. As
there is a lack of publicly available information about comparable licensing transactions in
the PRC suitable for the Groups purpose, the royalty savings as a percentage of sales revenue
is estimated by comparing the operational profit margin as a percentage of sales revenue of
CECT with its superior CECT brand name with those of comparable companies in the PRC which
operate on an OEM sub-contractor basis or with an inferior brand. Also, marketing expense is
required to maintain the brand name for CECT. An average of marketing expense as a percentage
of sales revenue is taken from the statements of operations of CECT in the medium term
forecast. This percentage is then used to estimate cash outflow relating to marketing expense
in the cash flow forecast under the Relief-from-Royalty Method.Due to the Groups strategic shift to focus more on its high-end VEVA-branded handsets, the
Group recorded an impairment charge of RMB26,235 on its CECT brand name in 2008 and an
impairment charge of RMB13,600 (US$1,992) in 2009. The impairment tests conducted by the Group
on the CECT brand name for the years ended December 31, 2007 did not result in any
impairment charges.Amortization of other intangible assets is recognized on a straight-line basis over the
estimated useful lives. The expected future amortization expense is as follows:
 RMBYear ending December 31, 2010
    
    
    4,433
  F-21




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
 11
    
    Short-term borrowingsShort-term borrowings consist of the following:
 December 31,2008
    
    
    2009RMB
    
    
    RMB
    
    
    US$Bills payable
    
    
    39,850
    
    
    
    191,200
    
    
    
    28,011Bank loans
    
    
    904,100
    
    
    
    693,508
    
    
    
    101,599Other borrowings, secured by bills receivable
    
    
    40,000
    
    
    
    
    
    
    
    Total short-term borrowings
    
    
    983,950
    
    
    
    884,708
    
    
    
    129,610
 Bills payable represents bank borrowings with payment terms of not more than 180 days and are
non-interest bearing unless they become trust receipt loans which then bear interest at the
prevailing bank lending rates.During each of the periods presented, the Group entered into various loan agreements with
commercial banks in the PRC at terms ranging from three months to one year. The weighted
average interest rate on bank loans outstanding as of December 31, 2008 and 2009 was 7.3% and
6.0%, respectively. The principal amounts of these short-term loans are repayable at the end
of the loan period, while the related interest expense of these short-term loans is payable on
a monthly or quarterly basis.Short-term borrowings of RMB68,000 and RMB135,008 (US$19,779) as of December 31, 2008 and
2009, respectively are subject to certain financial covenants relating to certain of the
Groups and Xings tangible net worth, borrowing to tangible net worth plus minority interest,
current ratio, and interest to earnings before interest and taxes ratios. If the Group were
to breach the covenants, the drawn down facilities would become payable on demand. The Group
was in compliance with these financial covenants as of December 31, 2008 and 2009.Short-term borrowings are secured by the following:
 December 31,2008
    
    
    2009RMB
    
    
    RMB
    
    
    US$Pledged by:- Bank deposits
    
    
    136,299
    
    
    
    251,720
    
    
    
    36,877- Bills receivable
    
    
    40,000
    
    
    
    
    
    
    
    Guarantees provided by:- Qiao Xing Group Limited (QXGL)
    
    
    160,000
    
    
    
    50,000
    
    
    
    7,321- QXGL and directors of the Company
    
    
    360,000
    
    
    
    290,000
    
    
    
    42,463- Xing
    
    
    336,000
    
    
    
    285,008
    
    
    
    41,732- directors of the Company
    
    
    218,500
    
    
    
    68,500
    
    
    
    10,030
  F-22




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
 12
    
    Convertible notesPursuant to a Securities Purchase Agreement and Registration Rights Agreement signed on May
15, 2008, the Company issued to two existing shareholders of the Company (the Investors)
US$70,000 of senior convertible notes (the Notes) that came with warrants to purchase
1,648,721 ordinary shares of the Company (the Investor Warrants). The consideration paid on
May 15, 2008 by the Investors for the Notes comprised a combination of 6,966,666 ordinary shares
of the Company that were owned by the Investors, valued at approximately US$48,349
based on the closing market price of the Companys ordinary shares on May 14, 2008, and cash
of US$21,651. All ordinary shares submitted by the Investors in exchange for the Notes were
cancelled. In addition, the Company also issued warrants to its placement agent to purchase
up to 942,127 ordinary shares of the Company at terms identical to the Investor Warrants (the
Agent Warrants and collectively with the Investor Warrants, the Warrants).The material terms and conditions of the Notes are summarized as follows:
 
    
    the Notes are unsecured and mature on May 15, 2011;
    
    the Notes bear interest at a rate of 4.0% per annum, payable in cash in arrears on a
calendar semi-annual basis beginning June 30, 2008;
    
    the Notes are convertible at the holders option into ordinary shares of the Company
at an initial conversion price of $7.43 per share. The conversion price is subject to
reset if the average of the daily volume weighted average price (VWAP) of the Companys
ordinary shares for the five consecutive trading days ending on each three-month
anniversary of the issuance date of the Notes until maturity (each a Reset Date) is
less than $6.76. In that event, the conversion price is reset to a price equal to the
greater of US$4.05 or 92.5% of the arithmetic average of the daily VWAP of the Companys
ordinary shares for the five trading days ending on the applicable Reset Date. The
conversion price of the Notes was reset to US$4.05 on November 15, 2008;
    
    the Notes cannot be converted if, after giving effect to such conversion, the holders
of the Notes (together with their affiliates) would beneficially own in excess of 9.99%
of the Companys ordinary shares outstanding immediately after giving effect to the
conversion;
    
    the Notes require an automatic re-pricing of the conversion price if the Company make
certain sales of its ordinary shares or ordinary share equivalents in a capital-raising
transaction at a price below the conversion price;
    
    the holders of the Notes have the right to require the Company to redeem the Notes at
any time on or after the 18 month anniversary of the issuance date of the Notes in an
amount equal to the sum of (a) the outstanding principal of the Notes, and (b) the
accrued and unpaid interest thereon. Accordingly, the Notes were classified as current
liabilities on the consolidated balance sheet as of December 31, 2008;
    
    in the event of a default, change of control and certain other fundamental
transactions, the holders of the Notes have the right to require the Company to redeem
all or any portion of the Notes at a price equal to the greater of (i) the amount to be
redeemed multiplied by a redemption premium of 125% and (ii) the amount to be redeemed
multiplied by the quotient determined by dividing the closing bid price of the Companys
ordinary shares on the date immediately preceding such event by the conversion price of
the Notes;
    
    all principal, interest, late charges and other amounts due under the Notes that are
payable in cash shall be settled in U.S. dollars in an amount equal to the applicable
U.S. dollar cash payment due under the terms of the Notes multiplied by 6.99 and divided
by the exchange rate of one U.S. dollar to RMB on the date such payment is due; and
    
    the Company is required under the terms of the Registration Rights Agreement to file
with the Securities and Exchange Commission (SEC) a registration statement to register
the ordinary shares issuable upon the conversion of the Notes and the exercise of the
Warrants to permit the resale of such ordinary shares to the public. The registration
statement was filed by the Company on June 27, 2008 and was declared effective by the SEC
on July 11, 2008.
 The material terms and conditions of the Warrants are summarized as follows:
 
    
    the initial exercise price of each Warrant is $8.91 per share, subject to adjustments
as provided for in the Warrant;
    
    the Warrants are exercisable at any time during a period of five years from May 15,
2008;
    
    the Warrants contain a cashless exercise feature if the registration statement
covering the shares underlying the Warrants is not available for the resale upon the
exercise of the Warrants;
  F-23




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
 
    
    the Warrants contain certain limitations on the exercise thereof in the
event that the holder would beneficially own in excess of 9.99% of the Companys ordinary
 shares outstanding immediately after giving effect to such exercise; and
    
    the Warrants require an automatic re-pricing of the exercise price if the Company
makes certain sales of its ordinary shares or ordinary share equivalents in a
capital-raising transaction at a price below the exercise price of the Warrants.
 The Notes included on the consolidated balance sheet as of December 31, 2008 and 2009 are
analyzed as follows:
 December 31,2008
    
    
    2009RMB
    
    
    RMB
    
    
    US$Gross proceeds
    
    
    489,601
    
    
    
    489,601
    
    
    
    71,727Discount on notes:- Equity-classified Investor Warrants
    
    
    (36,062
    )
    
    
    (36,062
    )
    
    
    (5,283
    )- Liability-classified embedded derivatives
    
    
    (304,037
    )
    
    
    (304,037
    )
    
    
    (44,542
    )Value of debt component at date of issue
    
    
    149,502
    
    
    
    149,502
    
    
    
    21,902Foreign currency realignment
    
    
    7,484
    
    
    
    7,261
    
    
    
    1,064Accretion of discount
    
    
    70,512
    
    
    
    296,146
    
    
    
    43,386Conversion of Notes into ordinary shares
    
    
    (21,287
    )
    
    
    (131,047
    )
    
    
    (19,199
    )Redemption of Notes
    
    
    
    
    
    
    (209,700
    )
    
    
    (30,721
    )Net value at end of year
    
    
    206,211
    
    
    
    112,162
    
    
    
    16,432
 The terms and features of the Investor Warrants were evaluated to determined whether they were
to be classified as equity or liability and the Company concluded that all indicators for
equity classification were present.The gross proceeds from the issuance of the Notes were allocated to the Investors Warrants and
the Notes on a relative fair value basis. The fair value of the Investors Warrants applied
for the purposes of the aforementioned allocation was estimated using a multi-period binomial
option pricing model on the grant date of the warrants and amounted to approximately
RMB59,415. As a result of the allocation, approximately RMB36,062 of the gross proceeds from
the issuance of the Notes was allocated to the value of the Investor Warrants, which was
recorded as a discount to the face value of the Notes and credited to additional paid-in
capital.The Notes are a form of hybrid instrument that comes with embedded derivatives, including the
right to convert the Notes into ordinary shares of the Company by the note holders, a put
option conditional upon certain events of default and a put option conditional upon a change
of control. The embedded derivatives were removed from the debt host and accounted for
separately as derivative instruments. The embedded derivatives were determined to be
classified as liabilities on the balance sheet. Subsequent to initial recognition, the
liability-classified embedded derivatives are marked-to-market at the end of each reporting
period with the resulting gain or loss recognized in the consolidated statement of operations.
The valuation of the embedded derivatives at each period-end is derived from various valuation
methods which uses significant unobservable inputs (Level 3), including Monte Carlo Simulation
and Backward Dynamic Programming.The embedded derivative liability included on the consolidated balance sheet as of December
31, 2008 and 2009 is analyzed as follows:
 December 31,2008
    
    
    2009RMB
    
    
    RMB
    
    
    US$Value on initial recognition
    
    
    304,037
    
    
    
    304,037
    
    
    
    44,542Foreign currency realignment
    
    
    (6,551
    )
    
    
    (6,450
    )
    
    
    (945
    )Cumulative gain on remeasurement
    
    
    (144,939
    )
    
    
    (57,004
    )
    
    
    (8,351
    )Settled on conversion of Notes
    
    
    (28,417
    )
    
    
    (87,575
    )
    
    
    (12,830
    )Settled on redemption of Notes
    
    
    
    
    
    
    (113,030
    )
    
    
    (16,559
    )Net value at end of year
    
    
    124,130
    
    
    
    39,978
    
    
    
    5,857(Gain) loss on remeasurement
for the period included in
earnings attributable to the
change in unrealized gain of
liabilities still outstanding
at end of year
    
    
    (138,206
    )
    
    
    1,129
    
    
    
    165
  F-24




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
 The discount arising from the Investors Warrants and the embedded derivatives is accreted to
interest expense to the first put date of the Notes using the effective interest method.Costs associated with the issuance of the Notes, which have been classified as deferred debt
issuance costs on the consolidated balance sheet, are analyzed as follows:
 December 31,2008
    
    
    2009RMB
    
    
    RMB
    
    
    US$Amount attributed to Agent Warrants
    
    
    31,451
    
    
    
    31,451
    
    
    
    4,608Other cash costs
    
    
    20,887
    
    
    
    20,887
    
    
    
    3,060Total deferred debt issuance costs on initial recognition
    
    
    52,338
    
    
    
    52,338
    
    
    
    7,668Foreign currency realignment
    
    
    (1,198
    )
    
    
    (1,164
    )
    
    
    (171
    )Amortization
    
    
    (10,851
    )
    
    
    (45,574
    )
    
    
    (6,677
    )Written-off on conversion of Notes
    
    
    (5,600
    )
    
    
    (5,600
    )
    
    
    (820
    )Net value at end of year
    
    
    34,689
    
    
    
    
    
    
    
    
 The fair value of the Agent Warrants on the grant date, which was estimated using a
multi-period binomial option pricing model, amounted to approximately RMB33,951. Of this
amount, RMB31,451 was debited to deferred debt issuance costs as cost associated with the
issuance of the Notes and while the balance of RMB2,500 was debited to additional paid-in
capital as cost associated with the issuance of the Investor Warrants.The deferred debt issuance costs are amortized to expense to the first put date of the Notes
using the effective interest method.Effective January 1, 2009, the Company adopted the
guidance related to Determining Whether an Instrument (or Embedded
Feature) is Indexed to an Entitys Own Stock the guidance applies to
any freestanding financial instruments or embedded features that have the characteristics of a
derivative, and to any freestanding financial instruments
that are potentially settled in an entitys own common stock.As a result  the Investors Warrants and the
Agent Warrants outstanding at January 1, 2009, which were previously treated as equity
 were no longer afforded equity treatment. As such, as of January 1, 2009, the Company
reclassified the fair value of the Warrants from equity to liability as if the Warrants had
been treated as a derivative liability since their date of issue. On January 1, 2009, the
Company recognized a cumulative-effect adjustment of RMB15,414, whereby RMB53,158 was
reclassified to beginning retained earnings, RMB1,440 to foreign currency translation
adjustments, and RMB70,012 from additional paid-in capital, to recognize the fair value of the
Warrants as warrant liability on such date.The warrant liability included on the consolidated balance sheet as of December 31, 2009 is
analyzed as follows:
 December 31, 2009RMB
    
    
    US$Recognized on January 1, 2009
    
    
    15,414
    
    
    
    2,258Foreign currency realignment
    
    
    4
    
    
    
    1Loss on remeasurement
    
    
    7,219
    
    
    
    1,057Net value at end of year
    
    
    22,637
    
    
    
    3,316Loss on remeasurement for the
period include in earnings
attributable to the change in
unrealized gain of liabilities
still outstanding at end of year
    
    
    7,219
    
    
    
    1,057
 Changes in the fair value of the warrant liability subsequent to January 1, 20009 are
recognized in the consolidated statement of operations.
  F-25




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
 The fair value of the Warrants on the date of grant was US$5.15 per warrant, which was
estimated by management using a multi-period binomial option pricing model based on the
following assumptions:
 Stock price of underlying ordinary share on grant date
    
    US$
    7.45Risk-free interest rate
    
    
    4.3
    %Expected dividend yield
    
    
    0
    %Expected term
    
    5 yearsExpected stock price volatility
    
    
    65.38
    %
 The fair value of the Warrants as of January 1 2009 and December 31, 2009 was US$0.87 per
warrant and US$1.28 per warrant, respectively, which was estimated by management using the
Black-Scholes option pricing model based on the following assumptions (Level 2):
 January 1,
    
    
    December 31,2009
    
    
    2009Stock price of underlying ordinary share
    
    US$
    2.54
    
    
    US$

    3.66Risk-free interest rate
    
    
    1.54
    %
    
    
    1.88
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %Expected term
    
    4.37 years
    

    
    3.37 yearsExpected stock price volatility
    
    
    79.21
    %
    
    
    80.55
    %
 In 2008, US$8,251 of the principal amount of the Notes and accrued interest thereon of US$46
were converted into 1,511,397 ordinary shares of the Company at a conversion price of US$5.49
per share. In 2009, US$30,706 of the principal amount of the Notes were redeemed and
US$16,073 of the principal amount of the Notes plus accrued interest thereon of US$590 were
converted into 4,114,286 ordinary shares at a conversion price of US$4.05 per share. The
extinguishment of the convertible debts that arose from the aforementioned conversions and
redemption resulted in a loss of RMB10,634 for the year ended December 31, 2008 and a gain of
RMB159,326 (US$23,341) for the year ended December 31, 2009, computed as follows:
 December 31,2008
    
    
    2009RMB
    
    
    RMB
    
    
    US$Fair value of ordinary shares issued on conversion
    
    
    55,054
    
    
    
    126,650
    
    
    
    18,555Cash consideration paid on redemption
    
    
    
    
    
    
    209,700
    
    
    
    30,72155,054
    
    
    
    336,350
    
    
    
    49,276(Less) add: Carrying amount of:- Notes
    
    
    (21,287
    )
    
    
    (319,460
    )
    
    
    (46,801
    )- Accrued interest
    
    
    (316
    )
    
    
    (4,028
    )
    
    
    (590
    )- Embedded derivatives
    
    
    (28,417
    )
    
    
    (172,188
    )
    
    
    (25,226
    )- Deferred debt issuance costs
    
    
    5,600
    
    
    
    
    
    
    
    Loss (gain) on extinguishment of convertible debts
    
    
    10,634
    
    
    
    (159,326
    )
    
    
    (23,341
    )
  F-26




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
 13
    
    Segment informationThe Group has one operating segment  CECT, the operating subsidiary in the PRC. The results
of CECT used by the management to evaluate business performance are based on U.S. GAAP and
those accounting policies are consistent with those used in the preparation of the
consolidated financial statements.Segment income is determined based on income before income
tax expense, and
extraordinary items and further excludes amortization of other intangible assets, impairment
of other intangible assets, fair value adjustments on inventories, property, machinery and equipment, land use
rights, and income (loss) before income tax expense of the Company. Segment assets consist of
total assets of CECT excluding goodwill, other intangible assets, fair value adjustments on
property, machinery and equipment, land use rights, and other assets
held by the Company. Customers accounting for 10% or more of revenues
are disclosed in Note 1, revenue concentrations.
 Year ended December 31,2007
    
    
    2008
    
    
    2009RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Revenues- Sales of mobile phones and accessories
    
    
    3,113,756
    
    
    
    2,140,346
    
    
    
    1,624,270
    
    
    
    237,957- Services and other revenues
    
    
    27,338
    
    
    
    13,527
    
    
    
    8,642
    
    
    
    1,266Total segment and consolidated revenue
    
    
    3,141,094
    
    
    
    2,153,873
    
    
    
    1,632,912
    
    
    
    239,223Segment income (loss)
    
    
    746,618
    
    
    
    606,853
    
    
    
    (3,349
    )
    
    
    (491
    )Segment assets
    
    
    3,492,959
    
    
    
    4,327,502
    
    
    
    4,012,783
    
    
    
    587,876Interest income
    
    
    10,619
    
    
    
    22,758
    
    
    
    18,451
    
    
    
    2,703Interest expense
    
    
    (47,034
    )
    
    
    (72,562
    )
    
    
    (50,368
    )
    
    
    7,379Depreciation
    
    
    (12,504
    )
    
    
    (13,898
    )
    
    
    10,607
    
    
    
    1,554
 A reconciliation of segment income to consolidated income (loss) before income tax expense,
noncontrolling interests and extraordinary items for the years ended December 31, 2007, 2008
and 2009, is as follows:
 Year ended December 31,2007
    
    
    2008
    
    
    2009RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Segment income (loss)  CECT
    
    
    746,618
    
    
    
    606,853
    
    
    
    (3,349
    )
    
    
    (491
    )Amortization of other intangible assets
    
    
    (32,280
    )
    
    
    (11,727
    )
    
    
    (4,733
    )
    
    
    (693
    )Impairment of other intangible assets
    
    
    
    
    
    
    (26,235
    )
    
    
    (13,600
    )
    
    
    (1,992
    )Fair value adjustment on property,
machinery and equipment
    
    
    1,750
    
    
    
    1,941
    
    
    
    5,641
    
    
    
    826Fair value adjustment on land use rights
    
    
    13
    
    
    
    26
    
    
    
    1,144
    
    
    
    168Fair value adjustment on inventories
    
    
    (502
    )
    
    
    
    
    
    
    
    
    
    
    Income (loss) before income tax expense
of the Company
    
    
    (4,348
    )
    
    
    24,564
    
    
    
    (223,460
    )
    
    
    (32,737
    )Consolidated earnings (loss) before
income tax expense, and extraordinary items
    
    
    711,251
    
    
    
    595,422
    
    
    
    (238,357
    )
    
    
    (34,919
    )
  F-27




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
 A reconciliation of segment assets to consolidated total assets as of December 31, 2008 and
2009 is as follows:
 December 31,2008
    
    
    2009RMB
    
    
    RMB
    
    
    US$Total segment assets  CECT
    
    
    4,327,502
    
    
    
    4,012,783
    
    
    
    587,876- Goodwill
    
    
    112,814
    
    
    
    112,814
    
    
    
    16,527- Other intangible assets, net
    
    
    22,766
    
    
    
    4,433
    
    
    
    649- Property, machinery and equipment, net
    
    
    (12,101
    )
    
    
    (6,460
    )
    
    
    (946
    )- Land use rights
    
    
    (1,144
    )
    
    
    
    
    
    
    - Assets held by the Company
    
    
    73,083
    
    
    
    12,517
    
    
    
    1,834- Deferred income taxes recognized on consolidation
    
    
    
    
    
    
    506
    
    
    
    74Total assets
    
    
    4,522,920
    
    
    
    4,136,593
    
    
    
    606,014
 14
    
    Income taxesThe Company and its subsidiaries are subject to income tax on an entity basis on income
arising in or derived from the tax jurisdictions in which they operate.The Company was incorporated under the International Business Companies Act of the BVI and,
accordingly, is exempt from BVI income taxes.Substantially all of the Groups income before income tax expense, noncontrolling interests,
and extraordinary items is generated in the PRC by CECT. Prior to January 1, 2008, CECT was
regarded as a high-tech enterprise by the PRC government and was granted a preferential PRC
enterprise income tax rate of 15%. Further, CECT was granted a tax holiday from the PRC
enterprise income tax for the period from May 22, 2000 to December 31, 2002, and was entitled
to a 7.5% PRC enterprise income tax rate from January 1, 2003 through December 31, 2005.
Prior to January 1, 2008, the branch of CECT at Huizhou, the PRC, is subject to the PRC
enterprise income tax at a rate of 24% as the branch is regarded as a manufacturing entity
located at the coastal zone.On March 16, 2007, the Fifth Plenary Session of the Tenth National Peoples Congress passed
the Enterprise Income Tax Law of the PRC (the New Tax Law) which took effect on January 1,
2008. Under the New Tax Law, effective January 1, 2008, the applicable enterprise income tax
rates in the PRC was revised to 25%.Under the New Tax Law, CECT, including its Huizhou branch, is subject to the enterprise income
tax rate of 25% commencing from the year beginning January 1, 2008. The deferred tax assets
and liabilities of CECT are measured using the enacted tax rate of 25% that is expected to
apply in the years in which those temporary differences are expected to be recovered or
settled.The new Tax Law also imposes a 10% withholding income tax for dividends distributed by a
foreign invested enterprise to its immediate holding company outside China for distribution of
earnings generated after January 1, 2008. Under the New Tax Law, the distribution of earnings
generated prior to January 1, 2008 is exempt from the withholding tax. In addition, as CECT
will not be distributing its earnings for the year ended December 31, 2008 and 2009 to the
Company, no deferred tax liability has been recognized for the undistributed earnings of CECT
through December 31, 2009. Total undistributed earnings of CECT at December 31, 2009
was RMB1,647,394.Income tax expense consists of the following:
 Year ended December 31,2007
    
    
    2008
    
    
    2009RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Current expense
    
    
    119,614
    
    
    
    162,267
    
    
    
    22,415
    
    
    
    3,284Deferred expense (benefit)
    
    
    (6,237
    )
    
    
    (6,550
    )
    
    
    (10,783
    )
    
    
    (1,580
    )Total income tax expense
    
    
    113,377
    
    
    
    155,717
    
    
    
    11,632
    
    
    
    1,704
  F-28




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
 Substantially all of the taxable income of the Group is generated by CECT, the Groups
subsidiary located in the PRC that is subject to the PRC enterprise income tax. A
reconciliation of the expected income tax expense (based on the PRC statutory income tax rate)
to the actual income tax expense is as follows:
 Year ended December 31,2007
    
    
    2008
    
    
    2009RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Expected tax based on PRC statutory
income tax rate at 25% (2007: 33%)
    
    
    234,713
    
    
    
    148,855
    
    
    
    (59,589
    )
    
    
    (8,730
    )Tax effect of preferential tax rates
    
    
    (134,627
    )
    
    
    
    
    
    
    
    
    
    
    Tax rate differential of the Company
    
    
    2,189
    
    
    
    (5,972
    )
    
    
    53,870
    
    
    
    7,892Non-deductible expenses:- Share-based compensation
expenses
    
    
    10,037
    
    
    
    3,667
    
    
    
    8,730
    
    
    
    1,279- Other
    
    
    1,065
    
    
    
    9,257
    
    
    
    7,604
    
    
    
    1,114Non-taxable income
    
    
    
    
    
    
    (90
    )
    
    
    
    
    
    
    Deferred tax asset not recognized
    
    
    
    
    
    
    
    
    
    
    1,017
    
    
    
    149Actual income tax expense
    
    
    113,377
    
    
    
    155,717
    
    
    
    11,632
    
    
    
    1,704
 The tax rate differential amounts represent the income or
loss that is not taxable due to the companys BVI incorporation.
 Deferred income tax assets and liabilities reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of those amounts shown on
the consolidated balance sheets are as follows:
 December 31,2008
    
    
    2009RMB
    
    
    RMB
    
    
    US$Deferred tax assets:Tax losses carried forward
    
    
    1,288
    
    
    
    
    
    
    
    Allowance for doubtful accounts
    
    
    1,033
    
    
    
    3,233
    
    
    
    474Inventory write-off
    
    
    3,919
    
    
    
    9,841
    
    
    
    1,442Accrued product warranties
    
    
    754
    
    
    
    481
    
    
    
    70Assets held for sale
    
    
    
    
    
    
    2,694
    
    
    
    395Property, machinery and equipment, net
    
    
    2,821
    
    
    
    1,614
    
    
    
    236Land use rights
    
    
    275
    
    
    
    
    
    
    
    0Impairment of investment at cost
    
    
    
    
    
    
    701
    
    
    
    103Total deferred tax assets
    
    
    10,090
    
    
    
    18,564
    
    
    
    2,720Deferred tax liability:Other intangible assets, net
    
    
    (3,416
    )
    
    
    (1,108
    )
    
    
    (162
    )Net deferred tax asset
    
    
    6,674
    
    
    
    17,456
    
    
    
    2,558
 In assessing the realizability of deferred income tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled reversal of deferred
tax liabilities, projected future taxable income, and tax planning strategies in making
this assessment.Based upon the level of historical taxable income and projections for future taxable income
over the periods in which the deferred tax assets are deductible, management believes that it
is more likely than not that the Group will realize the benefits of the deductible differences
as of December 31, 2008 and 2009. The amount of the deferred tax assets considered
realizable, however, could be reduced in the near term if estimates of future taxable income
are reduced.As of December 31, 2008 and 2009, the Group has no material unrecognized tax benefit which
would  effect the  income tax rate in future periods and does not believe
that there will be any significant increases or decreases of unrecognized tax benefits within
the next twelve months. No interest or penalties relating to income tax matters have been
imposed on the Group during the year ended December 31, 2007, 2008 and 2009, and no provision
for interest and penalties is deemed necessary as of December 31, 2008 and 2009.
  F-29




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
 According to the PRC Tax Administration and Collection Law, the statute of limitations is
three years if the underpayment of taxes is due to computational errors made by the taxpayer
or its withholding agent. The statute of limitations extends to five years under special
circumstances, which are not clearly defined. In the case of a related party transaction, the
statute of limitation is ten years. There is no statute of limitation in the case of tax
evasion.
 15
    
    Distribution of incomeFor the years ended December 31, 2007, 2008 and 2009, substantially all of the Groups income
was attributable to CECT. Income of CECT, as determined under generally accepted accounting
principles in the PRC (the PRC GAAP), is distributable after transfer to dedicated statutory
reserve funds, namely, the general reserve, the enterprise expansion fund, and the staff
welfare and bonus fund, pursuant to the laws applicable to Foreign Investment Enterprises in
the PRC and the Companys articles of association. These reserve funds can only be used for
specific purposes and are not distributable as cash dividends. Under the relevant
regulations, CECT is required to transfer at least 10% of its annual PRC GAAP income to the
general reserve until such reserve reaches 50% of its registered capital.Transfers to the enterprise expansion fund and the staff welfare and bonus fund are at the
discretion of the board of directors of CECT. For the years ended December 31, 2007, 2008 and
2009, CECT made transfers to the general reserve of approximately RMB65,796, RMB46,429 and
RMB513 (US$75), respectively. The board of directors of CECT did not recommend any transfers
to the enterprise expansion fund and the staff welfare and bonus fund for the years ended
December 31, 2007, 2008 and 2009. The accumulated balance of statutory reserve funds
maintained at CECT as of December 31, 2008 and 2009 were RMB183,555 and RMB184,068
(US$26,966), respectively.
  F-30




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
 16
    
    Earnings (loss) per share
 The following represents a reconciliation from basic earnings (loss) per share to diluted
earnings (loss) per share:
 Year ended December 31,2007
    
    
    2008
    
    
    2009RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Income (loss) before extraordinary item
    
    
    597,874
    
    
    
    439,705
    
    
    
    (249,989
    )
    
    
    (36,623
    )Income before extraordinary item attributable to
noncontrolling interests
    
    
    (33,074
    )
    
    
    (15,901
    )
    
    
    (380
    )
    
    
    (56
    )Income (loss) before extraordinary item
attributable to holders of ordinary shares
    
    
    564,800
    
    
    
    423,804
    
    
    
    (250,369
    )
    
    
    (36,679
    )Amount allocated to participating convertible notes
    
    
    
    
    
    
    (53,889
    )
    
    
    
    
    
    
    Income (loss) before extraordinary item available
to holders of ordinary shares
    
    
    564,800
    
    
    
    369,915
    
    
    
    (250,369
    )
    
    
    (36,679
    )Extraordinary item attributable to holders of
ordinary shares
    
    
    28,689
    
    
    
    
    
    
    
    
    
    
    
    Basic net income (loss) after extraordinary item
available to holders of ordinary shares
    
    
    593,489
    
    
    
    369,915
    
    
    
    (250,369
    )
    
    
    (36,679
    )Net income (loss) before extraordinary item
available to holders of ordinary shares
    
    
    564,800
    
    
    
    369,915
    
    
    
    (250,369
    )
    
    
    (36,679
    )Net income allocated to participating convertible
notes
    
    
    
    
    
    
    53,889
    
    
    
    
    
    
    
    Interest on convertible notes
    
    
    
    
    
    
    92,944
    
    
    
    
    
    
    
    Exchange loss on revaluation of convertible notes
    
    
    
    
    
    
    11,471
    
    
    
    
    
    
    
    Loss on extinguishment of convertible notes
    
    
    
    
    
    
    10,634
    
    
    
    
    
    
    
    Gain on remeasurement of derivatives embedded in
convertible notes
    
    
    
    
    
    
    (144,939
    )
    
    
    
    
    
    
    Fully diluted net income (loss) before
extraordinary item
    
    
    564,800
    
    
    
    393,914
    
    
    
    (250,369
    )
    
    
    (36,679
    )Extraordinary item
    
    
    28,689
    
    
    
    
    
    
    
    
    
    
    
    Fully diluted net income (loss) after
extraordinary item
    
    
    593,489
    
    
    
    393,914
    
    
    
    (250,369
    )
    
    
    (36,679
    )Weighted average ordinary shares:Basic
    
    
    48,322,000
    
    
    
    49,216,000
    
    
    
    48,034,000
    
    
    
    48,034,000Effect of dilutive ordinary share equivalents
    
    
    
    
    
    
    7,170,000
    
    
    
    
    
    
    
    Diluted
    
    
    48,322,000
    
    
    
    56,386,000
    
    
    
    48,034,000
    
    
    
    48,034,000Basic earnings (loss) per ordinary share:Before extraordinary items
    
    
    11.69
    
    
    
    7.52
    
    
    
    (5.21
    )
    
    
    (0.76
    )Extraordinary items
    
    
    0.59
    
    
    
    
    
    
    
    
    
    
    
    After extraordinary items
    
    
    12.28
    
    
    
    7.52
    
    
    
    (5.21
    )
    
    
    (0.76
    )Diluted earnings(loss) per ordinary share:Before extraordinary items
    
    
    11.69
    
    
    
    6.99
    
    
    
    (5.21
    )
    
    
    (0.76
    )Extraordinary items
    
    
    0.59
    
    
    
    
    
    
    
    
    
    
    
    After extraordinary items
    
    
    12.28
    
    
    
    6.99
    
    
    
    (5.21
    )
    
    
    (0.76
    )
 Ordinary share equivalents outstanding during the year ended December 31, 2007, which consist
of share options issued pursuant to the Companys stock option plan, were anti-dilutive and
accordingly, were excluded from the calculation of diluted earnings per share for the year
ended December 31, 2007. Except for the convertible notes issued in May 2008, all other
ordinary share equivalents outstanding during the year ended December 31, 2008, including
share options and warrants, were anti-dilutive and accordingly, were excluded from the
calculation of diluted earnings per share for the year ended December 31, 2008. For the year
ended December 31, 2009, all ordinary share equivalents outstanding, including share options,
restricted shares, convertible notes and warrants, were anti-dilutive.
  F-31




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
 17
    
    Ordinary shares
 Pursuant to a shareholders resolution of the Company passed on January 8, 2007, the par value
of the Companys shares was reduced to nil and the Company was authorized to issue an
unlimited number of ordinary shares. As a result, the Companys additional paid-in capital
account as of January 8, 2007 of approximately RMB308,283, which relates to the proceeds from
issuance of ordinary shares in prior periods, was transferred to and became part of the
Companys ordinary share capital.
 On April 13, 2007, the Companys Board of Directors and Xing approved and executed a
40-for-one split of the Companys ordinary shares. All shares and per share amounts presented
in the accompanying consolidated financial statements have been presented on a retroactive
basis to reflect the effect of the share split.
 On May 8, 2007, the Company issued 12,500,000 new ordinary shares at US$12 per share in
connection with its IPO on the NYSE. The net proceeds from the IPO, after deduction of
related expenses, amounted to approximately RMB1,021,219 (US$139,997).
 On January 7, 2008, the Company issued 565,000 new ordinary shares at US$7.50 per share upon
the exercise of share options granted to a director and certain of the Companys employees.
 On May 15, 2008, the Company repurchased 6,966,666 of its issued ordinary shares at US$6.94
per share from two existing shareholders of the Company through the issuance of the Notes
discussed in note 12 to the consolidated financial statements. All ordinary shares
repurchased were subsequently cancelled.
 On August 19, 2008, the holders of the Notes exercised the option to convert US$8,251 of the
principal amount of the Notes and accrued interest thereon of US$46 into 1,511,397 ordinary
shares of the Company at a conversion price of US$5.49 per share. The stock price of the
Companys ordinary shares was US$5.31 at the date of exercise of the option to convert.
 On December 4, 2009, the Company issued 960,884 ordinary shares to a director and various
employees of the Group upon the vesting of restricted shares granted under the QXMC 2007 Stock
Plan (Note 18(a)).
 On November 23, 2009, a holder of the Notes exercised the option to convert US$8,187 of the
principal amount of the Notes and accrued interest thereon of US$293 into 2,093,996 ordinary
shares of the Company at a conversion price of US$4.05 per share. The stock price of the
Companys ordinary shares was US$4.66 at the date of exercise of the option to convert.
 On December 9, 2009, a holder of the Notes exercised the option to convert US$7,886 of the
principal amount of the Notes and accrued interest thereon of US$296 into 2,020,290 ordinary
shares of the Company at a conversion price of US$4.05 per share. The stock price of the
Companys ordinary shares was US$4.35 at the date of exercise of the option to convert.
 18
    
    Stock plan and warrants
 (a)
    
    QXMC 2007 Stock Plan
 Pursuant to a shareholders resolution passed on March 19, 2007, the Company adopted an equity
incentive plan (the QXMC 2007 Stock Plan) under which the Company may grant incentive share
options, nonstatutory share options, restricted shares, share appreciation rights, restricted
share units, performance units, performance shares and other stock based awards to certain
qualifying directors, employees and consultants of the Group in accordance with the provisions
of the QXMC 2007 Stock Plan.
 On March 19, 2007, the Company granted share options to a director and various employees of
the Group to purchase 2,716,520 shares of the Companys ordinary shares at an exercise price
of US$7.50 per share. The options granted have terms ranging from 2 to 6 years from the date
of grant and vest on various dates commencing from November 1, 2007.
 The weighted-average fair value of the share options on the date of grant was US$5.23 per
share option, which was estimated by management using the Black-Scholes option pricing based
on the following assumptions:
 Fair value of underlying ordinary shares on grant date
    
    US$
    10.43Expected share price volatility
    
    
    47.50
    %Expected dividend yield
    
    
    0.0
    %Expected term (in years)
    
    
    3.5Risk-free interest rate
    
    
    5.0
    %
  F-32




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
 The estimated fair value of the Companys underlying shares on the date of grant was
determined by management considering the valuation performed by American Appraisal China
Limited, an unrelated independent valuation firm. Because the Company did not have a trading
history at the time the options were issued, the weighted average expected volatility of
47.50% was estimated based on the average volatility of several comparable listed companies in
the telecommunication equipment sector. The risk-free rate for periods within the contractual
life of the options is based on the market yield of U.S. dollar China International Government
Bonds in effect at the time of grant. The expected dividend yield was based on historical
dividends. The expected term was estimated based on the average vesting and contractual terms
as the Company does not have sufficient data on which to estimate the expected future
exercises of the option granted. Changes in these subjective input assumptions could
materially affect the fair value estimates.
 The Company recognizes compensation cost based on the grant date fair value over the period
that the employees are required to provide services in exchange for the award. The amount of
share-based compensation expense recognized for the options was approximately US$5,119
(RMB38,626), US$2,111 (RMB14,668) and US$1,767 (RMB12,070) during the years ended December 31,
2007, 2008 and 2009, respectively. Of the expense recognized in 2007, 1% was charged to
selling and distribution expenses, 94% to general and administrative expenses and 5% to
research and development expenses. Of the expense recognized in 2008, 2% was charged to
selling and distribution expenses, 83% to general and administrative expenses and 15% to
research and development expenses. Of the expense recognized in 2009, 1% was charged to
selling and distribution expenses, 85% to general and administrative expenses and 14% to
research and development expenses.
 In addition, on March 19, 2007, in consideration of services rendered in connection with the
Companys IPO, the Company also granted an option to a consultant to purchase up to 1,200,000
shares of the Companys common stock at an exercise price of US$18 per share with a term of
four years commencing from the grant date. The option vested on April 1, 2007 and will expire
on March 18, 2011. The estimated fair value of the option, which amounted to approximately
RMB12,859 (US$1,763) as computed using the Black-Scholes option-pricing model on the grant
date, was credited to additional paid-in capital and included as ordinary shares issuance
costs during the year ended December 31, 2007.
 The fair value of the share options on the date of grant was US$1.385 per share option which
was estimated by management using the Black-Scholes option pricing based on the following
assumptions:
 Fair value of underlying ordinary shares on grant date
    
    US$
    10.43Expected share price volatility
    
    
    48.90
    %Expected dividend yield
    
    
    0.0
    %Expected term (in years)
    
    
    2.0Risk-free interest rate
    
    
    5.1
    %
 Stock option activity of the Company during the year ended December 31, 2009 was as follows:
 Weighted
    
    
    Weightedaverage
    
    
    averageexercise
    
    
    remaining
    
    
    AggregateNumber of
    
    
    price
    
    
    contractual
    
    
    intrinsicoptions
    
    
    per share
    
    
    term
    
    
    valueUS$
    
    
    
    
    
    
    US$Balance as of January 1, 2009
    
    
    3,211,520
    
    
    
    11.42Granted
    
    
    
    
    
    
    Expired
    
    
    (266,720
    )
    
    
    7.50Cancelled
    
    
    (1,744,800
    )
    
    
    7.50Balance as of December 31, 2009
    
    
    1,200,000
    
    
    
    18.00
    
    
    1.2 years
    
    
    
    Exercisable as of December 31, 2009
    
    
    1,200,000
    
    
    
    18.00
    
    
    1.2 years
    
    
    
    
 In December 2009, the Company granted 1,955,057 restricted shares to a director and various
employees and concurrently cancelled 1,744,800 of employee share options that were outstanding
under the QXMC 2007 Stock Plan. Of the 1,955,057 restricted shares that were granted, 960,884
shares vested immediately while the balance of 994,173 shares vest on various dates ending
April 1, 2012. The grant of restricted shares and cancellation of outstanding share options
resulted in a modification charge of approximately US$6,360, which is being recognized over
the vesting periods of the restricted shares. The modification charge recognized in 2009
amounted to US$3,348 (RMB22,851), of which 1% was charged to selling and distribution
expenses, 91% to general and administrative expenses and 8% to research and development
expenses. As of December 31, 2009, the total unrecognized stock compensation expense amounted to
US$7,475, which is expected to be recognized over a remaining weighted average vesting period
of 2.25 years.
  F-33




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
 The following table summarizes the activities for the Companys unvested restricted shares for
the year ended December 31, 2009:
 Weightedaveragegrant dateNumber of
    
    
    fairshares
    
    
    valueUS$Balance as of January 1, 2009
    
    
    
    
    
    
    Granted
    
    
    1,955,057
    
    
    
    4.60Vested
    
    
    (960,884
    )
    
    
    4.60Balance as of December 31, 2009
    
    
    994,173
    
    
    
    4.60Expected to vest after December 31, 2009
    
    
    994,173
    
    
    
    4.60
 The fair value of restricted shares granted is determined based on the closing trading price
of the Companys shares on the grant date.
 (b)
    
    Warrants
 The Company did not have any outstanding warrants during the year ended December 31, 2007.
Warrants outstanding during the years ended December 31, 2008 and 2009 relate to the Warrants
issued in connection with the issuance of the Notes discussed in note 12 to the consolidated
financial statements. Information about the Warrants outstanding as of December 31, 2009 is as
follows:
 Weighted
    
    
    Weightedaverage
    
    
    averageexercise
    
    
    remainingNumber of
    
    
    price
    
    
    contractualwarrants
    
    
    per share
    
    
    TermUS$Investor Warrants
    
    
    1,648,721
    
    
    
    8.91
    
    
    3.4 yearsAgent Warrants
    
    
    942,127
    
    
    
    8.91
    
    
    3.4 yearsTotal
    
    
    2,590,848
    
    
    
    8.91
    
    
    3.4 yearsExercisable as of December 31, 2009
    
    
    2,590,848
    
    
    
    8.91
    
    
    3.4 years
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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
 19
    
    Fair value of financial instruments
 The carrying amounts for cash, restricted cash, accounts receivable, bills receivable,
prepayments to suppliers, prepaid expenses and other current assets, short-term borrowings,
accounts payable, prepayments from customers, accrued liabilities, amounts due from related
parties, and other payables and current liabilities, approximate their fair values because of
the short maturity of these instruments.
       Using InputsDescription
    
    December 31,2009
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Warrant liability
    
    
    112,162
    
    
    
    
    
    
    
    112,162
    
    
    
    Derivative liability
    
    
    39,978
    
    
    
    
    
    
    
    
    
    
    
    39,978Total
    
    
    152,140
    
    
    
    
    
    
    
    112,162
    
    
    
    39,978
  The carrying amount and the estimated fair value of the Groups convertible notes at December
31, 2009 were RMB112,162 (US$16,432) (2008: RMB206,211) and RMB106,281 (US$15,562) (2008:
RMB357,621), respectively. The liability-classified embedded derivatives relating to the
convertible notes and the Warrants are measured at fair value at the end of each reporting
period (see note 12).
 20
    
    Commitments and contingencies
 (a)
    
    Operating lease commitments
 The Group has operating lease agreements for office and factory premises which extend through
December 2011. As of December 31, 2009, the Groups future minimum lease payments required
under non-cancellable operating leases are as follows:
 RMBYear ending December 31,- 2010
    
    
    6,448- 2011
    
    
    945Total
    
    
    7,393
 Lease expenses of the Group for the years ended December 31, 2007, 2008 and 2009 were
approximately RMB4,560, RMB4,998 and RMB6,090 (US$892), respectively.
 (b)
    
    Guarantees
 The Group had provided guarantees to banks in respect of borrowings granted to QXCI to the
extent of RMB150,000 and nil as of December 31, 2008 and 2009, respectively. Such borrowings
were utilized by QXCI to the extent of RMB105,655 and nil as of December 31, 2008 and 2009,
respectively.
 21
    
    Related party transactions
 (a)
    
    Name and relationship of related parties
 Name of related party
    
    Existing relationship with the CompanyQiao Xing Universal Resources, Inc. (Xing)
    
    Parent companyHuizhou Qiao Xing Communication Industry
Ltd. (QXCI)
    
    Subsidiary of Xing until November 30, 2009Qiao Xing Group Limited (QXGL)
    
    A company controlled by certain directors of the
Company
 (b)
    
    Summary of related party transactions
 (i)
    
    During the years ended December 31, 2007, 2008 and 2009, the Group received
processing fee income from QXCI for handset processing services rendered, amounting to
RMB13,314, RMB6,573 and RMB1,371 (US$201), respectively.(ii)
    
    The Company provided guarantee in respect of US$40,000 of senior convertible notes
issued by Xing to two strategic investors in June 2006. Immediately prior to the listing
of the Companys ordinary shares on the NYSE on May 3, 2007, the two strategic investors
converted the US$40,000 convertible notes into 7,800,000 ordinary shares of the Company
that were then owned by Xing.(iii)
    
    During the year ended December 31, 2009, the Company redeemed US$30,706
(equivalent to RMB150,000) of the principal amount of the Notes, which were owned by
Xing. In addition, the Company paid to Xing US$1,073 (equivalent to RMB7,331) for
interest that was accrued on the Notes as of the date of redemption.
  F-35




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
 The Group also participates in a cash management arrangement at the direction and discretion
of Xing as further described below. Other transactions with related parties are set out in
other Notes to the consolidated financial statements.
 (c)
    
    Summary of related party balances
 December 31,2008
    
    
    2009RMB
    
    
    RMB
    
    
    US$Amount due to Xing
    
    
    (11,155
    )
    
    
    (5,568
    )
    
    
    (816
    )
 The amount represents non-interest bearing net advances to and from Xing which are unsecured
and have no fixed repayment terms. The amount resulted principally from the Groups
participation in a cash management arrangement at the direction and discretion of Xing (Note
2(c)) and represents the netting of the following advances to and from the related parties of
Xing:
 December 31,2008
    
    
    2009RMB
    
    
    RMB
    
    
    US$Amounts due (to) from related parties before
execution of netting arrangement:- Xing
    
    
    (14,047
    )
    
    
    (3,923
    )
    
    
    (575
    )- QXGL
    
    
    (4,364
    )
    
    
    (1,498
    )
    
    
    (219
    )- Director: Wu Zhi Yang
    
    
    (147
    )
    
    
    (147
    )
    
    
    (22
    )- QXCI
    
    
    7,403
    
    
    
    
    
    
    
    Net advances from Xing
    
    
    (11,155
    )
    
    
    (5,568
    )
    
    
    (816
    )
 22
    
    Subsequent events
 (a)
    
    In February 2010, CECT incorporated a wholly-owned subsidiary, Beijing Yilian Xuntong
Technology Co., Ltd. (BYXT), in the PRC to engage in the sale of mobile phones and
accessories. The registered and paid-up capital of BYXT was RMB10,000.(b)
    
    In April 2010, the Company issued 331,391 ordinary shares to a director and various employees
of the Group upon the vesting of restricted shares that were granted in 2009 under the QXMC
2007 Stock Plan.(c)
    
    In May 2010, CECT entered into an agreement to dispose of its 10% equity interest held in CEC
Mobile Co., Ltd. to a third party for a total consideration of RMB5,000 (US$733). An
impairment charge of RMB2,803 (US$411) was made during the year ended December 31, 2009 to
write down the carrying value of the investment to the value of the expected sales proceeds.
  F-36