UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
20-F/A


Amendment
No. 1





(Mark
One)





£
            REGISTRATION
      STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THESECURITIES
      EXCHANGE ACT OF 1934





OR





R
            ANNUAL REPORT
      PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT
      OF 1934





For
the fiscal year ended December 31, 2009





OR





£
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT
      OF 1934





For the transition period from
___________________ to
___________________.





OR





£
              SHELL COMPANY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT
      OF 1934





Date of event requiring this shell
company report________________.





Commission
file number:





EXCEED
COMPANY LTD.





(Exact
name of Registrant as specified in its charter)


N/A


(Translation
of Registrant’s name into English)


British
Virgin Islands


(Jurisdiction
of incorporation or organization)


Tai Yau
Ting


Suite 8,
20/F, One International Finance Centre


1 Harbour
View Street, Central, Hong Kong.


T: +852
3669 8105


(Address
of principal executive office)


(Name,
Telephone, E-mail and/or Facsimile Number and Address of Company Contact
Person)


Securities
registered or to be registered pursuant to Section 12(b) of the
Act:





(Title
      of each class)
            (Name
      of each exchange on which registered)Ordinary
      shares of par value US$0.0001 per share
            The
      NASDAQ Global MarketWarrants
            The
      NASDAQ Global MarketUnits
      consisting of one ordinary share and one warrant
            The
      NASDAQ Global Market





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





Indicate
the number of outstanding shares of each of the issuer’s classes of capital or
common stock as of the close of the period covered by the annual report:
19,654,904 ordinary shares, par value US$0.0001 per share.





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


£Yes R
No





If this
report is an annual or transaction report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.


£ Yes
 R
No





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.


R
Yes  £
No





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


£
Yes  o
No





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.


£Large
accelerated filer £ Accelerated
filer  RNon-accelerated filer





Indicate
by check mark which basis of accounting the registrant has used to prepare the
financial statements included in this filing.


£U.S.
GAAP    RInternational
Financial Reporting Standards as issued by the International Accounting Standard
Boards    £
Other





If
“Other” has been checked in response to the previous question, indicate by check
mark which financial statement item the registrant has elected to
follow.


£ Item 17
 £
Item 18





If this
is an annual report, indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act).


£ Yes
 R
No









EXPLANATORY
NOTE




We are
filing this Amendment No. 1 to our Annual Report on Form 20-F to reflect a
restatement of our consolidated financial statements for the year ended December
31, 2007, 2008 and 2009. During the preparation of the June 30, 2010 interim
consolidated financial statements, we determined that the number of shares
outstanding following the business combination was incorrectly computed,
resulting in an error in the basic and diluted earnings per share contained in
our consolidated financial statements for the years ended December 31, 2007,
2008 and 2009. The restatement resulted in an increase in the basic earnings per
share from RMB7.93 to RMB23.48 for the year ended December 31, 2007, RMB9.91 to
RMB29.35 for the year ended December 31, 2008 and RMB12.68 to RMB29.91 for the
year ended December 31, 2009 and an increase in the diluted earnings per share
from RMB7.93 to RMB23.48 for the year ended December 31, 2007, RMB9.91 to
RMB27.71 for the year ended December 31, 2008 and RMB11.98 to RMB21.56 for the
year ended December 31, 2009. In addition, the amount of shares reported as
outstanding were reduced by the amount of the escrow shares that had not been
released. These changes do not impact any other income statement or balance
sheet items.





The error
related to our interpretation of “contingently issuable shares” under IAS33. In
our original interpretation, we considered all contingently issuable sharesas
outstanding for all periods presented in the calculation of basic and diluted
earnings per share. Under the correct interpretation, basic earnings per share
should include only the number of contingently issuable shares of which all
necessary conditions for their release were satisfied as of the end of the
financial period, and diluted earnings per share should include only the number
of contingently issuable shares that would be issuable from the date of the
Acquisition and Redomestication if the conditions were satisfied as of the
reporting period.





The
restated calculation of basic earnings per share for the year ended December 31,
2009 does not include shares held in escrow that are subject to profit targets
for the years ending December 31, 2010 and 2011. In accordance with IAS 33,
escrow shares in relation to 2009 profit are effectively excluded in the
calculation of basic earnings per share as the target was not met until the end
of the day on December 31, 2009. The restated calculation of diluted earnings
per share for the year ended December 31, 2009 includes 2009 escrow shares that
are considered issued from the date of the Acquisition and Redomestication as if
the conditions were satisfied for the period. There were no contingently
issuable shares included in both of the restated basic and diluted earnings per
share for the years ended December 31, 2007 and 2008 as the Acquisition and
Redomestication was completed on October 21, 2009.





As a
result of the above, we are re-filing our annual report on Form 20-F for the
year ended December 31, 2009 to reflect our restated consolidated financial
statements for the years ended December 31, 2007, 2008 and 2009.  The
restated consolidated financial statements will be available on EDGAR, as part
of an amendment to our annual report on Form 20-F for the year ended December
31, 2009, at www.sec.gov/edgar.shtml. Upon request, we will provide a hard copy
of our restated audited consolidated financial statements free of
charge.





In
addition to the restated consolidated financial statements, which begin on page
F-1 hereof, we have also revised Item 3, including the basic and diluted
earnings per share for the years ended December 31, 2005 and 2006 in order to
reflect the effects of this restatement, Item 15, Item 18 and Item 19. Except
with respect to these matters, this amended report does not reflect events
occurring after the filing of the original Form 20-F on April 7, 2010. The
filing of this Form 20-F/A shall not be deemed an admission that the original
Form 20-F, when filed, included any untrue statement of a material fact or
omitted to state a material fact necessary to make a statement not
misleading.







TABLE
OF CONTENTS


PageIntroductionItem
      1.
              Identity
      of Directors, Senior Management and Advisors
              4Item
      2.
              Offer
      Statistics and Expected Timetable
              4Item
      3.
              Key
      Information
              4Item
      4.
              Information
      on the Company
              22Item
      4A.
              Unresolved
      Staff Comments
              43Item
      5.
              Operating
      and Financial Review and Prospects
              43Item
      6.
              Directors,
      Senior Management and Employees
              66Item
      7.
              Major
      Shareholders and Related Party Transactions
              71Item
      8.
              Financial
      Information
              73Item
      9.
              The
      Offer and Listing
              73Item
      10.
              Additional
      Information
              74Item
      11.
              Quantitative
      and Qualitative Disclosures About Market Risk
              82Item
      12.
              Description
      of Securities Other Than Equity Securities
              83Item
      13.
              Defaults,
      Dividend Arrearages and Delinquencies
              83Item
      14.
              Material
      Modifications to the Rights of Security Holders and Use of
      Proceeds
              83Item
      15.
              Controls
      and Procedures
              84Item
      16A.
              Audit
      Committee Financial Expert
              84Item
      16B.
              Code
      of Ethics
              84Item
      16C.
              Principal
      Accountant Fees and Services
              84Item
      16D.
              Exemptions
      from the Listing Standards for Audit Committees
              85Item
      16E.
              Purchases
      of Equity Securities by the Issuer and Affiliated
    Purchasers
              85Item
      16F.
              Change
      in Registrant’s Certifying Accountant
              85Item
      16G.
              Corporate
      Governance
              85Item
      17.
              Financial
      Statements
              85Item
      18.
              Financial
      Statements
              85Item
      19.
              Exhibits
              85


2


CONVENTIONS
WHICH APPLY TO THIS FORM





Except
where the context otherwise requires and for purposes of this form
only:





o
            “Acquisition”
      refers to the purchase by 2020 Chinacap Acquirco, Inc., or 2020, and
      Exceed of all the issued and outstanding ordinary shares of Windrace
      pursuant to as sales and purchase agreement dated May 8,
    2009;





o
            “business combination” refers to
      the completion of the Acquisition effective on October 21,
      2009;





o
            “China” or “PRC” refers to the
      People’s Republic of China;





o
            “Elevatech” refers to Elevatech
      Limited;





o
            “Exceed” refers to Exceed Company
      Ltd.;





o
            “Exceed Brand Management (BVI)”
      refers to Exceed Brand Management (BVI) Co.
  Ltd.;





o
            “Exceed Brand Management (HK)”
      refers to Exceed Brand Management (Hong Kong) Company
      Limited;





o
            “IFRS” refers to International
      Financial Reporting
Standards;





o
            “RichWise” refers to RichWise
      International Investment Group
Limited;





o
            “we”, “us”, “our company” and
      “our” refer to Windrace and its consolidated subsidiaries prior to the
      Acquisition and Exceed and its consolidated subsidiaries following the
      Acquisition;





o
            “Windrace” refers to Windrace
      International Company
Limited;





o
            “XDLong China” refers to Xidelong
      (China) Co. Ltd.;





o
            “XDLong Fujian” refers to Fujian
      Xidelong Sports Goods Co.,
Ltd.;





o
            “XDLong HK” refers to Hei Dai
      Lung Group Company Limited;
and





o
            “XDLong Investment” refers to
      Windrace Investment Holding
Limited.





This annual
report contains translations of Renminbi amounts into U.S. dollars at
specified rates solely for the convenience of the reader. Unless otherwise
noted, for all dates and periods through December 31, 2008, exchange rates of
Renminbi into U.S. dollars are based on the noon buying rate in The City of New
York for cable transfers of Renminbi as certified for customs purposes by
the Federal Reserve Bank of New York. For January 1, 2009 and all later dates
and periods, the exchange rate refers to the exchange rate as set forth in the
H.10 statistical release of the Federal Reserve Board. Translation of amounts
Renminbi into U.S. dollars was calculated at the rate of US$ 1.00 = RMB 6.8259
on December 31, 2009 solely for the convenience of the reader. We make no
representation that the Renminbi amounts referred to in this form could have
been or could be converted into U.S. dollars at any particular rate or at all.
On April 2, 2010, the exchange rate was RMB6.8255 to
US$1.00.


3


PART
I





Item
1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS





Not
Applicable





Item
2. OFFER STATISTICS AND EXPECTED TIMETABLE





Not
Applicable





Item
3. KEY INFORMATION





A.      SELECTED FINANCIAL
DATA





The
following selected consolidated statement of operations data for the five years
ended December 31, 2009 and the consolidated balance sheet data as of December
31, 2005, 2006, 2007, 2008 and 2009 have been derived from our consolidated
financial statements. The report of Crowe Horwath LLP, an independent registered
public accounting firm, on our consolidated financial statements as of December
31, 2008 and 2009 and for each of the years in the three year period ended
December 31, 2009 is included elsewhere in this annual report on Form 20-F. Our
selected consolidated statement of operations data for the years ended December
31, 2005 and 2006 and our consolidated balance sheets as of December
31, 2005, 2006 and 2007 have been derived from our audited consolidated
financial statements, which are not included in this annual report on Form 20-F.
You should read the selected consolidated financial data in conjunction with
those financial statements and the related notes and “Item 5. Operating and
Financial Review and Prospects” included elsewhere in this annual report on Form
20-F. Our consolidated financial statements are prepared and presented in
accordance with IFRS. Our historical results do not necessarily indicate our
results expected for any future periods.





For the year ended December 31,2005
                                        
                                        
                                        2006
                                        
                                        
                                        2007
                                        
                                        
                                        2008
                                        
                                        
                                        2009(in thousands, except per share data)RMB
                                        
                                        
                                        RMB
                                        
                                        
                                        RMB
                                        
                                        
                                        RMB
                                        
                                        
                                        RMB
                                        
                                        
                                        US$ (1)Consolidated
      Statements of Operations and Comprehensive Income DataRevenues
                                        
                                        
                                        301,554
                                        
                                        
                                        
                                        687,569
                                        
                                        
                                        
                                        1,296,402
                                        
                                        
                                        
                                        1,820,282
                                        
                                        
                                        
                                        2,077,958
                                        
                                        
                                        
                                        304,423Cost
      of sales
                                        
                                        
                                        (241,242
                                        )
                                        
                                        
                                        (511,068
                                        )
                                        
                                        
                                        (959,526
                                        )
                                        
                                        
                                        (1,323,262
                                        )
                                        
                                        
                                        (1,464,856
                                        )
                                        
                                        
                                        (214,603
                                        )Gross
      profit
                                        
                                        
                                        60,312
                                        
                                        
                                        
                                        176,501
                                        
                                        
                                        
                                        336,876
                                        
                                        
                                        
                                        497,020
                                        
                                        
                                        
                                        613,102
                                        
                                        
                                        
                                        89,820Other
      income and gains
                                        
                                        
                                        214
                                        
                                        
                                        
                                        235
                                        
                                        
                                        
                                        889
                                        
                                        
                                        
                                        1,188
                                        
                                        
                                        
                                        5,855
                                        
                                        
                                        
                                        858Selling
      and distribution costs
                                        
                                        
                                        (34,520
                                        )
                                        
                                        
                                        (76,560
                                        )
                                        
                                        
                                        (137,077
                                        )
                                        
                                        
                                        (225,752
                                        )
                                        
                                        
                                        (268,123
                                        )
                                        
                                        
                                        (39,280
                                        )Administrative
      expenses
                                        
                                        
                                        (6,208
                                        )
                                        
                                        
                                        (15,541
                                        )
                                        
                                        
                                        (29,984
                                        )
                                        
                                        
                                        (29,205
                                        )
                                        
                                        
                                        (44,509
                                        )
                                        
                                        
                                        (6,521
                                        )Aborted
      IPO expenses
                                        
                                        
                                        ―
                                        
                                        
                                        
                                        ―
                                        
                                        
                                        
                                        ―
                                        
                                        
                                        
                                        (31,382
                                        )
                                        
                                        
                                        ―
                                        
                                        
                                        
                                        ―Research
      and development expenses
                                        
                                        
                                        (2,009
                                        )
                                        
                                        
                                        (5,489
                                        )
                                        
                                        
                                        (12,784
                                        )
                                        
                                        
                                        (17,649
                                        )
                                        
                                        
                                        (24,953
                                        )
                                        
                                        
                                        (3,656
                                        )Finance
      costs
                                        
                                        
                                        (1,315
                                        )
                                        
                                        
                                        (1,332
                                        )
                                        
                                        
                                        (1,352
                                        )
                                        
                                        
                                        (23,511
                                        )
                                        
                                        
                                        (29,566
                                        )
                                        
                                        
                                        (4,332
                                        )Share
      of loss in jointly-controlled entity
                                        
                                        
                                        ―
                                        
                                        
                                        
                                        ―
                                        
                                        
                                        
                                        ―
                                        
                                        
                                        
                                        ―
                                        
                                        
                                        
                                        (16
                                        )
                                        
                                        
                                        (2
                                        )Profit
      before tax
                                        
                                        
                                        16,474
                                        
                                        
                                        
                                        77,814
                                        
                                        
                                        
                                        156,568
                                        
                                        
                                        
                                        170,709
                                        
                                        
                                        
                                        251,790
                                        
                                        
                                        
                                        36,887Tax
                                        
                                        
                                        (1,990
                                        )
                                        
                                        
                                        (9,974
                                        )
                                        
                                        
                                        (21,783
                                        )
                                        
                                        
                                        (2,181
                                        )
                                        
                                        
                                        (3,771
                                        )
                                        
                                        
                                        (552
                                        )Profit
      for the year
                                        
                                        
                                        14,484
                                        
                                        
                                        
                                        67,840
                                        
                                        
                                        
                                        134,785
                                        
                                        
                                        
                                        168,528
                                        
                                        
                                        
                                        248,019
                                        
                                        
                                        
                                        36,335Earnings
      per share (2)Basic
                                        
                                        
                                        2.52
                                        
                                        
                                        
                                        11.82
                                        
                                        
                                        
                                        23.48
                                        
                                        
                                        
                                        29.35
                                        
                                        
                                        
                                        29.91
                                        
                                        
                                        
                                        4.38Diluted
                                        
                                        
                                        2.52
                                        
                                        
                                        
                                        11.82
                                        
                                        
                                        
                                        23.48
                                        
                                        
                                        
                                        27.71
                                        
                                        
                                        
                                        21.56
                                        
                                        
                                        
                                        3.16





As December 31,2005
                
                
                2006
                
                
                2007
                
                
                2008
                
                
                2009(in
      thousands)RMB
                
                
                RMB
                
                
                RMB
                
                
                RMB
                
                
                RMB
                
                
                US$
      (1)Consolidated
      Balance Sheets Data:Cash
      and cash equivalents
                
                
                5,469
                
                
                
                14,714
                
                
                
                67,725
                
                
                
                120,068
                
                
                
                262,204
                
                
                
                38,413Working
      capital (3)
                
                
                11,666
                
                
                
                (43,158
                )
                
                
                (403
                )
                
                
                9,095
                
                
                
                846,507
                
                
                
                124,014Total
      assets
                
                
                112,995
                
                
                
                302,184
                
                
                
                597,011
                
                
                
                815,387
                
                
                
                1,467,785
                
                
                
                215,031Total
      liabilities
                
                
                85,288
                
                
                
                206,173
                
                
                
                281,784
                
                
                
                489,549
                
                
                
                319,353
                
                
                
                46,785Total
      stockholders’ equity
                
                
                27,707
                
                
                
                96,011
                
                
                
                315,227
                
                
                
                325,838
                
                
                
                1,148,432
                
                
                
                168,246





(1)
            Translations
      of RMB amounts into U.S. dollars were made at a rate of RMB6.8259 to
      US$1.00, the noon buying rate in New York City for cable transfers as
      certified for customs purposes by the Federal Reserve Bank of New York on
      December 31, 2009.


4




(2)
            Calculated
      on the basis of the business combination completed on October 21, 2009.
      See note 25 of our consolidated financial statements included elsewhere in
      this form.


(3)
            Working
      capital represents total current assets less total current
      liabilities.





EXCHANGE
RATE INFORMATION





This
annual report contains translations of Renminbi amounts into U.S. dollars at
specific rates solely for the convenience of the reader. For all dates and
periods through December 31, 2008, exchange rates of Renminbi into U.S. dollars
are based on the noon buying rate in The City of New York for cable transfers of
Renminbi as certified for customs purposes by the Federal Reserve Bank of New
York. For January 1, 2009 and all later dates and periods, the exchange rate
refers to the exchange rate as set forth in the H.10 statistical release of the
Federal Reserve Board. These rates are provided solely for your convenience and
we make no representation that any Renminbi or U.S. dollar amounts could have
been, or could be, converted into U.S. dollars or Renminbi, as the case may be,
at any particular rate, the rates stated below, or at all.





The
following table sets forth information concerning the exchange rates in Renminbi
and U.S. dollars for the periods indicated.





Renminbi per U.S. Dollar Noon Buying Rate(1)Average(2)
                
                
                High
                
                
                Low
                
                
                Period End2005
                
                
                8.1826
                
                
                
                8.2765
                
                
                
                8.0702
                
                
                
                8.07022006
                
                
                7.9579
                
                
                
                8.0702
                
                
                
                7.8041
                
                
                
                7.80872007
                
                
                7.5806
                
                
                
                7.8127
                
                
                
                7.2946
                
                
                
                7.29462008
                
                
                6.9193
                
                
                
                7.2946
                
                
                
                6.7800
                
                
                
                6.82252009
                
                
                6.8300
                
                
                
                6.8438
                
                
                
                6.8180
                
                
                
                6.8259





Renminbi per U.S. Dollar
                              Exchange RateHigh
                            
                            
                            LowDecember
      2009
                            
                            
                            6.8299
                            
                            
                            
                            6.8244January
      2010
                            
                            
                            6.8295
                            
                            
                            
                            6.8258February
      2010
                            
                            
                            6.8330
                            
                            
                            
                            6.8258March
      2010
                            
                            
                            6.8270
                            
                            
                            
                            6.8254April
      2010 (through April 2)
                            
                            
                            6.8263
                            
                            
                            
                            6.8255








(1)
            For
      December 2008 and prior periods, the exchange rate refers to the noon
      buying rate as reported by the Federal Reserve Bank of New York. For
      January 2009 and later periods, the exchange rate refers to the exchange
      rate as set forth in the H.10 statistical release of the Federal Reserve
      Board.


(2)
            Annual
      averages are calculated using the average of the exchange rates on the
      last day of each month during the
period.





On April
2, 2010, the daily exchange rate was RMB6.8255 to US$1.00.




B. CAPITALIZATION AND
INDEBTEDNESS





Not
applicable




C. REASONS FOR THE OFFER AND USE OF
PROCEEDS





Not
applicable




D. RISK
FACTORS





Risks
Relating to Our Business





Deterioration
of economic conditions and a resulting decrease in consumer demand for our
products could materially adversely affect our financial condition and results
of operations.





Demand
for our products, and the resulting purchase orders from its distributors, is
largely dependent upon prevailing economic conditions. The recent financial
crisis and economic downturns in global markets have impacted, and could further
impact, the purchase orders from our distributors. For example, although our
revenue decreased in the first half of 2009 compared to the same period in 2008,
demand for our products started to improve in the second half of 2009 and our
revenues increased 14.2% from RMB1,820.3 million for the year ended December 31,
2008 to RMB2,078.0 million for the year ended December 31, 2009. In the event
the demand for consumer products declines in China as a result of a downturn in
global economic conditions, demand our sports products could
decrease.


5


We
distribute our products mainly through the Xidelong retail stores operated by
independent third party distributors over which we have limited
control.





We
distribute our products mainly through the Xidelong retail stores, which offer
our products exclusively and do not carry other brands’ products. Our 22
distributors own and operate all Xidelong retail stores. They operate some of
the Xidelong retail stores directly and delegate operation of the remaining
stores to third parties. We have limited control over the Xidelong retail stores
operated by our distributors and authorized third party retail store operators.
We have contractual relationships only with our distributors and not with
authorized third party retail store operators. There can be no assurance that
these current distribution arrangements provide us with sufficient control to
ensure the Xidelong retail stores sell our products on an exclusive basis or to
prevent our Xidelong brand from being associated with any negative image
relating to quality or customer service. Such association could damage our brand
image and reputation and could have a material adverse effect on our business,
results of operations and financial condition. Further, if distributors
experience financial difficulties, they may unilaterally attempt to liquidate
their inventory build-up through discounts at their Xidelong retail stores
without our approval, which may damage the image and the value of our “  “ (Xidelong) brand.





Adverse
changes in the business and creditworthiness of our distributors could
materially adversely affect our financial condition and results of
operations.





We derive
all of our revenue from sales to distributors. Such arrangement is risky for the
following reasons:




•
            Our distributors generally do not
      have any contractual obligation to purchase minimum quantities of our
      products and may reduce purchases of our products on short
      notice.





•
            Our sources purchase orders
      primarily at sales fairs, and such orders constitute approximately 80% to
      90% of our annual revenue. Purchase order quantities may be subsequently
      adjusted upward or downward by amounts ranging from 10% to 15% before
      finalization. In 2008, we agreed with certain distributors to reduce
      orders by 15% to 20% before finalization to prevent overflow of inventory
      among such distributors arising out of any decreased consumer demand
      resulting from the reduction of delivery due to anticipated reduced
      consumer demand arising from the financial crisis and economic downturn
      that began in 2008. The products we ship to our distributors are based on
      actual orders received from distributors after upward or downward
      adjustments, if any.





•
            Certain distributors, especially
      those adversely affected by the worsened economic conditions, may delay or
      default on their payments to us. Increased credit risk of distributors may
      materially adversely affect our financial condition and results of
      operations and limit our growth
  prospects.





If our
distributors perform poorly or if we fail to maintain good relationship with our
distributors or retain them in our distribution network, our sales, financial
condition and operating results may be adversely affected.





We
rely on our distributors for the expansion of our retail sales network but they
may not be willing to accommodate the needs of our business plans.





As of
December 31, 2009, our distribution network consisted of 3,694 Xidelong retail
stores covering 28 provinces and municipalities in China, 1,000 of which were
operated directly by 22 distributors and the remaining 2,694 were operated
indirectly through authorized third party retail store operators. We rely on our
existing and new distributors to assist us in exploring new markets for our
products and identifying potential locations for new stores. Some of our
distributors, however, also distribute other brands of sports and leisurewear
products, including competitor brands. Although these distributors are required
to operate separate retail stores for other brands’ products, there can be no
assurance that they will always provide favorable retail store locations and
marketing resources to us. There can be no assurance that their expansion would
be timely or sufficient in scope to satisfy the needs of our
business.


6


We
rely on several large distributors for a significant portion of our
sales.





We derive
a significant portion of our sales from several large distributors. For 2007,
2008 and 2009, sales to our top five distributors accounted for approximately
43.4%, 43.1% and 46.0%, respectively, of our total revenue. For 2007, 2008 and
2009, sales to our single largest distributor accounted for approximately 13.8%,
12.3% and 13.0%, respectively, of our total revenue. We generally enter into
distributorship agreements with our distributors for up to a term of 12 months.
Starting from 2009, the duration of the renewal for distribution agreement has
been extended from one year to three years. The duration of our contractual
relationships with each of our top five distributors has been for more than
three years. We do not manufacture our products on a make-to-order basis, but
take orders for our prototype products at sales fairs before entering into sale
contracts with our distributors to manufacture our products. Our purchase orders
at sales fairs constitute approximately 80% to 90% of our revenue. There can be
no assurance that our top distributors will renew their distributorship
agreements with us on commercially acceptable terms or at all.





Under our
agreements with our distributors, we appoint only one distributor instead of
multiple competing distributors for one designated geographical area or region.
This enables us to manage and monitor the distributor and the Xidelong retail
stores in the designated region more effectively. While we may rely on a sole
distributor in a designated region to sell our products, we believe that we
would be able to appoint a replacement distributor in the designated region if
the need arises. However, to the extent that any distributor for any particular
market ceases to cooperate with us for any reason and we are not able to find a
suitable replacement distributor for that market in a timely manner, we may lose
significant business in that market. Furthermore, our top distributors are not
obliged to continue to place orders with us at the same levels as before or at
all. There can be no assurance that we would be able to obtain orders from other
distributors to replace any such lost sales. Any substantial reduction in
purchases from our top distributors, or any failure to renew their agreements
with us, may result in a significant loss of sales and our business, financial
condition and results of operation may be materially adversely
affected.





The
wholesale prices at which we sell our products to our distributors are
determined by factors beyond our control. In addition, sales of our products at
a discount to suggested retail price to end customers could have an adverse
effect on our business and brand name.





The
prices at which we sell our products are affected by supply and demand
fluctuations inherent in the market for our products. Under our business model,
we sell our products to distributors and do not sell directly to consumers. We
do not have any agreements with our distributors that provide for a minimum
purchase price at which the distributors buy our products. We do, however,
provide suggested retail prices. As such, the wholesale prices we offer for our
products to our distributors must match the distributors’ expectations for the
retail sale of our products to consumers. If distributors believe that our
suggested retail prices do not justify the wholesale prices at which we are
offering them, they may require us to lower our wholesale prices. If the
wholesale prices of our products should decrease, our growth targets, financial
condition, and results of operations may be materially adversely
affected.





During
the years ended December 31, 2007, 2008 and 2009, a number of distributors
notified us of certain products with minor deviation from specification. Because
such deviation and the amounts involved were immaterial, we allowed the
distributors and their authorized third-party retailers to sell these products
at a discount to the suggested retail prices to end consumers. The amounts of
any such discount were decided and approved by us on a case-by-case basis.
Further, such discounts only affected the suggested retail prices to end
consumers and had no impact on our revenue because the wholesale price at which
we sold these products to the distributors remained unchanged. However, if the
deviation from specification and the amounts involved were to become material in
the future, the distributors could potentially negotiate for a reduction in
wholesale prices, which would adversely affect our business. Increased sales of
products with deviation from specifications could also damage our brand
image.





We
are exposed to credit risks of our distributors, some of which may experience
financial difficulties, which could in turn adversely affect our financial
condition and results of operations.





We
provide credit terms to our distributors based on our assessment of each
distributor’s financial condition. Our distributors place advance orders at
sales fairs but the risk of default may increase when dealing with financially
ailing distributors or distributors struggling with economic uncertainty. Our
increased sales going forward may rely heavily on credit, and we may be unable
to collect these accounts receivable in full or at all. The loss of, or
significant decrease in, sales to these distributors, or their failure to pay us
in a timely manner or at all, could materially adversely affect our business,
financial condition and results of operation.


7


Our
sales to distributors may not directly correlate to the demand for our products
by end consumers, which could adversely affect our ability to accurately track
market trends and preferences of end consumers for our products and respond to
such changing market dynamics.





We sell
our products to distributors and do not sell directly to end consumers. We
neither accept returns from distributors of unsold stock nor track information
on a real-time basis with respect to the inventory levels and movements of our
products at all of the Xidelong retail stores. Our distributors do not provide
us with any sales reports. Therefore, in order to monitor consumer demand for
our products, we require our distributors to submit inventory reports that
provide information on the sales of our products by our distributors. These
reports enable us to identify whether our products are gaining consumer
acceptance at the Xidelong retail stores. However, such reporting system
requires the cooperation of the distributors to report accurately and submit the
relevant inventory data to us on a timely basis. If our distributors do not
provide accurate and timely inventory data, we are not able to assess accurately
whether our sales to distributors track sales of our products to end consumers.
Further, we are only able to obtain inventory data from the retail stores
directly operated by the distributors but not the authorized third party retail
store operators because we do not have contractual relationships with them.
Therefore, we rely on our distributors to monitor inventory levels and overall
sales performance of authorized third party retail store operators. If we are
unable to track end-consumer sales accurately, we may not be able to assess
market trends and preferences, which ultimately could have a material adverse
effect on our revenue.





We
face increasing labor costs and other costs of production in the PRC, which
could materially adversely affect our profitability.





The
sportswear manufacturing industry is labor intensive. Labor costs in China have
been increasing in recent years and our labor costs in the PRC could continue to
increase in the future. If labor costs in the PRC continue to increase, our
production costs, including both our own manufacturing and outsourcing costs,
will likely increase. This may in turn affect the selling prices of our
products, which may then affect the demand of such products and thereby
adversely affect our sales, financial condition and results of operations.
Moreover, increases in costs of product parts required for production of our
products, such as natural and synthetic leather, and semi-finished rubber soles,
increases in electricity costs and other increases in production costs, may
cause similar adverse effects, particularly if we are unable to identify and
employ other appropriate means to reduce our costs of production. Furthermore,
we may not be able to pass on these increased costs to consumers by increasing
the selling prices of our products in light of competitive pressure in the
markets where we operate. In such circumstances, our profit margin may decrease
and our financial results may be adversely affected.





Interruptions
in our supply of raw materials and product parts could adversely affect our
business, financial condition and results of operations.





We
purchase a large portion of our raw materials and product parts from a small
number of suppliers. For 2007 and 2008, our standard supply agreements were for
one year. Starting from 2009, such agreements have been extended to two years.
For 2007, 2008 and 2009, we purchased raw materials for our products from 38, 36
and 53 suppliers, respectively, most of which are located in Quanzhou, which is
adjacent to Jinjiang. Our contractual relationships with most of our suppliers
have been in place since 2004. For 2007, 2008 and 2009, our top five raw
material suppliers and subcontractors accounted for approximately 35.6%, 40.4%
and 43.7%, respectively, of our total purchases from raw material suppliers and
subcontractors. During the same periods, our single largest supplier accounted
for approximately 7.9%, 9.9% and 9.6%, respectively, of our total purchases.
There can be no assurance that our top suppliers will continue to deliver raw
materials or product parts to us in a timely manner or at acceptable prices and
quality, or at all. Any disruption in supply of raw materials or product parts
from our suppliers may adversely affect our business, financial condition and
results of operations.





Our
profitability may decrease if we are unable to pass on increased cost of raw
materials and product parts to our customers.





Our
manufacturing operations depend on adequate supplies of raw materials and
product parts. We purchase all of our raw materials on an order-by-order basis
with suppliers. The prices of certain of our key raw materials, such as
synthetic leather, are subject to factors beyond our control, such as
fluctuations in crude oil prices. We may also experience difficulty in obtaining
other acceptable quality materials on a timely basis and the prices that we pay
for such materials may increase due to increased demand or other factors. We may
not be able to pass on the increased cost to our customers by increasing the
selling prices due to competitive pressure in the markets. In such
circumstances, our business, financial condition and results of operations may
be adversely affected.


8


We
rely on third party contract manufacturers for a portion of our footwear
production and all of our apparel and accessories production and failure of such
parties to provide products in a timely fashion could adversely affect our
business, financial condition and results of operations.





During
2007 and 2008, we outsourced a portion of our footwear production to three
contract manufacturers and all of our apparel and accessories production to more
than 30 contract manufacturers. During 2009, we outsourced production of a
portion of our footwear to three contract manufacturers and all of our apparel
and accessories to more than 20 contract manufacturers.  The table
below sets forth the percentages of the products that we outsourced to these
contract manufacturers in terms of sales volume for the periods
indicated:





For the year ended December 31,2007
                
                
                2008
                
                
                2009Footwear
                
                
                37.1
                %
                
                
                47.8
                %
                
                
                39.2
                %Apparel
                
                
                100.0
                %
                
                
                100.0
                %
                
                
                100.0
                %Accessories
                
                
                100.0
                %
                
                
                100.0
                %
                
                
                100.0
                %





For 2007
and 2008, the duration of agreements with our contract manufacturers for
footwear, apparel and accessories had been one year. Starting from 2009, the
duration of agreements with our contract manufacturers has been extended to two
years.





For 2007,
2008 and 2009, our single largest contract manufacturer of footwear accounted
for approximately 35.2%, 40.8% and 37.9%, respectively, of our total purchases
of footwear. For 2007, 2008 and 2009, our single largest contract manufacturer
for apparel and accessories accounted for approximately 14.8%, 15.7% and 17.7%,
respectively, of our total purchases of apparel and accessories. For 2007, 2008
and 2009, our top five contract manufacturers for apparel and accessories
accounted for approximately 48.0%, 57.1%, and 64.3%, respectively, of our total
purchases of apparel and accessories.





We
have not entered into any long term contracts with these contract manufacturers.
As such, there can be no assurance that we can renew these contracts upon
expiry, on commercially acceptable terms, or at all. Contract manufacturers may
unilaterally terminate our supply contracts or they may seek to increase the
prices that they charge. As a result, we are not assured of an uninterrupted
supply of footwear, apparel and accessories of acceptable quality or at
acceptable prices from our contract manufacturers. We may not be able to offset
any interruption or decrease in supply of our products by increasing production
at our own production facilities due to capacity constraints, and we may not be
able to substitute suitable alternative contract manufacturers in a timely
manner at commercially acceptable terms. Any disruption in our supply of
products from contract manufacturers may adversely affect our business and could
result in loss of sales and increase in production costs, which would adversely
affect our business and results of operations.





We
may be involved in legal proceedings arising from violation of relevant laws,
rules or regulations particularly in respect of labor and environmental
protection by third party contract manufacturers and suffer from damage to our
reputation.





We
contract with third-party contract manufacturers and raw material suppliers. In
order to protect the reputation of our brand, we strive to adhere to all
relevant laws, rules and regulations, particularly in respect of labor and
environmental protection. However, we do not exercise any control over the
operations of our contract manufacturers or suppliers and are therefore not able
to ensure their compliance with applicable laws and regulations. Therefore,
there can be no assurance that our contract manufacturers or suppliers are in
compliance with, or will comply with, all applicable labor and environmental
laws, rules and regulations with respect to their manufacturing operations. In
the event that our contract manufacturers or suppliers violate any of these
laws, rules or regulations, any resulting negative publicity may damage our
brand and defeat our brand building efforts. In the event that we are named as a
defendant in a lawsuit or any other proceeding arising from violations by our
contract manufacturers or suppliers of any applicable laws, rules or regulations
with respect to their manufacturing operations, we will incur costs and
resources in defending ourselves in such a lawsuit or proceeding. As a result of
the foregoing factors, our business, profitability and results of operations may
be adversely affected.


9


Failure
to continue to obtain high quality endorsers to promote our products could harm
our business.





We engage
external educational institutions, former professional athletes and celebrities
to promote our products and establish the credibility of our products with
consumers. If any of the endorsers associated with our products were to stop
using our products in violation of their endorsement agreements, our business
could be adversely affected. In addition, actions taken by these endorsers that
harm their reputations could in turn also harm our brand image with consumers,
which could have an adverse effect on our sales and financial condition. In
addition, poor performance by our endorsers in their fields, our failure to
continue to identify correctly promising athletes and/or celebrities to use and
endorse its products, or our failure to enter into endorsement arrangements with
prominent athletes and sports organizations, could adversely affect our brand
and result in decreased sales of our products.





Failure
to effectively promote or maintain the Xidelong brand may affect our performance
and sales and cause us to incur significant costs.





The image
of the Xidelong brand is an important factor in influencing consumer preferences
and building brand loyalty. Promoting and maintaining the Xidelong brand is
therefore crucial to our success and growth within the PRC sportswear market. We
have a branding and promotional department that deals mainly with media
arrangements, sponsorships and other endorsement activities. We use a variety of
media, such as television, newspapers, magazines, the Internet and outdoor
billboard displays to build both regional and national brand recognition. We
collaborate with athletes, media celebrities and industry experts on marketing
and endorsement arrangements and they act as spokespersons for the Xidelong
brand. For 2007, 2008 and 2009, we spent approximately 7.2%, 7.5% and 7.8%,
respectively, of our annual revenue on advertising and promotional activities.
If we are unsuccessful in promoting our Xidelong brand among its targeted
consumer groups, the goodwill and consumer acceptance of our Xidelong brand may
be eroded, and our business, financial condition, results of operations and
prospects may be adversely affected. As we also promote our brand through
athletes, media celebrities and spokespersons, our brand is partly dependent on
the public perception of these individuals, over which we have no
control. Any negative publicity, whether in the PRC or abroad, in relation
to our brand or our brand representatives could have an adverse effect on the
public’s perception of our brands, which could have a negative impact on our
business and results of operations.





In
addition, we have incurred and expect to continue to incur significant costs and
expenses arising out of our brand-building activities, including sponsorships
and increased advertising in regional and national newspapers, magazines, the
Internet, television and billboard displays. These activities may not be
successful in building the goodwill and profile of our brand, which could have a
negative effect on our sales and results of operations.





Our
sales may be affected by seasonality, weather conditions and a number of other
factors.





We
operate our business in the PRC and derive all of our revenue from these
operations. Generally, PRC consumers’ spending behavior is stable year-on-year
but varies seasonally, particularly during the Chinese New Year in early spring,
the Labor Day holiday in early May, the summer months and the National Day
holiday in early October.





Generally,
we experience moderate fluctuations in our aggregate sales volume during the
year. Historically, revenues in the third and fourth fiscal quarters have
slightly exceeded those in the first and second fiscal quarters. However, the
mix of product sales may vary considerably from time to time as a result of
changes in seasonal and geographic demand for particular types of footwear,
apparel and accessories. In addition, unexpected and abnormal changes in climate
may affect sales of our products that are timed for release during a particular
season. For example, the climate change resulted in an extended winter season
from 2008 to 2009 in many regions in China. A longer winter adversely affected
the delivery schedules to the distributors and the sales volumes of our spring
and summer collections in the first quarter of 2009.





Fluctuations
in our sales may also result from a number of other factors
including:





o
            the timing of our competitors’
      launch of new products;


10


o
            the timing of international and
      domestic sports events;





o
            consumer acceptance of our new
      and existing products;





o
            changes in the overall sportswear
      industry growth rates;





o
            economic and demographic
      conditions that affect consumer spending and retail
      sales;





o
            the mix of products ordered by
      our distributors;





o
            the timing of the placement and
      delivery of distributor orders;
and





o
            variation in the expenditure
      necessary to support our
business.





As a
result, we believe that comparisons of our operating results between any interim
periods may not be meaningful and that these comparisons may not be an accurate
indicator of our future performance.





Our
operations may be disrupted and our business, financial condition and/or results
of operations may be adversely affected by a failure in our facilities for
reasons beyond our control.





Our
manufacturing operations could be disrupted for reasons beyond our control. The
causes of disruptions may include extreme weather conditions, landslides,
earthquakes, fires, natural catastrophes, raw material supply disruptions,
equipment and system failures, labor force shortages, energy shortages,
workforce actions or environmental issues. Any significant disruption to our
operations could adversely affect our ability to make and sell
products.





In
addition, the occurrence of any of these events could have a material adverse
effect on the productivity and profitability of any of our manufacturing
facilities and on our business, financial condition or results of operations,
and/or the operations of our distributors.





In May
2008, Wenchuan County of Sichuan Province, a region that is approximately 360
kilometers away from Chongqing City, suffered an earthquake with an 8.0
magnitude on the Richter Scale. 87 retail stores of our distributors were shut
down as a result of the earthquake. There can be no assurance that we will not
suffer any further losses in the future as a result of similar reasons beyond
our control.





We
have a limited operating history and our historical results of operations of our
apparel business may not be indicative of our future performance.





Our
business began when XDLong Fujian was established in September 2001. We
therefore have a limited history of operation and the historical financial
information in this registration statement may not necessarily reflect our
future results of operation. There also may not be a sufficient basis to
evaluate our future prospects.





Further,
since the commencement of our apparel business in 2003, we have outsourced all
of our apparel production to contract manufacturers. We are currently examining
plans to commence our own production of apparel. We have a limited operating
history in the sale and marketing of apparel and do not have any experience in
manufacturing apparel. As a result, the historical operating results of our
apparel business may not provide a meaningful basis for evaluating the
performance of our apparel business going forward and may not be indicative of
our future performance.





If
we are unable to increase our production capacity due to our internal production
constraints or our inability to locate suitable contract manufacturers with
sufficient production capacity of their own, our operating results may be
adversely affected.





We
manufacture a significant portion of our footwear at our production facility in
Jinjiang, Fujian province. We outsource the manufacturing of a portion of our
footwear and all of our apparel and accessories to contract manufacturers.
Although we produce a portion of our footwear products in house, we expect to
continue to rely on contract manufacturers for the production of a portion of
our footwear and all of our apparel and accessories. Therefore, our ability to
continue to increase our sales depends on the successful expansion of our
footwear production capacity at our production facility and the availability of
contract manufacturers with sufficient production capacity of their own. If we
are unable to continue to increase our internal production capacity or engage
suitable contract manufacturers, our operating results may be adversely
affected.


11


We
may not be able to manage our growth effectively and our growth may slow down in
the future.





We have
been expanding our business rapidly and intend to continue to do so either
through organic growth or through acquisitions and investments in related
businesses as we deem appropriate. Such expansion may place a significant strain
on our managerial, operational and financial resources. Further, we have no
prior experience in engaging in the management and operation of retail stores or
retail business. We will need to manage our growth effectively, which may entail
devising and implementing business plans, training and managing our growing
workforce, managing costs and implementing adequate control and reporting
systems in a timely manner. There can be no assurance that our personnel,
procedures and controls will be managed effectively to support our future growth
adequately. Failure to manage our expansion effectively may affect our success
in executing our business plan and adversely affect our business, financial
condition and results of operation. In addition, our growth in percentage terms
may slow in the future. Accordingly, you should not rely on our historic growth
rate as an indicator for our future growth rate.





We
may not be successful in our future expansion plans and may be unable to secure
sufficient funding for such plans to further grow our business.





Our
business expansion plans will require us to increase investments in, and devote
significant resources to, our brand promotion efforts, internal production
capacities, research and design capabilities and the Xidelong sales distribution
network operated by our distributors. If we fail to implement our future
expansion plans, we may not achieve our growth target. Furthermore, our ability
to obtain adequate funds to finance our expansion plans depends on our financial
condition and results of operations, as well as other factors that may be
outside our control, such as general market conditions, the performance of the
PRC sportswear industry, and political and economic conditions in China. If
additional capital is unavailable, we may be forced to abandon some or all of
our expansion plans, as a result of which our business, financial condition and
results of operations could be adversely affected.





Loss
of any key executive personnel or any failure to attract such personnel in the
future will adversely impact our business and growth prospects.





Our
future success will depend on the continued service of our senior management. In
particular, Mr. Lin Shuipan, chairman of the board and chief executive officer,
has over 15 years’ experience in the sportswear industry and is responsible for
our overall corporate strategies, planning and business development. His
experience and leadership is critical to our operations and financial
performance. We do not maintain any “key-man” insurance policy. If we lose the
services of Mr. Lin or any of our key executive personnel and cannot replace
them in a timely manner, such loss may reduce our competitiveness, and may
adversely affect our financial condition, operating results and future
prospects. In addition, our success depends significantly on other personnel
and, in particular, our team of designers. Other international and domestic
competitors that operate in the PRC may be able to offer more favorable
compensation packages to recruit personnel whom we consider desirable. Our
continued success will depend on our ability to attract and retain qualified
personnel in order to manage our existing operations as well as our future
growth. We may not be able to attract, assimilate or retain the personnel whom
we need. Our staff expenses in relation thereto may increase significantly. This
may adversely affect our ability to expand our business
effectively.





Failure
to develop technically innovative products could adversely affect our
competitiveness.





While
design and aesthetics of our products are important factors for consumer
acceptance of our products, technical innovation in the design of footwear,
apparel, and sports equipment is also essential to the commercial success of our
products. Research and development plays a key role in technical innovation. We
rely upon specialists in the fields of biomechanics, exercise physiology,
engineering, industrial design and related fields, and other experts to develop
cutting edge performance products. While we strive to produce products that help
to reduce injury, enhance athletic performance and maximize comfort, our failure
to introduce technical innovation in our products could result in a decline in
consumer demand for our products.


12


Our
research and development capabilities may be adversely affected if we are unable
to renew the technology cooperation agreement with the China Institute of Sport
Science.





One
element of our growth strategy is to continue to design and manufacture products
through further investment in product design and research and development
initiatives. We primarily rely on the China Institute of Sport Science for such
research and development initiatives. Our technology cooperation agreement with
the China Institute of Sport Science, General Administration of Sport of China
is for a term of five years from October 20, 2006, which we may renew at our
option. There can be no assurance, however, that the China Institute of Sport
Science will comply with the terms and conditions of the agreement and the
renewal provisions. If we do not renew the agreement or if the China Institute
of Sport Science breaches the agreement prior to the expiration of its term for
any reason, our research and development capabilities may be adversely affected.
This could in turn have an indirect adverse effect to our results of operations
and financial condition.





We
may be involved in litigation on intellectual property infringement or other
litigation or regulatory proceedings, which could adversely affect our
reputation, financial condition and results of operations.





We may
design products with elements that may inadvertently infringe copyright or other
intellectual property rights, as a result of which other parties may initiate
litigation or other proceedings against us. Responding to and defending these
proceedings may require substantial costs and diversion of resources, and the
result of these proceedings may be uncertain. Furthermore, our reputation may be
adversely affected.





We may be
subject to other lawsuits and regulatory actions relating to its business from
time to time. Due to the inherent uncertainties of litigation and regulatory
proceedings, we cannot accurately predict the ultimate outcome of any such
proceedings. An unfavorable outcome could have an adverse impact on our
business, financial condition and results of operations. In addition, any
significant litigation in the future, regardless of its merits, could divert
management’s attention from our operations and result in substantial legal
fees.





If
we are unable to protect adequately our intellectual property, we may be
involved in legal proceedings, which could be expensive and time consuming, and
consumers may shift their preference away from our products.





We
believe that our trademarks, patents, and other intellectual property rights are
important to our brand, success and competitive position. We consider the
Xidelong and ““ trademarks to be among our most
valuable assets, and we have registered these trademarks in the PRC. In
addition, we own other trademarks that we use in marketing our products. We
periodically discover products that we believe are counterfeit reproductions of
our products or that otherwise infringe on our intellectual property rights. We
may pursue litigation in the future to enforce our intellectual property rights.
Any such litigation could result in substantial costs and a diversion of our
resources. If we are unsuccessful in challenging a party’s products based on
trademark or design or utility patent infringement, continued sales of these
products could adversely affect our sales and our brand and result in the shift
of consumer preference away from our products. The actions we take to establish
and protect trademarks, patents, and other intellectual property rights may not
be adequate to prevent imitation of our products by others or to prevent others
from seeking to block sales of our products on grounds of violations of
proprietary rights.





Changes
in existing laws and regulations or additional or stricter laws and regulations
on environmental protection in the PRC may cause us to incur additional capital
expenditures.





Our
production facility is located in Jinjiang, Fujian province and is subject to
PRC environmental protection laws and regulations. These laws and regulations
require enterprises engaged in manufacturing that may generate industrial waste
to adopt effective measures to control and properly dispose of such waste. The
relevant administrative department for environmental protection can levy fines
for any violations of such environmental laws or regulations. For material
violations, the PRC government may suspend or close any or all of our
operations. There can also be no assurance that the PRC government will not
change the existing laws or regulations or impose additional or stricter laws or
regulation. Compliance with any of these additional or stricter laws or
regulations may cause us to incur additional capital expenditure, which we may
be unable to pass on to customers through higher prices for our
products.


13


Our
current insurance coverage may not be sufficient to cover the risks related to
our operations.





Our
operations are subject to hazards and risks normally associated with
manufacturing operations, which may cause damage to persons or property.
Currently, we maintain insurance policies for damage to real property and for
employer liability for personal injury of employees. We are not required under
PRC law to maintain, and we do not maintain, any product liability insurance. If
we were found liable for any product liability claim, we may be required to pay
substantial damages. Even if we were successful in defending such a claim, we
may incur substantial financial and other resources in defending such a claim.
Under such circumstances, our financial results will be adversely affected.
Depending on the outcome of any such claim, the reputation of Xidelong brand may
also be adversely affected. Further, we do not maintain business interruption
insurance or third party liability insurance against claims for property damage,
personal injury and environmental liabilities. The occurrence of any of these
events may result in interruption of our operations and subject us to
significant losses or liabilities. Any losses or liabilities that are not
covered by our current insurance policies may have a material adverse effect on
our business, financial condition and results of operations.





If
we are not in compliance with PRC laws and regulations, we may be subject to
certain legal consequences under PRC law.





Pursuant
to the State-owned Land Use Right Transfer Contract for the grant of land use
rights for the production site in Jinjiang, XDLong Fujian was required to
commence construction by February 28, 2006. However, XDLong Fujian did not
commence construction by such date. XDLong Fujian is applying to relevant local
government agency to postpone construction on the land. However, it is possible
that the local government will repossess the land before XDLong Fujian obtains
an approval to postpone construction. The land covers an area of approximately
15,000 square meters and XDLong Fujian paid approximately RMB531,000 to the
government as land grant fees. If the local government repossesses the land, we
will lose our land use rights over the land and we will not be able to recover
the land grant fees previously paid to the government. In addition, we will not
be able to construct additional facilities on the land to implement our
expansion plans.





Under PRC
law, a company must apply to the environmental protection authority in the PRC
for an environmental protection examination and acceptance after completion of a
construction project. XDLong China has not applied for an environmental
protection examination and acceptance for a construction project that it
finished. As a result, the environmental protection authority has the right to
request XDLong China to rectify such non-compliance by applying for an
environmental protection examination and acceptance within a specified period.
If XDLong China fails to obtain an environmental protection examination and
acceptance within the specified period of time, XDLong may be subject to a fine
up to RMB50,000 or be ordered to suspend its operations.





Difficulties
in obtaining new credit facilities or acceleration of payments under existing
credit facilities could have an adverse effect on our liquidity.





Under the
current economic situation, banks and other financial institutions have
tightened lending to businesses. As a result, businesses have difficulties in
obtaining credit at commercially acceptable terms, or at all. While we obtained
a new bank borrowing of RMB90.5 million in the year ended December 31, 2009,
there can be no assurance that we will continue to be able to obtain additional
funding when the need arises if current economic situation persists. If we are
unable to obtain new credit facilities and are unable to finance our liquidity
or working capital requirements through cash flows from operating activities or
other sources, our financial condition and results of operations could be
adversely affected.





In
addition, certain of our existing credit facilities require consent from lenders
in advance of a material change of ownership or change of business operations,
including restructuring, mergers and acquisitions. As of December 31, 2009, an
aggregate outstanding amount of RMB83.0 million of our outstanding loans
requires such consent. Jingtian & Gongcheng, Windrace’s PRC counsel, is of
the opinion that these loan agreements require consent for transactions that
occur in the PRC. Therefore, offshore transactions such as the Acquisition
should not require consents from the banks. In the event that the banks are of a
different opinion and believe that the Acquisition constitutes a material change
of ownership or change of business operations and therefore require consents in
advance of such changes, we could be deemed as in breach of these agreements for
not having obtained such consents in advance of relevant changes. If the banks
accelerate our payment obligations under these agreements, our liquidity could
be adversely affected.





We
relied on loans from Mr. Lin Shuipan, our Chief Executive Officer, in 2007, 2008
and 2009 for our expansion and the cessation of such shareholder support may
affect our cash flows.





We had
advances from Mr. Lin Shuipan, our Chief Executive Officer, in the amount of
approximately RMB82.5 million, RMB0.9 million, and RMB1.7 million in 2007, 2008
and 2009. These advances mainly served as short term funds to support the
expansion of our footwear production facilities and the construction of our
office building in Jinjiang. In the event that we fail to generate sufficient
cash flows from our operations or obtain alternative financing to meet our
operating expenditures in the future, our working capital will be
constrained.


14


Our
risk management and internal control systems improvements may not be adequate or
effective, which could adversely affect our business, financial condition and
results of operations.





We have
established risk management and internal control systems consisting of relevant
organizational framework, policies, procedures and risk management methods that
we believe are appropriate for our business operations, and we seek to continue
to improve such risk management and internal control systems from time to time.
However, due to the inherent limitations in the design and implementation of
risk management and internal control systems, there can be no assurance that our
risk management and internal control systems will be sufficiently effective in
identifying and preventing all such risks.





In
addition, as some of our risk management and internal control policies and
procedures are relatively new, we may need to establish and implement additional
risk management and internal control policies and procedures to improve further
our systems from time to time. Our risk management and internal control systems
also depend on their implementation by our employees, there can be no assurance
that such implementation will not involve any human errors or mistakes. If we
fail to timely adapt and implement our risk management and internal control
policies and procedures, our business, results of operations and financial
condition could be materially adversely affected.





While
we believe that we currently have adequate internal control procedures in place,
we are still exposed to potential risks from legislation requiring companies to
evaluate controls under Section 404 of the Sarbanes-Oxley Act of
2002.





We are
subject to the reporting obligations under the U.S. securities laws. The
Securities and Exchange Commission, or the SEC, as required under Section 404 of
the Sarbanes-Oxley Act of 2002, has adopted rules requiring public companies to
include a report of management on the effectiveness of such companies’ internal
control over financial reporting in their respective annual reports.  This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting. Our
management’s report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securities & Exchange
Commission that permit us to provide only our management’s report in this annual
report.  Our management conducted an evaluation of the effectiveness of our
internal control over financial reporting and concluded that our internal
control over financial reporting was effective as of December 31, 2009. If
we fail to maintain the effectiveness of our internal control over financial
reporting, we may not be able to conclude on an ongoing basis that we have
effective internal control over financial reporting in accordance with the
Sarbanes-Oxley Act. Moreover, effective internal control over financial
reporting is necessary for us to produce reliable financial reports. As a
result, any failure to maintain effective internal control over financial
reporting could result in the loss of investor confidence in the reliability of
our financial statements, which in turn could negatively impact the trading
price of our ordinary shares. Furthermore, we may need to incur additional costs
and use additional management and other resources in an effort to comply with
Section 404 of the Sarbanes-Oxley Act and other requirements going
forward.





Risks
Relating to the Industry in Which We Operate





Our
products face intense competition, and we may not have the resources necessary
to compete with competitors.





We are a
sports and leisure footwear, apparel and accessories company. This industry is
highly competitive in the PRC and the competitors in this market include both
international and domestic companies. Some of our competitors may have greater
financial, research and development and design, marketing, distribution,
management or other resources. Our results of operations could be affected by a
number of competitive factors, including entry by new competitors into our
current markets, expansion by existing competitors, better marketing/advertising
leading to stronger brand equity for the competitors, and competition with other
companies for the production capacity of contract manufacturers. Our results of
operations and market position may be adversely impacted by these competitive
pressures.


15


There can
be no assurance that our strategies will remain competitive or that we will
continue to be successful in the future. Increased competition could result in a
loss of our market share. In particular, if our competitors adopt aggressive
pricing policies, we may be forced to adjust the pricing of our products to
level their competitiveness. This could adversely affect our profitability and
financial results.





We
may not be able to predict or meet consumer preferences or demand
accurately.





We derive
a significant amount of revenue from the sale of sports and leisurewear products
that are subject to rapidly changing consumer preferences. Our sales and profits
are sensitive to these changing preferences and our success depends on our
ability to identify, originate and define product and fashion trends as well as
to anticipate, gauge and react to changing consumer demands in a timely manner.
All of our products are subject to changing consumer preferences that we cannot
predict with certainty. Our new products may not receive consumer acceptance as
consumer preferences could shift rapidly to different types of performance or
other sports footwear or apparel or away from these types of products
altogether, and our future success depends in part on our ability to anticipate
and respond to these changes. If we fail to anticipate accurately and respond to
trends and shifts in consumer preferences by adjusting the mix of existing
product offerings, developing new products, designs and styles, or influencing
sports and fitness preferences through vigorous marketing, we could experience
lower sales, excess inventories and lower profit margins, any of which could
have an adverse effect on our results of operations and financial
condition.





Consolidation
of distributors or concentration of retail market share among a few distributors
may increase and concentrate our credit risk and impair our ability to sell our
products.





The
sports and leisure footwear, apparel, and accessories retail markets in the PRC
are dominated by a few large sports and leisure footwear, apparel, and
accessories distributors with many stores. These significant distributors may
increase their market share by expanding through acquisitions or through the
establishment of additional stores. The consolidation of distributors
concentrates our credit risk in a relatively small number of distributors and,
if any of these retailers were to experience a shortage of liquidity, it would
increase the risk of nonpayment of their outstanding payables to us. In
addition, any shifting concentration of market share to a small number of
distributors in a particular county or region increases operational risks. If
any one of them substantially reduces their purchases of our products, we may be
unable to find a sufficient number of other retail stores for our products to
sustain the same level of sales and revenues. Further, the consolidation of
distributors could limit our ability to negotiate contract terms in our favor.
For example, due to a small number of distributors existing in the industry to
whom we can sell our products, our ability to sell products at the price level
that we wish to may be adversely affected. If the selling prices to the
distributors decrease, our profitability would be adversely
affected.





Risks
Relating to the PRC





All of
the business and assets of Windrace, our wholly-owned subsidiary in which our
business is conducted, are located in the PRC. Accordingly, our results of
operations, financial condition and prospects are subject, to a significant
degree, to economic, political and legal developments in the PRC.





Our
future performance is dependent on the PRC economy and, in particular, the level
of growth of the PRC consumer market.





We derive
all of our revenue from sales of our products in the PRC. The success of our
business depends on the condition and growth of the PRC consumer market, which
in turn depends on macro-economic conditions and individual income levels in the
PRC. There is no assurance that projected growth rates of the PRC economy and
the PRC consumer market will be realized under current economic situation. Any
future slowdowns or declines in the PRC economy or consumer spending may
adversely affect our business, operating results and financial condition. We
believe that consumer spending habits may be adversely affected during a period
of recession in the economy or that uncertainties regarding future economic
prospects could also affect consumer spending habits, all of which may have an
adverse effect on certain enterprises operating within the consumer and retail
sectors, including us. The consumer and retail market may be affected by the
changing operating conditions in the PRC. With accession of the PRC to the World
Trade Organization (the “WTO”), changes and developments in the consumer and
retail market may be volatile and unpredictable. For instance, the reduction in
tariffs on foreign products after the liberalization of the PRC market and
further entry of international brands may intensify the competition in the PRC
market. This may have a material adverse impact on our business, operating
results and financial condition.


16


Political,
economic and social policies of the PRC government and PRC laws and regulations
could affect our business and results of operations and may result in our
inability to sustain our growth.





The
economy of the PRC differs from the economies of most developed countries in a
number of respects, including:




o
            its
    structure;





o
            level of government
      involvement;





o
            level of
      development;





o
            level of capital
      reinvestment;





o
            control of capital
      reinvestment;





o
            control of foreign exchange;
      and





o
            allocation of
      resources.





Before
its adoption of reform and open door policies beginning in 1978, China was
primarily a planned economy. Since then, the PRC government has been reforming
the PRC’s economic system, and has begun reforming the government structure in
recent years. These reforms have resulted in significant economic growth and
social progress. Although the PRC government still owns a significant portion of
the productive assets in the PRC, economic reform policies since the late 1970s
have emphasized autonomous enterprises and the utilization of market mechanisms,
especially where these policies apply to privately-owned businesses such as
Windrace. Although we believe these reforms will have a positive effect on our
overall and long-term development, we cannot predict whether changes in the
PRC’s political, economic and social conditions, laws, regulations and policies
will have an adverse impact on our current or future business, results of
operations or financial condition.





Our
ability to continue to expand our business is dependent on a number of factors,
including general economic and capital market conditions, and credit
availability from banks or other lenders. In the past few years, the PRC
government has articulated a need to control the rate of economic growth and may
tighten its monetary policies, including increasing interest rates on bank loans
and deposits and tightening the money supply to control growth in lending. Under
current economic situation, financial institutions have tightened their lending.
Stricter lending policies may, among other things, affect our ability to obtain
financing, which may, in turn, adversely affect our growth and financial
condition.





As we
conduct a significant portion of our business through subsidiaries in China, we
are subject to PRC laws and regulations on labor and employee benefits. In
recent years, the PRC government has implemented policies to strengthen the
protection of employees and obligate employers to provide more benefits to their
employees. In addition, an employment contract law came into effect in China on
January 1, 2008. The PRC employment contract law and related legislations
require more benefits to be provided to employees, such as an increase in pay or
compensation for termination of employment contracts. As a result, we expect to
incur higher labor costs, which could have an adverse impact on our current or
future business, results of operations or financial condition. Additional
changes in the PRC’s political, economic and social conditions, laws,
regulations and policies could have an adverse effect on our business, results
of operations or financial condition.





Failure
to comply with the State Administration of Foreign Exchange regulations relating
to registration of interests before the establishment of offshore special
purpose companies by our beneficial owners may adversely affect our business
operations.





On
October 21, 2005, the State Administration of Foreign Exchange issued a public
notice that became effective on November 1, 2005. The notice requires PRC
residents to register with the local State Administration of Foreign Exchange
branch before establishing or controlling any company, referred to in the notice
as an “offshore special purpose company,” outside of the PRC for the purpose of
capital financing (the “No. 75 SAFE Initial Registration”). Besides that, an
alteration registration shall be filed after completing an investment in or
acquisition of any operating subsidiaries in the PRC, which we refer to herein
as a “round-trip investment,” and any change of shareholding or any other
material capital alteration in such offshore special purpose company involving a
round-trip investment shall also be filed within 30 days from the date of
shareholding transfer or capital alteration, and the registration conducted
under the above two situations is defined as the “No. 75 SAFE Alteration
Registration.”


17


Mr. Lin
Shuipan, Mr. Shi Jinlei and Ms. Chen Shuli are subject to the registration
requirements under the No. 75 SAFE Notice, and have conducted the No. 75 SAFE
Initial Registration with the Fujian Provincial State Administration of Foreign
Exchange. After the offshore special purpose companies were established by the
aforementioned persons, some round-trip investments by, and change of
shareholders or other material capital alteration in, such offshore special
purpose companies occurred, and Mr. Lin Shuipan, Mr. Shi Jinlei and Ms Chen are
subject to the No. 75 Alteration Registration for the above events.





Our PRC
beneficial owners must comply with these requirements in connection with our
future investments and financing activities. If our PRC beneficial owners fail
to comply with the relevant requirements, such failure may subject the
beneficial owners to fines and legal sanctions, which may adversely affect our
business operations.





Our
revenues are denominated in Renminbi, which is not freely convertible for
capital account transactions and may be subject to exchange rate
volatility.





We are
exposed to the risks associated with foreign exchange controls and restrictions
in China, as our revenues are denominated in Renminbi, which is currently not
freely exchangeable. The PRC government imposes control over the convertibility
of Renminbi into foreign currencies. Under the rules promulgated under the PRC
foreign exchange regulations, payments of current account items, including
profit distributions, interest payments and operation-related expenditures, may
be made in foreign currencies without prior approval but are subject to
procedural requirements. Strict foreign exchange control continues to apply to
capital account transactions. These transactions must be approved by or
registered with the PRC State Administration of Foreign Exchange and repayment
of loan principal, distribution of return on direct capital investment and
investments in negotiable instruments are also subject to restrictions. There
can be no assurance that we will be able to meet all of our foreign currency
obligations or to remit profits out of China.





Fluctuation
in the value of the Renminbi and of the U.S. dollar may have a material adverse
effect on your investment.





Any
significant revaluation of the Renminbi may have a material adverse effect on
our revenues and financial condition as well as on the value of, and any
dividends payable on, our ordinary shares in foreign currency terms. For
instance, a decline in the value of Renminbi against the U.S. dollar could
reduce the U.S. dollar equivalent amounts of our financial results, the value of
your investment in us and the dividends we may pay in the future, if
any.





There
remains significant international pressure on the PRC government to liberalize
further its currency policy, which could result in a further and more
significant appreciation in the value of the Renminbi against the U.S. dollar.
The Renminbi may be revalued further against the U.S. dollar or other
currencies, or may be permitted to enter into a full or limited free float,
which may result in an appreciation or depreciation in the value of the Renminbi
against the U.S. dollar or other currencies.





We
rely principally on dividends paid by our subsidiaries to fund any cash and
financing requirements we may have, and any limitation on the ability of our PRC
subsidiaries to pay dividends to us could have a material adverse effect on our
ability to conduct our business.





Windrace
and Exceed are holding companies incorporated in British Virgin Islands and rely
principally on dividends paid by their subsidiaries for cash requirements,
including the funds necessary to service any debt we may incur. If any of our
subsidiaries incurs debt in their own name in the future, the instruments
governing the debt may restrict dividends or other distributions on its equity
interest to Windrace and Exceed.


18


Furthermore,
applicable PRC laws, rules and regulations permit payment of dividends by the
consolidated PRC entities only out of their retained earnings, if any,
determined in accordance with PRC accounting standards, which differ in many
aspects from generally accepted accounting principles in other jurisdictions
including IFRS. Based on PRC accounting standards, the consolidated PRC entities
are also required to set aside a certain percentage of their after-tax profit
each year to their reserve fund in accordance with the requirements of relevant
laws and provisions in their respective articles of associations, which are not
available for distribution as cash dividends. As a result, the consolidated PRC
entities are restricted in their ability to transfer a portion of their net
income to Windrace or Exceed whether in the form of dividends, loans or
advances. Any limitation on the ability of our subsidiaries to pay dividends
could materially adversely limit our ability to grow, make investments or
acquisitions that could be beneficial to our businesses, pay dividends or
otherwise fund and conduct our business. Under the new PRC Enterprise Income Tax
Law and implementation regulations issued by the State Council, PRC income tax
at the rate of 10%, unless relevant treaties provide for a lower rate, is
applicable to dividends paid by enterprises incorporated in the PRC to
“non-resident enterprises” (enterprises that do not have an establishment or
place of business in the PRC, or that have such establishment or place of
business but the relevant income is not effectively connected with the
establishment or place of business) subject to the application of any relevant
income tax treaty that the PRC has entered into. If Windrace, Exceed or our
non-PRC incorporated subsidiaries are considered “nonresident enterprises,” any
dividend that Windrace, Exceed or any such subsidiary receives from the PRC
subsidiaries may be subject to PRC taxation at the 10% rate (or lower treaty
rate).





Any
changes in PRC policies on enterprise income tax may adversely affect our
ability to pay dividends and our financial condition.





Our
subsidiaries are incorporated in the PRC, Hong Kong or the British Virgin
Islands. On March 16, 2007, the new PRC Enterprise Income Tax Law (the “new tax
law”) was issued and on December 6, 2007, the Rules on the Implementation of
Enterprise Income Tax Law of the PRC (“Implementation Rules”) were issued, both
of which became effective on January 1, 2008. Under the new tax law, non-PRC tax
resident enterprises will be taxed at a withholding tax rate of 5% for Hong Kong
companies and 10% for British Virgin Islands companies. If an entity is deemed
to be a PRC tax resident enterprise, which is an enterprise that is set up under
PRC law within the territory of the PRC, or set up under the law of a foreign
country or region but which has “de facto management organization” within the
PRC, then qualified dividend and profit distribution from equity investment
between them shall be exempted from withholding tax and income tax. Among other
things, qualified dividend and profit distribution as stated in the new tax law
shall refer to investment income derived by a PRC tax resident enterprise from
the direct investment in other PRC tax resident enterprises, which shall exclude
investment income from circulating stock issued publicly by PRC tax resident
enterprises and traded on stock exchanges where the holding period is less than
12 months.





Our
subsidiaries may trigger withholding tax requirements in the future under the
new tax law and the Implementation Rules, depending on their classification as a
PRC or non-PRC tax resident enterprise. The new tax law provides that if an
enterprise incorporated outside of the PRC has “de facto management
organization” within the PRC, it may be recognized as a PRC tax resident
enterprise and may be subject to a 25% enterprise income tax on its worldwide
income. According to the Implementation Rules, “de facto management
organization” means the institution that materially and comprehensively manages
and controls the enterprise’s business, personnel, finance and assets. Given the
short history of the tax law and the Implementation Rules, how an enterprise
qualifies for tax exemptions remains unclear. Our ability to pay dividends and
our financial condition may be adversely affected as a result of the new tax law
and other changes in PRC policies and regulations on dividend distributions,
withholding tax, and enterprise income tax.





All of
our management is currently substantially based in the PRC, and may remain in
the PRC after the new tax law takes effect. Therefore, we may be treated as a
PRC resident enterprise for new tax law purposes. The tax consequences of such
treatment are currently unclear as they will depend on the implementation
regulations and on how local tax authorities apply or enforce the new tax law or
the implementation regulations.





The levy
and collection of enterprise income tax in China are handled by various local
governments, which in turn submit such tax revenues to their respective higher
administrative authorities. Each local government has its own administrative
practice with regard to the manner and the amount of tax submitted by the local
government to its higher administrative authorities. PRC enterprises, including
us, have no participation in or control over such administrative practices. Any
discrepancies in implementation among the local governments of such
administrative practice may result in uncertainties over the amount of tax for
which a PRC enterprise is liable.


19


Fluctuations
in the exchange rate may adversely affect us.





Substantially
all of our revenues and expenditures are denominated in Renminbi. As a result,
fluctuations in the exchange rate between the U.S. dollars and Renminbi will
affect our financial results in U.S. dollars terms without giving effect to any
underlying change in our business or results of operations. The Renminbi’s
exchange rate with the U.S. dollar and other currencies is affected by, among
other things, changes in China’s political and economic conditions. The exchange
rate for conversion of Renminbi into foreign currencies is heavily influenced by
intervention in the foreign exchange market by the People’s Bank of China. From
1995 until July 2005, the People’s Bank of China intervened in the foreign
exchange market to maintain an exchange rate of approximately 8.3 Renminbi per
U.S. dollar. On July 21, 2005, the PRC government changed this policy and began
allowing modest appreciation of the Renminbi versus the U.S. dollar. However,
the Renminbi is restricted to a rise or fall of no more than 0.5% per day versus
the U.S. dollar, and the People’s Bank of China continues to intervene in the
foreign exchange market to prevent significant short-term fluctuations in the
Renminbi exchange rate. Nevertheless, under China’s current exchange rate
regime, the Renminbi may appreciate or depreciate significantly in value against
the U.S. dollar in the medium to long term. There remains significant
international pressure on the PRC government to adopt a substantial
liberalization of its currency policy, which could result in a further and more
significant appreciation in the value of the Renminbi against the U.S.
dollar.





An
outbreak of the H1N1 swine flu, H5N1 strain of bird flu (Avian Flu), Severe
Acute Respiratory Syndrome (SARS) or any other similar epidemic may, directly or
indirectly, adversely affect Windrace’s operating results.





The
recent outbreak of the H1N1 swine flu in North America and Europe has caused
governments to take measures to prevent spread of the virus. In addition, there
have been reports of swine flu cases in Asia. If the H1N1 virus further spreads
in Asia, including China, epidemic could negatively affect the Asian economy.
Past occurrences of epidemics have caused different degrees of damage to the
national and local economies in China. China encountered epidemics such as SARS
and incidents of the Avian Flu, which is spread through poultry populations, and
is capable in certain circumstances of being transmitted to humans causing
death. If any of our employees are identified as a possible source of spreading
the swine flu, the Avian Flu or any other similar epidemic, we may be required
to quarantine employees that are suspected of being infected, as well as others
that have come into contact with those employees. We may also be required to
disinfect our affected premises, which could cause a temporary suspension of our
manufacturing capacity, thus adversely affecting operations. An outbreak of
swine flu or a recurrence of an outbreak of SARS, Avian Flu or any other similar
epidemic could restrict the level of economic activities generally and/or slow
down or disrupt our business activities, which could in turn adversely affect
our results of operations.





Power
shortages in the PRC may disrupt our business.





Our
manufacturing processes consume substantial amounts of electricity supplied by
local power grids. Certain cities in the PRC have experienced power shortages in
the past or been subjected to restrictions in electricity consumption. A power
shortage could affect or delay our production schedule. We maintain backup power
generators to provide electricity to our machinery and equipment in case of
electricity supply interruptions. However, there is no assurance that we will
always have adequate supply of electricity to meet our production requirements
and our results of operations may be adversely affected in the event of any
material interruption in electricity supply. An extended interruption in the
power supply may also affect the operations of the Xidelong retail stores and
result in a decrease in revenue.





Risks
Related to Investment in our Ordinary Shares





The
market price for our ordinary shares may be volatile.





The
trading price of our ordinary shares may be subject to fluctuations. During the
period from October 13, 2009, the first day on which our ordinary shares were
listed on the NASDAQ Capital Market, until April 6, 2010, the trading prices of
our ordinary shares ranged from $7.85 to $13.69 per ordinary shares and the
closing sale price on April 6, 2010 was $9.78 per ordinary share. The market
price for our ordinary shares may continue to be volatile and subject to
fluctuations in response to factors including the following:





o regulatory developments in our target
markets affecting us, our customers or our competitors;





o actual or anticipated fluctuations in
our quarterly operating results;


20


o
            changes in financial estimates by
      securities research
analysts;





o
            changes in the economic
      performance or market valuations of other sportswear
      companies;





o
            additions or departures of our
      directors, executive officers and key research personnel;
      and





o
            release or expiry of lock-up or
      other transfer restrictions on our outstanding ordinary
      shares.





In
addition, securities markets may from time to time experience significant price
and volume fluctuations that are not related to the operating performance of
particular companies. These market fluctuations may have a material adverse
effect on the market price of our ordinary shares. In addition, the performance
and fluctuation of the market prices of other companies with business operations
located mainly in China that have listed their securities in the United States
may affect the volatility in the price and trading volumes for our ordinary
shares. Some of these companies have experienced significant volatility. The
trading performances of these companies’ securities at the time of or after
their offerings may affect the overall investor sentiment towards PRC companies
listed in the United States and consequently may impact the trading performance
of our ordinary shares.





Substantial
future sales or perceived sales of our ordinary shares in the public market
could cause the price of our ordinary shares to decline.





Sales
of our ordinary shares in the public market, or the perception that these sales
could occur, could cause the market price of our ordinary shares to decline.
Such sales also might make it more difficult for us to sell equity or
equity-related securities in the future at a time and price that we deem
appropriate. If any existing shareholder or shareholders sell a substantial
amount of our ordinary shares, the prevailing market price for our ordinary
shares could be adversely affected. In addition, we may issue additional
ordinary shares for future acquisitions. If we pay for our future acquisitions
in whole or in part with additionally issued ordinary shares, your ownership
interests in our company would be diluted and this, in turn, could have a
material adverse effect on the price of our ordinary shares.





Your
right to participate in any future rights offerings may be limited, which may
cause dilution to your holdings.





We
may from time to time distribute rights to our shareholders, including rights to
acquire our securities. However, we cannot make rights available to you in the
United States unless we register the rights and the securities to which the
rights relate under the U.S. Securities Act of 1933, as amended, or the
Securities Act or an exemption from the registration requirements is available.
We are under no obligation to file a registration statement with respect to any
such rights or securities or to endeavor to cause such a registration statement
to be declared effective. Moreover, we may not be able to establish an exemption
from registration under the Securities Act. Accordingly, in the event we conduct
any rights offerings in the future, you may be unable to participate in such
offerings and may experience dilution in your holdings.





Certain
judgments obtained against us by our shareholders may not be
enforceable.





We
are a company incorporated under the laws of the British Virgin Islands. We
conduct our operations in China and substantially all of our assets are located
in China. In addition, our directors and executive officers, and some of the
experts named in this annual report, reside within China, and most of the assets
of these persons are located within China. As a result, it may be difficult or
impossible for you to bring an action against us or against these individuals in
the United States in the event that you believe that your rights have been
infringed under the U.S. federal securities laws or otherwise. Even if you are
successful in bringing an action of this kind, the laws of the British Virgin
Islands and of the PRC may render you unable to enforce a judgment against our
assets or the assets of our directors and officers.





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.





Under
the laws of some jurisdictions in the United States, majority and controlling
shareholders generally have certain fiduciary responsibilities to the minority
shareholders. Shareholder action must be taken in good faith, and actions by
controlling shareholders which are obviously unreasonable may be declared null
and void. British Virgin Island law protecting the interests of minority
shareholders may not be as protective in all circumstances as the law protecting
minority shareholders in some U.S. jurisdictions. In addition, the circumstances
under which a shareholder of a British Virgin Islands company may file
derivative actions against the company, and the procedures and defenses that may
be available to the company, may result in the rights of shareholders of a
British Virgin Islands company being more limited than those of shareholders of
a company organized in the United States.


21


Item
4. INFORMATION ON THE COMPANY





A.
          HISTORY AND DEVELOPMENT
OF THE COMPANY





We
were established in China as Xdlong Fujian in September 2001. In January 2002,
we rented a production facility in Jinjiang, Fujian province and commenced
designing, manufacturing and selling footwear under the brand ‘‘XDLONG’’. In
2003, we began designing and selling Xdlong apparel and accessories. Our
products are designed for sports and leisurewear consumers who seek performance
and lifestyle activities products.





In
March 2007, we established our own production facility in Jinjiang, Fujian
province, which currently operates nine production lines with each having a
designed production capacity of approximately one million pairs of footwear per
year. In 2007, 2008 and 2009, we manufactured 6.4 million, 7.0 million and 9.7
million pairs of footwear, respectively, from our production facility. As at
December 31, 2009, we had 22 distributors who operated 3,694 Xdlong retail
stores located in 28 provinces and municipalities in China.





Exceed
was incorporated in the British Virgin Islands on April 21, 2009 as a
wholly-owned subsidiary of 2020, a blank check company formed in Delaware for
the purpose of acquiring, through a merger, stock exchange, asset acquisition or
other similar business combination, an operating business that either:
(1) was located in China, (2) had its principal operations located in
China, or, (3) in 2020’s view, would benefit from establishing operations
in China.





On
October 20, 2009, 2020 merged with and into Exceed, making Exceed the surviving
entity. On October 21, 2009, Exceed acquired all of the outstanding securities
of Windrace from its shareholders, resulting in Windrace becoming a wholly-owned
subsidiary of Exceed.





The
merger of 2020 with and into Exceed resulted in the redomestication of 2020 to
the British Virgin Islands on October 21, 2009 and Exceed, the surviving entity
following the merger, became a foreign private issuer.





Prior to
the business combination with Windrace, neither 2020 nor Exceed had an
operating business.





Our
principal executive offices are located at Suite 8, 20/F, One International
Finance Centre, 1 Harbour View Street, Central, Hong Kong. Our telephone number
is (852) 3669 8105 .





B.
     BUSINESS OVERVIEW





We
design, develop and wholesale footwear, apparel and accessories under the “  “ (Xidelong) brand name and the “  “ logo. We have three principal categories of products: (i)
footwear, which mainly comprises running, leisure, basketball, skateboarding,
canvas, tennis and outdoor footwear, (ii) apparel, which mainly comprises sports
tops, pants, jackets, track suits and coats, and (iii) accessories, which mainly
comprise bags, socks, hats and caps. Our footwear, apparel and accessories
represented 53.0%, 45.7% and 1.3% of our total revenue for the year ended
December 31, 2009, respectively. Our primary footwear is running footwear, which
represented 14.1% of our total revenue for the year ended December 31, 2009, the
market for which has been growing rapidly in China due to the increasing demand
for lifestyle and leisure products and heightened interest in health
consciousness among Chinese customers.





We focus
primarily on second and third tier cities in China characterized by increasing
urbanization and strong economic development, which we believe present the best
opportunity for retail sales growth. Our target customers are between 15 to 35
years old. We plan to focus our market penetration in these areas using a
medium-end pricing strategy, with an average retail price of approximately
RMB200 to RMB300 for a pair of sports or leisure footwear. We also aim to
establish and further widen our regional leadership particularly in the
Southwestern Region and Northwestern Region in China.


22


We sell
our products mainly through the Xidelong retail stores, which sell our products
exclusively and do not carry or sell other brands’ products. Our 22
distributors own and operate all Xidelong retail stores. They operate some of
the Xidelong retail stores directly and delegate operation of the remaining
stores to third parties. We have contractual relationships only with our
distributors and not with authorized third party retail store operators. We
believe that the sale of our products through distributors has enabled us to
grow by leveraging on their regional retail expertise and economies of scale. We
provide retail policies and guidelines, training, advertising and marketing
support as well as renovation subsidies to assist distributors in the management
and expansion of the Xidelong retail sales network. As of December 31, 2009,
there were 3,694 Xidelong retail stores, of which 1,000 were operated directly
by distributors and the remaining were operated indirectly through authorized
third party retail store operators. The number of the Xidelong retail stores
grew from 2,519 as of December 31, 2007 to 3,694 as of December 31,
2009, representing a CAGR of 21.1%.





We place
great emphasis on the comfort and functionality of our products. We tailor our
sports and leisure footwear, especially running footwear, to the needs of PRC
consumers. The China Institute of Sport Science, General Administration of Sport
of China, the research center established by the General Administration of Sport
of China engaging in research in the field of sport science, works with us
exclusively in its research and development efforts in China. Under the
agreement with the China Institute of Sport Science, we pay an annual fee to the
China Institute of Sport Science for their assistance in the research and
development of technologies for our sports footwear and apparel and their
promotion of the technology content of our products. Further, we have the
exclusive right to use the endorsement “ The Strategic Partner of the China
Institute of Sport Science ” on our products and the first right of
refusal to use the know-how developed through our collaboration with the China
Institute of Sport Science. As the exclusive partner of the China Institute of
Sport Science, we allow the China Institute of Sport Science to use our research
and development facilities in Jinjiang. We believe that combined with our
existing strengths and market position, footwear, especially running footwear,
present the largest growth potential in the sports and leisure footwear sector
in China. Our commitment to the comfort and quality of its footwear for each
individual is represented by promotional slogans such as “ The Foot Knows Comfort, ” “
Run Freely ” and “
Respect Yourself.
”





We
manufacture our products through a combination of internal and external
production. Our production facility has a gross floor area of approximately
66,102 square meters and houses nine production lines with an aggregate annual
production capacity of approximately nine million pairs of footwear. During the
years ended December 31, 2007, 2008 and 2009, we manufactured some footwear
at our own production facility and outsourced the remaining footwear, generally
with a lower technology content, and all of our apparel and accessories to third
party contract manufacturers. As of December 31, 2009, we had three
subcontractors for footwear, 19 subcontractors for apparel and four
subcontractors for accessories.





All of
our products, whether manufactured at our production facility or outsourced to
contract manufacturers, undergo testing by our stringent quality control system
before being distributed for retail sale. During the years ended
December 31, 2007, 2008 and 2009, the percentages of footwear production
that we outsourced to these contract manufacturers in terms of sales volume
increased from 37.1% in 2007 to 47.8% in 2008 but decreased to 39.2% in 2009.
The percentages of footwear production that we outsourced to our contract
manufacturers decreased in 2009 because we increased production of our footwear
products in-house due to increased production capacity and decreased purchases
from contract manufacturers. Increased in-house production gives us more control
over footwear production and allows us to save costs.





Brand
and Products





Xidelong
brand





We market
our products under the Xidelong (  ) brand name and
the “  “ logo. We use the Chinese promotional slogan
“Respect Yourself” to
market our products, which is designed to symbolize our emphasis on
individualism.





In June
2006, our “Xidelong” trademark was recognized as “China’s Well-Known Trademark”
by the Hubei Province Jingzhou City Intermediate People’s Court.





To
achieve consistency in our brand image, we set management and operational
guidelines for all distributors to follow at the Xidelong retail stores. These
guidelines include inventory control, pricing and sale procedures, product and
window display requirements and customer service standards.


23


Products





We have
three principal products: (i) footwear, (ii) apparel and (iii)
accessories.





The table
below lists our current main products under each product type:





Footwear
            
            Apparel
            
            Accessories•Running
            
            •Sports
      tops
            
            •Bags•Leisure
            
            •Pants
            
            •Socks•Basketball
            
            •Jackets
            
            •Hats•Skateboarding
            
            •Track
      suits
            
            •Caps•Canvas
            
            •Coats•Tennis•Outdoor





The table
below sets forth our sales volume and revenue by product type:





Year ended December 31,2007
                                                          
                                                          
                                                          2008
                                                          
                                                          
                                                          2009Sales
                                                            volume
                                                          
                                                          
                                                          Revenue
                                                          
                                                          
                                                          Percentage
                                                            of total
                                                            revenue
                                                          
                                                          
                                                          Sales
                                                            volume
                                                          
                                                          
                                                          Revenue
                                                          
                                                          
                                                          Percentage
                                                            of total
                                                            revenue
                                                          
                                                          
                                                          Sales
                                                            volume
                                                          
                                                          
                                                          Revenue
                                                          
                                                          
                                                          Percentage
                                                            of total
                                                            revenue(units
      in
                                                            thousands)
                                                          
                                                          
                                                          (RMB
      in
                                                            thousands)
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          (units
      in
                                                            thousands)
                                                          
                                                          
                                                          (RMB
      in
                                                            thousands)
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          (units
      in
                                                            thousands)
                                                          
                                                          
                                                          (RMB
      in
                                                            thousands)Running
                                                          
                                                          
                                                          5,496
                                                          
                                                          
                                                          
                                                          364,741
                                                          
                                                          
                                                          
                                                          28.1
                                                          %
                                                          
                                                          
                                                          5,892
                                                          
                                                          
                                                          
                                                          425,627
                                                          
                                                          
                                                          
                                                          23.4
                                                          %
                                                          
                                                          
                                                          4,382
                                                          
                                                          
                                                          
                                                          293,174
                                                          
                                                          
                                                          
                                                          14.1
                                                          %Leisure
                                                          
                                                          
                                                          2,369
                                                          
                                                          
                                                          
                                                          131,462
                                                          
                                                          
                                                          
                                                          10.2
                                                          %
                                                          
                                                          
                                                          3,405
                                                          
                                                          
                                                          
                                                          218,769
                                                          
                                                          
                                                          
                                                          12.0
                                                          %
                                                          
                                                          
                                                          4,147
                                                          
                                                          
                                                          
                                                          274,370
                                                          
                                                          
                                                          
                                                          13.2
                                                          %Basketball
                                                          
                                                          
                                                          1,151
                                                          
                                                          
                                                          
                                                          99,652
                                                          
                                                          
                                                          
                                                          7.7
                                                          %
                                                          
                                                          
                                                          787
                                                          
                                                          
                                                          
                                                          71,337
                                                          
                                                          
                                                          
                                                          3.9
                                                          %
                                                          
                                                          
                                                          955
                                                          
                                                          
                                                          
                                                          88,666
                                                          
                                                          
                                                          
                                                          4.2
                                                          %Skateboarding
                                                          
                                                          
                                                          1,229
                                                          
                                                          
                                                          
                                                          74,887
                                                          
                                                          
                                                          
                                                          5.8
                                                          %
                                                          
                                                          
                                                          2,403
                                                          
                                                          
                                                          
                                                          155,796
                                                          
                                                          
                                                          
                                                          8.6
                                                          %
                                                          
                                                          
                                                          3,962
                                                          
                                                          
                                                          
                                                          262,893
                                                          
                                                          
                                                          
                                                          12.7
                                                          %Canvas
                                                          
                                                          
                                                          79
                                                          
                                                          
                                                          
                                                          3,035
                                                          
                                                          
                                                          
                                                          0.2
                                                          %
                                                          
                                                          
                                                          616
                                                          
                                                          
                                                          
                                                          27,373
                                                          
                                                          
                                                          
                                                          1.5
                                                          %
                                                          
                                                          
                                                          313
                                                          
                                                          
                                                          
                                                          12,864
                                                          
                                                          
                                                          
                                                          0.6
                                                          %Tennis
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          137
                                                          
                                                          
                                                          
                                                          11,572
                                                          
                                                          
                                                          
                                                          0.6
                                                          %
                                                          
                                                          
                                                          1,403
                                                          
                                                          
                                                          
                                                          104,083
                                                          
                                                          
                                                          
                                                          5.0
                                                          %Outdoor
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          124
                                                          
                                                          
                                                          
                                                          10,708
                                                          
                                                          
                                                          
                                                          0.6
                                                          %
                                                          
                                                          
                                                          854
                                                          
                                                          
                                                          
                                                          66,229
                                                          
                                                          
                                                          
                                                          3.2
                                                          %Beach
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          47
                                                          
                                                          
                                                          
                                                          1,879
                                                          
                                                          
                                                          
                                                          0.1
                                                          %
                                                          
                                                          
                                                          ―
                                                          
                                                          
                                                          
                                                          ―
                                                          
                                                          
                                                          
                                                          ―Footwear
      subtotal
                                                          
                                                          
                                                          10,324
                                                          
                                                          
                                                          
                                                          673,777
                                                          
                                                          
                                                          
                                                          52.0
                                                          %
                                                          
                                                          
                                                          13,411
                                                          
                                                          
                                                          
                                                          923,061
                                                          
                                                          
                                                          
                                                          50.7
                                                          %
                                                          
                                                          
                                                          16,016
                                                          
                                                          
                                                          
                                                          1,102,279
                                                          
                                                          
                                                          
                                                          53.0
                                                          %Apparel (1)
                                                          
                                                          
                                                          13,158
                                                          
                                                          
                                                          
                                                          598,122
                                                          
                                                          
                                                          
                                                          46.1
                                                          %
                                                          
                                                          
                                                          16,824
                                                          
                                                          
                                                          
                                                          857,203
                                                          
                                                          
                                                          
                                                          47.1
                                                          %
                                                          
                                                          
                                                          17,691
                                                          
                                                          
                                                          
                                                          948,738
                                                          
                                                          
                                                          
                                                          45.7
                                                          %Accessories (2)
                                                          
                                                          
                                                          ―
                                                          
                                                          
                                                          
                                                          24,503
                                                          
                                                          
                                                          
                                                          1.9
                                                          %
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          40,018
                                                          
                                                          
                                                          
                                                          2.2
                                                          %
                                                          
                                                          
                                                          1,861
                                                          
                                                          
                                                          
                                                          26,941
                                                          
                                                          
                                                          
                                                          1.3
                                                          %Total
                                                          
                                                          
                                                          23,482
                                                          
                                                          
                                                          
                                                          1,296,402
                                                          
                                                          
                                                          
                                                          100.0
                                                          %
                                                          
                                                          
                                                          30,235
                                                          
                                                          
                                                          
                                                          1,820,282
                                                          
                                                          
                                                          
                                                          100.0
                                                          %
                                                          
                                                          
                                                          35,568
                                                          
                                                          
                                                          
                                                          2,077,958
                                                          
                                                          
                                                          
                                                          100.0
                                                          %





Notes:




(1)
            We do not record apparel sales
      based on categories.




(2)
            We did not keep sales volume
      records for accessories during 2007, 2008 and 2009 as volume information
      for accessories was not material to our overall
      operations.





Business
Model





The
diagram below illustrates our business model:





24









Product
      design, research and development
            
            Our
      design team at the research and development center formulates new designs
      for footwear and apparel, and tests prototype designs. We carry out other
      research and development activities at our research and development
      center. See “Design, Research & Development.”Sales
      Fairs
            
            We
      display samples of our new products at sales fairs biannually and take
      orders for our new products. See “Sales Fairs.”Purchase
      orders from distributors
            
            At
      the sales fairs, distributors place purchase orders for new products. See
      “Sales Fairs.”Raw
      materials and product parts procurement
            
            Based
      on the purchase orders received at the sales fairs, our purchasing team
      procures the requisite quantity of raw materials and product parts. Raw
      materials and product parts undergo our quality control. See “Procurement”
      and “Quality Control.”Production
            
            The
      footwear production department carries out the production plan. See
      “Production.”


25






Outsourcing
              
              We
      outsource some of our footwear and all of our apparel and accessories
      production to contract manufacturers. See
“Outsourcing.”Quality
      Control
              
              We
      sample and check finished goods against our quality and performance
      standards at the science and technology laboratory located in the research
      and development center. See “Quality Control.”Distribution
      Management
              
              We
      deliver our products to distributors. We then monitor and oversee their
      operations of the Xidelong retail stores. We work with them to renovate
      the Xidelong retail stores, achieve performance targets and expand the
      sales distribution network. See “Sales and
  Distribution.”




Production




We
manufacture a portion of our footwear at our production facility covering an
aggregate gross floor area of approximately 66,102 square meters located in
Jinjiang, Fujian province. This production facility was established in March
2007. Prior to that, we manufactured footwear at a rented production facility,
also located in Jinjiang, Fujian province. As of December 31, 2009, our
production facility had 2,419 production staff.




In 2007,
we operated five production lines occupying an aggregate gross floor area of
6,000 square meters with an annual production capacity of approximately five
million pairs. After the establishment of our facility in March 2007, we
increased our production lines to seven production lines with an annual
production capacity of approximately seven million pairs. In June 2008, we
further increased our production lines to nine production lines with an annual
production capacity of approximately nine million pairs. The utilization rates
of our production facility for 2007, 2008 and 2009 were approximately 93%, 78%
and 98%, respectively.




Production
process




Footwear




The
following diagram illustrates the production process for our
footwear:


26








Raw
      materials procurement
              
              We
      procure raw materials such as natural and synthetic leather, nylon,
      canvas, rubber and plastics for our manufacturing requirements. We may
      also recommend raw materials suppliers to our subcontractors for product
      parts.Preparation
      and processing of raw materials
              
              Our
      quality control department inspects and tests raw materials for
      processing. Our quality control department also instructs and tests
      product parts supplied by our subcontractors.Sewing
      and stitching
              
              Our
      footwear production department sews and stitches individual parts created
      from raw materials and product parts from
  subcontractors.Shaping
      and assembly of soles
              
              Our
      footwear production department manufactures the upper soles and midsoles
      of the footwear and assembles them together.Assembly
              
              Our
      footwear production department assembles all unfinished footwear parts.
      The assembly process includes gluing the soles to the body of the shoe and
      pressing and drying the products.Quality
      Control
              
              Finished
      footwear undergoes our quality control tests.Packaging
              
              We
      package our finished products according to customer
  orders.


27


Apparel
and accessories




We
outsource the production of all our apparel and accessories to contract
manufacturers in the PRC. See “Outsourcing.”




Our
apparel business department handles matters relating to outsourcing such as the
selection and appointment of contract manufacturers and the contracts with
contract manufacturers.




Outsourcing




In 2007,
2008 and 2009, we outsourced production of a portion of our footwear, generally
products with lower technology content, to three contract manufacturers and all
of our apparel and accessories to more than 20 contract manufacturers. The table
below sets forth the percentages of the products that we outsourced to these
contract manufacturers in terms of sales volume for the periods
indicated:





For the year ended December
    31,2007
                
                
                2008
                
                
                2009Footwear
                
                
                37.1
                %
                
                
                47.8
                %
                
                
                39.2
                %Apparel
                
                
                100.0
                %
                
                
                100.0
                %
                
                
                100.0
                %Accessories
                
                
                100.0
                %
                
                
                100.0
                %
                
                
                100.0
                %





We
generally outsource production of our lower-priced footwear range. We outsource
our footwear production when production capacity is at or near full capacity. We
produce our higher-priced footwear in house, particularly higher-priced running
and basketball footwear which uses our proprietary intellectual property and
technology.




We
manufacture our products through a combination of internal and external
production. We purchase finished products from contract manufacturers. Other
than finished products, we do not purchase other products from contract
manufacturers. For semi-finished rubber soles, a key part of our footwear, and
other product parts, we purchase them from subcontractors. See “— Procurement.”
Contract manufacturers only carry out production activities and do not conduct
product design for us. We provide our contract manufacturers with the designs
and specifications of our products. We protect our intellectual property rights
from unauthorized use by our contract manufacturers through the registration of
trademarks, and also through engaging the appropriate legal services and
assistance to ensure that our trademarks are effectively protected and enforced
against any unauthorized use.




We
recommend raw material suppliers to our contract manufacturers for their
production and to subcontractors.




We select
and evaluate our contract manufacturers carefully. We assess contract
manufacturers on an annual basis based on factors such as their product quality
and ability to meet production orders on a timely basis. We engage contract
manufacturers based on sales orders receives at our sales fairs. For 2007, 2008
and 2009, our contract manufacturers contributed 37.1%, 47.8% and 39.2%,
respectively, of our total footwear sales volume. All of our contract
manufacturers are independent third parties and are located in Fujian province.
For 2007 and 2008, the duration of agreements with our contract manufacturers
for footwear, apparel and accessories had been one year. Beginning in 2009, the
duration of agreements with our contract manufacturers has been extended to two
years. We have not terminated our contractual relationships with any of our
contract manufacturers of footwear during the term of the agreements. However,
there have been some incidents of contract termination with our contract
manufacturers of apparel and accessories. When this occurs, we have been able to
appoint replacement contract manufacturers readily due to the large number of
replacement contract manufacturers from which we can select. See “Risk
Factors — We rely on third party contract manufacturers for the
production of a portion of our footwear and all of our apparel and
accessories.”




We
require our contract manufacturers to comply with our manufacturing standards
and specifications. We do not allow contract manufacturers to sub-contract our
production orders without prior consent. We subject outsourced products to our
quality control procedures. We return defective product parts or unused product
parts to the relevant contract manufacturers. We pay our contract manufacturers
by way of bank or telegraphic transfer. Before 2009, we generally paid 30% of
the contract price upon delivery with the remaining 70% paid within 60 days
thereafter. Starting from 2009, the payment of the second installment
representing 70% of the contract price has been extended from 60 days to 120
days after delivery.


28


We do not
oversee the manufacturing operations of our contract manufacturers except to
ensure their compliance with our order specifications and quality control.
Therefore, we believe that we will not be liable for any violations of
applicable laws, rules or regulations with respect to their manufacturing
operations.




Procurement




We
procure raw materials and product parts for our manufacturing
requirements.




We
procure raw materials for our footwear production at our production facility in
Jinjiang. The major raw materials used in the production of our footwear
products include natural and synthetic leather, nylon, canvas, rubber and
plastics. Our raw material suppliers are primarily located in Quanzhou, which is
adjacent to Jinjiang. We select raw material suppliers based on our selection
criteria, which include product quality, reliability, price, and speed of
delivery. We place orders for raw material requirements only after we receive
sales orders at our sales fairs.




We also
procure semi-finished rubber soles and other product parts from subcontractors.
Other than these semi-finished rubber soles and other product parts, we do not
purchase other finished products from subcontractors. Subcontractors manufacture
semi-finished rubber soles to our specifications. We also recommend raw material
suppliers to our subcontractors. We select subcontractors based on location,
product quality, reliability, price, and speed of delivery. Similar to our raw
materials suppliers, our product part suppliers are primarily located in
Quanzhou. We pay our subcontractors a subcontracting fee. The subcontracting
fees for 2007, 2008 and 2009 were approximately RMB21.5 million, RMB18.5 million
and RMB18.8 million, respectively.




We
generally pay our raw material suppliers on a monthly basis. For amounts payable
that are below RMB2 million, we generally make payment within 30 days. For
amounts that exceed RMB2 million, we generally pay 40% within 30 days, with the
remaining 60% payable within 60 days.




We do not
rely on any one supplier or subcontractor. As of December 31, 2009, we had 53
raw materials suppliers, three subcontractors for footwear, 19 subcontractors
for apparel and four subcontractors for accessories.




For 2007,
2008 and 2009, our top five raw material suppliers and subcontractors accounted
for approximately 35.6%, 40.4% and 43.7%, respectively, of total purchases from
raw material suppliers and subcontractors. Our single largest supplier accounted
for approximately 7.9%, 9.9% and 9.6%, respectively, of our total purchases
during the same periods.




Inventory
Control and Management




Our
inventory consists of (i) raw materials for footwear production; (ii) product
parts and (iii) finished products. We keep generally low inventory levels of raw
materials and product parts because we commence production only after receiving
confirmed sales orders from our distributors. We have established an inventory
management ports system to monitor inventory levels.




We do not
have any information relating to the sales of our products by the distributors
and the authorized third party retail store operators. After we sell our
products to the distributors, the products become part of the inventories of the
distributors, over which we have no control. We require our distributors to
provide us with inventory reports that give us information on their inventory
levels. Prior to 2008, our distributors submitted quarterly inventory reports to
us. Since 2008, we have required the distributors to submit the inventory
reports on a monthly basis. We monitor and verify the accuracy of the
distributors’ inventory reports in the following manner:





 ̈
            we
      agree with distributors on the date for
  stocktaking;





 ̈
            on
      the date scheduled for stocktaking, distributors record the inventory
      levels of Xidelong products at their warehouses and the Xidelong retail
      stores which they operate
directly;


29


 ̈
            distributors
      then compare their records on the opening balance of stocks after the last
      stocktaking against the results of the stocktaking, and prepare inventory
      reports;





 ̈
            distributors
      submit the inventory reports to us and our sales representatives then make
      arrangements with the distributors to carry out on-site stocktaking
      inspections based on the distributors’ inventory reports;
    and





 ̈
            our
      sales representatives prepare a report of the on-site inspection and
      identify any unusual inventory levels. We review the report and provide
      recommendations to the relevant distributors on the improvement of their
      sales performance.





The above
procedures enable us to gather information on the levels of market acceptance of
our products so that we can reflect the consumers’ preferences on the designs of
our new products. The tracking of the inventories also provides us information
on the market recognition of our products in a particular region so that we can
realign our strategy if necessary. This information can also assist in our
coordination with distributors to reallocate products to other regions where
necessary. We believe that this inventory control system helps to reduce
inventory build-up at the Xidelong retail stores.




Our
policy is to review regularly obsolete inventories based on the age and the
expected future salability of a product. In addition, we carry out our physical
inventory inspection on a timely basis to identify any obsolete or damaged
inventories. We will make specific provisions for a damaged item or an item of
inventory that has a carrying amount lower than the net realizable value. During
2007, 2008 and 2009, we did not make any provisions for obsolete
inventories.




We
maintain our finished goods inventory in two warehouses, one for storage of
footwear and the other for storage of apparel and accessories. We generally
store finished goods according to types of footwear in our warehouses. For 2007,
2008 and 2009, our average inventory turnover days were 19, 19 and 18,
respectively, while our inventory balances at December 31, 2007, 2008 and
2009 accounted for approximately 8.4%, 10.6% and 3.8%, respectively, of our
total assets.




Quality
Control




We
manufacture our products in accordance with our strict quality control system
and quality standards. From selecting raw materials to packaging finished
products, each stage of the production process is subject to our quality control
procedures. We conduct regular inspections of the production facilities of our
contract manufacturers and require the facilities and outsourced products to
meet both our internal quality control standards and all applicable national and
industry quality standards. We test our new products at the science and
technology laboratory in our research and development center in Jinjiang to help
ensure the products conform to quality and performance standards.




Raw
materials and product parts quality control




We
implement stringent selection criteria for raw materials suppliers and product
parts subcontractors as the first step towards maintaining the quality of our
products. We randomly test samples of raw materials and product parts from
suppliers and return any goods that do not meet our specifications or
standards.




Design
prototypes quality control




Before
commencing mass production, we test prototype designs for any design or
functional issues and the suitability of materials used. We implement test
production runs in order to identify and isolate any potential production issues
or defects.




Production
process quality control




We employ
on-site quality control staff to inspect each stage of the production process.
Our quality control staff inspect semi-finished products at two stages, the
first being the sewing and stitching stage, where we sew and stitch individual
parts together, and the second at the final assembly stage of our footwear where
we glue soles to the footwear, and press and dry the footwear. We also require
our quality control staff to inspect individual product parts and semi-finished
products to monitor compliance with our internal quality control over the
production process standards and measures. These inspection checks provide us
with a degree of control whereby we can detect defects during the production
process, and take steps to rectify these defects, where
appropriate.


30


Finished
products quality control




We
randomly select products from our finished product runs to undergo various
quality control sampling tests before these products are shipped for delivery or
stored at warehouses. We customize these tests for each product type and
include, for example, for footwear, shoe bending tests, abrasion resistance
tests, waterproofing tests, adhesive application tests, temperature tolerance
tests, and various other tests.




In
December 2005, the General Administration of Quality Supervision,
Inspection and Quarantine of the PRC designated our Xidelong footwear and
apparel as “State-designated Products Exempted from Quality Inspection.” In
2008, we obtained ISO 9001 certification for the design, development and
production of our footwear, and the design, development and production
management of our apparel.




Sales
and Distribution




Our sales
operations are managed and coordinated from our headquarters at Jinjiang, Fujian
province. As of December 31, 2009, our sales and marketing center comprised a
team of 171 staff. The sales department devises and implements policies for our
distributors to assist them in operating the Xidelong retail stores, which
include policies relating to marketing and promotion, sales management, pricing,
recording of sales and human resources. The sales department also sets sales
targets and monitors inventory levels of distributors.




Sales
network




We sell
all of our products on a wholesale basis to distributors. These distributors
operate, either directly or indirectly through third parties, the Xidelong
retail stores that sell our products. We do not sell products directly to
consumers. Distributors place wholesale orders (which include purchase orders
that the distributors secure from authorized third party retail store operators)
for our products at our sales fairs for retail sale at the Xidelong retail
stores. See “Sales Fairs.”




As of
December 31, 2009, our 22 distributors operated 3,694 Xidelong retail stores
directly and indirectly, of which the top five distributors accounted for
approximately 13.0%, 9.3%, 8.7%, 7.5% and 7.5% of our total revenue,
respectively.




We
categorize the Xidelong retail stores into the following: (i) department store
concessions and (ii) stand-alone shops. Department store concessions are
designated sections of department stores that sell our products. Stand-alone
shops are retail shops, usually on the street level.





The
following chart illustrates the structure of the sales network for our
products:


31








The
following map shows the geographical distribution of our distributors’ network
of 3,694 Xidelong retail stores across the PRC as of December 31,
2009:


32







As of
December 31, 2009, our 22 distributors established 3,694 Xidelong retail stores.
The table below sets forth the number of the distributors and the Xidelong
retail stores by sales regions:





As of December 31,2007
                      
                      
                      2008
                      
                      
                      2009No. of
                        Distributors
                      
                      
                      No. of
                        Retail
                        stores(1)
                      
                      
                      No. of
                        Distributors
                      
                      
                      No. of
                        Retail
                        stores(1)
                      
                      
                      No. of
                        Distributors
                      
                      
                      No. of
                        Retail
                        stores(1)Northern
      Region
                      
                      
                      4
                      
                      
                      
                      169
                      
                      
                      
                      4
                      
                      
                      
                      327
                      
                      
                      
                      4
                      
                      
                      
                      411Northeastern
      Region
                      
                      
                      3
                      
                      
                      
                      243
                      
                      
                      
                      2
                      
                      
                      
                      336
                      
                      
                      
                      2
                      
                      
                      
                      359Northwestern
      Region
                      
                      
                      3
                      
                      
                      
                      409
                      
                      
                      
                      3
                      
                      
                      
                      498
                      
                      
                      
                      3
                      
                      
                      
                      515Eastern
      Region
                      
                      
                      3
                      
                      
                      
                      453
                      
                      
                      
                      3
                      
                      
                      
                      586
                      
                      
                      
                      4
                      
                      
                      
                      678Southern
      Region
                      
                      
                      3
                      
                      
                      
                      267
                      
                      
                      
                      4
                      
                      
                      
                      373
                      
                      
                      
                      3
                      
                      
                      
                      438Southwestern
      Region
                      
                      
                      6
                      
                      
                      
                      978
                      
                      
                      
                      6
                      
                      
                      
                      1,157
                      
                      
                      
                      6
                      
                      
                      
                      1,293Total
                      
                      
                      22
                      
                      
                      
                      2,519
                      
                      
                      
                      22
                      
                      
                      
                      3,277
                      
                      
                      
                      22
                      
                      
                      
                      3,694







Note:




(1)
            The number of retail stores
      listed includes both stores operated directly by distributors and those
      operated indirectly through third parties, located in each region as
      defined in this registration
statement.




The table
below sets forth the numbers of the Xidelong retail stores operated by
authorized third party retail store operators by region:


33





As of December 31,2007
                
                
                2008
                
                
                2009Northern
      Region
                
                
                93
                
                
                
                234
                
                
                
                322Northeastern
      Region
                
                
                185
                
                
                
                256
                
                
                
                273Northwestern
      Region
                
                
                214
                
                
                
                303
                
                
                
                317Eastern
      Region
                
                
                239
                
                
                
                362
                
                
                
                446Southern
      Region
                
                
                178
                
                
                
                274
                
                
                
                336Southwestern
      Region
                
                
                655
                
                
                
                850
                
                
                
                1,000Total
                
                
                1,564
                
                
                
                2,279
                
                
                
                2,694





The table
below sets forth the number of the Xidelong retail stores opened and closed for
the periods indicated:





As of December 31,2007
                    
                    
                    2008
                    
                    
                    2009New
      retail stores opened
                    
                    
                    1,183
                    
                    
                    
                    920
                    
                    
                    
                    562Retail
      stores closed
                    
                    
                    147
                    
                    
                    
                    162
                    
                    
                    
                    145





The table
below sets out the length of relationship between us and distributor by
region:




For the year ended December
      31, 2009Northern
      Region
                1
      to 4 yearsNortheastern
      Region
                1
      to 2  yearsNorthwestern
      Region
                1
      to 7 yearsEastern
      Region
                1
      to 5 yearsSouthern
      Region
                1
      to 4 yearsSouthwestern
      Region
                1
      to 7 years




The table
below sets out the percentage of sales to distributors by region for the periods
indicated:





As of December 31,2007
                        
                        
                        2008
                        
                        
                        2009Northern
      Region
                        
                        
                        11.4
                        %
                        
                        
                        10.8
                        %
                        
                        
                        10.5
                        %Northeastern
      Region
                        
                        
                        16.1
                        %
                        
                        
                        13.6
                        %
                        
                        
                        11.4
                        %Northwestern
      Region
                        
                        
                        12.2
                        %
                        
                        
                        11.3
                        %
                        
                        
                        11.3
                        %Eastern
      Region
                        
                        
                        13.5
                        %
                        
                        
                        16.8
                        %
                        
                        
                        16.0
                        %Southern
      Region
                        
                        
                        13.3
                        %
                        
                        
                        13.9
                        %
                        
                        
                        14.7
                        %Southwestern
      Region
                        
                        
                        33.5
                        %
                        
                        
                        33.6
                        %
                        
                        
                        36.1
                        %100.0
                        %
                        
                        
                        100.0
                        %
                        
                        
                        100.0
                        %





We have
sales teams comprising regional managers, accounts managers and accounts
representatives who manage our sales in the various regions. Our sales teams are
responsible for monitoring and managing the performance of the distributors and
the Xidelong retail stores within their respective regions, as well as managing
the distributors’ compliance with our retail policies. These regional sales
teams report to our headquarters.




We have
formulated an internal expansion plan that entails opening, through our
distributors, approximately 700, 1,000 and 1,000 Xidelong retail stores in each
of 2010, 2011 and 2012, respectively.




Selection
of distributors




We select
distributors based on a range of criteria that we considers important for the
operation of the Xidelong distribution sales network of sportswear retail
stores. We do not require our distributors to have any minimum number of years
of relevant experience. We assess the suitability of a candidate to be a
distributor based on, but not limited to, the following:





 ̈
            its
      relevant experience in the management and operation of sportswear retail
      stores;





 ̈
            its
      creditworthiness;





 ̈
            its
      ability to develop and operate a network of retail stores in its
      designated sales region;




 ̈
            its
      ability to meet our sales targets;
and


34


 ̈
            the suitability of its store
      location and size.





We
identify suitable distributors and enter into distributorship agreements,
generally for a term of up to 12 months. Beginning in 2008, the duration of
distributorship agreements with our distributors has been extended to three
years.




Our
distributors directly operated 1,000 Xidelong retail stores out of 3,694
Xidelong retail stores at December 31, 2009. They have their own regional
management teams that oversee the overall supervision, management (including the
formulation of operational guidelines for the Xidelong retail stores) and
inspection of the Xidelong retail stores.




We set
guidelines for our distributors in respect of the location, store layout and
product display of their Xidelong retail stores. Distributors require our prior
approval before opening new Xidelong retail stores. We typically visit potential
locations for new Xidelong retail stores with distributors and consider the
suitability of such locations before approving a new Xidelong retail store
opening.




We also
allow our distributors to use authorized third party retail store operators to
operate the Xidelong retail stores. Distributors must obtain our approval before
appointing such retail store operators. As of December 31, 2009, authorized
third party retail store operators operated 2,694 Xidelong retail stores out of
3,694 total Xidelong retail stores.




We do not
have direct contractual relationships with the authorized third party retail
store operators and thus we require our distributors to implement, monitor
compliance with and enforce our retail store guidelines on the authorized third
party retail store operators.




Save for
the provision of subsidies to our distributors for new store openings,
renovation subsidies for the renovation and expansion of existing retail stores
selling Xidelong products, and the provision of credit terms for settlement of
its invoices, we do not make any payment, give any sales incentives, or pay any
fee to our distributors. Our distributors do not pay us any fee other than the
purchase price for the purchase of our products. Our distributors are
independent third parties.




For 2007,
2008 and 2009, sales to our top five distributors accounted for approximately
43.4%, 46.3% and 46.0%, respectively, of our total revenue. During the same
periods, sales to our single largest distributor accounted for approximately
13.8%, 12.3% and 13.0%, respectively, of our total revenue.




Distributorship
agreements




The
common principal terms of the distributorship agreements are as
follows:




 ̈
            Distribution exclusivity — the
      distributorship agreements allow our distributors to sell our products
      under the Xidelong brand on an exclusive
  basis.





 ̈
            Geographic exclusivity —
      distributors must sell our products under the Xidelong brand within a
      defined geographical area.





 ̈
            Product exclusivity —
      distributors must sell our products exclusively at the Xidelong retail
      stores.





 ̈
            Security deposit — distributors
      must pay us a fixed sum as security for the performance of their
      obligations under the
agreement.





 ̈
            Sale price — distributors pay a
      wholesale price for our products, which represents a discount to the
      suggested retail price of our products. Different discount rates apply to
      footwear, apparel and
accessories.





 ̈
            Payment and credit terms — we set
      payment and credit terms on a case-by-case basis with each distributor.
      Starting from 2009, we extended credit terms granted to our distributors
      from two months to four
months.


35




 ̈
            Sales target — we have the right
      to terminate the agreement if a distributor fails to meet sales targets
      for two consecutive years.





 ̈
            Training — we provide training to
      employees of the distributors on a periodic basis. Our training includes
      knowledge of our products, marketing skills, product display, window
      display and operation management. Distributors pay for all costs
      associated with such
training.





 ̈
            Support — we provide our
      distributors with free promotional material such as newspaper
      advertisements, product descriptions and video of our
      advertisements.





We can
renew the distributorship agreements on an annual basis solely at our option.
Beginning in 2009, we have allowed distribution agreements of three years in
length to strengthen our distribution relationships. We are entitled to
terminate a distributorship agreement if the distributor fails to adhere to our
market management policies or fails to meet the sales target.




If a
distributor terminates a distributorship agreement with us and there is no
replacement distributor, we are not required to repurchase any stock held by the
departing distributor. However, we will require any replacement distributor to
purchase inventories held by the departing distributor and will coordinate the
sale of inventories (including obsolete inventories) from the former distributor
to the replacement distributor. The terms on which such sales are made are
determined between the departing distributor and the replacement distributor.
For out-of-season stock, we coordinate with our distributors in reallocating
products to different regions or conducting sales promotional
activities.




Ordering
of our products




The
distributors attend sales fairs organized by us to place orders for our
products. Prior to 2008, we organized two major sales fairs each year, usually
in March to introduce the autumn/winter collections and in September to
introduce spring/summer collections to the distributors. Beginning in 2008, we
organized three sales fairs each year, usually in March to introduce the autumn
collection, in June to introduce the winter collection and in September to
introduce spring/summer collections to its distributors.




We
usually introduce our new collections to our distributors and third-party
retailers at our sales fairs, which are normally held four to six months before
the introduction of a new season’s products to end consumers. Our distributors
place most of their orders for these new products at the sales fairs, and we use
the orders collected at the sales fairs to determine production schedules for
each season and to plan future sales targets. We then manufacture products in
house or though third party contract manufacturers. After completion of
production, the products are delivered to distributors, which in turn either
sell the products directly to consumers or to their respective third-party
retailers for eventual sales to consumers. We believe that our streamlined
order, production and sales process allows us to manage our raw material
procurement and credit exposure, minimize inventory exposure and increase
sales.




Payments
for our products




We give
our distributors an invoice of the contract price payable at the time the
products are delivered. At the same time, we recognize revenue from the sales.
See “ Management’s Discussion
and Analysis of Financial Condition and Results of Operations — Critical
Accounting Policies and Estimates — Revenue recognition.”




Prior to
2009, we generally required our distributors to pay 30% of the contract price
upon delivery with the remaining 70% paid within 60 days after delivery.
Beginning in 2009 and to complement the new policy on length of distribution
agreements, we extended the payment of the second installment representing 70%
of the contract price from 60 days to 120 days after delivery. See “Management’s Discussion and
Analysis of Financial Condition and Results of Operations — Factors Affecting
Our Results of Operations and Financial Condition — The effect of the recent
economic downturns on us.”




We
generally assess the creditworthiness of our distributors based on their credit
history and historical sales performance before entering into agreements with
them. We require our distributors to comply with our credit policy. Our
management team monitors the receivable balances on an ongoing basis and makes
periodic assessment as to whether a bad debt provision needs to be made on a
timely basis. During 2007, 2008 and 2009, we did not make any bad debt
provisions.


36


As of
December 31, 2009, over 99% of the accounts receivable were current in nature.
The remaining 1% of the receivables that were due but not impaired related to a
number of distributors that had a good repayment record. Based on the experience
of transacting with our distributors in the past, we considered that no
provision of doubtful accounts was necessary because there had not been a
significant change in the credit quality of the distributors and we believed
that the accounts receivable were fully recoverable.




Management
of distributors and retail stores




We
collect, review and analyze data on the performance of our distributors. We
monitor the distributors’ performance in the following manner:




 ̈
            We agree with the distributors on
      sales target figures, which vary on a case-by-case basis depending on a
      distributor’s historical sales figures and prevailing market
      conditions;





 ̈
            We require the distributors to
      submit inventory reports to us, which contain information on inventory
      levels of the distributors. The inventory reports, however, do not record
      information on the sales of our products to end consumers, whether by the
      distributors or the authorized third party retail store operators. This
      reporting system enables us to obtain up-to-date information on the sales
      performance and inventory movement at distributors’ level. See “Inventory
      Control and Management;”





 ̈
            We appoint one to three regional
      managers for every province where our distributors operate. These regional
      managers carry out monthly on-site inspections of the Xidelong retail
      stores and prepare reports on such inspections. This enables us to
      identify and inform distributors of any non-performing Xidelong retail
      stores; and





 ̈
            in addition to sales target
      figures, we discuss with our distributors at the beginning of each year
      their annual performance targets, which includes evaluation criteria such
      as the number of new retail stores opened and the timeliness of settlement
      of invoices. At the end of each year, we meet with our distributors and
      review their performance and assign scores based on such criteria.
      However, our agreements with the distributors do not envisage our
      inspection of the financial statements of the distributors. If a
      distributor fails to meet its annual performance targets or scores below
      an acceptable level, or does not fulfill sales network expansion plans, we
      have the option to terminate the distributorship agreements. In
      determining whether to renew or terminate a distributorship, we also
      assess their compliance with our policies in respect of marketing
      activities, daily operations and customer
  service.





We do not
maintain any policy limiting the number of the Xidelong retail stores in any
particular region. When a region can sustain more than one store, and before we
approve the opening of the additional retail stores, we assess any additional
store’s viability and that of the existing store should any additional store be
opened. In particular, we consider factors such as the distributor’s ability to
manage and operate the new retail store effectively and, the proximity between
the new retail stores and the existing retail stores in the particular region,
with a view to avoiding an over concentration of retail stores. We further
assess market conditions such as customer demands, economic growth and
development, and any new governmental policies in a particular region to ensure
each store in the same area can operate without taking market share away from
other stores.




We
provide our operational and retail guidelines, policy and procedures to
distributors, which govern store layout, product display, customer service and
after-sale service standards. We monitor our distributors to ensure that they
operate the Xidelong retail stores in accordance with our guidelines, through
the following measures:




 ̈
            We conduct regular site
      inspections at both distributor and retail store levels. We currently
      employ more than 55 sales representatives who carry out on-site
      inspections of random retail stores every quarter. In areas where there
      are fewer retail stores, we conduct on-site inspections on a monthly
      basis. At the on-site inspections, our sales representatives inspect the
      major conditions of the retail stores such as location, layout, display
      shelves and products, quality of sales staff to ensure that they are
      consistent with our operations
  procedures;


37


 ̈
            Beginning
      in 2008, we implemented a policy requiring our sales representatives to
      conduct monthly on-site inspections of at least 20 retail stores in order
      to monitor more effectively the distributors’ and authorized third party
      retail store operators’ compliance with our operational and retail
      guidelines, policy and procedures, including whether our uniform retail
      prices are enforced;





 ̈
            We
      require our distributors to provide records of their sales and promotional
      activities; and





 ̈
            We
      provide training to the staff of our distributors and retailers to ensure
      that they are able to follow sales and promotional guidelines and policies
      effectively.





As we do
not have any direct contractual relationship with authorized third party retail
store operators, we rely on our distributors to implement and enforce our
operational and retail guidelines, policy and procedures on the authorized third
party retail store operators through the distributors’ agreement with the
authorized third party retail store operators. As such, we only have limited
control over whether authorized third party retail store operators adhere to our
guidelines. We adopt the same measures with authorized third party retail store
operators that we use to monitor our distributors’ compliance with these
guidelines. Our regular site inspections of the retail stores include both the
retail stores directly operated by the distributors and the retail stores
operated by authorized third party retail store operators. We carry out
inspections of retail stores operated by authorized third parties together with
the distributors who appoint the relevant authorized third party retail store
operators.




If a
distributor or authorized third party retail store operator fails to comply with
our operational guidelines, policy and procedures, we give a non-compliance
warning and requires it to take corrective measures. In the event of its
continued non-compliance, we have the option of terminating the distributorship
agreements or to demand the operations of a particular Xidelong retail store to
cease.




We
determine a time period during which a non-compliant distributor or authorized
third party retail store operator must rectify its non-compliance on a
case-to-case basis depending on the seriousness of the breach, but it will not
normally exceed three months.




Subsidies




We
subsidize our distributors for renovation costs of new, and refurbishment of
existing, Xidelong retail stores based on the size of such stores. For 2007,
2008 and 2009, we subsidized approximately RMB34.7 million, RMB71.6 million and
RMB85.3 million, respectively.




Sales
fairs




We hold
sales fairs where we showcase our prototype products to potential and existing
distributors. Distributors place orders for our products at these sales fairs.
We launch and sell our new collection of products for each season at these sales
fairs. Our purchase orders at the sales fairs constitute approximately 80% to
90% of annual revenue. We review orders placed at these sales fairs before
entering into corresponding sales contracts with the distributors. We began
holding three sales fairs a year since 2008.




We
generally informally offer distributors the flexibility to make downward or
upward adjustments to their purchase orders placed at the sales fairs by 10% to
15% before finalization to prevent overflow of inventory among our distributors.
We use orders received from the sales fairs to formulate our production
schedules for the relevant season. Before commencement of mass production, our
senior management reviews orders received from the sale fairs, coordinates with
managers of various departments and finalizes a plan of production quantity,
type and schedule for confirmation with relevant distributors. After such
confirmation, the distributors are not permitted to cancel or adjust these
confirmed sales. The distributors receive an invoice at the time the products
are delivered and we recognize revenue at the same time because we recognize
revenue from the sale of goods when a sale is made and the significant risks and
rewards of ownership have been transferred to the distributors, which generally
occurs when the product is sold and delivered to the distributors. See “Management’s Discussion and
Analysis of Financial Condition and Results of Operations — Critical Accounting
Policies and Estimates.”


38


Return
policy




We do not
have any formal return policy with our distributors. We only accept returns of
defective products. However, instead of returning defective products to us,
distributors generally choose to sell any defective products at a discount to
end customers. Since distributors are required to comply with our pricing
policy, distributors must obtain our prior written consent before they can sell
any products at a discount to the suggested retail price. We determine the
amount of discounts on a case-by-case basis. We do not provide any compensation
to distributors for defective products. To date, the number and value of
defective products have been nominal.




In
addition, we do not have any obsolete stock arrangements with our distributors.
Therefore, we do not have any arrangements with distributors to accept returns
of out-of season stock.




Promotion
and Marketing




Our
marketing department deals with sales fairs, contracts with distributors, market
research and management of distributors. We also have a branding and promotional
department that deals mainly with media arrangements, sponsorships and other
endorsement activities. We use a variety of media, such as television,
newspapers, magazines, the Internet and outdoor billboard displays to build both
regional and nationwide brand recognition. We collaborate with athletes, media
celebrities and industry experts on marketing and endorsement arrangements and
they act as spokespersons for the Xidelong brand.




For 2007,
2008 and 2009, advertising and promotional expenses constituted approximately
7.2%, 7.5% and 7.8% of our total revenue, respectively.




Spokespersons




We actively seek reputable
spokespersons to promote our brand. From October 2001 to September 2003, Mr. Cai
Zhenhuawas a brand spokesperson for our
products. Mr. Cai is a former table-tennis player and holder of various team and
individual titles from numerous World Championships and the Atlanta 1996 Olympic
Games. From February 2003 to May 2007, Mr. Aaron Kwokwas a brand
spokesperson for our products. Mr. Aaron Kwok is a Hong Kong entertainment
celebrity who promoted our brand name and, we believe, raised our profile across
the PRC, especially among younger consumers. As a result, in 2004, we were named
the company with the “Most Popular Spokesperson” by SINA
Corporation.




In 2007, we engaged Professor Sun
Yiningto be a brand spokesperson and
strategic marketing consultant. Professor Sun is a research member of the Hefei
Institute of Intelligent Machines and is a leading scholar on sensor technology
and artificial intelligence in the PRC. The appointment of Professor Sun is in
line with our objective of branding as a manufacturer of sports and leisurewear
products with innovative designs and high technological
performance.




Sponsorship
and endorsement




We
actively seek and are also invited to sponsor various sporting or festive events
related to our products. In 2003, we sponsored an “Xidelong Fashion Night” event
during China Fashion Week. In 2007, we sponsored an “Xidelong award” at the
“Qzone” web design awards. Qzone is a Chinese social networking internet site
that is geared toward young designers. In 2008, we sponsored a series of magic
shows on Anhui TV Channel. We believe our sponsorship of these events helped
promote and increase awareness of our brand among young designers, students and
net surfers.




Under
their cooperation agreements, the China Institute of Sport Science and the Hefei
Institute of Intelligent Machines agreed to help promote our products and
Xidelong brand at various marketing and promotion events during the respective
agreement periods. See “Research and Development.”




Pricing




We
determine the prices of our products based on a variety of factors, including
the costs of raw materials and production, market conditions (including the
spending power of consumers) and the prices of competitors’ products. The prices
of our products increased relatively steadily in 2007, 2008 and 2009 due to
increasing awareness of our brand name, product quality and research and
development. We believe that could increase our prices without losing market
shares despite fierce competition. See “ Management’s Discussion and Analysis
of Financial Condition and Results of Operations — Factors Affecting Our Results
of Operations and Financial Condition — The effect of the recent economic
downturns on us.”


39


We have
adopted a suggested retail price system that is applied nationwide to all retail
stores operated by our distributors or third-party retailers to maintain brand
image and avoid price competition among distributors and third-party retailers.
In addition, our distributors must obtain our prior written approval before
carrying out any promotional events or selling our products (including newly
launched products) at a discount. For sales of our products with deviation from
specification at a discount to suggested retail prices to end customers, see
“Risk Factors — Risks Relating
to Our Business — The wholesale prices at which we sell our products to
distributors are determined by factors beyond our control.” In addition,
sales of our products at a discount to suggested retail price to end customers
could have an adverse effect on our business and brand name.”




The table
below sets forth the retail price range of our products for the periods
indicated:





Year ended December 31,2007
                              
                              2008
                              
                              2009(in
      RMB)Footwear
                              
                              85
      to 338
                              
                              109
      to 346
                              
                              129
      to 354Apparel
                              
                              36
      to 499
                              
                              41
      to 500
                              
                              68
      to 418Accessories
                              
                              6
      to 159
                              
                              6
      to 219
                              
                              13
      to 168





We intend
to keep the pricing of our products at reasonable levels in the foreseeable
future in order to stay competitive and maintain product demand.




Competition




The
sports and leisure industry is highly competitive in the PRC. We compete with an
increasing number of international and domestic sports and leisure footwear
companies, sports and leisure apparel companies, sports accessories companies,
and large companies with diversified lines of sports and leisure shoes, apparel
and accessories. We expect competition to further intensify due to the entry of
new foreign and domestic sports and leisurewear retailers in the PRC and as a
result we may be required to adjust our prices in response to competitors’
pricing policies. Our ability to maintain or further increase our profitability
will primarily depend on our ability to compete effectively by leveraging our
leading market position in the PRC, brand recognition and product portfolio,
distributors’ extensive retail distribution network, experienced management and
product designs to differentiate us from competitors.




Performance
style and quality of footwear, apparel and accessories, new product development,
price, product identity through marketing and promotion, and support to
distributors and customer service are important aspects of competition in the
sports footwear, apparel and accessories business. We believe that we are
competitive in all these areas particularly as a result of, what we believe is,
our brand name, product quality and research and development.




Insurance




We
believe that we maintain insurance in line with industry standards. Our
insurance coverage primarily relates to property insurance.




We do not
maintain general product liability insurance for any of our products.
Nevertheless, we believe that our practice is in line with the general industry
practice in the PRC as product liability insurance is not required under PRC
law. In 2007, 2008 and 2009, we did not receive any material claims from
customers or consumers relating to our products.




C.
     ORGANIZATIONAL STRUCTURE





Exceed is
our investment holding company incorporated in the British Virgin Islands and we
conduct our operations through our PRC subsidiaries, which are our indirect
wholly owned subsidiaries. The following diagram illustrates
our significant direct and indirect subsidiaries as of March 31,
2010:


40








Subsidiaries





The
following table sets forth information relating to our direct and indirect
subsidiaries as of December 31, 2009.





Beneficial Ownership
                        Percentage
                      
                      Jurisdiction of
                        IncorporationWindrace
                      
                      
                      100
                      %
                      Cayman
      IslandsXDLong
      Investment
                      
                      
                      100
                      %
                      British
      Virgin IslandsExceed
      Brand Management (BVI)
                      
                      
                      50
                      %
                      British
      Virgin IslandsExceed
      Brand Management (HK)
                      
                      
                      50
                      %(1)
                      Hong
      KongXDLong
      HK
                      
                      
                      100
                      %
                      Hong
      KongXDLong
      Fujian
                      
                      
                      100
                      %
                      PRCXDLong
      China
                      
                      
                      100
                      %
                      PRC





Note:
(1) Exceed Brand Management (HK) is a wholly owned subsidiary of Exceed Brand
Management (BVI), in which we own a 50% interest.




D.      PROPERTY, PLANTS AND
EQUIPMENT




XDLong
China owned and occupied a parcel of land with an aggregate site area of
approximately 38,784 square meters together with buildings on such land. The
buildings comprise our production facility, a research and development center,
an office space, staff quarters, a recreation center and sports facilities, with
an aggregate gross floor area of approximately 99,024 square meters. We have
obtained the land use rights certificate in relation to the land and the
property ownership certificates for the buildings. The land use rights were
granted for industrial use for a term of 50 years from December 25,
2006.




XDLong
Fujian owns a parcel of land located within our production complex in Jinjiang,
which has an aggregate site area of approximately 15,277 square meters. Pursuant
to the State-owned Land Use Right Transfer Contract, construction on this land
must commence by February 28, 2006. XDLong Fujian did not commence construction
by such date because we decided to construct our production facilities on
another larger parcel of land owned by XDLong China. We have plans to construct
additional production facilities on the XDLong Fujian parcel of land. XDLong
Fujian is applying to relevant local government agency for postponing
construction on the land. However, there is a risk that the local government may
repossess the land before XDLong Fujian obtains an approval to postpone
construction.


41


Our
principal executive offices are located at Suite 8, 20/F, One International
Finance Centre, 1 Harbour View Street, Central, Hong Kong .




Environmental
Protection




Our
manufacturing operations are subject to PRC environmental laws and regulations
on air emission, solid waste emission, sewage and waste water, discharge of
waste and pollutants, and noise pollution. These laws and regulations include
Law of the PRC on Environmental Protection, Law of the PRC on the Prevention and
Control of Water Pollution, Law of the PRC on the Prevention and Control of
Atmospheric Pollution, Law of the PRC on the Prevention and Control of Pollution
from Environmental Noise and Law of the PRC on the Prevention and Control of
Environmental Pollution of Solid Waste. We are also subject to periodic
monitoring by relevant local government environmental protection
authorities.




According
to these environmental laws and regulations, all business operations that may
cause environmental pollution and other public hazards are required to
incorporate environmental protection measures into their operations and
establish a reliable system for environmental protection. Such a system must
adopt effective measures to prevent and control pollution levels and harm caused
to the environment in the form of waste gas, waste water and solid waste, dust,
malodorous gas, radioactive substance, noise, vibration and electromagnetic
radiation generated in the course of production, construction or other
activities.




Companies
in the PRC are also required to carry out an environment impact assessment
before commencing construction of production facilities and the installation of
pollution treatment facilities that meet the relevant environmental standards
and treat pollutants before discharge. We carried out the required environment
impact assessment before commencing construction of our production facilities
and have obtained all the required permits and environmental approvals for our
production facilities.




Our
production facility in Jinjiang received ISO 14001 certification in 2007, which
certifies that our environmental management system in respect of the design,
development, production and service of our products conforms to the
environmental management standards.




The main
environmental impact from our operations is the generation of wastewater and
noise pollution from the operation of production machinery. In order to comply
with the relevant environmental protection laws and regulations, we have
implemented an environmental protection system to ensure the emissions from
production operations meet the pollution indicators. In addition, our production
plant is located in an open area, away from residential areas and equipped with
an appropriate convection and ventilation system. In order to reduce the impact
on the environment, we have enhanced the convection and ventilation system at
our production facilities to improve air quality and adopted various measures to
prevent and minimize the noise pollution from our production
operations.




Health
and Safety Matters




The PRC
Production Safety Law (the “Production Safety Law”) requires that we maintain
safe working conditions under the Production Safety Law and other relevant laws,
administrative regulations, national standards and industrial standards. We are
required to offer education and training programs to our employees regarding
production safety. The design, manufacture, installation, use and maintenance of
our safety equipment are required to conform with applicable national and
industrial standards. In addition, we are required to provide employees with
safety and protective equipment that meet national and industrial standards and
to supervise and educate them to wear or use such equipment according to the
prescribed rules.




We
consider the safety of our employees to be a priority. We have implemented
internal health and safety policies in the workplace, available through our
handbook on production safety and security procedures, which incorporate safety
laws and regulations in the PRC. We have implemented safety guidelines on
production procedures for the safe operation of production equipment and
machinery during each stage of the production process. We require our employees
to attend occupational safety education training courses on our safety policies
and procedures to enhance their awareness of safety issues. We provide and
require our employees to wear suitable protective devices to ensure their
safety. We also provide employees with free annual medical
check-ups.


42


As
required under the Regulation of Insurance for Labor Injury, Provisional
Insurance Measures for Maternity of Employees, Interim Regulation on the
Collection and Payment of Social Insurance Premiums and Interim Provisions on
Registration of Social Insurance, we provide our employees in the PRC with
welfare schemes covering pension insurance, unemployment insurance, maternity
insurance, injury insurance and medical insurance.




In 2007,
2008 and 2009, we believe that we were in compliance with all applicable labor
and safety laws and regulations in all material respects, and implemented
internal safety guidelines and operating procedures. Further, we believe that we
are in compliance with the new PRC Labor Contract Law, which came into effect on
January 1, 2008, in all respects, and do not believe this new law will have any
impact on our business and operations. Since the commencement of our business,
none of our employees has been involved in any major accident in the course of
their employment and we have never been subject to disciplinary actions with
respect to the labor protection issues.





Item
4A. UNRESOLVED STAFF COMMENTS





None.





Item
5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS





You should read the following
discussion and analysis of our financial condition and results of operations
in conjunction with our consolidated financial statements and the related notes
included elsewhere in this annual report on Form 20-F. This discussion
may contain forward-looking statements based upon current expectations that
involve risks and uncertainties. Our actual results may differ materially
from those anticipated in these forward-looking statements as a
result of various factors, including those set forth under “Item 3. Key
Information—D. Risk Factors” or in other parts of this annual report on Form
20-F.





Overview





We design, develop and wholesale
footwear, apparel and accessories under the ““ (Xidelong)
brand name and the ““ trademark in China. Since we began
our operations in January 2002, we have experienced significant growth in second
and third tier cities in China. We have three principal categories of products:
(i) footwear, which mainly comprises running, leisure, basketball,
skateboarding, canvas, tennis and outdoor footwear, (ii) apparel, which mainly
comprises sports tops, pants, jackets, track suits and coats, and (iii)
accessories, which mainly comprise bags, socks, hats and caps. Our footwear,
apparel and accessories represented 53.0%, 45.7% and 1.3% of our total revenue
for the year ended December 31, 2009, respectively, the market for which has
been rapidly growing in China recently due to an increasing demand for lifestyle
and leisure products and what we believe is a heightened interest in health
consciousness among Chinese customers.




We place
great emphasis on the comfort and functionality of our products. In particular,
we focus our research and development efforts on designing sports and leisure
footwear, especially running footwear, tailored to the needs of PRC consumers.
The China Institute of Sport Science, which is the research center established
by the General Administration of Sport of China and China’s first government
agency engaging in research in the field of sport science, selected us
exclusively to collaborate on research and development efforts in China. Under
our agreement with the China Institute of Sport Science, we are required to pay
an annual fee to the China Institute of Sport Science for its assistance with
the research and development of technology for our sports footwear and apparel
and the promotion of the technology content of our products. In addition, we
have the exclusive right to use the endorsement “ The Strategic Partner of the China
Institute of Sport Science ” on our products and the first right to use
the expertise developed through our activities with the China Institute of Sport
Science. As the exclusive partner of the China Institute of Sport Science, we
allow the China Institute of Sport Science to use our research and development
center in Jinjiang. Our commitment to the comfort and quality of our footwear
for each individual is represented by slogans in our promotional campaigns such
as “ The Foot Knows
Comfort, ” “ Run
Freely ” and “ Respect
Yourself .”




We
distribute our products mainly through the Xidelong retail stores, which sell
our products exclusively and do not carry or sell other brands’ products. As of
December 31, 2009, all Xidelong retail stores were owned and operated by our 22
distributors. Some of the stores are operated directly and the remaining
indirectly through third parties. We have contractual relationships only with
our distributors and not with authorized third-party retail store operators. We
believe that the sale of our products through distributors has enabled us to
grow by exploiting their regional retail expertise and economies of scale. We
provide retail policies and guidelines, training, advertising and marketing
support as well as renovation subsidies to assist our distributors in the
management and expansion of the Xidelong retail sales network. As of December
31, 2009, there were 3,694 Xidelong retail stores, of which 1,000 were operated
directly by distributors and the remaining 2,694 were operated indirectly
through authorized third-party retail store operators. The number of the
Xidelong retail stores grew from 2,519 as of December 31, 2007 to 3,694 as of
December 31, 2009, representing a CAGR of 21.1%.


43


W e
manufacture our products through a combination of internal and external
production. Our production facility has a gross floor area of approximately
66,102 square meters and houses nine production lines with an aggregate annual
production capacity of approximately nine million pairs of footwear. During the
year ended December 31, 2009, we outsourced a portion of our footwear production
to three contract manufacturers, and all of our apparel and accessories
production to more than 20 contract manufacturers. The percentages of the
production of our footwear that we outsourced to our contract manufacturers in
terms of sales volume increased from 37.1% in 2007 to 47.8% in 2008 but
decreased to 43.7% in 2009. The percentages of footwear production that we
outsourced to our contract manufacturers decreased in 2009 because we increased
production of our footwear products in-house due to increased production
capacity and decreased purchases from contract manufacturers. Increased in-house
production gives us more control over footwear production and allows us to save
costs.




Our
revenues increased significantly at a CAGR of 26.6% from RMB1,296.4 million in
2007 to RMB2,078.0 million in 2009. The growth during these periods was
attributable to our business expansion and increased demand for our
products.





Factors
Affecting Our Results of Operations and Financial Condition




Our
financial condition and results of operations have been and will continue to be
affected by a number of factors, including those set forth below.




The
PRC economic growth




Our
financial condition and results of operations have been driven by macro-economic
conditions, increased disposable income and consumer spending in the PRC. In
2007, 2008 and 2009, we derived all of our revenue from domestic sales in the
PRC. According to the National Bureau of Statistics of China, the PRC economy
grew at a CAGR of approximately 15.1% from 1999 to 2009. From 1999 to 2009, the
per capita annual disposable income of urban households in China grew at a CAGR
of approximately 11.4% and consumer spending as measured by total retail sales
value grew at a CAGR of approximately 14.9%. In addition, although the global
economy has been affected by the financial crisis and economic downturns that
began in 2008, per capita consumption expenditure of urban residents in China
increased by 10.1% in 2009 compared to 2008 according to the National Bureau of
Statistics of China. Statistics published by the General Administration of Sport
of China suggest that there is a general correlation between disposable income
and sports participation in China. We expect that our results of operations will
continue to be driven by the growth of the PRC economy and increased disposable
income and consumer spending in the PRC, particularly in the provinces and
municipalities in which we operate.




The
effect of the global economic downturn on us




The
financial crisis and global economic downturn that began in 2008 have presented
challenges to economies worldwide, including China. The Chinese government has
adopted a stimulus package aimed at stimulating domestic consumer demand to
address the global financial crisis. China's economy started to recover in the
second half of 2009 as the increase in domestic consumption outpaced the
decrease in exports. We experienced an increase in sales volumes and revenues
due to increased consumer spending in the year ended December 31, 2009 compared
to the year ended December 31, 2008. The average selling prices of our products
increased in the year ended December 31, 2009 compared to the year ended
December 31, 2008 due to increased recognition of the Xidelong brand in China as
a result of marketing and brand promotion efforts over the years. We believe
that we will be able to continue to increase the selling prices of our products
in the future due to increasing awareness of our brand name, product quality and
research and development efforts.


44


We source
purchase orders primarily at sales fairs, and such orders constituted
approximately 80% to 90% of our annual revenue. Purchase order quantities may be
subsequently adjusted upward or downward by amounts ranging from 10% to 15%
before finalization. In 2008, we agreed with certain distributors to reduce
orders by 15% to 20% to prevent overflow of inventory among such distributors
due to anticipated reduced consumer demand arising from the financial crisis and
economic downturn that began in 2008. However, we received an increased number
of orders during the sales fair held in September 2009 compared to that held in
May 2009 as consumer confidence improved and signs of economic recovery started
to emerge in China. According to the National Bureau of Statistics of China,
total retail sales of consumer products, the primary gauge of consumer spending
in China, increased by 15.5% in 2009 compared to 2008. We believe that our
financial performance will continue to improve if consumer spending continues to
increase in China.




According
to the National Bureau of Statistics of China, urban retail sales accounted for
nearly 67.8% of total retail sales in 2009. Urban consumption is expected to
continue to be the primary contributor to consumer consumption in China. We
focus our business in second and third tier cities in inland China, which are
not as adversely affected by the financial crisis and the economic downturns as
the coastal cities in China. We believe that we will be able to continue to
capture the retail sales growth opportunities in second and third tier cities in
China characterized by increasing urbanization, strong economic development and
significant room for future growth.




Management
of collection of trade receivables




One of
our strategies during the financial crisis and the economic downturn is to grow
the distribution network through our distributors by enhancing our relationship
with them. Beginning in 2009, we extended the payment of the second installment
representing 70% of the contract price from 60 days to 120 days after delivery
as the duration of distributorship agreements has been extended from one to
three years. The extended agreements allow us to establish long-term
relationships with our distributors. For our distributors that experienced
difficulties in their liquidity, the longer credit period allows them to
overcome the unfavorable market condition confronting businesses worldwide. For
our distributors that do not have difficulties in their liquidity, the longer
credit period gives them more flexibility to grow the distribution network
during the economic downturn in a cost effective manner.




We have
adopted tightened credit verification procedures for every distributor who would
like to apply for credit terms. Distributors are required to make a 30% down
payment on every purchase order they made. The balance of the payment will then
be due after four months from the invoice date. Trade receivables are monitored
on an ongoing basis, and we have the sole discretion to cease doing business
with distributors who fail to make payment within the credit
period.




For any
distributor whose balance is overdue for more than 30 days, the sales manager in
charge will closely monitor such distributor and investigate the reason it is
overdue. If the overdue amount is caused by the financial difficulties of the
distributors, we will stop the shipment of all undelivered products and we will
make allowances for uncollectable receivables in accordance with our assessment
of the recoverability of the outstanding balance. No provision for
uncollectibility of the overdue balance will be made if (1) the distributor has
good trading record in the past and agrees to settle the overdue balance within
30 days; (2) the distributor continues to settle the outstanding balance; and
(3) there is a dispute on the overdue balance with the distributor that is
subject to clarification.




Moreover,
we have maintained good relationships with all the distributors for many years
and have rarely encountered any difficulties on collection of account
receivables. As of December 2009, over 99.5% of the trade receivables that were
neither past due nor impaired relate to customers with no recent history of
default. The receivables that were past due but not impaired relate to a number
of independent customers that have a good repayment record with the Group,
however, those past due amounts were subsequently settled in January 2010.
Therefore, our management believes that it has already taken adequate measures
to ensure timely settlement by the distributors and the extended credit period
has not materially adversely affected our liquidity and working capital or
affected management’s judgment on the collectability of the outstanding balances
from distributors.




Increased
consumer demand for sportswear products in the PRC




Consumer
demand for sportswear in the PRC is one of the key drivers of our revenue. The
success of our business depends in large part on the growth in the PRC consumer
market, particularly consumer demand for sportswear products. As general living
standards in the PRC continue to improve, we expect consumer demand in the PRC
to shift increasingly towards lifestyle enhancing products, such as sportswear,
which we believe will increase our sales. We also believe that the 16th Asian
Games in Guangzhou in 2010 will generate more interest in sports and
corresponding consumer demand for sportswear products in the
PRC.


45


Competitive
pricing of our products to increase profitability




We have
been able to increase our gross profit margins through competitive pricing of
our products and effective cost management. To increase sales volumes, our
pricing policy is to offer a range of products which are set at different price
points with the aim of targeting different segments within the mid-range market.
Currently, the average retail prices for our sports and leisure footwear range
from approximately RMB200 to RMB300. The gross profit margin for footwear has
increased from 26.1% in 2007 to 30.6% in 2009. The gross profit margin for
apparel has increased from 26.0% in 2007 to 28.2% in 2009. The gross profit
margin for accessories has increased from 23.4% in 2007 to 28.9% in 2009. The
sales volumes and revenues increased in the year ended December 31, 2009
compared to the year ended December 31, 2008 as a result of the increase in
consumer spending in 2009. The average selling prices of our products increased
in the year ended December 31, 2009 compared to the year ended December 31, 2008
due to increased recognition of the Xidelong brand in China as a result of
marketing and brand promotion efforts over the years.  In order to
maintain our price competitiveness and sales volumes, we review our pricing
strategy regularly to make adjustments based on various factors, including the
market response to existing recommended retail prices, the level of sales, the
expected product margin on individual products, the prices of our competitors’
products and the anticipated market trends and expected demand from
customers.




Diversified
product portfolio to increase revenue




We
believe that a diversified product mix and a wide range of merchandise available
in the Xidelong retail stores have been important factors in attracting
customers and to increases our revenue. In 2007, 2008 and 2009, we changed the
mix of our footwear products with an aim to increase our revenues generated from
different footwear product categories. To further diversify revenue sources, we
introduced three types of new footwear products, i.e., tennis, outdoor and beach
footwear, in 2008. To allocate resources to produce other footwear products that
are more popular to consumers, we discontinued the sales of beach footwear in
2009. In addition to footwear products, sales of apparel and accessories also
contributed to the growth in our revenue. We will continue to monitor customer
demand and adjust our product mix as we deem necessary to increase our average
selling prices, revenue and gross profit margins.




The
growth of our network through distributors




We
distribute our products mainly through the Xidelong retail stores, which offer
our products exclusively and do not carry other brands. Our 22 distributors own
and operate all Xidelong retail stores. They operate some of the Xidelong retail
stores directly and delegate operation of the remaining stores to third parties.
As of December 31, 2009, our 22 distributors operated a network of 3,694
Xidelong retail stores located in 28 
provinces and municipalities in the PRC. Our growth is largely driven by the
business performance of our distributors and the pace of expansion of the
network of the Xidelong retail stores. As of December 31, 2007, 2008 and 2009,
we had 22 distributors. We believe that our ability to supervise and manage our
distributors is critical to their continued performance and contribution to
increase our revenue.




Competitive
advantage




We focus
primarily on second and third tier cities in China, particularly in the
Southwestern Region, Northeastern Region and Northwestern Region of China,
characterized by increasing urbanization and strong economic development, which
we believe present the best opportunity for retail sales growth. We believe that
we will be able to leverage our leading market position, brand recognition and
product portfolio, extensive retail distribution network, experienced management
and product designs in the PRC to maintain our competitive advantage. For risks
relating to competition in the sportswear manufacturing industry in China, see “
Risk Factors — Risks Relating
to the Industry in Which We Operate — Our products face intense
competition .”




Effective
cost management




The major
raw materials used in the production of our footwear products are natural and
synthetic leather, nylon, canvas, rubber and plastics. To meet production
requirements and to remain profitable, we must obtain sufficient quantities of
good quality raw materials from our suppliers in a timely manner and at
commercially reasonable prices. In addition, we use crude oil and electricity in
our production. Therefore, increases in crude oil prices and electricity costs
would increase our production costs. We believe that we will be able to offset a
portion of any such increased costs through improvement of production efficiency
and utilization of economies of scale. Historically, we have been successful in
reducing cost of raw materials as a percentage of total cost of sales. For 2007,
2008 and 2009, the purchase of raw materials for our own production requirements
accounted for 21.3%, 18.0% and 18.4%, respectively, of our total cost of sales.
We seek to capitalize on our purchasing and bargaining power to continue to
obtain favorable prices from our major suppliers. Because we use a cost-plus
pricing policy to determine the selling price of our products, we are able to
pass on increased costs to our distributors. We believe that effective cost
management and ability to pass on increased costs to distributors will enable us
to maintain and increase our profitability.


46


Relationship
with quality contract manufacturers




In 2009,
we outsourced 39.2% of our footwear production by sales volume to three contract
manufacturers and all of our apparel and accessories production to more than 20
contract manufacturers. For 2007 and 2008, the duration of agreements with our
contract manufacturers for footwear, apparel and accessories had been one year.
Starting from 2009, the duration of agreements with our contract manufacturers
has been extended to two years. We have not terminated our contractual
relationships with any of our contract manufacturers of our footwear during the
term of the agreements. Due to a larger pool of contract manufacturers of
apparel and accessories available for selection, we have been using apparel and
accessories contract manufacturers capable of supplying goods with better
quality at more competitive prices. We believe that long-term contracts with
contract manufacturers as well as the relationships we have established with
them over the years will enable us to procure quality contract manufacturers to
meet our requirements at commercially reasonable terms. For risks relating to
reliance on contract manufacturers, see “Risk Factors — Risks Relating to
Our Business — We rely on our contract manufacturers for the production of a
portion of our footwear and all of our apparel and
accessories.”




Ability
to maintain brand recognition and marketing success




We
believe that brand recognition is crucial to customers’ purchasing decisions. We
position our Xidelong brand as a high quality sports and leisurewear brand for
consumers in the PRC. We place great emphasis on brand building and promote
Xidelong products through advertisements in the media, sponsorship of PRC sports
events and various other promotional activities. For 2007, 2008 and 2009, our
advertising and promotion expenses accounted for 7.2%, 7.5% and 7.8%,
respectively, of our total revenue. We intend to increase our marketing budgets
for promotional activities in the future in order to further strengthen our
brand and market position. We believe that we will be able to maintain the
position of our Xidelong brand in the market through enhanced marketing efforts
to increase market share and promote sales growth.




Seasonality




Our
results of operations have fluctuated from season to season and are likely to
remain seasonal. Historically, revenues in the third and fourth quarters have
slightly exceeded those in the first and second quarters. The seasonality of our
results of operations is primarily attributable to the seasonal nature of our
footwear and apparel products and the fact that our autumn and winter
collections generally command higher selling prices than our spring and summer
collections. In addition, other factors such as weather conditions, holiday
seasons, the timing of the launch of our new products and the timing of delivery
of our products also affect our sales from season to season. Due to the seasonal
fluctuations of our business, comparisons of sales and results of operations
between different periods within a financial year, or between different periods
in different financial years, are not necessarily meaningful and cannot be
relied on as accurate indicators of our future performance.




Level
of income tax and preferential tax treatment




Our
profits are affected by the income tax that we pay and any preferential tax
treatment that we are able to receive. As a foreign-invested enterprise engaged
in the manufacturing business, XDLong Fujian is entitled to the preferential tax
treatments provided under the Foreign Enterprise Income Tax Law. Accordingly,
XDLong Fujian is subject to an enterprise income tax rate of 27% but it is fully
exempted from the enterprise income tax during its first two profitable years,
followed by a 50% tax reduction for the next three years. Such tax treatment had
a significant positive effect on our profit after taxation for 2007. XDLong
China is qualified for the same type of preferential tax treatments as XDLong
Fujian because XDLong China is also a foreign-invested enterprise engaged in the
manufacturing business. XDLong China started generating profits in 2008.
Therefore, it enjoyed tax exemption in 2008 and 2009 and is expected to enjoy a
50% corporate income tax reduction in 2010, 2011 and 2012.


47


Pursuant
to the new PRC Corporate Income Tax Law (the “New Corporate Income Tax Law”) and
its Implementation Rules (effective on January 1, 2008), domestic-invested and
foreign-invested enterprises are subject to PRC corporate income tax at the same
rate of 25%. Foreign-invested enterprises established prior to the promulgation
of the New Corporate Income Tax Law and entitled to tax benefits are able to
continue to enjoy the tax benefits before they expire over a 5-year period after
January 1, 2008. Consequently, XDLong China is able to continue to enjoy its tax
benefits, commencing from its first profitable year but subject to expiration
within 5 years from January 1, 2008. With effect from January 1, 2008, the
applicable tax rate for XDLong Fujian and XDLong China is 25%.





A.           OPERATING RESULTS





Basis
of Presentation




The
following discussion and analysis of our financial condition and results of
operations is based on the selected financial information at and for the years
ended December 31, 2007, 2008 and 2009 and has been prepared based on the
financial statements of the companies that comprised Windrace and its
consolidated subsidiaries, or the Windrace group, after elimination of
inter-company transactions. This information should be read in conjunction with
the financial information and notes thereto included in the consolidated
financial statements and notes thereto included elsewhere in this registration
statement.





The
reorganization of Windrace involved a combination of entities under the common
control of Mr. Lin Shuipan and Ms. Chen Xiayu. Under paragraphs 10 through 13 of
IFRS 3, “Business Combinations” (“IFRS 3”), a combination of entities under
common control is deemed to be outside the scope of IFRS 3. Since the
reorganization of Windrace did not result in any change in the effective control
of Windrace or the relative shareholder interests before and after the
reorganization, the accompanying financial statements have been prepared on a
consolidated (combined) basis at historical cost for all periods presented. On
this basis, Windrace has been treated as the holding company of its subsidiaries
for all periods presented.




Our
consolidated income statements, consolidated statements of changes in equity and
consolidated cash flow statements include the results of operations and cash
flows of Windrace and its consolidated subsidiaries and have been prepared as if
the current group structure had been in existence at January 1, 2007, or since
the respective dates of their incorporation or establishment. Our consolidated
balance sheets at December 31, 2007, 2008 and 2009 have been prepared to present
the assets and liabilities of Windrace and its consolidated subsidiaries at the
respective dates as if the current group structure had been in existence at
those dates.




The
financial information has been prepared in accordance with IFRS (which comprise
standards and interpretation approved by the IASB and the International
Accounting Standards (“IAS”) and Standing Interpretations Committee
interpretations approved by the International Accounting Standards Committee).
All IFRS effective for the accounting periods commencing January 1, 2007, 2008
and 2009, together with the relevant transitional provision, have been adopted
by us in the preparation of the financial information throughout the years ended
December 31, 2007, 2008 and 2009.




The
financial information has been prepared under the historical cost convention and
in accordance with the accounting policies set out in the financial statements
included elsewhere in this registration statement, which conform with IFRS, and
is presented in Renminbi with all values rounded to the nearest thousand except
when otherwise indicated.




Consolidated
Income Statements




The
following table sets forth our results for the periods indicated:





Year ended December 31,2007
                            
                            
                            2008
                            
                            
                            2009(RMB
      in thousands)Revenue
                            
                            
                            1,296,402
                            
                            
                            
                            1,820,282
                            
                            
                            
                            2,077,958Cost
      of sales
                            
                            
                            (959,526
                            )
                            
                            
                            (1,323,262
                            )
                            
                            
                            (1,464,856
                            )Gross
      profit
                            
                            
                            336,876
                            
                            
                            
                            497,020
                            
                            
                            
                            613,102Other
      income and gains
                            
                            
                            889
                            
                            
                            
                            1,188
                            
                            
                            
                            5,855Selling
      and distribution costs
                            
                            
                            (137,077
                            )
                            
                            
                            (225,752
                            )
                            
                            
                            (268,123
                            )Administrative
      expenses
                            
                            
                            (29,984
                            )
                            
                            
                            (29,205
                            )
                            
                            
                            (44,509
                            )Aborted
      IPO expenses
                            
                            
                            —
                            
                            
                            
                            (31,382
                            )
                            
                            
                            —Research
      and development expense
                            
                            
                            (12,784
                            )
                            
                            
                            (17,649
                            )
                            
                            
                            (24,953
                            )Finance
      costs
                            
                            
                            (1,352
                            )
                            
                            
                            (23,511
                            )
                            
                            
                            (29,566
                            )Share
      of loss in jointly-controlled entity
                            
                            
                            ―
                            
                            
                            
                            ―
                            
                            
                            
                            (16
                            )Profit
      before tax
                            
                            
                            156,568
                            
                            
                            
                            170,709
                            
                            
                            
                            251,790Tax
                            
                            
                            (21,783
                            )
                            
                            
                            (2,181
                            )
                            
                            
                            (3,771
                            )Profit
      for the year
                            
                            
                            134,785
                            
                            
                            
                            168,528
                            
                            
                            
                            248,019


48


Critical
Accounting Policies and Estimates




Our
financial statements and notes thereto included elsewhere in this registration
statement have been prepared in accordance with IFRS. We have adopted IFRS
effective for the accounting periods commencing January 1, 2007, 2008 and 2009,
together with the relevant transitional provisions in the preparation of the
financial information throughout the years ended December 31, 2007, 2008 and
2009. The preparation of our financial information in accordance with IFRS
requires management to make estimates, judgments and assumptions that affect the
reported amounts of assets, liabilities, contingent liabilities, revenue and
expenses. The following sets forth the principal accounting policies applied in
preparing our financial statements that management believes are critical not
only because they are important to the portrayal of our financial condition and
results of operations, but also because the application and interpretation of
these policies require both judgments and estimates of matters that are
inherently uncertain and unknown. As a result, actual results may differ
materially from our estimates.




Revenue
recognition




We
recognize revenue when it is probable that the economic benefits will flow to us
and when the revenue can be reliably measured, on the following basis, depending
on the source of such revenue: (i) from the sale of goods, when the significant
risks and rewards of ownership have been transferred to the buyer, provided that
we maintain neither managerial involvement to the degree usually associated with
the ownership, nor effective control over the goods sold; which usually occurs
when the product is sold and delivered to the distributors with all
transportation and handling costs for delivery of products borne and paid
directly by the distributors, and (ii) interest income on an accrual basis using
the effective interest method by applying the rate that discounts the estimated
future cash receipts through the expected life of the financial instruments to
the net carrying amount of the financial assets. With respect to the sale of
goods, we generally recognize revenue when a sale is made and the above
condition in (i) is met, which generally occurs when the product is sold and
delivered to the distributors. All transportation and handling costs for
delivery of products are borne and paid directly by the
distributors.




In
addition, we utilize preliminary purchase orders received from consultations
with distributors at sales fairs to prepare sales estimates and formulate
production schedules for upcoming seasons. Purchase orders are subsequently
adjusted upward or downward by amounts ranging from 10% to 15% before
finalization. Once a purchase order is finalized, we re-confirm the delivery
schedule of sales orders with each distributor before shipment. Distributors are
invoiced and we recognize sales only at the time, and by the amount of, the
products ultimately delivered to distributors.




Although
our policy is to recognize product returns as a reduction of revenue, we have
not deemed it necessary to accrue for returns at the time when sales are
recorded because we have not had significant product returns or similar claims.
Our management periodically reviews this matter and will consider making such
accruals when there are indications of significant sales returns or similar
claims in future periods.




Although
we accept returns of defective products, instead of returning defective products
to us, distributors generally choose to sell any defective products at a
discount to end customers. Since distributors are required to comply with our
pricing policy, distributors must obtain our prior written consent before they
can sell any products at a discount to the suggested retail price. We determine
the amount of discounts on a case-by-case basis. We do not provide any
compensation to distributors for defective products. To date, the number and
value of defective products have been minimal.




We do not
have any arrangements with distributors to accept returns of out-of-season
stock. When in-season new products arrives, the current products on shelves
become out-of-season stock. In addition, we do not provide volume-based discount
programs or discounts for early payment.


49


We
closely monitor the inventories and sales by distributors by requiring them to
provide monthly inventory reports since 2008 and quarterly inventory reports
prior to 2008. We also monitor the inventory and sales of distributors by
reviewing local market condition reports provided by our regional sales
managers, who assists us in collecting sales and inventory data to arrange
production schedules and maintain inventory at optimal levels. In addition, we
conduct random on-site inspections of distributors and authorized retail stores
to track inventories and sales performance.




We
encourage distributors to clear their out-of-season inventory levels. An
authorized retailer with excess inventory at the end of a season may attempt to
sell such excess inventory through regular and special end-of-season sales.
Since distributors must strictly comply with our suggested retail pricing
policy, they must obtain prior written consent from us before conducting any
promotional events or selling any products to consumers at a discount to the
suggested retail price. The distributors bear the costs of any sales discounts
and we are not required to provide credits or subsidies to distributors for
their seasonal clearance sales.




To
facilitate the operation and development of our business and to promote and
enhance our brand recognition nationwide, we provide after-sales assistance and
guidance to distributors. Such after-sale assistance and guidance generally
include training of distributors’ employees and provision of promotional
equipment and marketing brochures. In addition, since all Xidelong retail stores
are required to sell our products on an exclusive basis, we also provide these
retail stores with standardized outlet design and layout, and subsidies for the
build-out of new retail stores and renovation of existing retail stores. These
after-sale assistance and guidance are selected, limited and commonly provided
by sportswear manufacturers to their distributors and retailers in China.
Moreover, such assistance and guidance does not interfere with the ability of
the distributors and retailers to conduct their normal business
operations.




As an
incentive for distributors to increase the number of authorized retail stores
and to create a uniform high-quality store image nationwide, we provide certain
build-out and renovation subsidies to qualified authorized retail stores located
within the distributors’ designated sales regions. If a particular authorized
retail store is operated by a third-party retailer, such subsidies are provided
to the retailer through the distributor. Such subsidies are granted and paid
when a new or renovated store is approved, and are charged to operations at that
time. For 2007, 2008 and 2009, we subsidized approximately RMB34.7 million,
RMB71.6 million and RMB85.3 million, respectively. These amounts were included
in selling and distribution costs.




Impairment
allowances for trade and other receivables




We
estimate the impairment allowances for trade and other receivables by assessing
the collectability of the receivables based on the related customers’ credit
history and prevailing market conditions. Allowances are applied to trade and
other receivables where events or changes in circumstances indicate that the
balances may not be collectible. Where the expectation is different from the
initial estimate, the difference is recognized as an impairment loss in the
period in which such estimate is changed. We reassess the impairment allowances
at each balance sheet date.




Historically,
we have had no experience of bad debts. All the customers who wish to trade on
credit terms are subject to credit verification procedures. In addition,
receivable balances are monitored on an ongoing basis and we have the sole
discretion to cease business with customers who fail to pay within the credit
period. Because of the recent fluctuations in the economic environment since the
second half of 2008, we have closely monitored the trade receivables balance
overdue 30 days and assessed the intention of the repayment from the
distributors.




We will
not make any provision of the overdue balance if (i) we have continuous trading
with the distributor; (ii) we receive continuous repayments from the
distributor; and (iii) we have no dispute on the overdue balance with the
distributor. We will make full provision on such balances if we considered them
not recoverable.




As of
December 2009, over 99.5% of the trade receivables that were neither past due
nor impaired relate to customers with no recent history of
default.  The receivables that were past due but not impaired relate
to a number of independent customers that have a good repayment record with the
Group, however, those past due amounts were subsequently settled in January
2010. There is no indication of deterioration in the creditworthiness of any of
our distributors.


50


Inventory




Inventories
are stated at the lower of cost and net realizable value after making due
allowances for obsolete or slow moving items. Cost is calculated using the
weighted average cost formula and comprises all costs of sales incurred in
bringing the inventories to their present location and condition. When
inventories are sold, the carrying amount of those inventories is recognized as
cost of sales in the period in which the related revenue is recognized. Net
realizable value is based on the estimated selling prices less any estimated
costs to be incurred for completion of the production process and disposal upon
delivery of finished goods to distributors. If net realizable value is less than
cost at the balance sheet date, the carrying amount is reduced to the realizable
value, and the difference is recognized as a loss on valuation of inventories.
Write-down of inventories to net realizable value is made based on the estimated
net realizable value of the inventories. The assessment of the write-down
amounts and the timing of such write-downs require estimates and management’s
judgment. Where the actual outcome or expectation in future periods is different
from management’s estimates, such differences may have a material impact on the
carrying amounts of our inventories and any write-down amounts and write-back
amounts in the period in which such estimate has been changed. No inventory
amounts were stated at net realizable value in each of the years in 2007, 2008
and 2009 and we did not make any provisions for inventories during the same
periods.




Useful
lives and impairment of assets




Property,
Plant and Equipment




Property,
plant and equipment (other than construction-in-progress) are recorded at cost
less accumulated depreciation and are depreciated over the estimated useful
lives of the related assets using the straight-line method. Where parts of an
item of property, plant and equipment have different useful lives, the cost of
that item is allocated on a reasonable basis among the parts and each part is
depreciated separately, where practicable. Residual values, useful lives and
depreciation method are reviewed and adjusted, if appropriate, at each balance
sheet date. Depreciation is recognized as an expense in the consolidated income
statements when an asset is available for use, that is, when it is in the
location and condition necessary for it to be capable of operating in the manner
intended by management.




Buildings
are depreciated over the shorter of the relevant lease term and a 20-year period
and manufacturing equipment, such as plant and machinery, is depreciated over a
five to ten-year period. Furniture, fixtures, motor vehicles and office
equipment, consisting of computers, office equipment, machinery and software,
are depreciated over a five-year period. Leasehold improvement is also
depreciated over a five-year period. Construction-in-progress represents costs
incurred for the design and construction of the production facility. Our
management determines the estimated useful lives and related depreciation
charges for our property, plant and equipment and such estimates are based on
historical experience of the actual useful lives of such property, plant and
equipment, and where no historical experience is available, based on such
property, plant and equipment used for similar nature and functions. Management
will increase the depreciation charge where useful lives are less than
previously stated amounts based on the estimated life of such property, plant
and equipment or will take write-offs or declare as obsolete or non-strategic
assets that have been abandoned or sold. Impairment reviews are conducted as
events or changes in circumstances indicating that the carrying amount may not
be recoverable. The recoverable amounts of property, plant and equipment have
been determined based on value-in-use calculations, which require the use of
judgment and estimates.




Financial
assets




Financial
assets within the scope of IAS 39 “Financial Instruments: Recognition and
Measurements” are classified as loans and receivables. When such financial
assets are recognized initially, they are measured at fair value. We assess
whether a financial asset contains an embedded derivative when we first become a
party to it and assess whether the embedded derivatives are required to be
recognized separately from their financial asset contract when the analysis
shows that the economic characteristics and risks of the embedded derivatives
are not closely related to those of the host contract. Reassessment only occurs
if there is a change in the terms of the financial asset that significantly
modifies the cash flows that would otherwise be required under the financial
asset. We determine that the classification of our financial assets upon the
initial recognition and, where allowed and appropriate, re-evaluates the
classification at the balance sheet date reported. All regular way purchases and
sales of financial assets are recognized on the trade date, that is, the dates
when we commit to purchase or sell the asset. Regular way purchases or sales are
purchases or sales of financial assets that require delivery of assets within
the period generally established by regulation or convention in the
marketplace.


51


Loans and
receivables are non-derivative financial assets with fixed or determinable
payments that are not quoted in an active market. Such assets are subsequently
carried at amortized cost using the effective interest method. Amortized cost is
calculated taking into account any discount or premium on acquisition and
includes fees that are an integral part of the effective interest rate and
transaction costs. Gains and losses are recognized in the consolidated income
statements when the loans and receivables are derecognized or impaired, as well
as through the amortization process.




We assess
at each balance sheet date whether there is any objective evidence that a
financial asset or a group of financial assets is impaired. If there is
objective evidence that an impairment loss on loans and receivable carried at
amortized cost has been incurred, the amount of the loss is measured as the
difference between the asset’s carrying amount and the present value of
estimated future cash flows (excluding future credit losses that have not been
incurred) discounted at the financial asset’s original effective interest rate.
The carrying amount of the asset is reduced either directly or through the
recognition of an allowance account. The amount of impairment loss is recognized
in our consolidated income statements in the period when it occurs. In relation
to trade receivables, an impairment allowance is made when there is objective
evidence, such as the probability of insolvency or significant difficulties of
the debtor, that we will not be able to collect all of the amounts due under the
original term of an invoice. The carrying amount of the receivables is reduced
through the use of an allowance account, and impaired receivables derecognized
when they are assessed as uncollectible. The identification of impairment
allowances of financial instruments and trade and other receivables requires
management judgment and estimates.




Description
of Selected Income Statement Items




Revenue




We
generate revenue from sales of footwear, apparel and accessories. The following
table sets forth a breakdown of our revenue for the periods
indicated:





2007
                        
                        
                        Percentage of
                          total revenue
                        
                        
                        2008
                        
                        
                        Percentage of
                          total revenue
                        
                        
                        2009
                        
                        
                        Percentage of
                          total revenueRMB (in thousands)FootwearRunning
      footwear
                        
                        
                        364,741
                        
                        
                        
                        28.1
                        %
                        
                        
                        425,627
                        
                        
                        
                        23.4
                        %
                        
                        
                        293,174
                        
                        
                        
                        14.1
                        %Leisure
      footwear
                        
                        
                        131,462
                        
                        
                        
                        10.2
                        %
                        
                        
                        218,769
                        
                        
                        
                        12.0
                        %
                        
                        
                        274,370
                        
                        
                        
                        13.2
                        %Basketball
      footwear
                        
                        
                        99,652
                        
                        
                        
                        7.7
                        %
                        
                        
                        71,337
                        
                        
                        
                        3.9
                        %
                        
                        
                        88,666
                        
                        
                        
                        4.2
                        %Skateboarding
      footwear
                        
                        
                        74,887
                        
                        
                        
                        5.8
                        %
                        
                        
                        155,796
                        
                        
                        
                        8.6
                        %
                        
                        
                        262,893
                        
                        
                        
                        12.7
                        %Canvas
      footwear
                        
                        
                        3,035
                        
                        
                        
                        0.2
                        %
                        
                        
                        27,373
                        
                        
                        
                        1.5
                        %
                        
                        
                        12,864
                        
                        
                        
                        0.6
                        %Tennis
      footwear
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        11,572
                        
                        
                        
                        0.6
                        %
                        
                        
                        104,083
                        
                        
                        
                        5.0
                        %Outdoor
      footwear
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        10,708
                        
                        
                        
                        0.6
                        %
                        
                        
                        66,229
                        
                        
                        
                        3.2
                        %Beach
      footwear
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        1,879
                        
                        
                        
                        0.1
                        %
                        
                        
                        ―
                        
                        
                        
                        ―subtotal
                        
                        
                        673,777
                        
                        
                        
                        52.0
                        %
                        
                        
                        923,061
                        
                        
                        
                        50.7
                        %
                        
                        
                        1,102,279
                        
                        
                        
                        53.0
                        %Apparel
                        
                        
                        598,122
                        
                        
                        
                        46.1
                        %
                        
                        
                        857,203
                        
                        
                        
                        47.1
                        %
                        
                        
                        948,738
                        
                        
                        
                        45.7
                        %Accessories
                        
                        
                        24,503
                        
                        
                        
                        1.9
                        %
                        
                        
                        40,018
                        
                        
                        
                        2.2
                        %
                        
                        
                        26,941
                        
                        
                        
                        1.3
                        %Total
                        
                        
                        1,296,402
                        
                        
                        
                        100.0
                        %
                        
                        
                        1,820,282
                        
                        
                        
                        100.0
                        %
                        
                        
                        2,077,958
                        
                        
                        
                        100.0
                        %





Our
revenue is derived primarily from sales of the following products:




•
            Footwear.Footwear accounted for 53.0% of
      revenue in 2009 and includes principally seven categories of footwear:
      running footwear, leisure footwear, basketball footwear, skateboarding
      footwear, canvas footwear, tennis footwear and outdoor footwear. A portion
      of our footwear production is
outsourced.





•
            Apparel.Sports apparel accounted for
      45.7% of revenue in 2009 and includes principally sports tops, sports
      pants, jackets and track suits. All of our apparel production is
      outsourced.





•
            Accessories.Accessories accounted for 1.3%
      of revenue in 2009 and include principally bags, socks, hats and caps. All
      of our accessories production is
  outsourced.


52


Expenses




Our
expenses consist of cost of sales, selling and distribution costs,
administrative expenses, research and development expenses and finance costs.
The following table sets forth a breakdown of our expenses for the periods
indicated:





Year ended December 31,2007
                  
                  
                  Percentage
                    of total
                    revenue
                  
                  
                  2008
                  
                  
                  Percentage
                    of total
                    revenue
                  
                  
                  2009
                  
                  
                  Percentage
                    of total
                    revenueRMB (in thousands)Cost
      of salesOpening
      inventories
                  
                  
                  50,515
                  
                  
                  
                  3.9
                  %
                  
                  
                  50,283
                  
                  
                  
                  2.7
                  %
                  
                  
                  86,060
                  
                  
                  
                  4.1
                  %Raw
      materials purchase
                  
                  
                  204,583
                  
                  
                  
                  15.8
                  %
                  
                  
                  238,436
                  
                  
                  
                  13.1
                  %
                  
                  
                  269,194
                  
                  
                  
                  13.0
                  %Finished
      goods:Footwear
                  
                  
                  187,389
                  
                  
                  
                  14.5
                  %
                  
                  
                  294,235
                  
                  
                  
                  16.1
                  %
                  
                  
                  310,740
                  
                  
                  
                  15.0
                  %Apparel
                  
                  
                  432,218
                  
                  
                  
                  33.3
                  %
                  
                  
                  647,586
                  
                  
                  
                  35.6
                  %
                  
                  
                  669,348
                  
                  
                  
                  32.2
                  %Accessories
                  
                  
                  17,172
                  
                  
                  
                  1.3
                  %
                  
                  
                  30,443
                  
                  
                  
                  1.7
                  %
                  
                  
                  17,997
                  
                  
                  
                  0.9
                  %Total
      purchases of finished goods
                  
                  
                  636,779
                  
                  
                  
                  49.1
                  %
                  
                  
                  972,264
                  
                  
                  
                  53.4
                  %
                  
                  
                  998,085
                  
                  
                  
                  48.1
                  %Total
      purchases
                  
                  
                  841,362
                  
                  
                  
                  64.9
                  %
                  
                  
                  1,210,700
                  
                  
                  
                  66.5
                  %
                  
                  
                  1,267,279
                  
                  
                  
                  61.1
                  %Manufacturing
      overhead costs
                  
                  
                  73,329
                  
                  
                  
                  5.7
                  %
                  
                  
                  89,722
                  
                  
                  
                  3.1
                  %
                  
                  
                  99,857
                  
                  
                  
                  4.8
                  %Direct
      and indirect labor costs
                  
                  
                  44,603
                  
                  
                  
                  3.4
                  %
                  
                  
                  58,617
                  
                  
                  
                  5.1
                  %
                  
                  
                  67,626
                  
                  
                  
                  3.2
                  %Less:
      closing inventories
                  
                  
                  (50,283
                  )
                  
                  
                  (3.9
                  )%
                  
                  
                  (86,060
                  )
                  
                  
                  (4.7
                  )%
                  
                  
                  (55,966
                  )
                  
                  
                  (2.7
                  )%959,526
                  
                  
                  
                  74.0
                  %
                  
                  
                  1,323,262
                  
                  
                  
                  72.7
                  %
                  
                  
                  1,464,856
                  
                  
                  
                  70.5
                  %Selling
      and distribution costsAdvertising
      and promotional expenses
                  
                  
                  93,014
                  
                  
                  
                  7.2
                  %
                  
                  
                  137,484
                  
                  
                  
                  7.5
                  %
                  
                  
                  162,598
                  
                  
                  
                  7.8
                  %Retail
      store renovation subsidies
                  
                  
                  34,699
                  
                  
                  
                  2.7
                  %
                  
                  
                  71,522
                  
                  
                  
                  3.9
                  %
                  
                  
                  85,334
                  
                  
                  
                  4.1
                  %Salaries
      of sales and marketing staff
                  
                  
                  4,237
                  
                  
                  
                  0.3
                  %
                  
                  
                  6,319
                  
                  
                  
                  0.3
                  %
                  
                  
                  10,237
                  
                  
                  
                  0.5
                  %Others
                  
                  
                  1,824
                  
                  
                  
                  0.2
                  %
                  
                  
                  4,690
                  
                  
                  
                  0.3
                  %
                  
                  
                  3,533
                  
                  
                  
                  0.2
                  %Traveling
      expenses
                  
                  
                  1,661
                  
                  
                  
                  0.1
                  %
                  
                  
                  2,790
                  
                  
                  
                  0.2
                  %
                  
                  
                  2,745
                  
                  
                  
                  0.1
                  %Sales
      fair expenses
                  
                  
                  1,642
                  
                  
                  
                  0.1
                  %
                  
                  
                  2,947
                  
                  
                  
                  0.2
                  %
                  
                  
                  3,676
                  
                  
                  
                  0.2
                  %137,077
                  
                  
                  
                  10.6
                  %
                  
                  
                  225,752
                  
                  
                  
                  12.4
                  %
                  
                  
                  268,123
                  
                  
                  
                  12.9
                  %Administrative
      expensesSalaries
      of administrative staff
                  
                  
                  6,597
                  
                  
                  
                  0.5
                  %
                  
                  
                  5,034
                  
                  
                  
                  0.3
                  %
                  
                  
                  9,545
                  
                  
                  
                  0.5
                  %Miscellaneous
      taxes and duties
                  
                  
                  5,565
                  
                  
                  
                  0.4
                  %
                  
                  
                  7,915
                  
                  
                  
                  0.4
                  %
                  
                  
                  6,664
                  
                  
                  
                  0.3
                  %Depreciation
                  
                  
                  4,208
                  
                  
                  
                  0.3
                  %
                  
                  
                  5,270
                  
                  
                  
                  0.3
                  %
                  
                  
                  5,379
                  
                  
                  
                  0.3
                  %Purchases
      of office supplies
                  
                  
                  3,808
                  
                  
                  
                  0.3
                  %
                  
                  
                  230
                  
                  
                  
                  0.1
                  %
                  
                  
                  94
                  
                  
                  
                  0.1
                  %Entertainment
      expenses
                  
                  
                  1,406
                  
                  
                  
                  0.1
                  %
                  
                  
                  1,522
                  
                  
                  
                  0.1
                  %
                  
                  
                  1,138
                  
                  
                  
                  0.1
                  %Acquisition
      related expenses
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  6,993
                  
                  
                  
                  0.3
                  %Others
                  
                  
                  8,400
                  
                  
                  
                  0.7
                  %
                  
                  
                  9,234
                  
                  
                  
                  0.5
                  %
                  
                  
                  14,696
                  
                  
                  
                  0.7
                  %29,984
                  
                  
                  
                  2.3
                  %
                  
                  
                  29,205
                  
                  
                  
                  1.7
                  %
                  
                  
                  44,509
                  
                  
                  
                  2.3
                  %Aborted
      IPO expenses
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  31,382
                  
                  
                  
                  1.7
                  %
                  
                  
                  ―
                  
                  
                  
                  ―Research
      and development expenses
                  
                  
                  12,784
                  
                  
                  
                  1.0
                  %
                  
                  
                  17,649
                  
                  
                  
                  1.0
                  %
                  
                  
                  24,953
                  
                  
                  
                  1.2
                  %Finance
      costs
                  
                  
                  1,352
                  
                  
                  
                  0.1
                  %
                  
                  
                  23,511
                  
                  
                  
                  1.3
                  %
                  
                  
                  29,566
                  
                  
                  
                  1.4
                  %Share
      of loss in jointly-controlled entity
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  16
                  
                  
                  
                  0.1
                  %Total
      Expenses
                  
                  
                  1,140,723
                  
                  
                  
                  88.0
                  %
                  
                  
                  1,650,761
                  
                  
                  
                  90.8
                  %
                  
                  
                  1,832,023
                  
                  
                  
                  88.4
                  %





Cost
of sales




In 2007,
2008 and 2009, cost of sales represented 74.0%, 72.7% and 70.5%, respectively,
of our revenue. Our cost of sales consists of fixed costs and variable costs. In
2007, 2008 and 2009, fixed costs represented 2.4%, 2.0% and 2.2%, respectively,
of our cost of sales. During the same periods, variable costs represented the
remaining 97.6%, 98.0% and 97.8%, respectively, of our cost of
sales.





Our fixed
costs primarily include:




o
            Manufacturing overhead:
      Manufacturing overhead related to rental
  expense.





o
            Depreciation: Depreciation
      relates to depreciation expenses arising from our production
      facilities.





o
            Indirect labor costs: Indirect
      labor costs consist primarily of salaries, social insurance and benefit
      expenses for our production
supervisors.


53


Our
      variable costs primarily include:





o
            Purchase of raw materials:
      Purchases of raw materials consist primarily of purchases of natural and
      synthetic leather, nylon, canvas, rubber, plastics and product parts that
      we use to manufacture our
footwear.





o
            Purchase of finished goods:
      Purchases of finished goods are the purchases of finished products that we
      outsource to contract
manufacturers.





o
            Manufacturing overhead: Other
      variable costs primarily consist of packaging materials and other
      consumables, utility expenses and subcontracting fees, which are paid to
      subcontractors who manufacture footwear product parts for our
      production.





Selling
and distribution costs




Our
selling and distribution costs consist primarily of advertising and promotional
expenses, retail store renovation subsidies and salaries for its sales and
marketing staff. In 2007, 2008 and 2009, selling and distribution costs
represented 10.6%, 12.4% and 12.9%, respectively, of our revenue. Advertising
and promotional expenses consist primarily of fees for advertising on television
and other mass media, advertisement production costs, sponsorship fees for
sporting events and television programs and fees for brand spokespersons. Retail
store renovation subsidies consist primarily of subsidies provided to our
distributors for renovation or refurbishment of new or existing Xidelong retail
stores. Salaries of sales and marketing staff consist primarily of salaries and
benefit expenses for our sales and marketing staff.




Administrative
expenses




Our
administrative expenses consist primarily of salaries of administrative staff,
depreciation, and miscellaneous taxes and duties. In 2007, 2008 and 2009,
administrative expenses represented 2.3%, 1.7% and 2.3%, respectively, of our
revenue. Salaries of administrative staff consist primarily of salaries and
benefit expenses for our administrative staff. Depreciation consists primarily
of depreciation expenses of our office building and equipment at our production
facility in Jinjiang. Miscellaneous taxes and duties consist primarily of stamp
duties and property tax for our new office and factory buildings completed in
March 2007. Others under administrative expenses consist primarily of social
insurance and other employee expenses for our administrative staff, amortization
of prepaid land lease payments, donation, entertainment expenses, office
expenses, rental expenses and utility expenses.





Research
and Development expenses




In 2007,
2008 and 2009, research and development expenses represented 1.0%, 1.0% and
1.2%, respectively, of our revenue. Research and development expenses consist
primarily of salaries paid to our research and development center staff,
materials consumed for our product research and development projects and
expenses incurred for our cooperation with the China Institute of Sport Science
and Hefei Institute of Intelligent Machines.




Finance
costs




Finance
costs are our interest expenses on short-term bank loans and preferred shares.
In 2007, 2008 and 2009, finance costs represented 0.1%, 1.3% and 1.4%,
respectively, of our revenue.




Gross
profit margin




We have a
diverse product portfolio, comprising a range of products across our three key
segments: footwear, apparel and accessories. During the years ended
December 31, 2006, 2007 and 2008, our gross profit margin increased
primarily due to an increase in the average selling prices across our product
lines and improvements in its management of production costs. Our gross profit
margins between apparel and accessories (which are all outsourced) and footwear
(which are mostly manufactured in house) are comparable primarily due to our
pricing strategy for different product segments based on their cost of sales in
order to achieve a reasonable level of gross profit margins.


54





The
following table sets forth a breakdown of our gross profit margin for the
periods indicated:





Year ended December 31,2007
                
                
                2008
                
                
                2009Running
      footwear
                
                
                25.7
                %
                
                
                27.7
                %
                
                
                27.1
                %Skateboarding
      footwear
                
                
                25.7
                %
                
                
                29.1
                %
                
                
                34.5
                %Leisure
      footwear
                
                
                26.4
                %
                
                
                27.8
                %
                
                
                29.0
                %Tennis
      footwear
                
                
                —
                
                
                
                34.4
                %
                
                
                32.9
                %Outdoor
      footwear
                
                
                —
                
                
                
                34.2
                %
                
                
                27.7
                %Basketball
      footwear
                
                
                27.5
                %
                
                
                30.3
                %
                
                
                36.3
                %Canvas
      footwear
                
                
                25.6
                %
                
                
                27.0
                %
                
                
                25.0
                %Beach
      footwear
                
                
                —
                
                
                
                27.2
                %
                
                
                —Footwear
                
                
                26.1
                %
                
                
                28.3
                %
                
                
                30.6
                %Apparel
                
                
                26.0
                %
                
                
                26.3
                %
                
                
                28.2
                %Accessories
                
                
                23.4
                %
                
                
                25.85
                %
                
                
                28.9
                %Total
                
                
                26.0
                %
                
                
                27.3
                %
                
                
                29.5
                %





Taxation




No
provision for Hong Kong profits tax was made as we did not generate any
assessable profit arising in Hong Kong in 2007, 2008 and 2009. We calculated
taxes on profits assessable in the PRC at the prevailing rates, based on
existing legislation, interpretations and practices in respect
thereof.




The
increase in PRC taxes paid was primarily due to the increase in assessable
profits of our subsidiaries in the PRC as a result of business expansion and
growth in revenue.




According
to the Income Tax Law of the PRC for Foreign Investment Enterprises and Foreign
Enterprises and as approved by relevant PRC tax authorities, XDLong Fujian, a
foreign-invested enterprise, was exempt from the PRC corporate income tax for
its first two profitable years, commencing January 1, 2003. Thereafter, it was
entitled to a 50% reduction in the PRC corporate income tax for the subsequent
three years from January 1, 2005 to December 31, 2007. Pursuant to the new
PRC Corporate Income Tax Law and its Implementation Rules effective from January
1, 2008, starting from January 1, 2008, the applicable tax rate for XDLong
Fujian is 25%.




XDLong
China, a foreign-invested enterprise, is exempt from the PRC corporate income
tax for its first two profitable years, commencing from January 1, 2008.
Thereafter, it is entitled to a 50% reduction in the PRC corporate income tax
for the subsequent three years from January 1, 2010 to December 31, 2012
(the “Tax Holidays”). Pursuant to the new PRC Corporate Income Tax Law and its
Implementation Rules effective from January 1, 2008, the PRC corporate income
tax rate for foreign-invested enterprises such as XDLong China is 25%. Existing
foreign-invested enterprise, such as XDLong China, however, are entitled to
continue to enjoy the Tax Holidays until 2012.





The
following table sets forth the reconciliation of the tax expense applicable to
profit before tax using the applicable statutory rates in the PRC to the tax
expense at our effective tax rates for the periods indicated:





Year ended December 31,2007
                
                
                2008
                
                
                2009Profit
      before tax
                
                
                156,568
                
                
                
                170,709
                
                
                
                251,790Tax
      at the applicable rates
                
                
                42,273
                
                
                
                47,334
                
                
                
                65,844Lower
      tax due to tax holidays
                
                
                (27,228
                )
                
                
                (54,191
                )
                
                
                (67,697
                )Tax
      effect of expenses not deductible for taxation purposes
                
                
                11
                
                
                
                9,038
                
                
                
                5,621Tax
      losses not recognized
                
                
                6,727
                
                
                
                —
                
                
                
                3Tax
      charge at our effective rate
                
                
                21,783
                
                
                
                2,181
                
                
                
                3,771





Prior to January 1, 2008, we operated solely in China and the applicable
tax rate was 27%. Starting from January 1, 2008, the applicable tax rates for
entities operating in China and Hong Kong were 25% and 16.5%, respectively. Tax
charge at our effective rate is derived from our tax at the applicable tax
rates, reduced by lower tax due to Tax Holidays and increased by tax losses not
recognized in 2007, 2008 and 2009 at the applicable tax rates.




Other
than unrecognized tax losses, there were no other differences between the
carrying amounts of assets and liabilities in the financial statements and the
corresponding tax bases used in the computation of taxable profit. Therefore,
there was no unprovided deferred tax liability in 2007, 2008 and 2009 and at the
balance sheet date of December 31, 2007, 2008 and 2009.


55


Results
of Operations




Year
ended December 31, 2009 compared to year ended December 31, 2008





Revenue. Revenue increased
14.2% from RMB1,820.3 million in the year ended December 31, 2008 to
RMB2,078.0 million in the year ended December 31, 2009 primarily due to the
following:





 ̈
            Increase in
      sales volumes: The
      increase in sales volumes contributed to a revenue growth by RMB169.0
      million. The increase was primarily attributable to the overall economic
      growth in China, increased demand for our products at the existing
      Xidelong retail stores, openings of new Xidelong retails stores, an
      increase in the variety of apparel products and an increase in the average
      size of the Xidelong retail stores with larger display areas for
      accessories. The deliveries of footwear increased from 13.4 million pairs
      in 2008 to 16.0 million pairs in 2009. The sales volume of apparel
      increased from 16.8 million units in 2008 to 17.7 million units in
      2009.





 ̈
            Increase in
      the number of retail stores: The number of Xidelong retail
      stores increased from 3,277 as of December 31, 2008 to 3,694 as of
      December 31, 2009, leading to a contribution of revenue growth by RMB18.7
      million.





 ̈
            Increase in
      average selling prices: As a result of increased
      consumer recognition of the Xidelong brand resulting from marketing and
      brand promotion efforts over the years, the average selling prices of all
      product types increased. In particular, apparel experienced an increase in
      average selling prices by 5.3%, while the average selling price of
      footwear remained unchanged, leading to a contribution to revenue growth
      by RMB70.0 million.





The
increase in revenue from 2008 to 2009 was partially offset by the decrease in
revenue from accessories by RMB13.1 million as we focused our promotional
efforts on our other key products.





Cost of sales . Cost of sales
increased 10.7% from RMB1,323.3 million in 2008 to RMB1,464.9 million in 2009.
The increase in cost of sales was primarily due to increased purchases of raw
materials by RMB30.8 million for our own production of footwear products. The
increase in cost of sales was also attributable to increased purchases of
finished products by RMB25.8 million from contract manufacturers to meet the
increase in deliveries resulting from increased demand for our products. The
increase in cost of sales was partially offset by the decrease in revenue from
accessories.





Gross profit . Our gross
profit increased 23.4% from RMB497.0 million in 2008 to RMB613.1 million in 2009
primarily as a result of an increase in sales. Our overall gross profit margin
increased from 27.3% in 2008 to 29.5% in 2009 primarily as a result of the
increase in average selling prices of our products due to enhanced brand
recognition. The rate of increase in revenues in 2009 compared to 2008 exceeded
the rate of increase in cost of sales during the same periods.




Other income and gains. Other
income and gains increased 391.7% from RMB1.2 million in 2008 to RMB5.9 million
in 2009. Other income and gains include subsidy income from the Jinjiang local
government for our technological innovation and interest income.  The
increase in other income and gains in 2009 was mainly attributable to the
reversal of over-provision for aborted IPO expenses of RMB5.1
million.




Selling and distribution
costs. Selling and distribution costs increased 18.7% from RMB225.8
million in 2008 to RMB268.1 million in 2009. This increase in selling and
distribution costs was primarily due to increases in advertising and promotional
expenses, retail store renovation subsidies and sales fair expenses. Advertising
and promotional expenses increased 18.3% from RMB137.5 million in 2008 to
RMB162.6 million in 2009 primarily because we invested more resources on
marketing and advertising activities to increase our brand recognition and
penetration.  Retail store renovation subsidies increased 19.3% from
RMB71.5 million in 2008 to RMB85.3 million in 2009 primarily due to the
expansion of the distributors’ distribution network.


56


Administrative expenses.
Administrative expenses increased 52.4% from RMB29.2 million in 2008 to RMB44.5
million in 2009 primarily due to increases in acquisition related expenses,
salaries of administrative staff and other expenses. Acquisition related
expenses of RMB7.0 million was incurred for the business combination in 2009.
Salaries of administrative staff increased 90.0% from RMB5.0 million in 2008 to
RMB9.5 million in 2009 as a result of recruitment of additional headcounts with
higher salaries and the bonuses we paid in 2009 due to our business expansion
while we did not pay any bonus in 2008. Other expenses increased 59.8% from
RMB9.2 million in 2008 to RMB14.7 million in 2009 mainly due to the increase in
professional fees paid to investor relations managers and legal
advisors.





Aborted IPO expenses. We
incurred RMB31.4 million in 2008 as expenses for a proposed initial public
offering on the Stock Exchange of Hong Kong that was subsequently aborted due to
unfavorable market conditions while we did not incur such expenses in
2009.




Research and development
expenses. Research and development expenses increased 42.0% from RMB17.6
million in 2008 to RMB25.0 million in 2009 primarily due to the increase in
expenses associated with the design of new products and product parts and our
research and development efforts with the China Institute of Sport Science and
the Hefei Institute of Intelligent Machines.




Finance costs. Finance costs
decreased 26.0% from RMB23.5 million in 2008 to RMB29.6 million in 2009
primarily due to interest arising from the preferred shares issued to Elevatech
on April 30, 2008 carrying an internal rate of return of 12%.




Profit before tax. As a
result of the foregoing, our profit before tax increased 47.5% from RMB170.7
million in 2008 to RMB251.8 million in 2009.




Tax. Tax increased 72.7% from
RMB2.2 million in 2008 to RMB3.8 million in 2009 primarily due to the increase
in our gross profits.




Profit for the year. As a
result of the above factors, our profit for 2009 was RMB248.0 million, an
increase of 47.2% from RMB168.5 million for 2008.




Year
ended December 31, 2008 compared to the year ended December 31,
2007




Revenue . Revenue increased
40.4% from RMB1,296.4 million in 2007 to RMB1,820.3 million in 2008 primarily
due to the following:




 ̈
            Increase in
      sales volumes: The
      increase in sales volumes contributed to a revenue growth by RMB438.1
      million. The increase was primarily attributable to the overall economic
      growth in China, increased production capacity by two million pairs by
      adding two additional production lines in June 2008, increased demand for
      our products at existing Xidelong retail stores, new openings of Xidelong
      retails stores, an increase in the variety of apparel products and an
      increase in the average size of the Xidelong retail stores with larger
      display areas for accessories. The deliveries of footwear increased from
      10.3 million pairs in 2007 to 13.4 million pairs in 2008. The sales volume
      of apparel increased from 13.2 million units in 2007 to 16.8 million units
      in 2008.





 ̈
            Introduction
      of new products: To
      diversify our revenue sources, we introduced beach footwear in June 2008
      and tennis and outdoor footwear in September 2008. The introduction of
      these new products contributed to an increase of revenue by RMB24.2
      million in 2008 whereas we did not generate revenue from these products in
      2007.





 ̈
            Increase in
      the number of retail stores: The number of distributors
      remained at 22 in 2007 and 2008. However, the number of Xidelong retail
      stores increased from 2,519 as of December 31, 2007 to 3,277 as of
      December 31, 2008, leading to a contribution of revenue growth by RMB14.6
      million.





 ̈
            Increase in
      average selling prices: As a result of increased
      consumer recognition of the Xidelong brand resulting from marketing and
      brand promotion efforts over the years, the average selling prices of all
      product types increased. In particular, footwear and apparel experienced
      an increase in average selling prices by 5.4% and 12.1%, respectively,
      leading to a contribution to revenue growth by RMB47.1
      million.


57


The
increase in revenue from 2007 to 2008 was partially offset by the decrease in
revenue from basketball footwear by RMB28.3 million due to its relatively higher
selling price and increasing fashion trend toward skateboarding
footwear.





Cost of sales . Cost of sales
increased 37.9% from RMB959.5 million in 2007 to RMB1,323.3 million in 2008. The
increase in cost of sales was primarily due to increased purchases of finished
products by RMB335.5 million from contract manufacturers to meet the increase in
deliveries resulting from increased demand for its products. The increase in
cost of sales was also attributable to increased purchases of raw materials by
RMB33.9 million for our own production of footwear products.




The
increase in cost of sales in 2008 compared to 2007 was partially offset by the
decrease in fixed costs by RMB3.5 million primarily because we did not incur any
rental expenses in 2008 due to termination of leases for our production
facilities after completion of our own production facility in Jinjiang in March
2007. The decrease in fixed costs was partially offset by an increase in
depreciation by RMB2.7 million due to an increase in production capacities
through addition of two more production lines and the completion of factory
buildings in March 2007.




Gross profit . Our gross
profit increased 47.5% from RMB336.9 million in 2007 to RMB497.0 million in 2008
primarily as a result of an increase in sales. Our overall gross profit margin
increased from 26.0% in 2007 to 27.3% in 2008 primarily as a result of the
increase in average selling prices of our products due to enhanced brand
recognition. The rate of increase in revenues in 2008 compared to 2007 exceeded
the rate of increase in cost of sales during the same periods.




Other income and gains. Other
income and gains increased 33.3% from RMB0.9 million in 2007 to RMB1.2 million
in 2008. Other income and gains include subsidy income from the Jinjiang local
government for our technological innovation and interest income.




Selling and distribution
costs. Selling and distribution costs increased 64.7% from RMB137.1
million in 2007 to RMB225.8 million in 2008. This increase in selling and
distribution costs was primarily due to increases in advertising and promotional
expenses, retail store renovation subsidies and sales fair expenses. Advertising
and promotional expenses increased 47.8% from RMB93.0 million in 2007 to
RMB137.5 million in 2008, primarily due to increased marketing activities and
advertisement expenses to promote our brand in anticipation of the Olympic Games
in 2008 in China, including sponsorship of “Sports World,” a sport program
featured on CCTV Olympic Games channel running from January to September 2008.
Retail store renovation subsidies increased 106.1% from RMB34.7 million in 2007
to RMB71.5 million in 2008 primarily due to the expansion of the distributors’
distribution network. Sales fair expenses increased 81.3% from RMB1.6 million in
2007 to RMB2.9 million in 2008 because we organized three sales fairs in 2008
whereas we organized two sales fairs in 2007.




Administrative expenses.
Administrative expenses decreased 2.7% from RMB30.0 million in 2007 to RMB29.2
million in 2008 primarily due to reduced salaries of administrative staff
because we did not pay bonuses in 2008 and reduced purchase of office supplies,
which was partially offset by the increase in miscellaneous taxes and duties and
depreciation.





Aborted IPO expenses. We
incurred RMB31.4 million in 2008 as expenses for a proposed initial public
offering on the Stock Exchange of Hong Kong that was subsequently aborted due to
unfavorable market conditions while we did not incur such expenses in
2007.




Research and development
expenses. Research and development expenses increased 37.5% from RMB12.8
million in 2007 to RMB17.6 million in 2008 primarily due to the increase in
expenses associated with the design of new products and product parts and our
research and development efforts with the China Institute of Sport Science and
the Hefei Institute of Intelligent Machines.




Finance costs. Finance costs
increased 1,578.6% from RMB1.4 million for 2007 to RMB23.5 million for 2008
primarily due to interest arising from the preferred shares issued to Elevatech
on April 30, 2008 carrying an internal rate of return of 12%.




Profit before tax. As a
result of the foregoing, our profit before tax increased 9.0% from RMB156.6
million in 2007 to RMB170.7 million in 2008.


58


Tax. Tax decreased 89.9% from
RMB21.8 million in 2007 to RMB2.2 million in 2008 primarily due to the
commencement of Tax Holidays enjoyed by XDLong China as it started to generate
profits in 2008.




Profit for the year. As a
result of the above factors, our profit in 2008 was RMB168.5 million, an
increase of 25.0% from RMB134.8 million in 2007.





B.
            LIQUIDITY
      AND CAPITAL RESOURCES





The
following table sets forth a summary of our consolidated cash flows for the
periods indicated:





Year ended December 31,2007
                
                
                2008
                
                
                2009Net
      cash inflow/(outflow) from operating activities
                
                
                146,265
                
                
                
                43,953
                
                
                
                (155,747
                )Net
      cash outflow from investing activities
                
                
                (188,737
                )
                
                
                (16,468
                )
                
                
                (1,563
                )Net
      cash inflow from financing activities
                
                
                94,219
                
                
                
                24,452
                
                
                
                (299,878
                )





We have
historically financed our liquidity requirements primarily through operating
cash flow, short-term bank loans and issuance of preferred shares. All of the
preferred shares were redeemed on October 21, 2009. Going forward, we believe
our liquidity requirements will be satisfied using a combination of the proceeds
of the Acquisition and cash flows from operations.




The
financial crisis and economic downturns that began in 2008 could adversely
affect our liquidity position. Our cash from operations could be adversely
affected by decreased consumer spending or longer collection periods of trade
receivables from our distributors whose liquidity positions may be similarly
negatively impacted by the financial and economic crisis. For information
relating to the management of accounts receivables from the distributors under
current market conditions, see “ — Factors Affecting Our Results of
Operations and Financial Condition — Management of collection of trade
receivables .” Additional financing from investors, banks or the capital
market may be limited as a result of the tight credit market and volatile
capital market under the current market conditions.




Cash
inflows from operating activities




For 2009,
our net cash outflow from operating activities was RMB155.7 million and was
primarily attributable to profit before tax of RMB251.8 million, an increase in
trade receivables of RMB528.0 million due to extension of credit periods for
certain distributors and an increase in prepayments, deposits and other
receivables of RMB9.3 million due to the increase in prepaid advertising
expense, which was partially offset by an adjustment for finance costs of
RMB29.6 million primarily due to interest arising from the preferred shares
issued to Elevatech carrying an internal rate of return of 12%, an increase in
trade and bills payables of RMB68.0 million due to the extension of credit
periods granted by certain suppliers as well as increased use of bills payables
with longer terms to settle purchases from suppliers and a decrease in inventory
of RMB30.1 million due to increased delivery of our products.




Most of
the suppliers granting an extended credit period to us have entered into supply
contracts with us for a term of two years or more. Due to the economic downturn,
many suppliers began to grant longer credit terms to their customers (including
us) to maintain business relationships. As a result, we began to receive credit
periods of up to four months, compared with periods ranging from 30 days to 90
days, in our trade payables. The extension of credit periods in our trade
payables to suppliers was unrelated to the extension of credit periods in our
trade receivables from distributors.




For 2008,
our net cash inflow from operating activities was RMB44.0 million and was
primarily attributable to profit before tax of RMB170.7 million, an adjustment
for finance costs of RMB23.5 million primarily due to interest arising from the
preferred shares issued to Elevatech carrying an internal rate of return of 12%,
the decrease in pledged deposits of RMB16.7 million due to a decrease in use of
bills payables, which was partially offset by an increase in trade receivables
of RMB143.1 million due to an increase in sales and extension of credit periods
for certain distributors and an increase in inventories of RMB35.8 million due
to decreased deliveries of our products during the fourth quarter of 2008 to
prevent potential overflow of inventory among the distributors. We were able to
sell such inventory in the first quarter of 2009 due to increased orders and
deliveries to distributors.


59


For 2007,
our net cash inflow from operating activities was RMB146.3 million and was
primarily attributable to profit before tax of RMB156.6 million, an adjustment
for depreciation of RMB11.4 million due to the construction of our production
facility in March 2007, an increase in trade and bills payables of RMB47.5
million primarily due to increased purchases of raw materials from our suppliers
and increased purchases of finished goods from contract manufacturers, an
increase in deposits received, other payables and accruals of RMB17.0 million
primarily due to increases in construction costs payables for the construction
of our production facility and value added tax payables, which was partially
offset by an increase in our trade receivables of RMB57.7 million primarily due
to the commensurate growth of our business, and PRC taxes paid of RMB21.7
million because of the commensurate growth of our business and revenue in our
PRC subsidiaries and an increase in pledged deposits of RMB11.3 million
primarily due to the increase in use of bills payables.





Cash
outflows from investing activities





For 2009,
our net cash outflow from investing activities was RMB1.6 million due to a
purchase of property, plant and equipment of RMB2.3 million, which was partially
offset by the interest received of RMB0.7 million.





For 2008,
our net cash outflow from investing activities was RMB16.5 million primarily due
to a purchase of property, plant and equipment of RMB17.3 million because we
added two production lines in June 2008 and we renovated the research and
development center.





For 2007,
our net cash outflow from investing activities was RMB188.7 million, consisting
primarily of purchases of items of property, plant and equipment of RMB187.4
million for our new production facility in Jinjiang.





Cash
inflows from financing activities





For 2009,
our net cash inflow from financing activities was RMB299.9 million due to new
bank loans of RMB90.5 million for working capital requirements , a capital in
the amount of RMB343.2 million received from 2020 upon recapitalization and
business combination and proceeds of RMB205.0 million from the issue of ordinary
shares to new investors, which was partially offset by the repayment of bank
loans of RMB52.5 million , the purchase of a unit option of RMB17.1 million and
the redemption of preferred shares of RMB272.4 million.





For 2008,
our net cash inflow from financing activities was RMB24.5 million due primarily
to proceeds from the offering of preferred shares of RMB85.1 million to
Elevatech, an additional contribution from RichWise of RMB28.4 million for
meeting target profits in 2007 and new bank loans of RMB20.0 million for working
capital requirements, which was partially offset by repayment of bank loans of
RMB28.0 million and a decrease in an amount due to a director of RMB81.1 million
due to the repayment of loans to Mr. Lin Shuipan.





For 2007,
our net cash inflow from financing activities was RMB94.2 million, consisting
primarily of proceeds from the issue of shares of RMB82.3 million due to
investment by RichWise and new bank loans of RMB28.0 million for working capital
use, which was partially offset by the repayment of bank loans of RMB17.0
million.





Capital
Expenditures





Our
capital expenditures principally include expenditures on property, plant and
equipment and construction in progress for our new factory buildings. Our
capital expenditure in 2007 primarily related to our production facility in
Jinjiang completed in March 2007. We financed our capital expenditure
requirements primarily through cash flow from operations.





The
following table sets out our historical capital expenditures for the periods
indicated:





Year ended December 31,2007
                
                
                2008
                
                
                2009Property,
      plant and equipment
                
                
                10,823
                
                
                
                17,256
                
                
                
                2,290Construction
      in progress
                
                
                176,567
                
                
                
                —
                
                
                
                —Land
      use rights
                
                
                2,483
                
                
                
                —
                
                
                
                —Total
                
                
                189,873
                
                
                
                17,256
                
                
                
                2,290


60





C.
            RESEARCH AND DEVELOPMENT, PATENTS
      AND LICENSES, ETC.





Design,
Research and Development





We
established our research and development center in 2002. In 2005, we established
a dedicated research and development facility adjacent to our production
facility in Jinjiang, Fujian province. The facility occupies a total gross floor
area of approximately 3,000 square meters.





Product
design





We carry
out our product design at the research and development center. We maintain a
dedicated design team and engage external design firms in order to keep up with
market trends and changing consumer preferences. Our design team initiates
various design themes for our products to appeal to different tastes and
preferences of consumers located in varying regions in the PRC. The design team
refines and improves on its design themes by taking into account other
considerations such as the comfort and functionality of the products, as well as
the technology used.





As of
December 31, 2009, our design team consisted of 158 designers. Our design team
formulates new designs for products, tests prototype designs by obtaining
feedback from other internal departments and distributors, and assesses demand
at sales fairs. When a prototype is approved for production, the design team
sends the design specifications to the production team. During the year ended
December 31, 2009, we launched 238 new footwear designs, 392 new apparel designs
and 110 new accessories designs at the sales fair in 2009.





Our
product design process consists of several integrated design steps ranging from
initial product concept design to production and testing of
prototypes.


61


The
diagram below illustrates the typical design process for our Xidelong footwear
and apparel:











Initial
      market survey and product strategy formulation
            
            Our
      design team, with the assistance of third party professionals, formulates
      new design concepts by analyzing information on global sportswear trends
      and market research.Product
      design
            
            We
      design or engage external designers to design products.Product
      development
            
            New
      designs from the product design stage are developed into product
      prototypes, which are tested against our quality and performance
      standards.Initial
      product review by distributors and marketing team
            
            Our
      marketing team reviews the initial batch of prototypes together with
      distributors to assess whether they meet the target standards. Prototypes
      are refined based on evaluations carried out by athletes and our marketing
      personnel.


62





Sales
      fairs
            
            We
      then displays samples of all our new products in a seasonal sales fair, at
      which we launch our new product collections and our distributors place
      sales orders.





Samples
of the final products are then provided to our production facilities and our
contract manufacturers. Before mass production commences, we also perform pilot
production runs to identify, and subsequently rectify, potential problems in the
production process.





Research
and development





As a
leading PRC sports and leisurewear company, we place great emphasis on the
comfort and functionality of our products. In particular, our sports and leisure
footwear are designed to tailor to the needs of PRC consumers. Our research and
development is principally focused on (i) developing new technologies to improve
existing or create new products, by using the latest technology and materials to
enhance the comfort and quality of our products, and (ii) testing and other
quality control activities. We maintain a science and technology laboratory in
Jinjiang that tests potential new materials and products. We believe our
research capabilities and the development of new products that incorporate the
latest technology is an important element of our growth strategy.





China
Institute of Sport Science





The
General Administration of Sport of China, a PRC government agency, established
the China Institute of Sport Science in 1958 as China’s first governmental
agency engaging in research in the field of sport science. The functions of the
China Institute of Sport Science include strengthening public fitness and
enhancing the performance of Chinese athletes through research and development.
The China Institute of Sport Science has six research centers focusing on four
main areas of research: (i) developing Chinese athletes; (ii) monitoring and
developing public fitness levels; (iii) studying sports sociology; and (iv)
improving sports equipment.





On
October 20, 2006, we entered into an exclusive five-year technology cooperation
agreement with the China Institute of Sport Science, where it stated the
following as reasons for selecting us as its exclusive collaboration
partner:




 ̈
            our
      commitment to enhancing the technological level of our
      products;





 ̈
            our
      strength and resources in technology research and
    development;





 ̈
            our
      commitment to developing products into one of the world’s famous
      brands;





 ̈
            the
      high quality of our products and, in particular, our running footwear,
      which is comparable to running footwear from leading international brands
      based on market research conducted by the China Institute of Sport
      Science;





 ̈
            our
      large scale and modernized production facility in Jinjiang and research
      and development center, which can accommodate international science and
      research activities; and





 ̈
            the
      extensive experience and professional knowledge of Mr. Lin Shuipan, our
      founder, chairman of the board and chief executive
  officer.





Under the
cooperation agreement, the China Institute of Sport Science will assist us with
the research and development of technology for our sports footwear and apparel.
While the China Institute of Sport Science owns the know-how developed under the
cooperation agreement, we have the first right of refusal to use such know-how.
In addition, we pay an annual fee of RMB0.5 million to the China Institute of
Sport Science pursuant to the cooperation agreement for their assistance in the
research and development of our products. Other than such annual fees, we do not
pay any other fees, including usage fees, to the China Institute of Sport
Science.


63





Our
current collaborative projects with the China Institute of Sport Science include
research initiatives to establish a national database of different foot shapes
and characteristics of the PRC population. In April 2007, we launched a
nationwide foot measurement campaign where we collected foot measurement data
from consumers across the PRC, using the foot shape measurement equipment
developed in conjunction with the China Institute of Sport Science, which helped
analyze the data in the foot shape database, and which we subsequently
incorporated into the design and development of footwear insoles and
soles.





The
Hefei Institute of Intelligent Machines





The Hefei
Institute of Intelligent Machines, Chinese Academy of Sciences was founded in
1979 and is a national research center for sensor technology and artificial
intelligence. With over 50 scientists and technical staff, the Hefei Institute
of Intelligent Machines focuses on the fields of biomimetic sensing and
artificial intelligence. The Hefei Institute of Intelligent Machines has
developed biomimetic sensing robotics and micro/nano sensors and has produced
special sensors and sensing control systems that integrate optics, micro/nano
technology and various sensing systems that measure strength, tactile sense and
vision.





We
entered into a two-year technology development agreement with the Hefei
Institute of Intelligent Machines from May 2007 to May 2009. The collaborative
projects under the original agreement included a testing system for foot
pressure distribution that analyzes the contact surface between the foot and
support surface in footwear. While the Hefei Institute of Intelligent Machines
owned the proprietary know-how developed under the agreement, we had the
exclusive right to use the know-how developed during the agreement
period.





Key
recent achievements





The
following are our recent key research and development achievements in footwear
technologies:





Arch
support pad





Arch
support pads are commonly used in footwear to provide underside support to the
feet in order to reduce foot or heel pain. Our research and development
activities with the China Institute of Sport Science and the Hefei Institute of
Intelligent Machines resulted in the development of a foot shape database and
testing system for foot pressure distribution, providing shock absorption
functions, which are specifically tailored to consumers in the PRC.





Silicone
rubber materials





Our
research and development activities with the China Institute of Sport Science
and the Hefei Institute of Intelligent Machines resulted in the development of
silicone rubber materials that have higher levels of color-fading resistance and
have a higher overall durability compared with conventional rubber materials. We
have used these materials in the production of specially designed midsoles for
shock absorption and balancing functions.





Nano-silver
photocatalyst





We have
developed footwear materials that contain nano-silver photocatalysts.
Nano-silver photocatalysts in footwear materials absorb odors and have an
antibacterial effect. We are currently using nano-silver photocatalyst
technology in our footwear.





For 2007,
2008 and 2009, our total expenditure on research and development amounted to
RMB12.8 million, RMB17.6 million and RMB25.0 million, respectively, representing
1.0%, 1.0% and 1.2% of our total revenue during the same periods,
respectively.





Intellectual
Property Rights





As of
December 31, 2009, we had registered 25 trademarks, including  and  , with the Trademark Office of
the State Administration for Industry and Commerce in the PRC. As of December
31, 2009, we had seven pending applications for the registration of trademarks
in the PRC. In addition, we have registered four domain names.


64


We
recognize the importance of protecting and enforcing our intellectual property
rights. We safeguard our intellectual property rights through the registration
of trademarks, and may include the relevant protective provisions in contracts
with third parties. Our employees and contract manufacturers are subject to
confidentiality agreements but there has been no action taken against any
employee or contract manufacturers for a breach of such confidentiality. In
addition, we plan to apply for intellectual property rights to any new
technologies developed together with scientific and educational institutions. We
mitigate the risks of infringement by others through obtaining the appropriate
legal services and advice to ensure that our trademarks are adequately protected
and to prevent the risks of infringement.





In
December 2005, Liu Dingyi registered the Chinese domain name “  .com” on the China Internet Network Information Center (CNNIC)
and used the website to promote and sell travel products and services. On June
8, 2006, we obtained an injunction from the Hubei Province Jingzhou City
Intermediate People’s Court restraining Liu Dingyi from infringing on our
trademark and ordered the termination of the domain name registration. In
addition, the court awarded us RMB5,000 in damages.





D.
            TREND
      INFORMATION





Other
than as disclosed elsewhere in this annual report, we are not aware of any
trends, uncertainties, demands, commitments or events for the period from
January 1, 2009 to December 31, 2009 that are reasonably likely to have a
material effect on our net revenues, income, profitability, liquidity or capital
resources, or that caused the disclosed financial information to be not
necessarily indicative of future operating results or financial
conditions.





E.
            OFF-BALANCE SHEET
      ARRANGEMENTS





We do not
have any outstanding off-balance sheet guarantees, interest rate swap
transactions or foreign currency forward contracts. We do not engage in trading
activities involving non-exchange traded contracts. In our ongoing business, we
do not enter into transactions involving, or otherwise form relationships with,
unconsolidated entities or financials partnerships that are established for the
purpose of facilitating off-balance sheet arrangements or other contractually
narrow or limited purposes.





F.
            CONTRACTUAL OBLIGATIONS AND
      COMMERCIAL COMMITMENTS





Our
contractual obligations primarily consist of short-term debt obligations,
operating lease obligations and purchase obligations. The following table sets
forth a breakdown of our contractual obligations as of December 31, 2009 and
their maturity profile:





Payment Due by PeriodTotal
                  
                  
                  Less than 1
                    Year
                  
                  
                  1-3 Years
                  
                  
                  3-5 Years
                  
                  
                  More than 5
                    YearsRMB (in thousands)Short-term
      debt obligations (including interest obligations) (1)
                  
                  
                  59,544
                  
                  
                  
                  59,544
                  
                  
                  
                  ―
                  
                  
                  
                  ―
                  
                  
                  
                  ―Operating
      lease obligations (2)
                  
                  
                  188
                  
                  
                  
                  173
                  
                  
                  
                  15
                  
                  
                  
                  ―
                  
                  
                  
                  ―Purchase
      obligations (3)
                  
                  
                  24,267
                  
                  
                  
                  24,267
                  
                  
                  
                  ―
                  
                  
                  
                  ―
                  
                  
                  
                  ―Annual
      fee for research and development assistance (4)
                  
                  
                  500
                  
                  
                  
                  500
                  
                  
                  
                  ―
                  
                  
                  
                  ―
                  
                  
                  
                  ―Total
                  
                  
                  84,499
                  
                  
                  
                  84,484
                  
                  
                  
                  15
                  
                  
                  
                  ―
                  
                  
                  
                  ―





(1)
            Primarily attributed to bank
      loans.





(2)
            Includes lease obligations for
      our office premises and display
  locations.





(3)
            Includes advertising and
      promotional expenses.





(4)
            Under the agreement with the
      China Institute of Sport Science, we have committed to pay predetermined
      annual fees of RMB0.5 million to the China Institute of Sport Science for
      each of the years from October 2006 to October 2011 for their assistance
      with the research and development of technology for sports footwear and
      apparel, and the promotion of the technology content of our
      products.


65





G.
            SAFE
  HARBOR





This
annual report contains forward-looking statements that are based on our current
expectations, assumptions, estimates and projections about us and our industry.
All statements other than statements of historical fact in this form are
forward-looking statements. These forward-looking statements can be identified
by words or phrases such as “may”, “will”, “expect”, “anticipate”, “estimate”,
“plan”, “believe”, “is/are likely to” or other similar expressions. The
forward-looking statements included in this form relate to, among
others:





 ̈
            our
      goals and strategies;





 ̈
            our
      future business development, financial condition and results of
      operations;





 ̈
            our
      projected revenues, earnings, profits and other estimated financial
      information;





 ̈
            expected
      changes in our margins and certain costs or
  expenditures;





 ̈
            our
      plans to expand and diversify the sources of our
  revenues;





 ̈
            our
      plans for staffing, research and development and regional
      focus;





 ̈
            our
      plans to launch new products;





 ̈
            competition
      in the sportswear industry in
China;





 ̈
            the
      outcome of ongoing, or any future, litigation or
    arbitration;





 ̈
            changes
      in PRC governmental preferential tax treatment and financial incentives we
      currently qualify for and expect to qualify for;
  and





 ̈
            PRC
      governmental policies relating to the sportswear manufacturing
      industry.





These
forward-looking statements involve various risks and uncertainties. Although we
believe that our expectations expressed in these forward-looking statements are
reasonable, we cannot assure you that our expectations will turn out to be
correct. Our actual results could be materially different from and worse than
our expectations. Important risks and factors that could cause our actual
results to be materially different from our expectations are generally set forth
in the “Risk Factors” section of Item 3 and elsewhere in this annual report. The
forward-looking statements made in this annual report relate only to events or
information as of the date on which the statements are made in this annual
report. We undertake no obligation to update any forward-looking statements to
reflect events or circumstances after the date on which the statements are made
or to reflect the occurrence of unanticipated events.





Item
6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES





A.     DIRECTORS AND SENIOR
MANAGEMENT





The
following table sets forth certain information relating to our directors as of
March 31, 2010. The business address of each of our directors and executive
officers is Suite 8, 20/F, One International Finance Centre, 1 Harbour View
Street, Central, Hong Kong .





Name
            
            Age
            
            PositionLin
      Shuipan
            
            42
            
            Director,
      Chairman of the Board and Chief Executive OfficerJin
      Jichun
            
            68
            
            DirectorWilliam
      J. Sharp
            
            68
            
            Director


66


Directors





Mr. Lin Shuipan , aged 42, is
our founder, executive Director, the chairman of the board and chief executive
officer. He is responsible for our overall corporate strategies, planning and
business development. Mr. Lin has over 16 years’ experience in the sportswear
industry. From 1993 to 1997, he was the technical engineer and factory manager
of Huatingkou Footwear Manufacturing Factory in Chendai Town, Jinjiang. From
1997 to 2000, he was the general manager of Jiuzhou Footwear Business Company
Limited in Chendai Town, Jinjiang. In 2001, Mr. Lin founded XDLong Fujian and
was its vice-chairman from 2001 to September 2007 and has been its chairman
since September 2007. He has been the general manager of XDLong Fujian since its
establishment. Mr. Lin has also been the chairman and general manager of XDLong
China since its establishment in April 2004. In 2003, he was named as one of the
100 Outstanding Persons in China’s Economy. In 2003, he was appointed as a
representative of the 14 th
Jinjiang People’s Congress and the executive director of Jinjiang Chendai
Chamber of Commerce. In 2004, Mr. Lin was appointed as vice president of
Jinjiang Footwear Manufacturing Association. In 2005, he was appointed as a
member of the standing committee of Quanzhou Foreign Invested Enterprises
Association and in 2007, as vice president of Jinjiang Youth Chamber of
Commerce. In 2006, he was appointed as a representative of the 14 th
Quanzhou People’s Congress. He was also appointed as a representative of the 14
th
and 15 th
Jinjiang People’s Congress in 2003 and 2006, respectively.





Mr. Jin Jichun , aged 68, is
an independent non-executive director. Mr. Jin is a professor of sports
biomechanics at the Beijing Sports University. Mr. Jin received a bachelor’s
degree in gymnastics and obtained a degree in kinesiology at the Shanghai Sports
College in 1958 and 1966, respectively. From 1982 to 1984, he was a visiting
scholar at the University of Delaware, specializing in biomechanics. He served
as a member of the editorial staff of the International Journal of Sport
Biomechanics for a total period of four years between 1985 and 1989. Since 1987,
he has been a council member of the International Council of Sport Science and
Physical Education, and was appointed its regional coordinator of Asia in
2001.





William Sharp , age 69,
 has
been a member of our Board of Directors since November 2009. Since 2001, Mr.
Sharp has served as President of Global Industrial Consulting, a consulting
firm. Since 1998, Mr. Sharp has been a director of Ferro Corp, a New York Stock
Exchange listed company that produces performance materials where he serves as
chairman of the Audit Committee and as a member of the Compensation Committee
and the Finance Committee. From 1964 to 2000, Mr. Sharp served at Goodyear Tire
and Rubber Company in various capacities, including President of the North
American Tire division, President of the Global Support Operations and President
of its Europe, Middle East and Africa division. Since August 2005, Mr. Sharp has
been a director of Xingda International Holdings Limited where he serves as
Chairman of the Compensation and Management Development Committee and a member
of the Audit Committee. Mr. Sharp has actively advised leading global private
equity investors in their investments in China including GIC. Mr. Sharp received
a B.S. from Ohio State University.





Senior
Management





Mr. Qian Zhen Li , aged 41, is
our deputy general manager. He joined us in February 2009 and is primarily
responsible for its production management and quality control. Mr. Qian has
nearly 20 years’ experience in the footwear manufacturing industry. From 1990 to
1999, he served as the head of quality control for Fuzhou Qing Lu Footwear Co.,
Ltd. primarily responsible for its production management and quality control.
From 2000 to 2002, he served as the factory manager for Pu Tain Jia Yu Hua
Footwear Co., Ltd. primarily responsible for its strategic planning for
production and quality control. From 2002 to 2005, he served as the general
manager of Quanzhou Ju Xing Footwear Co., Ltd. primarily responsible for its
business strategy, planning and development. From 2006 to 2008, he served as the
president of the production department for GuiRenNiao (China) Co., Ltd.
primarily responsible for its production management and quality control of the
footwear business.





Mr. Yu Shulong , aged 47, is
our deputy financial officer. Mr. Yu joined us in August 2009. From 1983 to
1993, he worked for Anhui Sugong County Salt Co. Ltd. and was responsible for
accounting, finance and distribution related matters. From 1993 to 2005, he
worked as the financial manager for Fujian Fengzhu Group Co. Ltd. From 2006 to
2009, he worked as the chief financial officer for Fujian Jinjiang San Li Motor
Co. Ltd. Mr. Yu obtained a diploma in finance and accounting from Anhui Anqing
Commercial College.





Mr. Ding Dongdong , aged 28,
is our vice president. He is primarily responsible for the design, research and
development of its footwear and apparel. Mr. Ding joined us in September 2001.
He was the development manager of the apparel department of XDLong Fujian from
2002 to 2003, and was promoted to the position of manager in 2003. He is
responsible for data collection, apparel design, processing and production,
quality control and after-sales of the apparel department. Mr. Ding obtained a
diploma in apparel design from the Guangdong Apparel Institute in July 2002. Mr.
Ding is the brother-in-law of Mr. Lin Shuipan, an executive
Director.





67




Ms. Liu Ming , aged 43, is our
vice president. She is also the assistant to the Chairman. She joined us in
January 2008 and is primarily responsible for the sales of its products,
development of the Xidelong sales distribution network, as well as its apparel
business. Furthermore, she is responsible for our overall administrative
management. Ms. Liu obtained an Executive Masters of Business Administration
(EMBA) from Qinghua University Continuous Learning Institution in April 2003.
From 1998 to 2000, she worked as the marketing manager and chief of the general
office for Jinjiang Aile Holiday Hotel. From 2001 to 2007, she worked as the
vice general manager and the general manager of the Xi’an Branch of Guirenniao
(Fujian) Sports Products Limited.





Ms. Tai Yau Ting , aged 30, is
our chief financial officer and company secretary and is a qualified accountant.
She joined us in February 2008 and is primarily responsible for its financial
management, internal control and risk management. Ms. Tai graduated from the
University of Toronto with a bachelor’s degree in applied science in 2002 and a
master’s degree in applied science in 2004. Ms. Tai has been a member of the
American Institute of Certified Public Accountants since August 2007 and a
member of CPA Australia since April 2009. Prior to joining us, she worked for
Ernst & Young and has over four years’ auditing, accounting and financing
experience.





B.
            COMPENSATION





Compensation
of Directors





We offer
our directors and executive officers competitive remuneration packages to
attract and retain management talent. The principal component of our
compensation for directors and executives is basic salaries. We also provide a
discretionary bonus to the directors and executive officers as an incentive for
their contribution depending on our profitability during the year. During the
years ended December 31, 2007, 2008 and 2009, the aggregate amount of
compensation paid to directors and executive officers amounted to RMB0.6
million, RMB1.5 million and RMB1.2 million, respectively. The increase from 2007
to 2008 was primarily attributable to the increase in compensation paid to Mr.
Lin Shuipan for his services rendered in connection with the proposed initial
public offering on the Stock Exchange of Hong Kong as well as the engagement of
one non-executive director and three independent non-executive directors to meet
the requirements of the proposed initial public offering on the Stock Exchange
of Hong Kong. See Note 9 to the financial statements included elsewhere in this
registration statement.





The
following table sets forth the compensation paid to our directors and executive
officers for the periods indicated:





Year ended December 31,2007
                
                
                2008
                
                
                2009(RMB
      in thousands)Salary
                
                
                447
                
                
                
                1,445
                
                
                
                1,238Bonus
                
                
                135
                
                
                
                —
                
                
                
                —Pension
                
                
                15
                
                
                
                17
                
                
                
                6Total
                
                
                597
                
                
                
                1,462
                
                
                
                1,244





The
compensation of our directors and executive officers is determined by reference
to our operating results as a whole, market environment, salary trends, tasks
and responsibilities of the director and executive officer, and compensation
packages offered by companies in the same industry in the PRC. The compensation
of directors and executive officers was subject to performance reviews on an
annual basis.





Our
compensation policies are formulated based on the performance of individual
directors and executive officers and are reviewed regularly. The primary goal of
our remuneration policy is to enable us to retain and motivate management by
offering them compensation commensurate with their performance.





Compensation
Discussion and Analysis





This
section discusses the compensation we paid in previous fiscal years to our
current executive officers. These executive officers include (i) Mr. Lin
Shuipan, the chairman of the board and chief executive officer, and Ms. Tai Yau
Ting, the chief financial officer, and (ii) our three next most highly paid
executive officers or employees during 2009 who also serve as our officers, or
collectively, the named executive officers.


68


Determination
of Compensation





We have a
compensation committee that makes all compensation decisions regarding our named
executive officers. Compensation decisions with respect to our named executive
officers have focused on attracting and retaining individuals who could help us
meet and exceed our financial and operational goals. Our compensation committee
considers our growth, individual performance and market trends when setting
individual compensation levels.




C.
            BOARD
      PRACTICES





Independence
of Directors





We apply
the standards of NASDAQ in determining whether a director is independent. Under
the relevant standards, an independent director means a person other than an
executive officer or employee of the company, and no director qualifies as
independent unless the issuer’s board of directors affirmatively determines that
the director does not have a relationship that would interfere with the exercise
of independent judgment in carrying out the responsibilities of a director.
NASDAQ requires that a majority of the board of directors of a company be
independent. We have determined that Messrs. Sharp and Jin are
independent.





Audit
Committee





To comply
with the rules of NASDAQ, we have established an audit committee. NASDAQ rules
require that the audit committee be comprised of at least two independent
directors who are also able to read and understand fundamental financial
statements, including a company’s balance sheet, income statement and cash flow
statement. Messrs. Sharp (chair) and Jin are members of the audit committee.
Messrs. Sharp and Jin have an understanding of generally accepted accounting
principles and financial statements, the ability to assess the general
application of such principles in connection with our financial statements,
including estimates, accruals and reserves, experience in analyzing or
evaluating financial statements of similar breadth and complexity as the
company’s financial statements, an understanding of internal controls and
procedures for financial reporting and an understanding of audit committee
functions.





Audit
Committee Financial Expert





The board
of directors has identified Mr. Sharp as an “audit committee financial expert”
within the meaning of all applicable rules.





Audit
Committee Pre-Approval Policies and Procedures





In
accordance with Section 10A(i) of the Securities Exchange Act of 1934, before
the company engages its independent accountant to render audit or permitted
non-audit services, the engagement will be approved by the audit
committee.





Code
of Conduct





We have
adopted a code of conduct that applies to all directors, officers and employees.
The code of conduct codifies the business and ethical principles that govern all
aspects of our business.





Compensation
Committee





To comply
with the rules of the NASDAQ, we have established a compensation committee. The
purpose of the compensation committee is to administer any stock option plans,
including authority to make and modify awards under such plans. Messrs. Jin
(chair) and Sharp are members of the compensation committee.





Nominating
Committee





To comply
with the rules of the NASDAQ, we have formed a nominating and corporate
governance committee. The nominating committee is responsible for overseeing the
selection of persons to be nominated to serve on our board of directors. The
nominating committee will consider persons identified by our members,
management, stockholders, investment bankers and others. Messrs. Jin (chair) and
Sharp are members of the nominating and corporate governance
committee.


69


Employment
Agreement with Executive Director





Our
directors and executive officers have entered into service contracts with us for
a term of three years from execution of the respective contracts until
termination by three months’ notice in writing served by either party on the
other. We have no service contracts with any of our directors or executive
officers that provide benefits to them upon termination.




D.
            EMPLOYEES





Employees





As of
December 31, 2009, we had a total of 3,114 full-time employees. The following
sets forth the number of employees as of December 31, 2009:





Number of employeesFootwear
      production department
                
                
                2,419Research
      and development center
                
                
                157Quality
      control department
                
                
                148Sales
      and marketing center
                
                
                146Administration
      department
                
                
                112Apparel
      business department
                
                
                66Finance
      department
                
                
                26Brand
      and promotion department
                
                
                25Senior
      management
                
                
                12Human
      resources department
                
                
                3Total
                
                
                3,114





We
have made contributions in relation to the retirement of our employees in
accordance with applicable laws and regulations in the PRC, which require
contribution by both employees and the company at a fixed percentage of the
salaries of such employees. For 2007, 2008 and 2009, the employee social
insurance (including our retirement contribution) paid by us amounted to
approximately RMB10.5 million, RMB14.5 million and RMB17.9 million,
respectively, which represented 17.5%, 19.6% and 19.4% of the total salaries of
our employees during the same periods, respectively.





For
the year ended December 31, 2007, we paid year-end bonuses of RMB5.9 million to
559 employees meeting performance targets in that year. For the year ended
December 31, 2008, we did not pay any year-end bonus to our employees. For the
year ended December 31, 2009, we paid year-end bonuses of RMB8.5 million to 966
employees meeting performance targets in that year.





We
believe we are in material compliance with all applicable labor and safety laws
and regulations in the PRC, including the PRC Labor Contract Law, the PRC
Production Safety Law, the PRC Regulation for Insurance for Labor Injury, the
PRC Unemployment Insurance Law, the PRC Provisional Insurance Measures for
Maternity of Employees, PRC Interim Provisions on Registration of Social
Insurance, PRC Interim Regulation on the Collection and Payment of Social
Insurance Premiums and other related regulations, rules and provisions issued by
the relevant governmental authorities from time to time, for our operations in
the PRC.





According
to the PRC Labor Contract Law, we are required to enter into labor contracts
with our employees. We are required to pay no less than local minimum wages to
our employees. We are also required to provide employees with labor safety and
sanitation conditions meeting PRC government laws and regulations and carry out
regular health examinations of our employees engaged in hazardous
occupations.





E.
            SHARE
      OWNERSHIP





Please
see Item 7.A.


70


Item
7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS





A.
            MAJOR
      SHAREHOLDERS





The
following table sets forth information with respect to the beneficial ownership,
within the meaning of Rule 13d-3 of the U.S. Securities Exchange Act of 1934, as
amended, or the Exchange Act, of our ordinary shares, as of March 31,
2010:




 ̈
            each
      person known to us to own beneficially more than 5% of our ordinary
      shares; and





 ̈
            each
      of our directors and executive officers who beneficially own ordinary
      shares within the meaning of Rule 13d-3 of the Exchange
    Act.





Beneficial
ownership includes voting or investment power with respect to the securities.
Except as indicated below, and subject to applicable community property laws,
the persons named in the table have sole voting and investment power with
respect to all ordinary shares shown as beneficially owned by them. Percentage
of beneficial ownership is based on 19,654,904 ordinary shares outstanding as of
March 31, 2010.





Beneficial Owner
                
                Ordinary Shares
                  Beneficially Owned
                
                
                Percentage of Ordinary Shares
                  Beneficially OwnedDirectors
      and executive officersLin
      Shuipan
                
                
                3,830,244
                (1)
                
                
                19.5
                %Tai
      Yau Ting
                
                
                ―
                
                
                
                *Jin
      Jichun
                
                
                ―
                
                
                
                *William
      J. Sharp
                
                
                70,312
                
                
                
                *All
      directors and executive officers as a group (3 persons)
                
                
                3,900,556
                
                
                
                19.8
                %Principal
      shareholders2020
      International Capital Group Limited (1)
                
                
                1,312,504
                
                
                
                6.8
                %2020
      Strategic Investments, LLC (2)
                
                
                1,312,504
                
                
                
                6.8
                %Windtech
      Holdings Limited (3)
                
                
                3,957,784
                
                
                
                20.1
                %





The
percentages shown in the table are based on 19,654,904 ordinary shares
outstanding on March 31, 2010, which number excludes an additional 11,267,167
shares currently held in escrow and issuable to the former holders of ordinary
shares of Windrace if certain earnings targets are met in fiscal years 2009,
2010 and 2011.





*
            Percentage of ownership is less
      than 1% of the outstanding ordinary shares of the combined
      company.





(1)
            Includes 1,312,504 ordinary
      shares held by 2020 Strategic Investments, LLC, a Nevis company. 
      2020 International Capital Group Limited, a British Virgin Islands
      company, has voting and dispositive power of the 1,312,504 shares directly
      owned by 2020 Strategic Investments, LLC as its sole manager. 
      Pursuant to an advisory agreement with 2020 Strategic Investments, LLC,
      2020 International Capital Group Limited will receive 100% of the profits
      generated by the 1,312,504 ordinary shares owned by 2020 Strategic
      Investments LLC in excess of a preferred return to Mr. Koo, the sole
      member of 2020 Strategic Investments, LLC, of $3,750 per year (the
      “Preferred Return”), effectively giving 2020 International Capital Group
      Limited an economic interest in the 1,312,504 ordinary shares owned by
      2020 Strategic Investments,
LLC.





(2)
            Includes 1,312,504 ordinary
      shares held by 2020 Strategic Investments, LLC, 2020 International Capital
      Group Limited has voting and dispositive power of these shares as its sole
      manager.  Pursuant to an advisory agreement with 2020 International
      Capital Group Limited, 2020 International Capital Group Limited will
      receive 100% of the profits generated by the 1,312,504 ordinary shares
      owned by 2020 Strategic Investments LLC in excess of a preferred return to
      Mr. Koo, the sole member of 2020 Strategic Investments, LLC of $3,750 per
      year, effectively giving 2020 International Capital Group Limited an
      economic interest in the 1,312,504 ordinary shares owned by 2020 Strategic
      Investments, LLC.





(3)
            Represents 1,583,114 ordinary
      shares owned by Wisetech and 2,374,670 ordinary shares owned by Windtech.
      Each of Wisetech and Windtech is controlled by its sole director Yuk Mei
      Tsui, an employee of New Horizon Capital Advisors Ltd.  Jianming Yu
      has neither voting nor dispositive control over the shares of Exceed owned
      or to be owned by Wisetech and Windtech.  Yuk Mei Tsui disclaims
      beneficial ownership of shares of Exceed held or to be held by Wisetech
      and Windtech except to the extent of her pecuniary interest therein. 
      Wisetech and Windtech operate as a group with respect to their interests
      in us within the meaning of the federal securities
      laws.


71


B.
            RELATED PARTY
      TRANSACTIONS





As of
December 31, 2009, the total amount payable to related parties amounted to
RMB1.7 million, consisting of RMB1.7 million financial support from Mr. Lin
Shuipan.





Mr. Lin
Shuipan and Ms. Chen Xiayu provided personal guarantees to a credit facility
agreement with a credit up to RMB60 million from November 10, 2008 to November
9, 2010, of which RMB18 million was drawn down as of December 31,
2009.





Appearance
design patents license





Mr. Lin
Shuipan applied to the State Intellectual Property of PRC for registration of 11
appearance design patents for sports footwear, two appearance design patents for
leisure footwear, three appearance design patents for shoe soles and two
appearance design patents for package boxes, respectively, during the period
from April 2001 to February 2003.  The registrations were granted during
the period from November 2001 to October 2003.  Before such registrations
were granted, Mr. Lin granted XDLong Fujian an exclusive license to use the
appearance design patents at nil consideration from October 1, 2001 to September
30, 2007.  XDLong Fujian used these appearance design patents in the
design, manufacture and sale of its footwear during the license period but do
not currently use such patents in its business operations.  XDLong Fujian
does not anticipate using these patents in its future business operations
because the relevant appearance designs are out of fashion.





Financial
assistance





Mr. Lin
Shuipan provided financial assistance to support our operations from time to
time.  The financial assistance comprised interim financing and personal
guarantees, including those guarantees described below.  As of
December 31, 2007, 2008 and 2009, the amount due to Mr. Lin Shuipan was
approximately RMB82.5 million, RMB0.9 million and RMB1.7 million,
respectively.  At January 31, 2009, the amount due to Mr. Lin Shuipan was
fully paid up.  The balance was unsecured, interest-free and repayable on
demand.





A credit
facility agreement with a credit up to RMB60 million from November 10, 2008 to
November 9, 2010 is secured by the personal guarantees from Mr. Lin Shuipan and
Ms. Chen Xiayu.  As of December 31, 2009, a short-term bank loan of RMB18
million drawn down under a credit facility agreement with a maximum credit of
RMB60 million are secured by the personal guarantees from Mr. Lin Shuipan and
Ms. Chen Xiayu.





Investment
by Elevatech





On April
30, 2008, Windrace issued and allotted 2,500 preferred shares representing 2.5%
of the issued share capital of Windrace to Elevatech, an indirect wholly-owned
subsidiary of The Goldman Sachs Group, Inc., pursuant to a subscription
agreement dated March 28, 2008 and last amended on June 2, 2008. In addition,
Mr. Lin Shuipan and RichWise transferred an aggregate of 5,500 preferred shares
representing 5.5% of the issued share capital of Windrace to Elevatech pursuant
to a share transfer agreement dated March 28, 2008 and last amended on June 2,
2008.





Pursuant
to a letter agreement dated May 8, 2009 among Windrace, Elevatech, Mr. Lin
Shuipan and RichWise, all of the preferred shares were redeemed by Windrace in
exchange for the issue of a promissory note by Windrace to Elevatech, providing
for payment by Windrace of (i) HK$306.2 million (RMB272.5 million) as redemption
price on the earlier of the fifth business day following the date of issue of
the promissory note and October 31, 2009 and (ii) US$1.0 million (RMB 6.9
million) as additional premium on June 30, 2010. The shares were redeemed by
Windrace on October 21, 2009 in accordance with the letter agreement, and we
paid the initial payment of HK$306.2 million to Elevatech.





Investment
by RichWise





On April
18, 2007, XDLong HK, XDLong Fujian and XDLong China entered into a subscription
and shareholders’ agreement with RichWise, Mr. Lin Shuipan and Ms. Chen Xiayu
under which RichWise subscribed for 20% of the issued share capital of XDLong
Investment for HK$88.0 million and agreed to pay XDLong Investment a premium of
HK$32.0 million if XDLong HK’s audited profit after tax in 2007 increased by at
least 100.0% as compared with that in 2006 (the “Minimum Profit Growth Rate”).
On March 25, 2008, the same parties entered into a supplementary subscription
and shareholders’ agreement and agreed to lower the Minimum Profit Growth Rate
to 70.0%. XDLong HK achieved the Minimum Profit Growth Rate on December 31, 2007
and RichWise is required under the supplementary subscription and shareholders’
agreement to pay XDLong Investment HK$32.0 million. Such amount was fully
settled by four installments on February 27, 2008, March 26, 2008, March 28,
2008 and May 8, 2008.


72


Item
8. FINANCIAL INFORMATION





A.
            CONSOLIDATED STATEMENTS AND OTHER
      FINANCIAL INFORMATION





Consolidated
Financial Statements





Please
see Item 18 “Financial Statements” for our audited consolidated financial
statements filed as a part of this annual report.





Legal
Proceedings





We are
not involved in any legal matters that management believes will have a material
adverse effect on our business.





Dividend
Policy





The
payment of dividends by us in the future will be contingent upon revenues and
earnings, if any, capital requirements and our general financial condition. The
payment of any dividends is within the discretion of the board of directors and
subject to the limitations imposed by British Virgin Islands law. It is the
present intention of the board of directors to retain all earnings, if any, for
use in business operations and, accordingly, we do not anticipate declaring any
dividends in the foreseeable future. Loans or credit facilities may also limit
our ability to pay dividends.





B.
            SIGNIFICANT
      CHANGES





Except
as disclosed elsewhere in this annual report, we have not experienced any
significant changes since the date of our audited consolidated financial
statements included in this annual report.





Item
9. THE OFFER AND LISTING





A.
            OFFER AND LISTING
      DETAILS





Price
Range of Our Ordinary Shares, Warrants and Units





The
following table sets forth the high and low closing sale prices for our ordinary
shares, warrants and units as reported on the market on which the securities
were trading during the period





Ordinary Shares
                  
                  
                  Warrants
                  
                  
                  UnitsHigh
                  
                  
                  Low
                  
                  
                  High
                  
                  
                  Low
                  
                  
                  High
                  
                  
                  LowYearly
      Highs and LowsYear
      2009
                  
                  $
                  13.69
                  
                  
                  $
                  7.25
                  
                  
                  $
                  4.85
                  
                  
                  $
                  0.03
                  
                  
                  $
                  19.98
                  
                  
                  $
                  7.13Year
      2008
                  
                  $
                  7.60
                  
                  
                  $
                  6.60
                  
                  
                  $
                  0.95
                  
                  
                  $
                  0.03
                  
                  
                  $
                  8.20
                  
                  
                  $
                  6.45Year
      2007 (from December 3, 2007 for ordinary shares and warrants and November
      9, 2007 for units)
                  
                  $
                  7.30
                  
                  
                  $
                  7.11
                  
                  
                  $
                  0.95
                  
                  
                  $
                  0.82
                  
                  
                  $
                  8.24
                  
                  
                  $
                  8.01Quarterly
      Highs and LowsFirst
      Quarter of 2010
                  
                  $
                  10.30
                  
                  
                  $
                  8.20
                  
                  
                  $
                  5.06
                  
                  
                  $
                  2.92
                  
                  
                  $
                  12.60
                  
                  
                  $
                  9.52Fourth
      Quarter of 2009
                  
                  $
                  13.69
                  
                  
                  $
                  7.84
                  
                  
                  $
                  4.85
                  
                  
                  $
                  1.20
                  
                  
                  $
                  19.98
                  
                  
                  $
                  7.50Third
      Quarter of 2009
                  
                  $
                  8.03
                  
                  
                  $
                  7.72
                  
                  
                  $
                  1.49
                  
                  
                  $
                  0.17
                  
                  
                  $
                  9.20
                  
                  
                  $
                  7.83Second
      Quarter of 2009
                  
                  $
                  7.81
                  
                  
                  $
                  7.57
                  
                  
                  $
                  0.27
                  
                  
                  $
                  0.03
                  
                  
                  $
                  8.07
                  
                  
                  $
                  7.46First
      Quarter of 2009
                  
                  $
                  7.73
                  
                  
                  $
                  7.25
                  
                  
                  $
                  0.11
                  
                  
                  $
                  0.03
                  
                  
                  $
                  7.95
                  
                  
                  $
                  7.12Fourth
      Quarter of 2008
                  
                  $
                  7.30
                  
                  
                  $
                  6.60
                  
                  
                  $
                  0.23
                  
                  
                  $
                  0.03
                  
                  
                  $
                  7.40
                  
                  
                  $
                  6.45Third
      Quarter of 2008
                  
                  $
                  7.50
                  
                  
                  $
                  7.04
                  
                  
                  $
                  0.50
                  
                  
                  $
                  0.20
                  
                  
                  $
                  7.95
                  
                  
                  $
                  7.10Second
      Quarter of 2008
                  
                  $
                  7.60
                  
                  
                  $
                  7.18
                  
                  
                  $
                  0.60
                  
                  
                  $
                  0.40
                  
                  
                  $
                  8.09
                  
                  
                  $
                  7.41First
      Quarter of 2008
                  
                  $
                  7.39
                  
                  
                  $
                  6.96
                  
                  
                  $
                  0.95
                  
                  
                  $
                  0.45
                  
                  
                  $
                  8.20
                  
                  
                  $
                  7.51Monthly
      Highs and LowsMarch
      2010
                  
                  $
                  10.30
                  
                  
                  $
                  8.94
                  
                  
                  $
                  5.06
                  
                  
                  $
                  3.81
                  
                  
                  $
                  10.61
                  
                  
                  $
                  10.61February
      2010
                  
                  $
                  9.49
                  
                  
                  $
                  8.22
                  
                  
                  $
                  4.19
                  
                  
                  $
                  3.48
                  
                  
                  $
                  12.60
                  
                  
                  $
                  12.25January
      2010
                  
                  $
                  9.81
                  
                  
                  $
                  8.20
                  
                  
                  $
                  4.72
                  
                  
                  $
                  2.92
                  
                  
                  $
                  10.80
                  
                  
                  $
                  9.52December
      2009
                  
                  $
                  9.66
                  
                  
                  $
                  8.47
                  
                  
                  $
                  3.53
                  
                  
                  $
                  2.28
                  
                  
                  $
                  11.66
                  
                  
                  $
                  10.81


73


The
closing price of our ordinary shares, warrants and units on April 6, 2010 was
$9.78, $4.50 and $10.61, respectively.





As of
March 31, 2010, we had approximately 1 holder of record of our units, 18 holders
of record of our ordinary shares and 4 holders of record of our warrants. Such
number does not include beneficial owners holding shares through nominee
names.





B.
            PLAN OF
      DISTRIBUTION





Not
applicable





C.
            MARKETS





Our
ordinary shares, warrants and units began being traded on the NASDAQ Capital
Market on October 13, 2009. Prior to such date, the securities had been traded
on the NYSE Amex.





Our
ordinary shares, warrant and units currently trade under the symbols “EDS,”
“EDSWW” and “EDSUU,” respectively. These securities were traded on the NYSE Amex
under the symbols “TTY,” “TTYWW” and “TTYUU,” respectively. In addition, from
October 13, 2009 through October 19, 2009, when the symbols were switched to
their current symbols, these securities were traded under the symbols “TTY,”
“TTYWW” and “TTYUU”.





Each of
our units consists of one ordinary share and one warrant. Each of our warrant is
exercisable into one ordinary share. Our units commenced trading on November 9,
2007. Our ordinary shares and warrants commenced trading separately from our
units on December 3, 2007. However, transactions in our units continue to
occur.





D.
            SELLING
      SHAREHOLDER





Not
applicable





E.
            DILUTION





Not
applicable




F.
            EXPENSES OF THE
      ISSUE





Not
applicable





Item
10. ADDITIONAL INFORMATION





A.
            SHARE
    CAPITAL





Not
applicable





B.
            MEMORANDUM AND ARTICLES OF
      ASSOCIATION





Our
amended and restated memorandum and articles of association dated September 24,
2009 is filed as Exhibit 1.1 to this form.





C.
            MATERIAL
      CONTRACTS





We have
not entered into any material contracts other than in the ordinary course of
business or other than those described in Item 4 “Information on the Company”
and elsewhere in this annual report.


74


D.
            EXCHANGE
      CONTROLS





All of
our revenues are denominated in Renminbi, while a portion of our expenditures
are denominated in foreign currencies, primarily the U.S. dollar. Fluctuations
in exchange rates, particularly those involving the U.S. dollar may affect our
costs and operating margins. In addition, these fluctuations could result in
exchange losses and increased costs in Renminbi terms. Where our operations
conducted in Renminbi are reported in dollars, such fluctuations could result in
changes in reported results which do not reflect changes in the underlying
operations. Since January 1, 1994, the PRC government has used a unitary managed
floating rate system. Under that system, the People’s Bank of China, or PBOC,
publishes a daily base exchange rate with reference primarily to the supply and
demand of the Renminbi against the U.S. dollar and other foreign currencies in
the market during the previous day. Authorized banks and financial institutions
are allowed to quote buy and sell rats for Renminbi within a specified bank
around the central bank’s daily exchange rate. On July 21, 2005, PBOC announced
an adjustment of the exchange rate of the U.S. dollar to Renminbi from 1:8.27 to
1:8.11 and modified the system by which the exchange rates are determined. While
the international reaction to the Renminbi revaluation has generally been
positive, there remains significant international pressure on the PRC government
to adopt an even more flexible currency policy, which could result in a further
reevaluation and a significant fluctuation of the exchange rate of the Renminbi
against the U.S. dollar, including possible devaluations. As substantially all
of our revenues are denominated in Renminbi, such a potential future devaluation
of the Renminbi against the U.S. dollar could negatively impact our results of
operations.





In
October 2005, SAFE promulgated regulations that require registration with local
SAFE in connection with direct or indirect offshore investment by PRC residents,
including PRC individual residents and PRC corporate entities. These regulations
apply to our shareholders who are PRC residents and also apply to our prior and
future offshore acquisitions.





The SAFE
regulations retroactively require registration by March 31, 2006 of direct or
indirect investments previously made by PRC residents in offshore companies. If
a PRC resident with a direct or indirect stake in an offshore parent company
fails to make the required SAFE registration, the PRC subsidiaries of such
offshore parent company may be prohibited from making distributions of profit to
the offshore parent and from paying the offshore parent proceeds from any
reduction in capital, share transfer or liquidation in respect of the PRC
subsidiaries. Further, failure to comply with various SAFE registration
requirements described above could result in liability under PRC law for foreign
exchange evasion.





For more
information about foreign exchange control and other foreign exchange
regulations in China, see “Risk Factors” in Item 3 “Key
Information.”





E.
            TAXATION





The following is a general summary
of certain British Virgin Islands and U.S. federal income tax considerations.
The discussion is not intended to be, nor should it be construed as, legal or
tax advice to any particular prospective holder of our ordinary shares,
warrants and units. The discussion is based on laws and relevant interpretations thereof in effect as
of the date hereof, all of which are subject to change or different
interpretations, possibly with retroactive effect. The discussion does not
address United States state or local tax laws, or tax laws of jurisdictions other
than British Virgin Islands and the United States.





British
Virgin Islands Taxation





There are
no income, corporation, capital gains, inheritance, gift or withholding taxes in
effect in the British Virgin Islands on the basis of present
legislation.





No
British Virgin Islands stamp duty is payable in respect of the issue or transfer
of the ordinary shares.





United
States Federal Income Taxation





General





The
following is a summary of the material U.S. federal income tax consequences of
the acquisition, ownership and disposition of our ordinary shares and warrants,
which are sometimes referred to collectively as our securities, purchased by an
investor pursuant to this offering.  The discussion below of the U.S.
federal income tax consequences to “U.S. Holders” will apply to a beneficial
owner of our securities that is for U.S. federal income tax
purposes:


75





 ̈
            an
      individual citizen or resident of the United
  States;





 ̈
            a
      corporation (or other entity treated as a corporation for U.S. federal
      income tax purposes) that is created or organized (or treated as created
      or organized) in or under the laws of the United States, any state thereof
      or the District of Columbia;





 ̈
            an
      estate whose income is includible in gross income for U.S. federal income
      tax purposes regardless of its source;
or





 ̈
            a
      trust if (i) a U.S. court can exercise primary supervision over the
      trust’s administration and one or more U.S. persons are authorized to
      control all substantial decisions of the trust, or (ii) it has a valid
      election in effect under applicable U.S. Treasury regulations to be
      treated as a U.S. person.





If a
beneficial owner of our securities is not described as a U.S. Holder and is
not an entity treated as a partnership or other pass- through entity for U.S.
federal income tax purposes, such owner will be considered a “Non-U.S. Holder.”
The U.S. federal income tax consequences applicable specifically to Non-U.S.
Holders are described below under the heading “Non-U.S. Holders.”





This
summary is based on the Internal Revenue Code of 1986, as amended (the “Code”)
its legislative history, existing and proposed Treasury regulations promulgated
thereunder, published rulings and court decisions, all as currently in
effect.  These authorities are subject to change or differing
interpretations, possibly on a retroactive basis.





This
discussion does not address all aspects of U.S. federal income taxation that may
be relevant to any particular holder based on such holder’s individual
circumstances.  In particular, this discussion considers only holders that
own our securities as capital assets within the meaning of Section 1221 of
the Code, and does not address the potential application of the alternative
minimum tax or the U.S. federal income tax consequences to holders that are
subject to special rules, including:





 ̈
            financial
      institutions or financial services
entities;





 ̈
            broker-dealers;





 ̈
            taxpayers
      who have elected mark-to-market
accounting;





 ̈
            tax-exempt
      entities;





 ̈
            governments
      or agencies or instrumentalities
thereof;





 ̈
            insurance
      companies;





 ̈
            regulated
      investment companies;





 ̈
            real
      estate investment trusts;





 ̈
            certain
      expatriates or former long-term residents of the United
      States;





 ̈
            persons
      that actually or constructively own 5% or more of our voting
      shares;





 ̈
            persons
      that acquired our securities pursuant to an exercise of employee stock
      options, in connection with employee stock incentive plans or otherwise as
      compensation;





 ̈
            persons
      that hold our securities as part of a straddle, constructive sale,
      hedging, conversion or other integrated transaction;
  or





 ̈
            persons
      whose functional currency is not the U.S.
  dollar.


76


This
discussion does not address any aspect of U.S. federal non-income tax laws, such
as gift or estate tax laws, or state, local or non-U.S. tax laws. 
Additionally, the discussion does not consider the tax treatment of partnerships
or other pass-through entities or persons who hold
our securities through such entities.  If a partnership (or other
entity classified as a partnership for U.S. federal income tax purposes) is the
beneficial owner of our securities, the U.S. federal income tax treatment of a
partner in the partnership will generally depend on the status of the partner
and the activities of the partnership.





We have
not sought, and will not seek, a ruling from the Internal Revenue Service
(“IRS”) or an opinion of counsel as to any U.S. federal income tax consequence
described herein.  The IRS may disagree with the consequences
described herein, and its determination may be upheld by a court. 
Moreover, there can be no assurance that future legislation, regulations,
administrative rulings or court decisions will not adversely affect the accuracy
of the statements in this discussion.





BECAUSE
OF THE COMPLEXITY OF THE TAX LAWS AND BECAUSE THE TAX CONSEQUENCES TO ANY
PARTICULAR HOLDER OF OUR SECURITIES MAY BE AFFECTED BY MATTERS NOT DISCUSSED
HEREIN, EACH HOLDER OF OUR SECURITIES IS URGED TO CONSULT WITH ITS TAX ADVISOR
WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND
DISPOSITION OF OUR SECURITIES, INCLUDING THE APPLICABILITY AND EFFECT OF STATE,
LOCAL AND NON-U.S. TAX LAWS, AS WELL AS U.S. FEDERAL TAX LAWS.





Tax
Consequences to U.S. Holders of Ordinary Shares and Warrants





Taxation
of Distributions Paid on Ordinary Shares





Subject
to the passive foreign investment company, or “PFIC”, rules discussed below, a
U.S. Holder will be required to include in gross income as ordinary income the
U.S. dollar amount of any dividend paid on our ordinary shares. A distribution
on our ordinary shares will be treated as a dividend for U.S. federal income tax
purposes to the extent the distribution is paid out of our current or
accumulated earnings and profits (as determined for U.S. federal income tax
purposes). Such dividend will not be eligible for the dividends-received
deduction generally allowed to U.S. corporations in respect of dividends
received from other U.S. corporations. Distributions in excess of such earnings
and profits will be applied against and reduce the U.S. Holder’s basis in its
ordinary shares and, to the extent in excess of such basis, will be treated as
gain from the sale or exchange of such ordinary shares.





With
respect to non-corporate U.S. Holders for taxable years beginning before January
1, 2011, dividends may be taxed at the lower applicable long term capital gains
rate (see “— Taxation on the Disposition of Ordinary Shares and Warrants” below)
provided that (1) our ordinary shares are readily tradable on an established
securities market in the United States, (2) we are not a PFIC, as discussed
below, for either the taxable year in which the dividend was paid or the
preceding taxable year, and (3) certain holding period requirements are met.
Under published IRS authority, shares are considered for purposes of clause (1)
above to be readily tradable on an established securities market in the United
States only if they are listed on certain exchanges, which include the NASDAQ
Stock Market. Although our ordinary shares are currently traded on the NASDAQ
Stock Market, U.S. Holders nevertheless should consult their own tax advisors
regarding the availability of the lower rate for any dividends paid with respect
to our ordinary shares.





If PRC
taxes apply to dividends paid to a U.S. Holder on our ordinary shares, such
taxes may be treated as foreign taxes eligible for credit against such holder’s
U.S. federal income tax liability (subject to certain limitations), and a U.S.
Holder may be entitled to certain benefits under the income tax treaty between
the United States and the PRC. U.S. Holders should consult their own tax
advisors regarding the creditability of any such PRC tax and their eligibility
for the benefits of the income tax treaty between the United States and the
PRC.





Possible
Constructive Dividends





If an
adjustment is made to the number of ordinary shares for which a warrant may be
exercised or to the exercise price of a warrant, the adjustment may, under
certain circumstances, result in a constructive distribution that could be
taxable as a dividend to the U.S. Holder of the warrant.  Conversely, the
absence of an appropriate anti-dilution adjustment may result in a constructive
distribution that could be taxable as a dividend to the U.S. Holders of our
ordinary shares.





77


Taxation
on the Disposition of Ordinary Shares and Warrants





Upon a
sale or other taxable disposition of our ordinary shares or warrants, and
subject to the PFIC rules discussed below, a U.S. Holder generally will
recognize capital gain or loss in an amount equal to the difference between the
amount realized and the U.S. Holder’s adjusted tax basis in the ordinary shares
or warrants, both determined in U.S. dollars.





Capital
gains recognized by U.S. Holders generally are subject to U.S. federal income
tax at the same rate as ordinary income, except that long-term capital gains
recognized by non-corporate U.S. Holders are generally subject to U.S. federal
income tax at a maximum rate of 15% for taxable years beginning before January
1, 2011 (and 20% thereafter). Capital gain or loss will constitute long-term
capital gain or loss if the U.S. Holder’s holding period for the ordinary shares
or warrants exceeds one year. The deductibility of capital losses is subject to
various limitations.





If PRC
taxes apply to any gain from the disposition of our ordinary shares or warrants
by a U.S. Holder, such taxes may be treated as foreign taxes eligible for credit
against such holder’s U.S. federal income tax liability (subject to certain
limitations), and a U.S. Holder may be entitled to certain benefits under the
income tax treaty between the United States and the PRC. U.S. Holders should
consult their own tax advisors regarding the creditability of any such PRC tax
and their eligibility for the benefits of the income tax treaty between the
United States and the PRC.





Exercise
of Warrants





A U.S.
Holder generally will not be required to recognize gain or loss by reason of its
exercise of warrants for cash. The U.S. Holder’s tax basis in the ordinary
shares it receives upon exercise of the warrants for cash generally will be an
amount equal to the sum of the U.S. Holder’s initial investment in the warrants
and the exercise price of the warrants. The U.S. Holder’s holding period for
ordinary shares received upon exercise of the warrants for cash generally will
begin on the date following the date of exercise of the warrants and will not
include the period(s) during which the U.S. Holder held the warrants. Any U.S.
Holder that exercises the warrants other than by paying the exercise price in
cash should consult its tax advisor regarding the tax treatment of such an
exercise, which may vary from that described above.





Expiration
of a Warrant





Upon
expiration of a warrant, a U.S. Holder will recognize a loss in an amount equal
to the U.S. holder’s tax basis in the warrant, determined in U.S. dollars. 
Any such loss would generally be treated as capital loss and will be long-term
capital gain or loss if the warrant was held by the U.S. holder for more than
one year at the time of such expiration.  The deductibility of capital
losses is subject to various limitations.





Passive
Foreign Investment Company Rules





A foreign
corporation will be a passive foreign investment company, or PFIC, if at least
75% of its gross income in a taxable year of the foreign corporation, including
its pro rata share of the gross income of any company in which it is considered
to own at least 25% of the shares by value, is passive income. 
Alternatively, a foreign corporation will be a PFIC if at least 50% of its
assets in a taxable year of the foreign corporation, ordinarily determined based
on fair market value and averaged quarterly over the year, including its pro
rata share of the assets of any company in which it is considered to own at
least 25% of the shares by value, are held for the production of, or produce,
passive income.  Passive income generally includes dividends, interest,
rents and royalties (other than certain rents or royalties derived from the
active conduct of a trade or business), and gains from the disposition of
passive assets.





Our
actual PFIC status for the 2010 taxable year or any subsequent taxable year will
not be determinable until after the end of each such taxable year. The PFIC
determination is dependant on a number of factors, some of which are beyond our
control, including the amount of our operating income and the market valuation
of our assets, including goodwill, and certain aspects of the PFIC rules are not
entirely certain. Accordingly, there can be no assurance with respect to our
status as a PFIC for the 2010 taxable year or any future taxable
year.





If we
qualified as a PFIC and a U.S. Holder did not make either a timely
qualified electing fund (“QEF”) election for our first taxable year as a PFIC in
which the U.S. Holder held (or was deemed to hold) ordinary shares, or a
mark-to-market election, as described below, such holder generally will be
subject to special rules with respect to:




78





 ̈
            any gain recognized by the U.S.
      Holder on the sale or other disposition of its ordinary shares or
      warrants; and





 ̈
            any “excess distribution” made to
      the U.S. Holder (generally, any distributions to such U.S. Holder during a
      taxable year of the U.S. Holder that are greater than 125% of the average
      annual distributions received by such U.S. Holder in respect of the
      ordinary shares during the three preceding taxable years of such U.S.
      Holder or, if shorter, such U.S. Holder’s holding period for the ordinary
      shares).





Under
these rules,





 ̈
            the
      U.S. Holder’s gain or excess distribution will be allocated ratably over
      the U.S. Holder’s holding period for the ordinary shares or
      warrants;





 ̈
            the
      amount allocated to the taxable year of the U.S. Holder in which the U.S.
      Holder recognized the gain or received the excess distribution or to the
      period in the U.S. Holder’s holding period before the first day of our
      first taxable year in which we qualified as a PFIC will be taxed as
      ordinary income;





 ̈
            the
      amount allocated to other taxable years (or portions thereof) of the U.S.
      Holder and included in its holding period will be taxed at the highest tax
      rate in effect for that year and applicable to the U.S. Holder;
      and





 ̈
            the
      interest charge generally applicable to underpayments of tax will be
      imposed in respect of the tax attributable to each such other taxable year
      of the U.S. Holder.





In
addition, if we are a PFIC, a U.S. Holder who acquires our ordinary shares or
warrants from a deceased U.S. Holder who dies before January 1, 2010 and who had
not made a timely QEF election for the ordinary shares generally will be denied
the step-up of U.S. federal income tax basis in such shares or warrants to their
fair market value at the date of the deceased holder’s death.  Instead,
such U.S. Holder would have a tax basis in such shares or warrants equal to the
deceased holder’s tax basis, if lower.





In
general, a U.S. Holder may avoid the PFIC tax consequences described above in
respect to our ordinary shares if the U.S. Holder is able to make a
timely QEF election to include in income its pro rata share of our net capital
gains (as long-term capital gain) and other earnings and profits (as ordinary
income), on a current basis, in each case whether or not distributed, in the
taxable year of the U.S. Holder in which or with which our taxable year
ends.  A U.S. Holder may make a separate election to defer the payment of
taxes on undistributed income inclusions under the QEF rules, but if deferred,
any such taxes will be subject to an interest charge.





In
order to comply with the requirements to make a QEF election, a U.S. Holder must
receive certain information from us.  Upon request from a U.S. Holder, we
will endeavor to provide to the U.S. Holder no later than 90 days after the
request such information as the IRS may require, including a PFIC annual
information statement, in order to enable the U.S. Holder to make and maintain a
QEF election.  However, there is no assurance that we will have timely
knowledge of our status as a PFIC in the future or of the required information
to be provided.





A U.S.
Holder may not make a QEF election with respect to its warrants.  As a
result, if a U.S. Holder sells or otherwise disposes of a warrant to purchase
our ordinary shares (other than upon exercise of a warrant), any gain recognized
generally will be subject to the special tax and interest charge rules treating
the gain as an excess distribution, as described above, if we were a PFIC at any
time during the period the U.S. Holder held the warrants.  If a U.S. Holder
that exercises such warrants properly makes a QEF election with respect to the
newly acquired ordinary shares (or has previously made a QEF election with
respect to its ordinary shares), the QEF election will apply to the newly
acquired ordinary shares, but the adverse tax consequences relating to PFIC
shares, adjusted to take into account the current income inclusions resulting
from the QEF election, will continue to apply with respect to such newly
acquired ordinary shares (which generally will be deemed to have a holding
period for the purposes of the PFIC rules that includes the period the U.S.
Holder held the warrants), unless the U.S. Holder makes a purging
election.  The purging election creates a deemed sale of such shares at
their fair market value.  The gain recognized by the purging election will
be subject to the special tax and interest charge rules treating the gain as an
excess distribution, as described above.  As a result of the purging
election, the U.S. Holder will have a new basis and holding period in the
ordinary shares acquired upon the exercise of the warrants for purposes of the
PFIC rules.





The QEF
election is made on a shareholder-by-shareholder basis and, once made, can be
revoked only with the consent of the IRS.  A U.S. Holder generally makes a
QEF election by attaching a completed IRS Form 8621 (Return by a Shareholder of
a Passive Foreign Investment Company or Qualified Electing Fund), including the
information provided in a PFIC annual information statement, to a timely filed
U.S. federal income tax return for the tax year to which the election
relates.  Retroactive QEF elections generally may be made only by filing a
protective statement with such return and if certain other conditions are met or
with the consent of the IRS.





79





If a U.S.
Holder has elected the application of the QEF rules to our ordinary shares, and
the special tax and interest charge rules do not apply to such shares (because
of a timely QEF election for our first taxable year as a PFIC in which the
U.S. Holder holds (or is deemed to hold) such shares or a purge of the PFIC
taint pursuant to a purging election), any gain recognized on the appreciation
of our ordinary shares generally will be taxable as capital gain and no interest
charge will be imposed.  As discussed above, U.S. Holders of a QEF are
currently taxed on their pro rata shares of its earnings and profits, whether or
not distributed.  In such case, a subsequent distribution of such earnings
and profits that were previously included in income generally will not be
taxable as a dividend.  The tax basis of a U.S. Holder’s shares in a QEF
will be increased by amounts that are included in income, and decreased by
amounts distributed but not taxed as dividends, under the above rules. 
Similar basis adjustments apply to property if by reason of holding such
property the U.S. Holder is treated under the applicable attribution rules as
owning shares in a QEF.





Although
a determination as to our PFIC status will be made annually, an initial
determination that our company is a PFIC will generally apply for subsequent
years to a U.S. Holder who held ordinary shares or warrants while we were a
PFIC, whether or not we meet the test for PFIC status in those years.  A
U.S. Holder who makes the QEF election discussed above for our first taxable
year as a PFIC in which the U.S. Holder holds (or is deemed to hold) ordinary
shares, however, will not be subject to the PFIC tax and interest charge rules
(or the denial of basis step-up at death) discussed above in respect to such
shares.  In addition, such U.S. Holder will not be subject to the QEF
inclusion regime with respect to such shares for any of our taxable years that
ends within or with a taxable year of the U.S. holder and in which we are not a
PFIC.  On the other hand, if the QEF election is not effective for each of
our taxable years in which we are a PFIC and during which the U.S. Holder holds
(or is deemed to hold) ordinary shares, the PFIC rules discussed above will
continue to apply to such shares unless the holder makes a purging election and
pays the tax and interest charge with respect to the gain inherent in
such shares attributable to the pre-QEF election period.





Alternatively,
if a U.S. Holder, at the close of its taxable year, owns ordinary shares in a
PFIC that is treated as marketable stock, the U.S. Holder may make a
mark-to-market election with respect to such shares for such taxable year. 
If the U.S. Holder makes a valid mark-to-market election for the first tax year
in which the U.S. Holder holds (or is deemed to hold) our ordinary
shares and for which we are determined to be a PFIC, such holder
generally will not be subject to the PFIC rules described above in respect to
its ordinary shares.  Instead, in general, the U.S. Holder will include as
ordinary income each year the excess, if any, of the fair market value of its
ordinary shares at the end of its taxable year over the adjusted basis in its
ordinary shares.  The U.S. Holder also will be allowed to take an ordinary
loss in respect of the excess, if any, of the adjusted basis of its ordinary
shares over the fair market value of its ordinary shares at the end of its
taxable year (but only to the extent of the net amount of previously included
income as a result of the mark-to-market election).  The U.S. Holder’s
basis in its ordinary shares will be adjusted to reflect any such income or loss
amounts, and any further gain recognized on a sale or other taxable disposition
of the ordinary shares will be treated as ordinary income.  Currently, a
mark-to-market election may not be made with respect to warrants.





The
mark-to-market election is available only for shares that are regularly traded
on a national securities exchange that is registered with the Securities and
Exchange Commission, including the NASDAQ Stock Market, or on a foreign
exchange or market that the IRS determines has rules sufficient to ensure that
the market price represents a legitimate and sound fair market value. 
Although our ordinary shares currently trade on the NASDAQ Stock Market, U.S.
Holders nevertheless should consult their own tax advisors regarding the
availability and tax consequences of a mark-to-market election in respect to our
ordinary shares under their particular circumstances.





80


If we are
a PFIC and, at any time, have a non-U.S. subsidiary that is classified as a
PFIC, U.S. Holders generally would be deemed to own a portion of the shares of
such lower-tier PFIC, and generally could incur liability for the deferred tax
and interest charge described above if we receive a distribution from, or
dispose of all or part of our interest in, the lower-tier PFIC.  Upon
request, we will endeavor to cause any lower-tier PFIC to provide to a U.S.
Holder no later than 90 days after the request the information that may be
required to make or maintain a QEF election with respect to the lower-tier
PFIC.  However, there is no assurance that we will be able to cause a
lower-tier PFIC to provide such information to a U.S. Holder.  U.S. Holders
are urged to consult their own tax advisors regarding the tax issues raised by
lower-tier PFICs.





If a U.S.
Holder owns (or is deemed to own) shares or warrants in a PFIC during any
taxable year of the U.S. Holder, such holder may have to file an IRS Form 8621
(whether or not a QEF election or mark-to-market election is made).





The rules
dealing with PFICs and with the QEF and mark-to-market elections are very
complex and are affected by various factors in addition to those described
above.  Accordingly, U.S. Holders of our ordinary shares and warrants
should consult their own tax advisors concerning the application of the PFIC
rules to our ordinary shares and warrants under their particular
circumstances.





Tax
Consequences to Non-U.S. Holders of Ordinary Shares and Warrants





Dividends
paid to a Non-U.S. Holder in respect to its ordinary shares generally will not
be subject to U.S. federal income tax, unless the dividends are effectively
connected with the Non-U.S. Holder’s conduct of a trade or business within the
United States (and, if required by an applicable income tax treaty, are
attributable to a permanent establishment or fixed base that such holder
maintains in the United States).





In
addition, a Non-U.S. Holder generally will not be subject to U.S. federal income
tax on any gain attributable to a sale or other disposition of our ordinary
shares or warrants unless such gain is effectively connected with its conduct of
a trade or business in the United States (and, if required by an applicable
income tax treaty, is attributable to a permanent establishment or fixed base
that such holder maintains in the United States) or the Non-U.S. Holder is an
individual who is present in the United States for 183 days or more in the
taxable year of sale or other disposition and certain other conditions are met
(in which case, such gain from United States sources generally is subject to tax
at a 30% rate or a lower applicable tax treaty rate).





Dividends
and gains that are effectively connected with the Non-U.S. Holder’s conduct of a
trade or business in the United States (and, if required by an applicable income
tax treaty, are attributable to a permanent establishment or fixed base in the
United States) generally will be subject to tax in the same manner as for a U.S.
Holder and, in the case of a Non-U.S. Holder that is a corporation for U.S.
federal income tax purposes, may also be subject to an additional branch profits
tax at a 30% rate or a lower applicable tax treaty rate.





The U.S.
federal income tax treatment of a Non-U.S. Holders’ exercise of a warrant
generally will correspond to the U.S. federal income tax treatment of the
exercise of a warrant by a U.S. Holder, as described under “Tax Consequences to
U.S. Holders of Ordinary Shares and Warrants—Exercise of Warrants”
above.





Backup
Withholding and Information Reporting





In
general, information reporting for U.S. federal income tax purposes will apply
to distributions made on our ordinary shares within the United States to a
non-corporate U.S. Holder and to the proceeds from sales and other dispositions
of our ordinary shares or warrants by a non-corporate U.S. Holder to or through
a U.S. office of a broker.  Payments made (and sales and other dispositions
effected at an office) outside the United States will be subject to information
reporting in limited circumstances.





In
addition, backup withholding of United States federal income tax, currently at a
rate of 28%, generally will apply to dividends paid on our ordinary shares to a
non-corporate U.S. Holder and the proceeds from sales and other dispositions of
shares or warrants by a non-corporate U.S. Holder, in each case
who:




 ̈
            fails to provide an accurate
      taxpayer identification
number;





 ̈
            is notified by the IRS that
      backup withholding is required;
or





 ̈
            in certain circumstances, fails
      to comply with applicable certification
    requirements.





81





A
Non-U.S. Holder generally may eliminate the requirement for information
reporting and backup withholding by providing certification of its foreign
status, under penalties of perjury, on a duly executed applicable IRS Form W-8
or by otherwise establishing an exemption.





Backup
withholding is not an additional tax.  Rather, the amount of any backup
withholding will be allowed as a credit against a U.S. Holder’s or a Non-U.S.
Holder’s U.S. federal income tax liability and may entitle such holder to a
refund, provided that certain required information is timely furnished to the
IRS.





F.
            DIVIDENDS AND PAYING
      AGENTS





Not
applicable





G.
            STATEMENTS BY
      EXPERTS





Not
applicable





H.
            DOCUMENTS ON
      DISPLAY





We
previously filed with the Securities and Exchange Commission our registration
statement on Form S-1 under the Securities Act with respect to our ordinary
shares, warrants and units.





We
are subject to the periodic reporting and other informational requirements of
the Securities Exchange Act of 1934, as amended, and are required to file
reports and other information with the Securities and Exchange Commission.
Specifically, we are required to file annually a Form 20-F no later than six
months after the close of each fiscal year, which is December 31. Copies of
reports and other information, when so filed, may be inspected without charge
and may be obtained at prescribed rates at the public reference facilities
maintained by the Securities and Exchange Commission at 100 F Street, N.E.,
Room 1580, Washington, D.C. 20549. The public may obtain information
regarding the Washington, D.C. Public Reference Room by calling the Securities
and Exchange Commission at 1-800-SEC-0330. The Securities and Exchange
Commission also maintains a web site at www.sec.gov that contains reports, proxy
and information statements, and other information regarding registrants that
make electronic filings with the Securities and Exchange Commission using its
EDGAR system. As a foreign private issuer, we are exempt from the rules under
the Exchange Act prescribing the furnishing and content of quarterly reports and
proxy statements, and officers, directors and principal shareholders are exempt
from the reporting and short-swing profit recovery provisions contained in
Section 16 of the Exchange Act.





I.
            SUBSIDIARY
      INFORMATION





Not
applicable





Item
11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Foreign
currency risk





We
operate in China and all of our transactions are settled in Renminbi.  Our
assets and liabilities, and transactions arising from operations are denominated
in Renminbi.  We have not used any forward contract or currency borrowing
to hedge our exposure as foreign currency risk is considered minimal. 
Fluctuations in the exchange rate will also affect the relative value of any
dividend we issue that will be exchanged into U.S. dollars.





We do not
believe that we have any significant foreign currency risk.  Therefore, we
have not entered into any hedging transactions in an effort to reduce our
exposure to foreign currency risk.





Credit
risk





We trade
only with recognized and creditworthy customers.  It is our policy that all
customers who wish to trade on credit terms are subject to credit verification
procedures.  In addition, receivable balances are monitored on an ongoing
basis and our exposure to bad debts is not significant.





82


Since we
trade only with recognized and creditworthy third parties, there is no
requirement for collateral.





The
credit risk of our other financial assets, which comprise deposits, other
receivables, pledged bank deposits and cash and bank balances, arises from
default of the counterparty, with a maximum exposure equal to the carrying
amounts of these instruments.





Our
exposure to credit risk is influenced mainly by the individual characteristics
of each customer.  The default risk of the industry in which our customers
operate also has an influence on credit risk but to a lesser extent.  At
the balance sheet date, we have a certain concentration of credit risk as
41.77%, 41.55% and 48.10%, respectively, of our total trade and other
receivables that were due from our five largest customers during 2007, 2008 and
2009.





The
maximum exposure to credit risk, without taking collateral into account, is
represented by the carrying amount of each financial asset.  We do not
provide any guarantees which would expose us to credit risk.





Interest
rate risk





We do not
have any significant exposure to risk of changes in market interest rates as our
debt obligations were all with fixed interest rates.  If we borrow money in
the future, we may be exposed to interest rate risk.  We do not have any
derivative financial instruments and believe our exposure to interest rate risk
and other relevant market risks is not material.





Commodity
price risk





The major
raw materials used in the production of our products include natural and
synthetic leather, nylon, canvas, rubber and plastics.  We are exposed to
fluctuation in the prices of these raw materials, which are influenced by global
as well as regional supply and demand conditions.  Fluctuations in the
prices of raw materials could adversely affect our financial performance. 
We historically have not entered into any commodity derivative instruments to
hedge the potential commodity price changes.





Liquidity
risk





We
monitor our risk to a shortage of funds by considering the maturity of both our
financial assets and projected cash flows from operations.  Our objective
is to maintain a balance between continuity of funding and flexibility through
use of bank borrowings and other borrowings to meet its working capital
requirements.  See “ — Liquidity and Capital
Resources.





Item
12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES





Not
applicable





PART
II





Item
13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES





Not
applicable





Item 14. MATERIAL MODIFICATIONS TO
THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS





A.
— D. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS





Not
applicable





E.
            USE OF
      PROCEEDS





Not
applicable




83





Item
15. CONTROLS AND PROCEDURES





Evaluation
of Disclosure Controls and Procedures





As of the
end of the period covered by this annual report, our chief executive officer and
chief financial officer have performed an evaluation of the effectiveness of our
disclosure controls and procedures as defined and required under Rules 13a-15(e)
and 15d-15(e) of the Securities Exchange Act of 1934, as amended. Based upon
that evaluation, they have concluded that our disclosure controls and procedures
were effective in ensuring that the information required to be disclosed by us
in the reports that we file and furnish under the Securities Exchange Act of
1934, as amended, is recorded, processed, summarized and reported, within the
time periods specified in by the Securities and Exchange Commission’s rules and
regulations.





Management’s
Report on Internal Control over Financial Reporting




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in U.S. Securities Exchange Act
Rules 13a-15(f) and 15d-15(f). For the year ended December 31, 2009,
under the supervision, and with the participation of our company’s management,
including our principal executive officer and principal financial officer, we
conducted an assessment of the effectiveness of our internal control over
financial reporting based on criteria established in the framework in Internal
Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, management
concluded that our internal control over financial reporting in relation to
interpretation and adoption of complicated generally accepted accounting
principles was not effective as of December 31, 2009 as described
below.
  Internal
control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles. Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance
with the policies and procedures may deteriorate.
  A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the Company's annual or interim financial
statements will not be prevented or detected on a timely basis. The following
material weakness has been identified and included in management's report. The
Company did not maintain adequate controls in relation to interpretation and
adoption of complicated generally accepted principles to provide reasonable
assurance related to our interpretation of “contingently issuable shares” under
IAS33.
  Other
than the material weakness noted above, there were no changes to our controls
over financial reporting during the fiscal year ended December 31, 2009 that
have materially affected, or are reasonably likely to materially affect, our
internal controls over financial reporting. As of the date of the filing of this
report, management has implemented remedial action which we believe mitigates
the material weakness noted above.




Changes
in Internal Control over Financial Reporting





During
the year ended December 31, 2009, there were no changes in our internal control
over financial reporting that have materially affected, or are reasonably likely
to materially affect, our internal control over financial
reporting.





Item
16A. AUDIT COMMITTEE FINANCIAL EXPERT





Our board
of directors has determined that Mr. William Sharp qualifies as an Audit
Committee Financial Expert as defined by the applicable rules of the Securities
and Exchange Commission.





Our board
of directors has determined that Mr. Jin Jichun is independent as such term is
defined by Rule 5605(a)(2) of the NASDAQ Listing Rules.





Item
16B. CODE OF ETHICS





Our board
of directors has adopted a code of ethics, which is applicable to our senior
executive and financial officers. In addition, our board of directors has
adopted a code of conduct, which is applicable to all of our directors, officers
and employees.





Item
16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES





The
following table sets forth the aggregate fees by categories specified below in
connection with certain professional services rendered by our principal external
auditors for the periods indicated. We did not pay any other fees to our
principal external auditors during the periods indicated below.


For the year ended December 31,2008
                      
                      
                      2009RMB
                      
                      
                      RMB
                      
                      
                      US$(in
      thousands)Audit
      fees (1)
                      
                      
                      286
                      
                      
                      
                      369
                      
                      
                      
                      54Audit-related
      fees (2)
                      
                      
                      –
                      
                      
                      
                      –
                      
                      
                      
                      –Tax
      fees (3)
                      
                      
                      –
                      
                      
                      
                      –
                      
                      
                      
                      –Total
                      
                      
                      286
                      
                      
                      
                      369
                      
                      
                      
                      54


84


(1)
            Audit
      fees means the aggregate fees in each of the fiscal years listed for
      professional services rendered by our principal auditors for the audit of
      our annual consolidated financial statements or services that are normally
      provided by the auditors in connection with statutory and regulatory
      filings or engagements. Services comprising the fees disclosed under this
      category also involve principally limited reviews performed on our
      consolidated financial statements and the audits of the annual financial
      statements of our subsidiaries and affiliated
  companies.





(2)
            Audit-related
      fees means the aggregate fees in each of the fiscal years listed for
      assurance and related services by our principal auditors that are
      reasonably related to the performance of the audit or review of our
      financial statements and are not reported under “Audit
    fees”.





(3)
            Tax fees
      means the aggregate fees for tax related
  service.





Item
16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES





We have
not been granted an exemption from the applicable listing standards for the
audit committee of our board of directors.





Item 16E. PURCHASES OF EQUITY
SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS





Not
applicable





Item
16F.  CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT





Not
applicable





Item
16G.  CORPORATE GOVERNANCE





We are
incorporated under the laws of British Virgin Islands. Our ordinary shares are
currently listed on the Nasdaq and, for so long as our securities continue to be
listed, we will remain subject to the rules and regulations established by
Nasdaq. Nasdaq Marketplace Rule 5615(a)(1)(3) provides that foreign private
issuers listed on Nasdaq may elect to follow home country corporate governance
practices in lieu of certain of the corporate governance requirements set forth
in the Rule 5400 series, Rule 5250(d), and Rules 5210(c) and 5255, with the
exception that all such issuers shall: (i) comply with Rule 5625 (Notification
of Material Noncompliance); (ii) have an audit committee that satisfies Rule
5605(c)(3) that consists of members that meet the criteria for independence
referenced in Rule 5605(c)(2)(A)(ii); and (iii) comply with Rules 5210(c) and
5255 unless prohibited from complying by law or regulation in its home country.
Further, foreign private issuers electing to follow home country practice in
lieu of a requirement of Rules 5600, 5250(d), 5210(c) or 5255 are required to
submit to Nasdaq a written statement from an independent counsel in such
issuer’s home country certifying that the issuer’s practices are not prohibited
by the home country's laws.





We are a
foreign private issuer. Therefore, we are permitted to follow the corporate
governance practices in the British Virgin Islands in lieu of certain corporate
governance requirements contained in the Rule 5600 Series since the laws of the
British Virgin Islands do not require compliance. Nasdaq Rule 5635 requires
shareholder approval prior to an issuance of securities in connection with: (i)
the acquisition of the stock or assets of another company; (ii) equity-based
compensation of officers, directors, employees or consultants; (iii) a change of
control; and (iv) private placements. Under the laws of the British Virgin
Islands, we are not required to solicit shareholder approval of stock plans,
including those in which our officers or directors may participate; stock
issuances that will result in a change in control; the issuance of our stock in
related party transactions or other transactions in which we may issue 20% or
more of our outstanding shares; or, below market issuances of 20% or more of our
outstanding shares to any person.





PART
III





Item
17. FINANCIAL STATEMENTS





Not
applicable





Item
18. FINANCIAL STATEMENTS





Our
consolidated financial statements are included at the end of this annual
report.





Item
19. EXHIBITS





ExhibitNumber
            
            Description1.1*
            
            Amended
      and Restated Memorandum of Association8.1*
            
            List
      of Subsidiaries12.1
            
            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 August 23,
2010





*     Previously
filed


85


SIGNATURE





The
registrant hereby certifies that it meets all of the requirements for filing its
annual report on Form 20-F (as amended by this Form
20-F/A Amendment No. 1)
and that it has duly caused and authorized the undersigned to sign this annual
report on its behalf.





EXCEED
      COMPANY LTD.By:
            /s/ Lin ShuipanName: Lin ShuipanTitle: Chairman and Chief
              Executive Officer





Date:
August 23, 2010


86





Audited
Financial Statements





EXCEED
COMPANY LTD. AND ITS SUBSIDIARIES


(Incorporated
in the British Virgin Islands with limited liability)





December
31, 2009





EXCEED
COMPANY LTD.AND SUBSIDIARIES





CONTENTS





PagesINDEPENDENT
      AUDITORS' REPORT
                1AUDITED
      FINANCIAL STATEMENTSConsolidated:Statements
      of comprehensive income
                2Statements
      of financial position
                3Statements
      of changes in equity
                4 -
      7Statements
      of cash flows
                8 -
      9Notes
      to consolidated financial statements
                10 –
      57





Independent
Auditor’s Report





To the
Board of Directors and Shareholders of


Exceed
Company Ltd.





We have
audited the accompanying consolidated statements of financial position of Exceed
Company Ltd. (the “Company’) and its subsidiaries (collectively the “Group”) as
of December 31, 2009 and 2008 and the related consolidated statements of
comprehensive income, changes in equity, and cash flows for each of the years in
the three year period ended December 31, 2009.





Management’s
Responsibility for the Financial Statements


Management
is responsible for the preparation and fair presentation of these consolidated
financial statements in accordance with International Financial Reporting
Standards as issued by the International Accounting Standards
Board.  This responsibility includes: designing, implementing and
maintaining internal control relevant to the preparation and fair presentation
of financial statements that are free from material misstatement, whether due to
fraud or error; selecting and applying appropriate accounting policies; and
making accounting estimates that are reasonable in the
circumstances.





Auditor’s
Responsibility


Our
responsibility is to express an opinion on these financial statements based on
our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States) and International Standards on
Auditing. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement in all material respects. The Group is not required to have, nor
were we engaged to perform, an audit of its internal control over financial
reporting.  Our audits included  consideration of
internal  control  over  financial  reporting  as
a basis  for  designing  audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the  effectiveness  of the
Group's  internal  control over financial reporting.
Accordingly, we express no such opinion.  Our audits of the financial
statements included examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audits also included performing such other
procedures as we considered necessary in the circumstances.





We
believe that our audits provide a reasonable basis for our opinion.





Opinion


In our
opinion, the accompanying consolidated statements of financial position and the
related statements of comprehensive income, changes in equity, and cash flows
present fairly, in all material respects, the consolidated financial position of
Exceed Company Ltd. and its subsidiaries as of  December 31, 2009 and
2008 and the results of their operations and their cash flows for each of the
years in the three year period ended December 31, 2009, in conformity with
International Financial Reporting Standards as issued by the International
Accounting Standards Board.





/s/ Crowe
Horwath LLP





Sherman
Oaks, California


April 7,
2010 except for notes 2.5 and 25


for which
the date is August 23, 2010




1




EXCEED
COMPANY LTD. AND SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME





Year
ended December 31, 2009





Notes
                                            
                                            
                                            2009
                                            
                                            
                                            2009
                                            
                                            
                                            2008
                                            
                                            
                                            2007(in thousands except for share and per share data)USD'000
                                            
                                            
                                            RMB'000
                                            
                                            
                                            RMB'000
                                            
                                            
                                            RMB’000REVENUE
                                            
                                            5
                                            
                                            
                                            
                                            304,423
                                            
                                            
                                            
                                            2,077,958
                                            
                                            
                                            
                                            1,820,282
                                            
                                            
                                            
                                            1,296,402Cost
      of sales
                                            
                                            
                                            
                                            
                                            
                                            (214,603
                                            )
                                            
                                            
                                            (1,464,856
                                            )
                                            
                                            
                                            (1,323,262
                                            )
                                            
                                            
                                            (959,526
                                            )Gross
      profit
                                            
                                            
                                            
                                            
                                            
                                            89,820
                                            
                                            
                                            
                                            613,102
                                            
                                            
                                            
                                            497,020
                                            
                                            
                                            
                                            336,876Other
      income and gains
                                            
                                            5
                                            
                                            
                                            
                                            858
                                            
                                            
                                            
                                            5,855
                                            
                                            
                                            
                                            1,188
                                            
                                            
                                            
                                            889Selling
      and distribution costs
                                            
                                            
                                            
                                            
                                            
                                            ( 39,280
                                            )
                                            
                                            
                                            (268,123
                                            )
                                            
                                            
                                            ( 225,752
                                            )
                                            
                                            
                                            ( 137,077
                                            )Administrative
      expenses
                                            
                                            
                                            
                                            
                                            
                                            (6,521
                                            )
                                            
                                            
                                            (44,509
                                            )
                                            
                                            
                                            (29,205
                                            )
                                            
                                            
                                            (29,984
                                            )Aborted
      IPO expenses
                                            
                                            6
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (31,382
                                            )
                                            
                                            
                                            -Research
      and development expenses
                                            
                                            
                                            
                                            
                                            
                                            (3,656
                                            )
                                            
                                            
                                            (24,953
                                            )
                                            
                                            
                                            (17,649
                                            )
                                            
                                            
                                            (12,784
                                            )Finance
      costs
                                            
                                            7
                                            
                                            
                                            
                                            (4,332
                                            )
                                            
                                            
                                            (29,566
                                            )
                                            
                                            
                                            (23,511
                                            )
                                            
                                            
                                            (1,352
                                            )Share
      of loss in jointly-controlled entity
                                            
                                            
                                            
                                            
                                            
                                            (2
                                            )
                                            
                                            
                                            (16
                                            )
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -PROFIT
      BEFORE TAX
                                            
                                            8
                                            
                                            
                                            
                                            36,887
                                            
                                            
                                            
                                            251,790
                                            
                                            
                                            
                                            170,709
                                            
                                            
                                            
                                            156,568Tax
                                            
                                            10
                                            
                                            
                                            
                                            (552
                                            )
                                            
                                            
                                            (3,771
                                            )
                                            
                                            
                                            (2,181
                                            )
                                            
                                            
                                            21,783PROFIT
      FOR THE YEAR
                                            
                                            
                                            
                                            
                                            
                                            36,335
                                            
                                            
                                            
                                            248,019
                                            
                                            
                                            
                                            168,528
                                            
                                            
                                            
                                            134,785Other
      comprehensive income for the year, net of tax:Exchange
      differences on translation of financial statements of overseas
      subsidiaries
                                            
                                            
                                            
                                            
                                            
                                            350
                                            
                                            
                                            
                                            2,391
                                            
                                            
                                            
                                            3,180
                                            
                                            
                                            
                                            840Total
      comprehensive income for the year attributable to equity holders of the
      Company
                                            
                                            
                                            
                                            
                                            
                                            36,685
                                            
                                            
                                            
                                            250,410
                                            
                                            
                                            
                                            171,708
                                            
                                            
                                            
                                            135,625EARNINGS
      PER SHARE
                                            
                                            25Net
      profit per shareBasic
      (as restated)*
                                            
                                            
                                            
                                            
                                            
                                            4.38
                                            
                                            
                                            
                                            29.91
                                            
                                            
                                            
                                            29.35
                                            
                                            
                                            
                                            23.48Diluted
      (as restated)*
                                            
                                            
                                            
                                            
                                            
                                            3.16
                                            
                                            
                                            
                                            21.56
                                            
                                            
                                            
                                            27.71
                                            
                                            
                                            
                                            23.48Weighted
      average number of shares outstandingBasic
      (as restated)*
                                            
                                            
                                            
                                            
                                            
                                            8,292,331
                                            
                                            
                                            
                                            8,292,331
                                            
                                            
                                            
                                            5,741,466
                                            
                                            
                                            
                                            5,741,466Diluted
      (as restated)*
                                            
                                            
                                            
                                            
                                            
                                            12,725,257
                                            
                                            
                                            
                                            12,725,257
                                            
                                            
                                            
                                            6,867,946
                                            
                                            
                                            
                                            5,741,466





*
            The
      escrow shares which are held in escrow are regarded as issued and not
      outstanding, earning per share and weighted average number of shares
      outstanding has been restated. (see Note 2.5 –
  Restatement)





The
accompanying notes are an integral part of these consolidated financial
statements.


2


EXCEED
COMPANY LTD. AND SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF FINANCIAL POSITION





December
31, 2009





Notes
                      
                      
                      2009
                      
                      
                      2009
                      
                      
                      2008USD'000
                      
                      
                      RMB'000
                      
                      
                      RMB'000NON-CURRENT
      ASSETSProperty,
      plant and equipment
                      
                      12
                      
                      
                      
                      39,933
                      
                      
                      
                      272,578
                      
                      
                      
                      286,644Prepaid
      land lease payments
                      
                      13
                      
                      
                      
                      4,299
                      
                      
                      
                      29,347
                      
                      
                      
                      30,099Total
      non-current assets
                      
                      
                      
                      
                      
                      44,232
                      
                      
                      
                      301,925
                      
                      
                      
                      316,743CURRENT
      ASSETSInventories
                      
                      14
                      
                      
                      
                      8,199
                      
                      
                      
                      55,966
                      
                      
                      
                      86,060Trade
      receivables
                      
                      15
                      
                      
                      
                      119,068
                      
                      
                      
                      812,747
                      
                      
                      
                      284,795Prepayments,
      deposits and other receivables
                      
                      16
                      
                      
                      
                      2,906
                      
                      
                      
                      19,840
                      
                      
                      
                      5,421Due
      from a shareholder
                      
                      
                      
                      
                      
                      15
                      
                      
                      
                      103
                      
                      
                      
                      -Pledged
      deposits
                      
                      17
                      
                      
                      
                      2,198
                      
                      
                      
                      15,000
                      
                      
                      
                      2,300Cash
      and bank balances
                      
                      18
                      
                      
                      
                      38,413
                      
                      
                      
                      262,204
                      
                      
                      
                      120,068Total
      current assets
                      
                      
                      
                      
                      
                      170,799
                      
                      
                      
                      1,165,860
                      
                      
                      
                      498,644CURRENT
      LIABILITIESTrade
      and bills payables
                      
                      19
                      
                      
                      
                      28,646
                      
                      
                      
                      195,538
                      
                      
                      
                      127,581Deposits
      received, other payables and accruals
                      
                      20
                      
                      
                      
                      9,206
                      
                      
                      
                      62,842
                      
                      
                      
                      68,378Interest-bearing
      bank borrowings
                      
                      21
                      
                      
                      
                      8,497
                      
                      
                      
                      58,000
                      
                      
                      
                      20,000Due
      to a director
                      
                      22
                      
                      
                      
                      247
                      
                      
                      
                      1,687
                      
                      
                      
                      890Tax
      payable
                      
                      
                      
                      
                      
                      189
                      
                      
                      
                      1,286
                      
                      
                      
                      268Preferred
      shares
                      
                      23
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      272,432Total
      current liabilities
                      
                      
                      
                      
                      
                      46,785
                      
                      
                      
                      319,353
                      
                      
                      
                      489,549NET
      CURRENT ASSETS
                      
                      
                      
                      
                      
                      124,014
                      
                      
                      
                      846,507
                      
                      
                      
                      9,095Net
      assets
                      
                      
                      
                      
                      
                      168,246
                      
                      
                      
                      1,148,432
                      
                      
                      
                      325,838STOCKHOLDERS’
      EQUITYPreferred
      stock – USD0.0001 par value; 5,000,000 shares authorized; nil issued and
      outstanding
                      
                      
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Common
      stock* – par value of USD0.0001 per share; 55,000,000 shares authorized;
      30,123,335* shares issued and 18,856,168 shares outstanding (2008:
      25,000,000 shares authorized; 5,741,466* shares issued and
      outstanding)
                      
                      24
                      
                      
                      
                      2
                      
                      
                      
                      13
                      
                      
                      
                      4Reserves
                      
                      24
                      
                      
                      
                      168,244
                      
                      
                      
                      1,148,419
                      
                      
                      
                      325,824Total
      equity
                      
                      
                      
                      
                      
                      168,246
                      
                      
                      
                      1,148,432
                      
                      
                      
                      325,838





*
            The
      escrow shares which are held in escrow are regarded as issued and not
      outstanding, earning per share and weighted average number of shares
      outstanding has been restated. (see Note 2.5 –
  Restatement)





The
accompanying notes are an integral part of these consolidated financial
statements.


3


EXCEED
COMPANY LTD. AND SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF CHANGES IN EQUITY





Year
ended December 31, 2009





Statutory
                  
                  
                  ExchangeIssued
      common stock
                  
                  
                  Capital
                  
                  
                  Other
                  
                  
                  surplus
                  
                  
                  fluctuation
                  
                  
                  Retained
                  
                  
                  TotalShares
                  
                  
                  Amount
                  
                  
                  reserve(ii)
                  
                  
                  reserve(iii)
                  
                  
                  fund(iv)
                  
                  
                  reserve(v)
                  
                  
                  profits
                  
                  
                  reserves
                  
                  
                  TotalRMB
      '000
                  
                  
                  RMB
      '000
                  
                  
                  RMB
      '000
                  
                  
                  RMB
      '000
                  
                  
                  RMB
      '000
                  
                  
                  RMB
      '000
                  
                  
                  RMB
      '000
                  
                  
                  RMB
      '000At
      January 1, 2007
                  
                  
                  5,741,466
                  *
                  
                  
                  4
                  *
                  
                  
                  6
                  *
                  
                  
                  -
                  
                  
                  
                  8,974
                  
                  
                  
                  624
                  
                  
                  
                  86,403
                  
                  
                  
                  96,007
                  *
                  
                  
                  96,011Total
      comprehensive income for the year
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  840
                  
                  
                  
                  134,785
                  
                  
                  
                  135,625
                  
                  
                  
                  135,625Reversal
      of issued share capital of a subsidiary pursuant to the Group
      Reorganization (note (i))
                  
                  
                  -
                  
                  
                  
                  (10
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (10
                  )Capital
      contribution to a subsidiary
                  
                  
                  -
                  
                  
                  
                  1
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1Reverse
      merger adjustments:Reversal
      of issued share capital of a subsidiary pursuant to the Group
      Reorganization (note (i))
                  
                  
                  -
                  
                  
                  
                  10
                  
                  
                  
                  (10
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (10
                  )
                  
                  
                  -Capital
      contribution to a subsidiary
                  
                  
                  -
                  
                  
                  
                  (1
                  )
                  
                  
                  1
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1
                  
                  
                  
                  -Capital
      contribution to a subsidiary
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  83,600
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  83,600
                  
                  
                  
                  83,600At
      December 31, 2007 and January 1, 2008
                  
                  
                  5,741,466
                  *
                  
                  
                  4
                  *
                  
                  
                  83,597
                  *
                  
                  
                  -
                  
                  
                  
                  8,974
                  
                  
                  
                  1,464
                  
                  
                  
                  221,188
                  
                  
                  
                  315,223
                  *
                  
                  
                  315,227





*
            The
      escrow shares which are held in escrow are regarded as issued and not
      outstanding, earning per share and weighted average number of shares
      outstanding has been restated. (see Note 2.5 –
  Restatement)





continued/...


4





EXCEED
COMPANY LTD. AND SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF CHANGES IN EQUITY (continued)





Year
ended December 31, 2009





Statutory
                  
                  
                  ExchangeIssued
      common stock
                  
                  
                  Capital
                  
                  
                  Other
                  
                  
                  surplus
                  
                  
                  fluctuation
                  
                  
                  Retained
                  
                  
                  TotalShares
                  
                  
                  Amount
                  
                  
                  reserve(ii)
                  
                  
                  reserve(iii)
                  
                  
                  fund(iv)
                  
                  
                  reserve(v)
                  
                  
                  profits
                  
                  
                  reserves
                  
                  
                  TotalRMB
      '000
                  
                  
                  RMB
      '000
                  
                  
                  RMB
      '000
                  
                  
                  RMB
      '000
                  
                  
                  RMB
      '000
                  
                  
                  RMB
      '000
                  
                  
                  RMB
      '000
                  
                  
                  RMB
      '000At
      December 31, 2007 January 1, 2008
                  
                  
                  5,741,466
                  *
                  
                  
                  4
                  *
                  
                  
                  83,597
                  *
                  
                  
                  -
                  
                  
                  
                  8,974
                  
                  
                  
                  1,464
                  
                  
                  
                  221,188
                  
                  
                  
                  315,223
                  *
                  
                  
                  315,227Total
      comprehensive income for the year
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  3,180
                  
                  
                  
                  168,528
                  
                  
                  
                  171,708
                  
                  
                  
                  171,708Transfer
      to statutory surplus
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  19,299
                  
                  
                  
                  -
                  
                  
                  
                  (19,299
                  )
                  
                  
                  -
                  
                  
                  
                  -Reversal
      of issued share capital of a subsidiary pursuant to the Group
      Reorganization (Note (i))
                  
                  
                  -
                  
                  
                  
                  (1
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (1
                  )Reverse
      merger adjustments:Reversal
      of issued share capital of a subsidiary pursuant to the Group
      Reorganization (Note (i))
                  
                  
                  
                  
                  
                  
                  1
                  
                  
                  
                  (1
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (1
                  )
                  
                  
                  -Capital
      contribution from an equity holder of Windrace (as defined in Note
      1)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  28,400
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  28,400
                  
                  
                  
                  28,400Issue
      of shares of Windrace (as defined in Note 1)
                  
                  
                  -
                  
                  
                  
                  8
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  8Issue
      of preferred shares
                  
                  
                  -
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (189,504
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (189,504
                  )
                  
                  
                  (189,504
                  )Reverse
      merger adjustments:Capital
      contribution
                  
                  
                  -
                  
                  
                  
                  (8
                  )
                  
                  
                  8
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  8
                  
                  
                  
                  -At
      December 31, 2008 and January 1, 2009
                  
                  
                  5,741,466
                  *
                  
                  
                  4
                  *
                  
                  
                  112,004
                  *
                  
                  
                  (189,504
                  )
                  
                  
                  28,273
                  
                  
                  
                  4,644
                  
                  
                  
                  370,417
                  
                  
                  
                  325,834
                  *
                  
                  
                  325,838





*
            The
      escrow shares which are held in escrow are regarded as issued and not
      outstanding, earning per share and weighted average number of shares
      outstanding has been restated. (see Note 2.5 –
  Restatement)





continued/...





5




EXCEED
COMPANY LTD. AND SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF CHANGES IN EQUITY (Continued)





Year
ended December 31, 2009




Statutory
                  
                  
                  ExchangeIssued
      common stock
                  
                  
                  Capital
                  
                  
                  Other
                  
                  
                  surplus
                  
                  
                  fluctuation
                  
                  
                  Retained
                  
                  
                  TotalShares
                  
                  
                  Amount
                  
                  
                  reserve(ii)
                  
                  
                  reserve(iii)
                  
                  
                  fund(iv)
                  
                  
                  reserve(v)
                  
                  
                  profits
                  
                  
                  reserves
                  
                  
                  TotalRMB
      '000
                  
                  
                  RMB
      '000
                  
                  
                  RMB
      '000
                  
                  
                  RMB
      '000
                  
                  
                  RMB
      '000
                  
                  
                  RMB
      '000
                  
                  
                  RMB
      '000
                  
                  
                  RMB
      '000At
      December 31, 2008 and January 1, 2009
                  
                  
                  5,741,466
                  *
                  
                  
                  4
                  *
                  
                  
                  112,004
                  *
                  
                  
                  (189,504
                  )
                  
                  
                  28,273
                  
                  
                  
                  4,644
                  
                  
                  
                  370,417
                  
                  
                  
                  325,834
                  *
                  
                  
                  325,838Total
      comprehensive income for the year
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,391
                  
                  
                  
                  248,019
                  
                  
                  
                  250,410
                  
                  
                  
                  250,410Transfer
      to statutory surplus
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  28,210
                  
                  
                  
                  -
                  
                  
                  
                  (28,210
                  )
                  
                  
                  -
                  
                  
                  
                  -Reverse
      merger adjustments:Shares
      issued to 2020 shareholders (as defined in Note 1) (retroactively adjusted
      for reverse merger with the Windrace on October 21, 2009)
                  
                  
                  10,500,000
                  
                  
                  
                  7
                  
                  
                  
                  415,702
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  415,702
                  
                  
                  
                  415,709Shares
      of 2020 redeemed on October 21, 2009
                  
                  
                  (1,343,082
                  )
                  
                  
                  (1
                  )
                  
                  
                  (72,502
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (72,502
                  )
                  
                  
                  (72,503
                  )Issue
      of shares (Note 24)
                  
                  
                  3,957,784
                  
                  
                  
                  3
                  
                  
                  
                  204,997
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  204,997
                  
                  
                  
                  205,000Purchase
      of an unit option (Note 24)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (17,083
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (17,083
                  )
                  
                  
                  (17,083
                  )Preferred
      shares redemption adjustment:Written-off
      of accrued interest on preferred shares (Note 23)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  41,061
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  41,061
                  
                  
                  
                  41,061At
      December 31, 2009
                  
                  
                  18,856,168
                  *
                  
                  
                  13
                  *
                  
                  
                  643,118
                  *
                  
                  
                  (148,443
                  )
                  
                  
                  56,483
                  
                  
                  
                  7,035
                  
                  
                  
                  590,226
                  
                  
                  
                  1,148,419
                  *
                  
                  
                  1,148,432At
      December 31, 2009 (USD’000)
                  
                  
                  18,856,168
                  *
                  
                  
                  2
                  *
                  
                  
                  94,217
                  *
                  
                  
                  (21,747
                  )
                  
                  
                  8,275
                  
                  
                  
                  1,030
                  
                  
                  
                  86,469
                  
                  
                  
                  168,244
                  *
                  
                  
                  168,246





*
            The
      escrow shares which are held in escrow are regarded as issued and not
      outstanding, earning per share and weighted average number of shares
      outstanding has been restated. (see Note 2.5 –
  Restatement)





The
accompanying notes are an integral part of these consolidated financial
statements.


6


EXCEED
COMPANY LTD. AND SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF CHANGES IN EQUITY (continued)





Year
ended December 31, 2009





Notes:





(i)
            Pursuant
      to a group reorganization effective April 28, 2008 (the “Group
      Reorganization”), Windrace International Company Limited (formerly known
      as Xdlong International Company Limited) became the holding company of
      certain subsidiaries, as described in note 1 to the financial
      statements).  The founders, Mr. Lin Shuipan and Ms. Chen Xiayu
      continue to govern the financial and operating policies and activities of
      such entities following ownership interest held by third parties since
      March 2008.  Accordingly, such entities were under the common
      control of Mr. Lin Shuipan and Ms. Chen Xiayu for all periods presented
      herein.





(ii)
            The
      capital reserve at January 1, 2008 represented the excess of the
      consideration received from the equity holder of a subsidiary over the
      nominal value of the issued capital of a subsidiary pursuant to Group
      Reorganization.





The
addition to capital reserve of RMB28,400,000 during 2008 represents a
contribution from an equity holder of the Group pursuant to an agreement dated
March 28, 2008 whereby the equity holder agreed to pay the contribution if the
audited profit after tax of the Group for 2007 had an increase of more that 70%
when compared to that for 2006.





(iii)
            The
      other reserve represented distribution to certain holders of the Company
      pursuant to a share purchase agreement on March 28, 2008 (Note
      23).





(iv)
            In
      accordance with the relevant regulations applicable in the PRC,
      subsidiaries established in the PRC are required to transfer a certain
      percentage of their statutory annual profits after tax (after offsetting
      any prior years’ losses), if any, to the statutory surplus fund until the
      balance of the fund reaches 50% of their respective registered capital.
      Subject to certain restrictions as set out in the relevant PRC
      regulations, the statutory surplus fund may be used to offset against
      accumulated losses of the respective PRC subsidiaries. The amount of the
      transfer is subject to the approval of the board of directors of the
      respective PRC subsidiaries.





(v)
            Exchange
      fluctuation reserve comprises all foreign exchange differences arising
      from the translation of the financial statements of foreign operations.
      This reserve is dealt with in accordance with the accounting policy in
      Note 2.1.


7


EXCEED
COMPANY LTD. AND SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF CASH FLOWS





Year
ended December 31, 2009





Notes
                    
                    
                    2009
                    
                    
                    2009
                    
                    
                    2008
                    
                    
                    2007USD'000
                    
                    
                    RMB'000
                    
                    
                    RMB'000
                    
                    
                    RMB’000CASH
      FLOWS FROM OPERATING ACTIVITIESProfit
      before tax
                    
                    
                    
                    
                    
                    36,887
                    
                    
                    
                    251,790
                    
                    
                    
                    170,709
                    
                    
                    
                    156,568Non-cash
      adjustments for:Interest
      income
                    
                    5,8
                    
                    
                    
                    (107
                    )
                    
                    
                    (727
                    )
                    
                    
                    (788
                    )
                    
                    
                    (259
                    )Finance
      costs
                    
                    7
                    
                    
                    
                    4,333
                    
                    
                    
                    29,566
                    
                    
                    
                    23,511
                    
                    
                    
                    1,352Over-provision
      for aborted IPO expenses
                    
                    
                    
                    
                    
                    (751
                    )
                    
                    
                    (5,128
                    )
                    
                    
                    -
                    
                    
                    
                    -Share
      of loss of a jointly-controlled entity
                    
                    26
                    
                    
                    
                    (2
                    )
                    
                    
                    (16
                    )
                    
                    
                    -
                    
                    
                    
                    -Loss
      on write-off of items of property, plant and equipment
                    
                    8
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    97
                    
                    
                    
                    307Loss
      on disposal of items of property, plant and equipment
                    
                    8
                    
                    
                    
                    28
                    
                    
                    
                    189
                    
                    
                    
                    -
                    
                    
                    
                    4Depreciation
                    
                    8
                    
                    
                    
                    2,368
                    
                    
                    
                    16,166
                    
                    
                    
                    15,300
                    
                    
                    
                    11,420Amortisation
      of prepaid land lease payments
                    
                    8
                    
                    
                    
                    110
                    
                    
                    
                    752
                    
                    
                    
                    746
                    
                    
                    
                    746Impairment
      of an advance of loan to a jointly-controlled entity
                    
                    26
                    
                    
                    
                    2
                    
                    
                    
                    16
                    
                    
                    
                    -
                    
                    
                    
                    -Operating
      cash flow before working capital changes
                    
                    
                    
                    
                    
                    42,868
                    
                    
                    
                    292,608
                    
                    
                    
                    209,575
                    
                    
                    
                    170,138Decrease/(increase)
      in inventories
                    
                    
                    
                    
                    
                    4,409
                    
                    
                    
                    30,094
                    
                    
                    
                    (35,777
                    )
                    
                    
                    232Increase
      in trade receivables
                    
                    
                    
                    
                    
                    (77,345
                    )
                    
                    
                    (527,952
                    )
                    
                    
                    (143,132
                    )
                    
                    
                    (57,658
                    )Increase
      in prepayments, deposits and other receivables
                    
                    
                    
                    
                    
                    (1,366
                    )
                    
                    
                    ( 9,320
                    )
                    
                    
                    (2,711
                    )
                    
                    
                    3,365(Increase)/decrease
      in pledged deposits
                    
                    
                    
                    
                    
                    (1,861
                    )
                    
                    
                    ( 12,700
                    )
                    
                    
                    16,700
                    
                    
                    
                    (11,250
                    )Increase
      in trade and bills payables
                    
                    
                    
                    
                    
                    9,956
                    
                    
                    
                    67,956
                    
                    
                    
                    4,255
                    
                    
                    
                    47,461Increase
      in deposits received, other payables and accruals
                    
                    
                    
                    
                    
                    1,397
                    
                    
                    
                    9,533
                    
                    
                    
                    1,892
                    
                    
                    
                    17,030Cash
      (used in)/generated from operations
                    
                    
                    
                    
                    
                    (21,942
                    )
                    
                    
                    (149,781
                    )
                    
                    
                    50,802
                    
                    
                    
                    169,318Interest
      paid
                    
                    
                    
                    
                    
                    (473
                    )
                    
                    
                    (3,228
                    )
                    
                    
                    (1,716
                    )
                    
                    
                    (1,352
                    )PRC
      taxes paid
                    
                    
                    
                    
                    
                    (401
                    )
                    
                    
                    (2,738
                    )
                    
                    
                    (5,133
                    )
                    
                    
                    (21,701
                    )Net
      cash (outflow)/ inflow from operating activities
                    
                    
                    
                    
                    
                    (22,816
                    )
                    
                    
                    (155,747
                    )
                    
                    
                    43,953
                    
                    
                    
                    146,265





continued/...


8


EXCEED
COMPANY LTD. AND SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF CASH FLOWS (continued)





Year
ended December 31, 2009





Notes
                        
                        
                        2009
                        
                        
                        2009
                        
                        
                        2008
                        
                        
                        2007USD'000
                        
                        
                        RMB'000
                        
                        
                        RMB'000
                        
                        
                        RMB’000CASH
      FLOWS FROM INVESTING ACTIVITIESPurchases
      of items of property, plant and equipment
                        
                        12
                        
                        
                        
                        (
      335
                        )
                        
                        
                        (
      2,290
                        )
                        
                        
                        (17,256
                        )
                        
                        
                        (187,390
                        )Proceeds
      from disposal of property, Plant and equipment
                        
                        
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        886Increase
      in investment in subsidiary
                        
                        
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (9
                        )Interest
      received
                        
                        5,8
                        
                        
                        
                        107
                        
                        
                        
                        727
                        
                        
                        
                        788
                        
                        
                        
                        259Net
      cash outflow from investing activities
                        
                        
                        
                        
                        
                        (228
                        )
                        
                        
                        (1,563
                        )
                        
                        
                        (16,468
                        )
                        
                        
                        (188,737
                        )CASH
      FLOWS FROM FINANCING ACTIVITIESCash
      received from 2020 upon recapitalization
                        
                        
                        
                        
                        
                        50,279
                        
                        
                        
                        343,200
                        
                        
                        
                        -
                        
                        
                        
                        -Purchase
      of a unit option
                        
                        24
                        
                        
                        
                        (
      2,503
                        )
                        
                        
                        (
      17,083
                        )
                        
                        
                        -
                        
                        
                        
                        -Capital
      contributions from equity holder of the Company
                        
                        
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        28,400
                        
                        
                        
                        82,335Proceeds
      from issue of ordinary shares
                        
                        22
                        
                        
                        
                        30,035
                        
                        
                        
                        205,018
                        
                        
                        
                        -
                        
                        
                        
                        1Proceeds
      from issue of preferred shares
                        
                        22
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        85,135
                        
                        
                        
                        -Redemption
      of preferred shares
                        
                        22
                        
                        
                        
                        (39,912
                        )
                        
                        
                        (272,432
                        )
                        
                        
                        -
                        
                        
                        
                        -New
      bank loans
                        
                        
                        
                        
                        
                        13,258
                        
                        
                        
                        90,500
                        
                        
                        
                        20,000
                        
                        
                        
                        28,000Repayment
      of bank loans
                        
                        
                        
                        
                        
                        (
      7,691
                        )
                        
                        
                        (
      52,500
                        )
                        
                        
                        (28,000
                        )
                        
                        
                        (
      17,000
                        )Increase/(decrease)
      in amount due to a director
                        
                        
                        
                        
                        
                        118
                        
                        
                        
                        806
                        
                        
                        
                        (81,083
                        )
                        
                        
                        883Increase
      in amount due from a shareholder
                        
                        
                        
                        
                        
                        (
      15
                        )
                        
                        
                        (
      103
                        )
                        
                        
                        -
                        
                        
                        
                        -Exchange
      realignment
                        
                        
                        
                        
                        
                        362
                        
                        
                        
                        2,472
                        
                        
                        
                        -
                        
                        
                        
                        -Net
      cash inflow from financing activities
                        
                        
                        
                        
                        
                        43,931
                        
                        
                        
                        299,878
                        
                        
                        
                        24,452
                        
                        
                        
                        94,219NET
      INCREASE IN CASH AND CASH EQUIVALENTS
                        
                        
                        
                        
                        
                        20,887
                        
                        
                        
                        142,568
                        
                        
                        
                        51,937
                        
                        
                        
                        51,747CASH
      AND CASH EQUIVALENTS AT BEGINNING OF YEAR
                        
                        
                        
                        
                        
                        17,590
                        
                        
                        
                        120,068
                        
                        
                        
                        67,725
                        
                        
                        
                        14,714Effect
      of foreign exchange rate changes
                        
                        
                        
                        
                        
                        ( 64
                        )
                        
                        
                        ( 432
                        )
                        
                        
                        406
                        
                        
                        
                        1,264CASH
      AND CASH EQUIVALENTS AT END OF YEAR
                        
                        
                        
                        
                        
                        38,413
                        
                        
                        
                        262,204
                        
                        
                        
                        120,068
                        
                        
                        
                        67,725ANALYSIS
      OF BALANCES OF CASH AND CASH EQUIVALENTSCash
      and bank balances
                        
                        17
                        
                        
                        
                        38,413
                        
                        
                        
                        262,204
                        
                        
                        
                        120,068
                        
                        
                        
                        67,725





The
accompanying notes are an integral part of these consolidated financial
statements.


9


EXCEED
COMPANY LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





December
31, 2009





1.
            CORPORATE
      INFORMATION





The
Company is a limited liability company incorporated in the British Virgin
Islands (“BVI”) on April 21, 2009, as a wholly-owned subsidiary of 2020 ChinaCap
Acquirco, Inc. (“2020”), a blank check company formed in Delaware for the
purpose of acquiring, through a merger, stock exchange, asset acquisition or
other similar business combination, an operating business that either:
(1) was located in China, (2) had its principal operations located in
China, or, (3) in 2020’s view, would benefit from establishing operations
in China.





On May 8,
2009, the Company entered into a purchase agreement (the “Purchase Agreement”)
among 2020, Windrace International Company Limited (“Windrace”) and the selling
shareholders party thereto (the “Sellers”), which owned 100% of the issued and
outstanding equity securities of Windrace (the “Acquisition).





On
October 5, 2009, the board of directors of 2020 has unanimously approved the
simultaneous reincorporation of 2020 from the State of Delaware to the BVI
through a redomestication merger (the “Redomestication”) with and into the
Company.  In the Redomestication, the Company issued its securities in
exchange for the issued and outstanding securities of 2020 (being 10,500,000
shares of common stock) on a one-to-one basis, and redeemed 1,343,082 shares of
2020 common stock at US$7.92 per share.





On
October 21, 2009, the Company completed its Acquisition of Windrace through its
acquisition of the outstanding shares of Windrace under the Purchase Agreement,
as supplemented by a supplemental purchase agreement dated July 27, 2009 and a
letter agreement dated September 9, 2009, among Windrace and the Sellers on
the one hand, and 2020 and the Company on the other hand.  The
Business Combination was accounted for as a reverse recapitalization, whereby
the Company will be the surviving and continuing entity for financial reporting
purposes and will be deemed to be the acquirer of 2020.





The
Acquisition and the Redomestication will be accounted for as a reverse
recapitalization, whereby the Company will be the surviving and continuing
entity for financial reporting purposes and will be deemed to be the acquirer of
2020. The Acquisition and the Redomestication are being accounted for as a
reverse recapitalization because (i) after the Acquisition and the
Redomestication the Sellers together with the Investors held approximately 51%
of the issued and outstanding ordinary shares of Exceed (not taking the Escrowed
Shares, an additional 2,212,789 shares issuable to the Sellers if certain
earnings targets in 2011 are met, and the additional shares issuable the
Investors as described in this Note 24) and 2020’s directors resigned and were
replaced by Mr. Lin Shuipan, the CEO of the Company  immediately prior
to the Acquisition, and Professor Jin Jichun, a designee of the Sellers who will
be considered an independent director under applicable regulatory rules and thus
independent of both 2020 and the Investors, and (ii) 2020 has no prior
operations and was formed for the purpose of effecting a business combination
such as the proposed Acquisition.


10


EXCEED
COMPANY LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





December
31, 2009





1.
            CORPORATE
      INFORMATION (continued)





In
accordance with the applicable accounting guidance for accounting for the
Acquisition and the Redomestication as a reverse recapitalization, initially the
Company will be deemed to have undergone a recapitalization, whereby its issued
and outstanding ordinary shares were converted into 17,008,633 ordinary shares
of Exceed. Immediately thereafter, Exceed, as the parent company of the Company,
which is the continuing accounting entity, will be deemed to have acquired the
assets and assumed the liabilities of 2020 in exchange for the issuance of the
Exceed securities identical in number and terms to the outstanding securities of
2020. Exceed, as the parent company of the Company, will be deemed to have
acquired 2020 in accordance with the applicable accounting guidance for
accounting for the Acquisition and the Redomestication as a reverse
recapitalization, and 2020’s assets and liabilities will be recorded at their
historical carrying amounts, with no step-up in basis or other
intangible assets or goodwill recorded. All direct costs of the Acquisition and
the Redomestication are being charged to operations in the period that such
costs were incurred.





Windrace
is one of the largest branded sportswear companies in China that is engaged in
the design, manufacturing, trading and distribution of sporting goods, including
footwear, apparel and accessories, in China.





During
      the year ended December 31, 2009, the Company had direct or indirect
      equity interests in the following subsidiaries, the particulars of which
      are set out below, as a result of which the Company had the ability to
      direct the financial and operating policies of each of the entities, and
      thus had effective control over such
entities:


11


EXCEED
COMPANY LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





December
31, 2009





1.
            CORPORATE
      INFORMATION (continued)





Place and
                                        
                                        Nominal valuedate of
                                        
                                        of issued
                                        
                                        Percentageincorporation or
                                        
                                        ordinary share/
                                        
                                        of equityestablishment/
                                        
                                        registered
                                        
                                        attributable to
                                        
                                        PrincipalName
                                        
                                        operation
                                        
                                        capital
                                        
                                        the Company
                                        
                                        activitiesDirect
                                        
                                        IndirectWindrace
      International Company Limited
                                          (Formerly
      known as Xdlong International
                                        
                                        Cayman Islands
                                          March 25, 2008
                                        
                                        HKD92,000
                                        
                                        100
                                        
                                        -
                                        
                                        Investment
                                          holdingCompany
      Limited)Windrace
      Investment Holding Limited
                                        
                                        British Virgin Islands
                                        
                                        USD100
                                        
                                        -
                                        
                                        100
                                        
                                        Investment("Windrace
      Investment")
                                        
                                        August 17, 2007
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        holding(Formerly
      known as Xdlong InvestmentHolding
      Limited)Hei
      Dai Lung Group Company Limited
                                        
                                        Hong Kong
                                        
                                        HKD10,000
                                        
                                        -
                                        
                                        100
                                        
                                        Investment("XDLong
      HK")
                                        
                                        November 5, 2003
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        holdingXidelong
      (China) Co., Ltd.
                                        
                                        PRC
                                        
                                        HKD390,000,000
                                        
                                        -
                                        
                                        100
                                        
                                        Manufacture("XDLong
      China")
                                        
                                        April 13, 2004
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        and sale of(Note
      (i) and (ii))
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        sportswearFujian
      Xidelong Sports Goods Co., Ltd.
                                        
                                        PRC
                                        
                                        HKD25,000,000
                                        
                                        -
                                        
                                        100
                                        
                                        Manufacture("XDLong
      Fujian")
                                        
                                        September 26, 2001
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        and sale of(Note
      (i) and (iii))
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        sportswear


Notes:





(i)
            These
      entities are wholly foreign-owned enterprises and limited liability
      companies established in the PRC.





(ii)
            The
      registered capital of XDLong China is HKD390,000,000 and was fully paid as
      of October 26, 2009.





(iii)
            The
      registered capital of XDLong Fujian is HKD25,000,000 and was fully paid as
      of June 13, 2008.





(iv)
            Functional
      and reporting currency of XDLong China and XDLong Fujian, the operating
      subsidiaries of the Group, is
RMB.


12


EXCEED
COMPANY LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





December
31, 2009





2.1.
            BASIS
      OF PRESENTATION AND PREPARATION





Basis of
presentation


The
Business Combination was accounted for as a reverse recapitalization since,
immediately following completion of the transaction, the shareholders of
Windrace immediately prior to the Business Combination had effective control of
the Company through (1) their majority shareholder interest in the combined
entity, (2) significant representation on the Board of Directors, and (3) being
named to all of the senior executive positions.  For accounting
purposes, Windrace was deemed to be the accounting acquirer in the transaction
and, consequently, the transaction was treated as a recapitalization of Windrace
(i.e., a capital transaction involving the issuance of stock by the Company for
the stock of Windrace).  Accordingly, the combined assets, liabilities
and results of operations of Windrace became the historical financial statements
of the Company at the closing of the transaction, and the Company’s assets
(primarily cash and cash equivalents), liabilities and results of operations
were consolidated with Windrace beginning on the acquisition date.  No
step-up in basis or intangible assets or goodwill was recorded in this
transaction. All direct costs of the transaction were charged to operations in
the period that such costs were incurred.





The
consolidated financial statements issued following a reverse acquisition are
those of the accounting acquirer for all periods required presented, and are
retroactively adjusted to reflect the capital structure of the legal parent, the
accounting acquiree.  Comparative information presented in those
consolidated financial statements is also retroactively adjusted to reflect the
capital structure of the legal parent, the accounting acquiree.





The
consolidated financial statements of the Group have been prepared in accordance
with International Financial Reporting Standards (IFRSs) as issued by the
International Accounting Standards Board (IASB). They have been prepared under
the historical cost convention except for the derivative component of preferred
shares, which has been measured at fair value. These financial statements are
presented in Renminbi (“RMB”) and all amounts are rounded to the nearest
thousand except where otherwise indicated.





All
income, expenses and unrealized gains and losses resulting from intercompany
transactions and balances within the Group are eliminated on consolidation in
full.





Investments
in non-consolidated subsidiaries, typically representing an ownership interest
in the voting stock of the subsidiaries of between 20% and 50%, are stated
at cost of acquisition plus the Company’s equity in undistributed net income or
proportionate share of net losses since acquisition.





Minority
interests represent the interest of outside shareholders not held by the Group
in the results and net assets of the Company’s subsidiaries.





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 USD1.00 = RMB6.8259, based on the noon buying rate in The City of New
York for cable transfers of Renminbi as certified for customs purposes by
the Federal Reserve Bank of New York. 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.


13


EXCEED
COMPANY LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





December
31, 2009





2.2.
              SUMMARY
      OF SIGNIFICANT ACCOUNTING
POLICIES





Subsidiaries


A
subsidiary is an entity whose financial and operating policies the Company
controls, directly or indirectly, so as to obtain benefits from its
activities.





Jointly-controlled
entities


A
      jointly-controlled entity is a joint venture that is subject to joint
      control, resulting in none of the participating parties having unilateral
      control over the economic activity of the jointly-controlled
      entity.





The
Group's interests in jointly-controlled entities are stated in the consolidated
statement of financial position at the Group's share of net assets under the
equity method of accounting, less any impairment losses.  The Group's
share of the post-acquisition results and reserves of jointly-controlled
entities is included in the consolidated statements of comprehensive income and
consolidated reserves, respectively.  Unrealized gains and losses
resulting from transactions between the Group and its jointly-controlled
entities are eliminated to the extent of the Group’s interests in the
jointly-controlled entities, except where unrealized losses provide evidence of
an impairment of the asset transferred.





The
results of jointly-controlled entities are included in the Group's consolidated
statements of comprehensive income to the extent of dividends received and
receivable.  The Group's interests in jointly-controlled entities are
treated as non-current assets and are stated at cost less any impairment
losses.





Related
parties


A party
is considered to be related to the Group if:





(a)
            the
      party, directly or indirectly through one or more intermediaries, (i)
      controls, is controlled by, or is under common control with, the Group;
      (ii) has an interest in the Company that gives it significant influence
      over the Group; or (iii) has joint control over the
  Group;





(b)
            the
      party is an associate;





(c)
            the
      party is a member of the key management personnel of the
      Group;





(d)
            the
      party is a close member of the family of any individual referred to in (a)
      or (b);





(e)
            the
      party is an entity that is controlled, jointly controlled or significantly
      influenced by or for which significant voting power in such entity resides
      with, directly or indirectly, any individual referred to in (b) or (c);
      or





(f)
            the
      party is a post-employment benefit plan for the benefit of the employees
      of the Group, or of any entity that is a related party of the
      Group.


14





EXCEED
COMPANY LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





December
31, 2009





2.2.
              SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(continued)





Impairment of non-financial
assets


Where an
indication of impairment exists, or when annual impairment testing for an asset
is required (other than inventories, deferred tax assets and financial assets),
the asset's recoverable amount is estimated. An asset's recoverable amount is
the higher of the asset's or cash-generating unit's value in use and its fair
value less costs to sell, and is determined for an individual asset, unless the
asset does not generate cash inflows that are largely independent of those from
other assets or groups of assets, in which case the recoverable amount is
determined for the cash-generating unit to which the asset belongs.





An
impairment loss is recognized only if the carrying amount of an asset exceeds
its recoverable amount. In assessing value in use, the estimated future cash
flows are discounted to their present value using a pre-tax discount rate that
reflects current market assessments of the time value of money and the risks
specific to the asset. An impairment loss is charged to the consolidated
statements of comprehensive income in the period in which it
arises.





An
assessment is made at each reporting date as to whether there is any indication
that previously recognized impairment losses may no longer exist or may have
decreased. If such an indication exists, the recoverable amount is estimated. A
previously recognized impairment loss of an asset is reversed only if there has
been a change in the estimates used to determine the recoverable amount of that
asset, but not to an amount higher than the carrying amount that would have been
determined (net of any depreciation/amortization) had no impairment loss been
recognized for the asset in prior periods. A reversal of such an impairment loss
is credited to the consolidated statements of comprehensive income in the period
in which it arises.


15


EXCEED
COMPANY LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





December
31, 2009





2.2.
              SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(continued)





Property, plant and
equipment and depreciation


Property,
plant and equipment, other than construction in progress, are stated at cost
less accumulated depreciation and any impairment losses.





The cost
of an item of property, plant and equipment comprises its purchase price and any
directly attributable costs of bringing the assets to its working condition and
location for its intended use. Expenditure incurred after the items of property,
plant and equipment have been put into operation, such as repairs and
maintenance, is normally charged to the consolidated statements of comprehensive
income in the period in which it is incurred. In situations where it can be
clearly demonstrated that the expenditure has resulted in an increase in the
future economic benefits expected to be obtained from the use of an item of
property, plant and equipment, and where the cost of the item can be measured
reliably, the expenditure is capitalized as an additional cost of that asset or
as a replacement.





Depreciation
is calculated on the straight-line basis to write off the cost of each item of
property, plant and equipment to its residual value over its estimated useful
life. The estimated useful lives used for this purpose are as
follows:





Buildings
              
              Over the shorter of lease terms or 20 yearsLeasehold improvements
              
              5 yearsPlant and machinery
              
              5 to 10 yearsMotor vehicles
              
              5 yearsFurniture, fixtures and office equipment
              
              5 years





Where
parts of an item of property, plant and equipment have different useful lives,
the cost of that item is allocated on a reasonable basis among the parts and
each part is depreciated separately.





Residual
values, useful lives and the depreciation method are reviewed, and adjusted if
appropriate, at least at the end of reporting period.





An item
of property, plant and equipment is derecognized upon disposal or when no future
economic benefits are expected from its use or disposal. Any gain or loss on
disposal or retirement recognized in the consolidated statements of
comprehensive income in the year the asset is derecognized is the difference
between the net sales proceeds and the carrying amount of the relevant
asset.





Research and development
costs


All
research costs are charged to the consolidated statements of comprehensive
income as incurred.





Expenditure
incurred on projects to develop new products is capitalized and deferred only
when the Group can demonstrate the technical feasibility of completing the
product so that it will be available for use or sale, its intention to complete
and its ability to use or sell the asset, how the asset will generate future
economic benefits, the availability of resources to complete the project and the
ability to measure reliably the expenditure during the development. Product
development expenditure which does not meet these criteria is expensed when
incurred.


16


EXCEED
COMPANY LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





December
31, 2009





2.2.
              SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(continued)





Financial
assets


Financial
assets in the scope of IAS 39 "Financial Instruments: Recognition and
Measurements" are classified as loans and receivables. When financial assets are
recognized initially, they are measured at fair value. The Group assesses
whether a contract contains an embedded derivative when the Group first becomes
a party to it and assesses whether an embedded derivatives is required to be
separated from the host contract when the analysis shows that the economic
characteristics and risks of the embedded derivatives are not closely related to
those of the host contract. Reassessment only occurs if there is a change in the
terms of the contract that significantly modifies the cash flows that would
otherwise be required under the contract.





The Group
determines the classification of its financial assets after initial recognition
and, where allowed and appropriate, re-evaluates this designation at the end of
reporting period.





All
regular way purchases and sales of financial assets are recognized on the trade
date, that is, the date that the Group commits to purchase or sell the asset.
Regular way purchases or sales are purchases or sales of financial assets that
require delivery of assets within the period generally established by regulation
or convention in the marketplace.





Loans
and receivables


Loans and
receivables are non-derivative financial assets with fixed or determinable
payments that are not quoted in an active market. Such assets are subsequently
carried at amortized cost using the effective interest method less any allowance
for impairment. Amortized cost is calculated taking into account any discount or
premium on acquisition and includes fees that are an integral part of the
effective interest rate and transaction costs. Gains and losses are recognized
in the consolidated statements of comprehensive income when the loans and
receivables are derecognized or impaired, as well as through the amortization
process.





Impairment of financial
assets


The Group
assesses at the end of reporting period whether there is any objective evidence
that a financial asset or a group of financial assets is impaired.





Assets
carried at amortized cost


If there
is objective evidence that an impairment loss on loans and receivables carried
at amortized cost has been incurred, the amount of the loss is measured as the
difference between the asset's carrying amount and the present value of
estimated future cash flows (excluding future credit losses that have not been
incurred) discounted at the financial asset's original effective interest rate
(i.e., the effective interest rate computed at initial recognition). The
carrying amount of the asset is reduced either directly or through the use of an
allowance account. The amount of the impairment loss is recognized in the
consolidated statements of comprehensive income. Loan and receivables together
with any associated allowances are written off when there is no realistic
prospect of future recovery.





If, in a
subsequent period, the amount of the impairment loss decreases and the decrease
can be related objectively to an event occurring after the impairment was
recognized, the previously recognized impairment loss is reversed by adjusting
the allowance account. Any subsequent reversal of an impairment loss is
recognized in the consolidated statements of comprehensive income, to the extent
that the carrying value of the asset does not exceed its amortized cost at the
reversal date.


17





EXCEED
COMPANY LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





December
31, 2009





2.2.
              SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(continued)





Impairment of financial
assets (continued)


Assets carried at amortized cost(continued)


In
relation to trade receivables, an impairment allowance is made when there is
objective evidence (such as the probability of insolvency or significant
financial difficulties of the debtor) that the Group will not be able to collect
all of the amounts due under the original terms of an invoice. The carrying
amount of the receivables is reduced through the use of an allowance account.
Impaired debts are derecognized when they are assessed as
uncollectible.





Derecognition of financial
assets


A
financial asset (or, where applicable, a part of a financial asset or part of a
group of similar financial assets) is derecognized where:


●
            the
      rights to receive cash flows from the asset have
  expired;


●
            the
      Group retains the rights to receive cash flows from the asset, but has
      assumed an obligation to pay them in full without material delay to a
      third party under a "pass-through" arrangement;
  or


●
            the
      Group has transferred its rights to receive cash flows from the asset and
      either (a) has transferred substantially all the risks and rewards of the
      asset, or (b) has neither transferred nor retained substantially all the
      risks and rewards of the asset, but has transferred control of the
      asset.





Where the
Group has transferred its rights to receive cash flows from an asset and has
neither transferred nor retained substantially all the risks and rewards of the
asset nor transferred control of the asset, the asset is recognized to the
extent of the Group's continuing involvement in the asset. Continuing
involvement that takes the form of a guarantee over the transferred asset is
measured at the lower of the original carrying amount of the asset and the
maximum amount of consideration that the Group could be required to
repay.





Derecognition of financial
liabilities


A
financial liability is derecognized when the obligation under the liability is
discharged or cancelled, or expires.





When an
existing financial liability is replaced by another from the same lender on
substantially different terms, or the terms of an existing liability are
substantially modified, such an exchange or modification is treated as a
derecognition of the original liability and a recognition of a new liability,
and the difference between the respective carrying amounts is recognized in the
consolidated statements of comprehensive income.





Inventories


Inventories
are stated at the lower of cost and net realizable value after making due
allowances for obsolete or slow moving items. Cost is calculated using the
weighted average cost method and comprises all costs incurred in bringing the
inventories to their present location and condition.





Net
realizable value is based on the estimated selling prices less any estimated
costs to be incurred for completion of the production process and disposal upon
delivery of finished goods to distributors.





When
inventories are sold, the carrying amount of those inventories is recognized as
cost of sales in the period in which the related sales are
recognized.


18


EXCEED
COMPANY LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





December
31, 2009





2.2.
              SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(continued)





Leases


Leases
where substantially all the rewards and risks of ownership of assets remain with
the lessor are accounted for as operating leases. Where the Group is the lessee,
rentals payable under the operating leases are charged to the consolidated
statements of comprehensive income on the straight-line basis over the lease
terms.





Prepaid land lease
payments


Prepaid
land lease payments under PRC land use right arrangements are initially stated
at cost and subsequently amortized on the straight-line basis over the lease
terms.





Cash and cash
equivalents


For the
purpose of the consolidated cash flow statements, cash and cash equivalents
comprise cash on hand and demand deposits, and short-term, highly liquid
investments that are readily convertible into known amounts of cash, are subject
to an insignificant risk of changes in value, and have a short maturity of
generally within three months when acquired, less bank overdrafts which are
repayable on demand and form an integral part of the Group's cash
management.





For the
purpose of the consolidated statements of financial position, cash and bank
balances comprise cash on hand and at banks, including term deposits, which are
not restricted as to use.





Provisions


A
provision is recognized when a present obligation (legal or constructive) has
arisen as a result of a past event and it is probable that a future outflow of
resources will be required to settle the obligation, provided that a reliable
estimate can be made of the amount of the obligation.





When the
effect of discounting is material, the amount recognized for a provision is the
present value at the end of reporting period of the future expenditures expected
to be required to settle the obligation. The increase in the discounted present
value amount arising from the passage of time is included in finance costs in
the consolidated statements of comprehensive income.





Income
tax


Income
tax comprises current and deferred tax. Income tax is recognized in the
consolidated statements of comprehensive income, or in equity if it relates to
items that are recognized in the same or a different period directly in
equity.





Current
tax assets and liabilities for the current and prior periods are measured at the
amount expected to be recovered from or paid to the taxation
authority.





Deferred
tax is provided, using the liability method, on all temporary differences at the
end of reporting period between the tax bases of assets and liabilities and
their carrying amounts for financial reporting purposes.


19


EXCEED
COMPANY LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





December
31, 2009





2.2.
              SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(continued)





Income tax
(continued)





Deferred
tax liabilities are recognized for all taxable temporary differences,
except:





•
            where
      the deferred tax liability arises from goodwill or from the initial
      recognition of an asset or liability in a transaction that is not a
      business combination and, at the time of the transaction, affects neither
      the accounting profit nor taxable profit or loss;
  and





•
            in
      respect of taxable temporary differences associated with investments in
      subsidiaries, where the timing of the reversal of the temporary
      differences can be controlled and it is probable that the temporary
      differences will not reverse in the foreseeable
  future.





Deferred
tax assets are recognized for all deductible temporary differences, carryforward
of unused tax credits and tax losses, to the extent that it is probable that
future taxable profit will be available against which the deductible temporary
differences, and the unused tax credits and unused tax losses can be utilized,
except:





•
            where
      the deferred tax asset relating to the deductible temporary differences
      arises from the initial recognition of an asset or liability in a
      transaction that is not a business combination and, at the time of the
      transaction, affects neither the accounting profit nor taxable profit or
      loss; and





•
            in
      respect of deductible temporary differences associated with investments in
      subsidiaries, deferred tax assets are only recognized to the extent that
      it is probable that the temporary differences will reverse in the
      foreseeable future and future taxable profit will be available against
      which the temporary differences can be
utilized.





The
carrying amount of deferred tax assets is reviewed at the end of reporting
period and, where appropriate, reduced to the extent that it is no longer
probable that sufficient taxable profit will be available to allow all or part
of the deferred tax assets to be utilized. Conversely, previously unrecognized
deferred tax assets are reassessed at the end of reporting period and are
recognized to the extent that it is probable that sufficient taxable profit will
be available to allow all or part of the deferred tax asset to be
utilized.





Deferred
tax assets and liabilities are measured at the tax rates that are expected to
apply to the period when the asset is realized or the liability is
settled.  The expected rates are projected based on tax rates (and tax
laws) that have been enacted or substantively enacted at the end of reporting
period.





Deferred
tax assets and liabilities are offset when the Group has a legally enforceable
right to offset current tax assets against current tax liabilities and when the
deferred tax assets and liabilities relate to income taxes levied by the same
taxation authority and the Group intends to settle its current tax assets and
liabilities on a net basis.


20


EXCEED
COMPANY LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





December
31, 2009





2.2.
              SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(continued)





Revenue
recognition


Revenue
is recognized when there is probable economic benefits to the Group and when the
revenue can be measured reliably, on the following bases:





(a)
            from
      sale of goods, when the significant risks and rewards of ownership have
      been transferred to the buyer, provided that the Group maintains neither
      managerial involvement to the degree usually associated with ownership,
      nor effective control over the goods sold; which usually occurs when the
      product is sold and delivered to the distributors with all transportation
      and handling costs for delivery of products borne and paid directly by the
      distributors, and





(b)
            interest
      income, on an accrual basis using the effective interest method by
      applying the rate that discounts the estimated future cash receipts
      through the expected life of the financial instruments to their net
      carrying amount .




In
addition, the Group utilizes preliminary purchase orders received from
consultations with customers at sales fairs to prepare sales estimates and
formulate production schedules for upcoming seasons. Purchase order quantities
may be subsequently adjusted upward or downward by amounts ranging from 10% to
15% before finalization. Once a purchase order is finalized, the Group
re-confirms the delivery schedule of sales orders with each distributor before
shipment. Distributors are invoiced and sales are recognized by the Group only
at the time that products are ultimately delivered to distributors.




Although
the Group’s policy is to recognize product returns as a reduction of revenue,
the Group has not deemed it necessary to accrue for returns at the time when
sales are recorded, as the Group has not had any significant product returns or
similar claims. Management periodically reviews this matter and will consider
making such accruals, when there are indications of significant sales returns or
similar claims in future periods.




Although
the Group accepts returns of defective products from distributors, distributors
generally choose to sell any defective products at a discount rather than to
return such defective products to the Group. Since distributors are required to
comply with the Group’s pricing policy, prior written consent must be obtained
from the Group before any products are sold at a discount to the suggested
retail price, which is determined on a case-by-case basis. The Group does not
provide any compensation to distributors for defective products. To date, the
number and value of defective products has been minimal.




The Group
does not have any arrangements with distributors to accept returns of
out-of-season stock.  When in-season new products arrives, the current
products on shelves become out-of-season stock.




The Group
does not provide volume-based discount programs or discounts for early
payment.


21


EXCEED
COMPANY LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





December
31, 2009





2.2.
              SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(continued)





Revenue recognition
(continued)


The Group
closely monitors inventories and sales by distributors by requiring distributors
to provide monthly inventory reports since 2008 and quarterly inventory reports
prior to 2008, and by reviewing local market condition reports provided by the
Group’s regional sales managers. The monitoring of market information through
the regional sales managers assists the Group in collecting sales and inventory
data to arrange production schedules and maintain optimum inventory levels. The
Group also carries out random on-site inspections of distributors and authorized
retail stores to track inventories and sales performance.




The Group
encourages distributors to clear their out-of-season inventory levels. An
authorized retailer with excess inventory at the end of a season may attempt to
sell such excess inventory through regular and special end-of-season sales.
Since distributors must strictly comply with the Group’s suggested retail
pricing policy, prior written consent must be obtained from the Group before a
distributor may conduct any promotional events or sell any of the Group’s
products to consumers at a discount to the suggested retail price. The
distributors bear the costs of any sales discounts and the Group is not required
to provide credits or subsidies to distributors for their seasonal clearance
activities.




In order
to facilitate the operation and development of its business, including promoting
brand recognition and building a nationwide brand image, the Group provides
selective industry-standard post-sales assistance and guidance to distributors,
including training of distributors’ employees and promotional equipment and
marketing brochures. Distributors are required to sell the Group’s products on
an exclusive basis to be eligible for such assistance and guidance.




To
encourage distributors to expand sales to authorized retail stores and to create
a uniform high-quality store image nationwide, the Group provides certain
build-out and renovation subsidies to qualified authorized retail stores.
Depending on the category of the authorized retail stores, the Group has
different sets of criteria and standards for determining whether a store
qualifies for the subsidies, including location, size and rent for the
authorized retail stores, as well as compliance with the Group’s
standards.




Build-out
and renovation subsidies are provided to distributors who have qualified
authorized retail stores within their designated sales regions. Where a
particular authorized retail store is operated by a third-party retailer, such
subsidies are provided to the retailer through the distributor.




Such
subsidies are granted and paid when a new or renovated store is approved, and
are charged to operations when payments are made.  During the year,
the Group provided subsidies of RMB85,335,000 (2008: RMB71,522,000). These
amounts were included in selling and distribution costs.


22


EXCEED
COMPANY LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





December
31, 2009





2.2.
              SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(continued)





Borrowing
costs


Borrowing
costs directly attributable to the acquisition, construction or production of an
asset that necessarily takes a substantial period of time to get ready for its
intended use or sale are capitalized as part of the cost of the respective
assets. During the two years ended December 31, 2009, no interest has been
capitalized.  All other borrowing costs are expensed in the period
they occur.  Borrowing costs consist of interest and other costs that
an entity incurs in connection with the borrowing of funds.





Government
grants


Government
grants are recognized at their fair value where there is reasonable assurance
that the grant will be received and all attaching conditions will be complied
with. When the grant relates to an expense item, it is recognized as income over
the periods necessary to match the grant on a systematic basis to the costs that
it is intended to compensate. Where the grant relates to an asset, the fair
value is deducted from the carrying amount of the asset and released to the
consolidated statements of comprehensive income by way of a reduced depreciation
charge.





Employee
benefits


Pension
schemes


The Group
operates a defined contribution Mandatory Provident Fund retirement benefit
scheme (the “MPF Scheme”) under the Mandatory Provident Fund Schemes Ordinance,
for those employees who are eligible to participate in the MPF Scheme.
Contributions are made based on a percentage of the employees’ basic salaries
and are charged to the consolidated statements of comprehensive income as they
become payable in accordance with the rules of the MPF Scheme. The assets of the
MPF Scheme are held separately from those of the Group in an independently
administered fund. The Group’s employer contributions vest fully with the
employees when contributed into the MPF Scheme.  The Group has no
further payment obligations once the contributions have been paid.





The
employees of the Group’s subsidiaries which operate in Mainland China are
required to participate in central pension schemes operated by the local
municipal government. The subsidiaries are required to contribute certain
percentages of their payroll costs to the central pension schemes. The
contributions are charged to the consolidated statements of comprehensive income
as they become payable in accordance with the rules of the central pension
schemes.  The Group has no further payment obligations once the
contributions have been paid.





Other
benefits


The Group
contributes on a monthly basis to defined contribution housing, medical and
other benefit plans organized by the PRC government. The PRC government assumes
the obligations to all existing and retired employees under these plans.
Contributions to these plans by the Group are expensed as incurred. The Group
has no further obligations beyond the required contributions under these
plans.


23


EXCEED
COMPANY LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





December
31, 2009





2.2.
              SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(continued)





Foreign
currencies


These
financial statements are presented in RMB. Each entity in the Group determines
its own functional currency and items included in the financial statements of
each entity are measured using that functional currency. Foreign currency
transactions are initially recorded using the functional currency rates ruling
at the dates of the transactions. Monetary assets and liabilities denominated in
foreign currencies are retranslated at the functional currency rates of exchange
ruling at the end of reporting period. All differences are taken to the
consolidated statements of comprehensive income. Non-monetary items that are
measured in terms of historical cost in a foreign currency are translated using
the exchange rates at the dates of the initial transactions. Non-monetary items
measured at fair value in a foreign currency are translated using the exchange
rates at the date when the fair value was determined.





The
functional currencies of certain overseas subsidiaries are currencies other than
RMB. As of the end of reporting period, the assets and liabilities of these
entities are translated into the presentation currency of the Group at exchange
rates ruling at the end of reporting period and, their consolidated statements
of comprehensive income are translated into RMB at the weighted average exchange
rates for the year. The resulting exchange differences are included in a
separate component of equity, the exchange fluctuation reserve. On disposal of a
foreign entity, the deferred cumulative amount recognized in equity relating to
that particular foreign operation is recognized in the consolidated statements
of comprehensive income.





For the
purpose of the consolidated cash flow statements, the cash flows of foreign
subsidiaries are translated into RMB at the exchange rates prevailing at the
dates of the cash flows. Frequently recurring cash flows of overseas
subsidiaries which arise throughout the period are translated into RMB at the
weighted average exchange rates for the period.





Merger and accounting
treatment


In
accordance with the applicable accounting guidance for accounting for the
Acquisition and the Redomestication as a reverse recapitalization, initially the
Company will be deemed to have undergone a recapitalization, whereby its issued
and outstanding ordinary shares were converted into 17,008,633 ordinary shares
of Exceed. Immediately thereafter, Exceed, as the parent company of the Company,
which is the continuing accounting entity, will be deemed to have acquired the
assets and assumed the liabilities of 2020 in exchange for the issuance of the
Exceed securities identical in number and terms to the outstanding securities of
2020. Exceed, as the parent company of the Company, will be deemed to have
acquired 2020 in accordance with the applicable accounting guidance for
accounting for the Acquisition and the Redomestication as a reverse
recapitalization, and 2020’s assets and liabilities will be recorded at their
historical carrying amounts, with no step-up in basis or other
intangible assets or goodwill recorded. All direct costs of the Acquisition and
the Redomestication are being charged to operations in the period that such
costs were incurred.


24


EXCEED
COMPANY LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





December
31, 2009





2.3.
              IMPACT
      OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING
    STANDARDS





The Group
has adopted the following new interpretations and amendments to IFRSs for the
first time for the current year’s financial statements.





IFRS
      1 and IAS 27 Amendments
            
            Amendments
      to IFRS 1 First-time Adoption of IFRSs and IAS 27  Consolidated
      and Separate Financial Statements – Cost of an  Investment in a
      Subsidiary, Jointly Controlled Entity
    or  AssociateIFRS
      2 Amendment
            
            Share-based
      Payment - Vesting Conditions and CancellationIFRS
      7 Amendment
            
            Amendments
      to IFRS 7 Financial Instruments: DisclosuresIFRS
      8
            
            Operating
      SegmentsIAS
      1 (Revised)
            
            Presentation
      of Financial StatementsIAS
      18 Amendment*
            
            Amendments
      to Appendix to IAS 18 Revenue – Determining whether  an entity
      is acting as a principal or as an agentIAS
      23 (Revised)
            
            Borrowing
      CostsIAS
      32 and IAS 1
              Amendments
            
            Amendments
      to IAS 32 Financial Instruments: Presentation and IAS 1 Presentation of
      Financial Statements – Puttable Financial Instruments and Obligations
      Arising on LiquidationIFRIC-Int  9
      and
              IAS 39 Amendments
            
            Amendments
      to IFRIC-Int 9 Reassessment of Embedded Derivatives and IAS 39 Financial
      Instruments: Recognition and Measurement – Embedded
      DerivativesIFRIC-Int
      13
            
            Customer
      Loyalty ProgrammesIFRIC-Int
      16
            
            Hedges
      of a Net Investment in a Foreign OperationIFRIC)-Int
      18
            
            Transfers
      of Assets from Customers (adopted from 1 July 2009)Improvements
      to IFRSs (October 2008)





*   Included
in Improvements toIFRSs 2009 (as issued in May
2009).





The
adoption of these new interpretations and amendments has had no significant
financial effect on these financial statements and there have been no
significant changes to the accounting policies applied in these financial
statements.


25


EXCEED
COMPANY LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





December
31, 2009




2.4.
            ISSUED
      BUT NOT YET EFFECTIVE INTERNATIONAL FINANCIAL REPORTING
      STANDARDS





The Group
has not applied the following new and revised IFRSs, that have been issued but
are not yet effective, in the financial statements.





IFRS
      1 (Revised)
            
            First-time
      Adoption of International Financial Reporting Standards 1IFRS
      1 Amendments
            
            Amendments
      to IFRS 1 First-time Adoption of International Financial Reporting
      Standards– Additional
      Exemptions for First- time Adopters2IFRS
      2 Amendments
            
            Amendments
      to IFRS 2 Share-based Payment – Group Cash-settled Share-based Payment
      Transactions2IFRS
      3 (Revised)
            
            Business
      Combinations 1IFRS
      9
            
            Financial
      Instruments 6IAS
      24 (Revised)
            
            Related
      Party Disclosures 5IAS
      27 (Revised)
            
            Consolidated
      and Separate Financial Statements1IAS
      32 Amendment
            
            Amendment
      to IAS 32 Financial
      Instruments: Presentation –  Classification of Rights Issues3IAS
      39 Amendment
            
            Amendment
      to IAS 39 Financial
      Instruments: Recognition and Measurement – Eligible Hedged Items1IFRIC-Int
      17
            
            Distribution
      of Non-cash Assets to Owners 1IFRIC-Int
      19
            
            Extinguishing
      Financial Liabilities with Equity Instruments4Amendment
      to IFRS 5 included in Improvements to IFRSs issued in  October
      2008
            
            Amendment
      to IFRS 5 Non-current Assets Held for Sale and Discontinued Operations –
      Plan to sell the
      controlling interest in a subsidiary1





Apart
from the above, the IASB has also issued Improvements to IFRSs 2009
which sets out amendments to a number of IFRSs primarily with a view to removing
inconsistencies and clarify wording.  Amendments to IFRS 2, IAS 38,
IFRIC-Int 9 and IFRIC-Int 16 are effective for annual periods beginning on or
after 1 July 2009 while amendments to IFRS 5, IFRS 8, IAS 1, IAS 7, IAS 17, IAS
38 and IAS 39 are effective for annual periods beginning on or after 1 January
2010 although there are separate transitional provisions for each standard or
interpretation.





1    Effective
for annual periods beginning on or after 1 July 2009


2    Effective
for annual periods beginning on or after 1 January 2010


3    Effective
for annual periods beginning on or after 1 February 2010


4    Effective
for annual periods beginning on or after 1 July 2010


5    Effective
for annual periods beginning on or after 1 January 2011


6    Effective
for annual periods beginning on or after 1 January 2013





The Group
is in the process of making an assessment of the impact of these new and revised
IFRSs upon initial application.  So far, it has concluded that these
new and revised IFRSs are unlikely to have a significant impact on the Group’s
results of operations and financial position.


26


EXCEED
COMPANY LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





December
31, 2009





2.5.
              RESTATEMENT





These
consolidated financial statements have been amended to correct an error for the
calculation of the basic and diluted earnings per share attributable to the
ordinary equity holders of the Company for the year ended December 31, 2009,
2008 and 2007.  The error related to the interpretation of
“contingently issuable shares” under IAS33.





In the
original interpretation, all contingently issuable shares were considered as
outstanding and were included in the calculation of basic and diluted earnings
per share. Under the correct interpretation, basic earnings per share should
include only the number of contingently issuable shares of which all necessary
conditions for their release were satisfied as of the end of the financial
period, and diluted earnings per share should include only the number of
contingently issuable shares that would be issuable from the date of the
Acquisition and Redomestication if the conditions were satisfied as of the
reporting period.





As
restated, no escrow shares that are subject to profit targets for the years
ending December 31, 2010 and 2011were included in the calculation of basic
earnings per share. In accordance with IAS 33, escrow shares in relation to 2009
profit are effectively excluded in the calculation of basic earnings per share
as the target was not met until the end of the day on December 31, 2009. The
restated calculation of diluted earnings per share for the year ended December
31, 2009 includes 2009 escrow shares that are  considered issued from
the date of the Acquisition and Redomestication as if the conditions were
satisfied for the period.  There were no contingently issuable shares
included in both of the restated basic and diluted earnings per share for the
years ended December 31, 2007 and 2008 as the Acquisition and Redomestication
was completed on October 21, 2009.





Year
ended December 31, 2009





Before
      correction
                    
                    
                    After
      correctionUSD'000
                    
                    
                    RMB'000
                    
                    
                    USD'000
                    
                    
                    RMB'000Number
      of sharesWeighted
      average number of ordinary shares for the purposes of basic earnings per
      share
                    
                    
                    19,559,498
                    
                    
                    
                    19,559,498
                    
                    
                    
                    8,292,331
                    
                    
                    
                    8,292,331Weighted
      average number of ordinary shares for the purposes of diluted earnings per
      share
                    
                    
                    22,894,924
                    
                    
                    
                    22,894,924
                    
                    
                    
                    12,725,257
                    
                    
                    
                    12,725,257Earnings
      per shareBasic
                    
                    USD1.86
                    
                    
                    RMB12.68
                    
                    
                    USD4.38
                    
                    
                    RMB29.91Diluted
                    
                    USD1.76
                    
                    
                    RMB11.98
                    
                    
                    USD3.16
                    
                    
                    RMB21.56


27


EXCEED
COMPANY LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





December
31, 2009





2.5.
              RESTATEMENT
      (continued)





Year
      ended December 31, 2008Before
      correction
                            
                            
                            After
      correctionRMB'000
                            
                            
                            RMB'000Number
      of sharesWeighted
      average number of ordinary shares for the purposes of basic earnings per
      share
                            
                            
                            17,008,633
                            
                            
                            
                            5,741,466Weighted
      average number of ordinary shares for the purposes of diluted earnings per
      share
                            
                            
                            17,008,633
                            
                            
                            
                            6,868,910Earnings
      per shareBasic
                            
                            RMB9.91
                            
                            
                            RMB29.35Diluted
                            
                            RMB9.91
                            
                            
                            RMB27.71Year
      ended December 31, 2007Before
      correction
                            
                            
                            After
      correctionRMB'000
                            
                            
                            RMB'000Number
      of sharesWeighted
      average number of ordinary shares for the purposes of basic earnings per
      share
                            
                            
                            17,008,633
                            
                            
                            
                            5,741,466Weighted
      average number of ordinary shares for the purposes of diluted earnings per
      share
                            
                            
                            17,008,633
                            
                            
                            
                            5,741,466Earnings
      per shareBasic
                            
                            RMB7.93
                            
                            
                            RMB23.48Diluted
                            
                            RMB7.93
                            
                            
                            RMB23.48


28


EXCEED
COMPANY LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





December
31, 2009





3.
            SIGNIFICANT
      ACCOUNTING ESTIMATES





In the
process of applying the Group’s accounting policies, management has made
estimates and assumptions in determining certain amounts recognized in the
financial statements, some of the estimates and assumptions are based on
expected outcome of future events.  These estimates may not
necessarily be indicative of the actual outcome.  The significant
estimates and assumptions are discussed below.





Accounting
treatment of preferred shares


The Group
recognized a financial liability during the year ended December 31, 2008 in
respect of the obligation to repay the GS Investor (as defined in Note 23)
pursuant to a redemption option granted to the GS Investor. The Group’s
management has assessed the terms of the Subscription Agreement and the Share
Purchase Agreement (as defined in Note 23) and the related facts and
circumstance, and concluded that the funds contributed by the GS Investor should
be classified as a financial liability. The financial liability was recognized
initially at fair value plus transaction costs that are directly attributable to
the financial liability. After initial recognition, the financial liability is
measured at amortized cost using the effective interest method.





Useful
lives of property, plant and equipment


The Group
determines the estimated useful lives and related depreciation charges for its
property, plant and equipment based on the historical experience of the actual
useful lives of property, plant and equipment of similar nature and
functions.  Management will revise the depreciation period where
actual useful lives are different from those previously estimated, it will write
off or write down the value of obsolete or non-strategic assets that have been
abandoned.





Net
realizable value of inventories


Net
realizable value of inventories is the estimated selling price in the ordinary
course of business less estimated selling expenses.  The net
realizable value is estimated based on the current market conditions and
historical experience of selling merchandise of similar nature.  The
estimates can change significantly as a result of changes in customer taste or
competitor actions.  The Group reassesses these estimates at the end
of reporting period.





Impairment
allowances for trade and other receivables


The Group
estimates the impairment allowances for trade and other receivables by assessing
the collectability of the receivables based on the related customers’ credit
history and prevailing market conditions.  Allowances are applied to
trade and other receivables where events or changes in circumstances indicate
that the balances may not be collectible.  Where the expectation is
different from the initial estimate, the difference is recognized as an
impairment loss in the period in which such estimate is changed.  The
Group reassesses the impairment allowances at the end of reporting
period.





Historically,
the Group has no experience of bad debts.  All the customers who wish
to trade on credit terms are subject to credit verification
procedures.  In addition, receivable balances are monitored on an
ongoing basis and the Group has the sole discretion to cease business with
customers who fail to pay within the credit period.  Despite the
recent fluctuations in the economic environment since the second half of 2008,
management has closely monitored the trade receivables balance overdue 30 days
and assessed the intention of the repayment from the
distributors.


29


EXCEED
COMPANY LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





December
31, 2009





3.
            SIGNIFICANT
      ACCOUNTING ESTIMATES (continued)





The Group
will not make any provision of the overdue balance if (1) the Group has
continuous trading with the distributor; (2) the Group receives continuous
repayment from the distributor; and (3) the Group has no dispute on the overdue
balance with the distributor.





The Group
will make full provision on such balances if they are considered not recoverable
by the Group.





4.
            SEGMENT
      INFORMATION





The Group
determines its operating segments based on the reports reviewed by the chief
operating decision-makers that are used to make strategic
decisions.





The Group
operates one business segment, which is the manufacture and sale of sportswear,
including footwear, apparel and accessories.  The chief operating
decision-makers consider the major product lines (being footwear, apparel and
accessories) as one business segment for assessment of segment performance as
they exhibit similar long term financial performance and they are similar in
terms of product nature, production process, customer type and class, and
distribution method.  As such, no further business segment analysis is
presented.




In
addition, the Group’s revenue, expenses, assets and liabilities and capital
expenditures are predominantly attributable to a single geographical region,
which is the PRC. Therefore, no analysis of business or geographical segment is
presented.





5.
            REVENUE,
      OTHER INCOME AND GAINS





Sales,
which is also the Group's turnover, represents the net invoiced value of goods
sold during the year.





An
analysis of sales, other income and gains is as follows:





2009
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  2007USD'000
                  
                  
                  RMB'000
                  
                  
                  RMB'000
                  
                  
                  RMB’000RevenueManufacture
      and sale of sportswear:Footwear
                  
                  
                  161,485
                  
                  
                  
                  1,102,280
                  
                  
                  
                  923,061
                  
                  
                  
                  673,777Apparel
                  
                  
                  138,991
                  
                  
                  
                  948,738
                  
                  
                  
                  857,203
                  
                  
                  
                  598,122Accessories
                  
                  
                  3,947
                  
                  
                  
                  26,940
                  
                  
                  
                  40,018
                  
                  
                  
                  24,503304,423
                  
                  
                  
                  2,077,958
                  
                  
                  
                  1,820,282
                  
                  
                  
                  1,296,402


30


EXCEED
COMPANY LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





December
31, 2009





5.
            REVENUE,
      OTHER INCOME AND GAINS (continued)





2009
                    
                    
                    2009
                    
                    
                    2008
                    
                    
                    2007USD'000
                    
                    
                    RMB'000
                    
                    
                    RMB'000
                    
                    
                    RMB’000Other income and gainsBank
      interest income
                    
                    
                    107
                    
                    
                    
                    727
                    
                    
                    
                    788
                    
                    
                    
                    259Subsidy
      income from the PRC government*
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    400
                    
                    
                    
                    630Other
      income**
                    
                    
                    751
                    
                    
                    
                    5,128
                    
                    
                    
                    -
                    
                    
                    
                    -858
                    
                    
                    
                    5,855
                    
                    
                    
                    1,188
                    
                    
                    
                    889





*
            There
      are no unfulfilled conditions or contingencies relating to these
      subsidies.


**
            Being
      reversal of over-provision for aborted IPO expenses in 2008 (Note
      6).





6.
            ABORTED
      IPO EXPENSES





In 2008,
the Group applied for initial public offering (“IPO”) on the Hong Kong Stock
Exchange for capital raising to fund business expansion. On July 3, 2008, the
Group decided not to proceed with its Hong Kong IPO due to the unfavourable
market condition. The expenses related to the professional charges incurred for
the IPO was charged to the consolidated statement of income during the year
ended December 31, 2008.





7.
            FINANCE
      COSTS





2009
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  2007USD'000
                  
                  
                  RMB'000
                  
                  
                  RMB'000
                  
                  
                  RMB’000Interest
      on bank loans wholly repayable within one year
                  
                  
                  473
                  
                  
                  
                  3,228
                  
                  
                  
                  1,716
                  
                  
                  
                  1,352Interest
      on preferred shares
                  
                  
                  3,859
                  
                  
                  
                  26,338
                  
                  
                  
                  21,795
                  
                  
                  
                  -4,332
                  
                  
                  
                  29,566
                  
                  
                  
                  23,511
                  
                  
                  
                  1,352


31




EXCEED
COMPANY LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





December
31, 2009





8.            PROFIT
BEFORE TAX





The
Group's profit before tax is arrived at after charging/(crediting):




Notes
                        
                        
                        2009
                        
                        
                        2009
                        
                        
                        2008
                        
                        
                        2007USD'000
                        
                        
                        RMB'000
                        
                        
                        RMB'000
                        
                        
                        RMB’000Included
      in cost of salesCost
      of inventories sold*
                        
                        
                        
                        
                        
                        214,603
                        
                        
                        
                        1,464,856
                        
                        
                        
                        1,323,262
                        
                        
                        
                        959,526Included
      in selling and distribution expensesDepreciation
      of property, plant and equipment
                        
                        12
                        
                        
                        
                        34
                        
                        
                        
                        230
                        
                        
                        
                        198
                        
                        
                        
                        151Employee
      benefits expenses (including directors' remuneration - note
      9):Wages
      and salaries
                        
                        
                        
                        
                        
                        1,500
                        
                        
                        
                        10,237
                        
                        
                        
                        6,319
                        
                        
                        
                        4,237Pension
      scheme contributions**
                        
                        
                        
                        
                        
                        210
                        
                        
                        
                        1,434
                        
                        
                        
                        1,125
                        
                        
                        
                        4771,744
                        
                        
                        
                        11,901
                        
                        
                        
                        7,642
                        
                        
                        
                        4,865Included
      in administrative expensesDepreciation
      of property, plant and equipment
                        
                        12
                        
                        
                        
                        801
                        
                        
                        
                        5,469
                        
                        
                        
                        5,360
                        
                        
                        
                        4,300Employee
      benefits expenses (including directors' remuneration - note
      9):Wages
      and salaries
                        
                        
                        
                        
                        
                        1,258
                        
                        
                        
                        8,587
                        
                        
                        
                        5,034
                        
                        
                        
                        6,875Pension
      scheme contributions**
                        
                        
                        
                        
                        
                        124
                        
                        
                        
                        844
                        
                        
                        
                        602
                        
                        
                        
                        8952,183
                        
                        
                        
                        14,900
                        
                        
                        
                        10,996
                        
                        
                        
                        12,070Minimum
      lease payments under operating leases in respect of production facilities
      and office premises*
                        
                        
                        
                        
                        
                        51
                        
                        
                        
                        346
                        
                        
                        
                        373
                        
                        
                        
                        750Auditors'
      remuneration
                        
                        
                        
                        
                        
                        54
                        
                        
                        
                        369
                        
                        
                        
                        286
                        
                        
                        
                        110Amortisation
      of prepaid land lease payments
                        
                        13
                        
                        
                        
                        110
                        
                        
                        
                        752
                        
                        
                        
                        746
                        
                        
                        
                        746Loss
      on write-off of items of property, plant and equipment
                        
                        
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        97
                        
                        
                        
                        307Loss
      on disposal of items of property, plant and equipment
                        
                        
                        
                        
                        
                        28
                        
                        
                        
                        189
                        
                        
                        
                        -
                        
                        
                        
                        4


32




EXCEED
COMPANY LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





December
31, 2009





8.            PROFIT
BEFORE TAX (continued)





Notes
                      
                      
                      2009
                      
                      
                      2009
                      
                      
                      2008
                      
                      
                      2007USD'000
                      
                      
                      RMB'000
                      
                      
                      RMB'000
                      
                      
                      RMB’000Included
      in research and development expensesDepreciation
      of property, plant and equipment
                      
                      12
                      
                      
                      
                      54
                      
                      
                      
                      365
                      
                      
                      
                      30
                      
                      
                      
                      -Employee
      benefits expenses (including directors' remuneration - note
      9):Wages
      and salaries
                      
                      
                      
                      
                      
                      853
                      
                      
                      
                      5,823
                      
                      
                      
                      3,844
                      
                      
                      
                      4,384Pension
      scheme contributions**
                      
                      
                      
                      
                      
                      112
                      
                      
                      
                      764
                      
                      
                      
                      587
                      
                      
                      
                      4291,019
                      
                      
                      
                      6,952
                      
                      
                      
                      4,461
                      
                      
                      
                      4,813Other
      research and development costs
                      
                      
                      
                      
                      
                      2,637
                      
                      
                      
                      18,001
                      
                      
                      
                      13,188
                      
                      
                      
                      7,971Included
      in other income and gainsInterest
      income
                      
                      
                      
                      
                      
                      (107
                      )
                      
                      
                      (727
                      )
                      
                      
                      (788
                      )
                      
                      
                      (259
                      )





*
            The
      cost of inventories sold includes approximately RMB70,879,000 (2008:
      RMB63,445,000. 2007: RMB51,514,000), relating to direct staff cost,
      depreciation of the manufacturing facilities and operating lease payments
      for production facilities, which are also included in the respective total
      amounts disclosed above for each of these types of
    expenses.





**
            As
      of December 31, 2009, the Group had no forfeited contributions available
      to reduce its contributions to the pension schemes in future years(2008: Nil
      2007: Nil).





9.
            DIRECTORS'
      REMUNERATION





Details
      of directors' remuneration are as
follows:





2009
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  2007USD'000
                  
                  
                  RMB'000
                  
                  
                  RMB'000
                  
                  
                  RMB’000Other
      emoluments:Salaries,
      bonuses, allowances and benefits in kind
                  
                  
                  181
                  
                  
                  
                  1,238
                  
                  
                  
                  1,445
                  
                  
                  
                  582Pension
      scheme contributions
                  
                  
                  1
                  
                  
                  
                  6
                  
                  
                  
                  17
                  
                  
                  
                  15182
                  
                  
                  
                  1,244
                  
                  
                  
                  1,462
                  
                  
                  
                  597


33


EXCEED
COMPANY LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





December
31, 2009





9.
            DIRECTORS'
      REMUNERATION (continued)





There
      was no arrangement under which a director waived or agreed to waive any
      remuneration during the year (2008: Nil; 2007:
  Nil).





During
      the year, no remuneration was paid by the Group to any of the directors of
      the Group as an inducement to join or upon joining the Group or as
      compensation for loss of office (2008: Nil; 2007:
  Nil).





The
Group's remuneration policies are formulated based on the performance of
individual employees and are reviewed regularly.  Subject to the
Group's profitability, the Group may also provide discretionary bonuses to its
employees as an incentive for their contribution to the Group.  The
primary goal of the remuneration policy with regard to the remuneration packages
of the Group's executive directors is to enable the Group to retain and motivate
executive directors by linking their compensation with performance as measured
against corporate objectives achieved.





The
principal elements of the Group's executive directors remuneration packages
include basic salaries and discretionary bonuses.





10.
            TAX





No tax
provision for Hong Kong profits has been made as the Group did not generate any
assessable profits arising in Hong Kong during the reporting periods. Taxes on
profits assessable in the PRC have been calculated at the prevailing rates,
based on existing legislation, interpretations and practices in respect
thereof.





2009
                    
                    
                    2009
                    
                    
                    2008
                    
                    
                    2007USD'000
                    
                    
                    RMB'000
                    
                    
                    RMB'000
                    
                    
                    RMB’000Current
      tax - Mainland ChinaCharge
      for the year
                    
                    
                    552
                    
                    
                    
                    3,771
                    
                    
                    
                    2,181
                    
                    
                    
                    21,783





Under the
new PRC Corporate Income Tax Law (the ''New Corporate Income Tax Law'') and its
Implementation Rules (effective on January 1, 2008), the PRC corporate income
tax rate for domestic-invested and foreign-invested enterprises is unified to
25%.  Accordingly, the applicable tax rate for XDLong Fujian is 25% in
2008 and 2009.





XDLong
China, a foreign-invested enterprise established before the New Corporate Income
Tax Law, can continue to enjoy the existing tax holiday whereby it is exempted
from the PRC corporate income tax for its first two profitable years, commencing
from January 1, 2008, and thereafter is entitled to a 50% reduction in the PRC
corporate income tax for the subsequent three years from January 1, 2010 to
December 31, 2012.  No provision for the PRC corporate income tax has
been made for XDLong China in 2008 and 2009 as its assessable profits are fully
exempt for PRC corporate income tax purposes.


34


EXCEED
COMPANY LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





December
31, 2009





10.
            TAX
      (continued)





A
reconciliation of the tax expense applicable to profit before tax using the
applicable statutory rates for the jurisdictions in which the Company and the
majority of its subsidiaries operated to the tax expense at the effective tax
rates are as follows:




2009
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  2007USD'000
                  
                  
                  RMB'000
                  
                  
                  RMB'000
                  
                  
                  RMB’000Profit
      before tax
                  
                  
                  36,887
                  
                  
                  
                  251,790
                  
                  
                  
                  170,709
                  
                  
                  
                  156,568Tax
      at the applicable rates (Note)
                  
                  
                  9,646
                  
                  
                  
                  65,844
                  
                  
                  
                  47,334
                  
                  
                  
                  42,273Tax
      exemption due to tax holidays
                  
                  
                  (9,918
                  )
                  
                  
                  (67,697
                  )
                  
                  
                  (54,191
                  )
                  
                  
                  (27,228
                  )Tax
      effect of expenses not deductible for taxation purpose
                  
                  
                  824
                  
                  
                  
                  5,621
                  
                  
                  
                  9,038
                  
                  
                  
                  11Income
      not subject to tax
                  
                  
                  -
                  
                  
                  
                  3
                  
                  
                  
                  -
                  
                  
                  
                  6,727Tax
      charge at the Group's effective rate
                  
                  
                  552
                  
                  
                  
                  3,771
                  
                  
                  
                  2,181
                  
                  
                  
                  21,783





Note:
            Prior
      to January 1, 2008, the Group operated solely in China and the applicable
      tax rate was 27%.  The applicable tax rates from January 1, 2008
      were a mix of 25% and 16.5% for entities operating in China and Hong Kong
      respectively.





The Group
had the following estimated unused tax losses, which will expire as
follows:





2009
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  2007USD'000
                  
                  
                  RMB'000
                  
                  
                  RMB'000
                  
                  
                  RMB’000Year
      of expiration2010
                  
                  
                  4
                  
                  
                  
                  29
                  
                  
                  
                  29
                  
                  
                  
                  292011
                  
                  
                  209
                  
                  
                  
                  1,430
                  
                  
                  
                  1,430
                  
                  
                  
                  1,4302012
                  
                  
                  986
                  
                  
                  
                  6,727
                  
                  
                  
                  6,727
                  
                  
                  
                  6,7271,199
                  
                  
                  
                  8,186
                  
                  
                  
                  8,186
                  
                  
                  
                  8,186





No
deferred tax asset has been recognised in respect of tax losses due to
unpredictability of future profit streams and the fact that utilization of these
losses is subject to approval by the tax authority in the PRC.





There
      is no difference between the carrying amounts of assets and liabilities in
      the financial statements and the corresponding tax bases used in the
      computation of taxable profit, and there is no taxable difference arising
      on investments in subsidiaries.  Accordingly, there is no
      deferred tax liability at the end of reporting
  periods.


35


EXCEED
COMPANY LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





December
31, 2009





11.
            RELATED
      PARTY TRANSACTIONS





The Group
had the following material transactions with related parties:





(a)
            Mr.
      Lin Shuipan, a director of the Company, has guaranteed certain bank loans
      and bills payables made available to the Group up to RMB30,000,000 during
      the two years ended December 31, 2007, as further detailed in Note 20 to
      the financial statements. The personal guarantee provided by Mr. Lin
      Shuipan expired upon repayment of the respective bank loans and bills
      payables by the Group in 2008.





(b)
            Mr.
      Lin Shuipan, a director of the Company, and Ms. Chen Xiayu, the spouse of
      Mr. Lin Shuipan, have guaranteed certain bank loans and bills payables
      made available to the Group up to RMB60,000,000 during the three years
      ended December 31, 2009, as further detailed in Note 21 to the financial
      statements.  The personal guarantee provided by Mr. Lin Shuipan
      and Ms. Chen Xiayu will expire upon repayment of the respective bank loans
      and bills payables by the Group in June
2010.





(c)
            Mr.
      Lin Shuipan granted the Group an exclusive license to use certain design
      patents in respect of the Group’s products at nil consideration from
      October 1, 2001 to September 30, 2007. These patents are registered in the
      name of Mr. Lin Shuipan in the PRC and were used by the Group during the
      license period. The license expired on September 30,
  2007.





(d)
            The
      Group entered into an agreement with Professor Sun Yining, a non-executive
      director of Windrace, on September 6, 2007.  Pursuant to the
      agreement, Professor Sun Yining was appointed as a brand spokesperson of
      the Group for a term of two years from September 6, 2007.  The
      annual remuneration to Professor Sun Yining comprises RMB200,000 cash
      payment and RMB20,000 in-kind payment of the Group's products. The
      agreement expired in September 2009 and Professor Sun Yining resigned as a
      non-executive director of Windrace on November 10,
  2009.





(e)
            Details
      of remuneration to the executive directors of the Group are disclosed in
      Note 9 to the financial statements:





2009
                    
                    
                    2009
                    
                    
                    2008
                    
                    
                    2007USD'000
                    
                    
                    RMB'000
                    
                    
                    RMB'000
                    
                    
                    RMB’000Short
      term employee benefits
                    
                    
                    181
                    
                    
                    
                    1,238
                    
                    
                    
                    1,445
                    
                    
                    
                    582Post-employment
      benefits
                    
                    
                    1
                    
                    
                    
                    6
                    
                    
                    
                    17
                    
                    
                    
                    15Total
      compensation paid to key management personnel
                    
                    
                    182
                    
                    
                    
                    1,244
                    
                    
                    
                    1,462
                    
                    
                    
                    597





(f)
            Details
      of the outstanding balance due to a director as of the end of reporting
      period are disclosed in Note 22 to the financial
    statements.


36


EXCEED
COMPANY LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





December
31, 2009





12.
            PROPERTY,
      PLANT AND EQUIPMENT





Furniture,fixturesLeasehold
                        
                        
                        Plant
      and
                        
                        
                        Motor
                        
                        
                        and
      office
                        
                        
                        ConstructionBuildings
                        
                        
                        improvements
                        
                        
                        machinery
                        
                        
                        vehicles
                        
                        
                        equipment
                        
                        
                        in
      progress
                        
                        
                        TotalRMB'000
                        
                        
                        RMB'000
                        
                        
                        RMB'000
                        
                        
                        RMB'000
                        
                        
                        RMB'000
                        
                        
                        RMB'000
                        
                        
                        RMB’000Cost:As
      of January 1, 2007
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        13,504
                        
                        
                        
                        3,243
                        
                        
                        
                        479
                        
                        
                        
                        101,300
                        
                        
                        
                        299,190Additions
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        9,537
                        
                        
                        
                        349
                        
                        
                        
                        922
                        
                        
                        
                        176,567
                        
                        
                        
                        17,256Transfers
                        
                        
                        277,867
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (277,867
                        )
                        
                        
                        -Disposals
                        
                        
                        -
                        
                        
                        
                        (3,984
                        )
                        
                        
                        -
                        
                        
                        
                        (69
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (4,053
                        )Written
      off
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (1,456
                        )
                        
                        
                        -
                        
                        
                        
                        (219
                        )
                        
                        
                        -
                        
                        
                        
                        (1,675
                        )As
      of December 31, 2007January
      1, 2008
                        
                        
                        277,867
                        
                        
                        
                        -
                        
                        
                        
                        17,601
                        
                        
                        
                        3,243
                        
                        
                        
                        479
                        
                        
                        
                        -
                        
                        
                        
                        299,190Additions
                        
                        
                        8,120
                        
                        
                        
                        183
                        
                        
                        
                        7,682
                        
                        
                        
                        349
                        
                        
                        
                        922
                        
                        
                        
                        -
                        
                        
                        
                        17,256Written
      off
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (345
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (345
                        )As
      of December 31, 2008 and January 1, 2009
                        
                        
                        285,987
                        
                        
                        
                        183
                        
                        
                        
                        24,938
                        
                        
                        
                        3,592
                        
                        
                        
                        1,401
                        
                        
                        
                        -
                        
                        
                        
                        316,101Additions
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,037
                        
                        
                        
                        122
                        
                        
                        
                        1,131
                        
                        
                        
                        -
                        
                        
                        
                        2,290Disposals
                        
                        
                        -
                        
                        
                        
                        (182
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (29
                        )
                        
                        
                        -
                        
                        
                        
                        (211
                        )Exchange
      realignment
                        
                        
                        -
                        
                        
                        
                        (1
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (1
                        )As
      of December 31, 2009
                        
                        
                        285,987
                        
                        
                        
                        -
                        
                        
                        
                        25,975
                        
                        
                        
                        3,714
                        
                        
                        
                        2,503
                        
                        
                        
                        -
                        
                        
                        
                        318,179Accumulated
      depreciation:As
      of January 1, 2008
                        
                        
                        9,378
                        
                        
                        
                        -
                        
                        
                        
                        3,085
                        
                        
                        
                        1,826
                        
                        
                        
                        116
                        
                        
                        
                        -
                        
                        
                        
                        14,405Provided
      during the year
                        
                        
                        12,534
                        
                        
                        
                        16
                        
                        
                        
                        2,157
                        
                        
                        
                        410
                        
                        
                        
                        183
                        
                        
                        
                        -
                        
                        
                        
                        15,300Written
      off
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (248
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (248
                        )As
      of December 31, 2008 and January 1, 2009
                        
                        
                        21,912
                        
                        
                        
                        16
                        
                        
                        
                        4,994
                        
                        
                        
                        2,236
                        
                        
                        
                        299
                        
                        
                        
                        -
                        
                        
                        
                        29,457Provided
      during the year
                        
                        
                        12,869
                        
                        
                        
                        3
                        
                        
                        
                        2,612
                        
                        
                        
                        301
                        
                        
                        
                        381
                        
                        
                        
                        -
                        
                        
                        
                        16,166Written
      off
                        
                        
                        -
                        
                        
                        
                        (19
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (3
                        )
                        
                        
                        -
                        
                        
                        
                        (22
                        )As
      of December 31, 2009
                        
                        
                        34,781
                        
                        
                        
                        -
                        
                        
                        
                        7,606
                        
                        
                        
                        2,537
                        
                        
                        
                        677
                        
                        
                        
                        -
                        
                        
                        
                        45,601Carrying
      amount:As
      of December 31, 2008
                        
                        
                        264,075
                        
                        
                        
                        167
                        
                        
                        
                        19,944
                        
                        
                        
                        1,356
                        
                        
                        
                        1,102
                        
                        
                        
                        -
                        
                        
                        
                        286,644As
      of December 31, 2009
                        
                        
                        251,206
                        
                        
                        
                        -
                        
                        
                        
                        18,369
                        
                        
                        
                        1,177
                        
                        
                        
                        1,826
                        
                        
                        
                        -
                        
                        
                        
                        272,578USD'000
                        
                        
                        USD'000
                        
                        
                        USD'000
                        
                        
                        USD'000
                        
                        
                        USD'000
                        
                        
                        USD'000
                        
                        
                        USD'000As
      of December 31, 2009
                        
                        
                        36,802
                        
                        
                        
                        -
                        
                        
                        
                        2,691
                        
                        
                        
                        172
                        
                        
                        
                        268
                        
                        
                        
                        -
                        
                        
                        
                        39,933





The
Group's buildings are situated in Mainland China and are held on land under
medium term leases (lease with a term less than 50 years).


37


EXCEED
COMPANY LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





December
31, 2009





12.
            PROPERTY,
      PLANT AND EQUIPMENT (continued)





As of
December 31, 2009, certain of the Group's buildings with carrying amount of
approximately RMB243,481,000 (2008: RMB104,434,000) were pledged to secure
general banking facilities granted to the Group (Note 21).





13.
            PREPAID
      LAND LEASE PAYMENTS





2009
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  2007USD'000
                  
                  
                  RMB'000
                  
                  
                  RMB'000
                  
                  
                  RMB’000Carrying
      amount at January 1
                  
                  
                  4,504
                  
                  
                  
                  30,745
                  
                  
                  
                  31,491
                  
                  
                  
                  29,754Additions
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,483Recognised
      during the year
                  
                  
                  (110
                  )
                  
                  
                  (752
                  )
                  
                  
                  (746
                  )
                  
                  
                  (746
                  )Carrying
      amount at December 31
                  
                  
                  4,394
                  
                  
                  
                  29,993
                  
                  
                  
                  30,745
                  
                  
                  
                  31,491Current
      portion included in prepayments, deposits and other
      receivables
                  
                  
                  (95
                  )
                  
                  
                  (646
                  )
                  
                  
                  (646
                  )
                  
                  
                  (646
                  )Non-current
      portion
                  
                  
                  4,299
                  
                  
                  
                  29,347
                  
                  
                  
                  30,099
                  
                  
                  
                  30,845





The
Group's prepayment of land use rights premiums is for medium term land located
in Mainland China.





As of
December 31, 2009, land use rights with carrying amount of approximately
RMB29,837,000,(2008: RMB11,924,000 2007:RMB5,830,00), respectively, were pledged
to secure general banking facilities granted to the Group (Note
21).





XDLong
China owned and occupied a parcel of land with an aggregate site area of
approximately 38,784 square meters together with buildings on such land. The
buildings consist of the Group’s production facility, a research and development
center, an office facility, staff quarters, and a recreation center and sports
facility, with an aggregate gross floor area of approximately 99,024 square
meters. The Group has obtained the land use rights certificate in relation to
the land and the property ownership certificates for the buildings. The land use
rights were granted for industrial use for a term of 50 years from December 25,
2006.





XDLong
Fujian owns a parcel of land located within the Group’s production complex in
Jinjiang, which has an aggregate site area of approximately 15,277 square
meters. Pursuant to the State-owned Land Use Right Transfer Contract,
construction on this land was required to commence by February 28, 2006.
However, XDLong Fujian did not commence construction by such date because the
Group decided to construct its production facilities on another larger parcel of
land owned by XDLong China. Currently, the Group has plans to construct
additional production facilities on the XDLong Fujian parcel of land. On May 14,
2008, XDLong Fujian applied to the relevant local government agency for the
approval to postpone construction on the land. The local government agency has
verbally confirmed that the local government does not intend to repossess the
parcel of land held for use by XDLong Fujian, or otherwise cancel the underlying
contract. Management of the Group has concluded that the possibility of
incurring an impairment in value or loss of land use is remote.


38


EXCEED
COMPANY LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





December
31, 2009





13.
            PREPAID
      LAND LEASE PAYMENTS (continued)





Management
based its conclusion on the fact that the local government has been advised that
the Group intends to commence construction on the parcel of land and that local
government officials have provided verbal assurances that they do not intend to
take punitive action for the Group’s failure to commence
construction.  Consistent with the objectives of the local government,
the construction of the additional production facilities in the Jinjiang area
will inject capital into the local economy and result in an expansion of the
Group’s local workforce.    As of December 31, 2009, the
carrying amounts of this piece of land were RMB5,584,000 (2008: RMB5,707,000
2007:RMB5,829,000).





14.
            INVENTORIES





2009
                  
                  
                  2009
                  
                  
                  2008USD'000
                  
                  
                  RMB'000
                  
                  
                  RMB'000Raw
      materials
                  
                  
                  1,768
                  
                  
                  
                  12,071
                  
                  
                  
                  4,273Work
      in progress
                  
                  
                  182
                  
                  
                  
                  1,243
                  
                  
                  
                  5,327Finished
      goods
                  
                  
                  6,249
                  
                  
                  
                  42,652
                  
                  
                  
                  76,4608,199
                  
                  
                  
                  55,966
                  
                  
                  
                  86,060





15.
            TRADE
      RECEIVABLES





2009
                  
                  
                  2009
                  
                  
                  2008USD'000
                  
                  
                  RMB'000
                  
                  
                  RMB'000Trade
      receivables
                  
                  
                  119,068
                  
                  
                  
                  812,747
                  
                  
                  
                  284,795Impairment
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -119,068
                  
                  
                  
                  812,747
                  
                  
                  
                  284,795





The
Group's trading terms with its customers are mainly on credit. The credit period
is generally for a period of two months to its customers.  Starting
from 2009, the Group has extended the credit period up to four months to its
customers as the duration of the renewal for distribution agreement has been
extended for three years from one year.


39


EXCEED
COMPANY LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





December
31, 2009





15.          TRADE
RECEIVABLES (continued)





An aging
analysis of the Group's trade receivables as of December 31, 2009, based on the
invoice date, is as follows:





2009
                  
                  
                  2009
                  
                  
                  2008USD'000
                  
                  
                  RMB'000
                  
                  
                  RMB'000Within
      60 days
                  
                  
                  58,710
                  
                  
                  
                  400,750
                  
                  
                  
                  184,42461
      to 90 days
                  
                  
                  39,549
                  
                  
                  
                  269,956
                  
                  
                  
                  90,41591
      to 180 days
                  
                  
                  20,809
                  
                  
                  
                  142,041
                  
                  
                  
                  9,956181
      to 360 days
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -119,068
                  
                  
                  
                  812,747
                  
                  
                  
                  284,795





Starting
from 2009, the Group has extended the credit period up to four months to its
customers as the duration of the renewal for distribution agreement has been
extended for three years from one year.  An aging of trade receivables
as December 31, 2009, that were neither past due nor impaired or past due but
not impaired, is as follows:





Past due but not impairedNeither pastdue nor
                            
                            
                            Less than
                            
                            
                            31 to
                            
                            
                            Overimpaired
                            
                            
                            30 days
                            
                            
                            120 days
                            
                            
                            120 days
                            
                            
                            Sub-total
                            
                            
                            TotalRMB'000
                            
                            
                            RMB'000
                            
                            
                            RMB'000
                            
                            
                            RMB'000
                            
                            
                            RMB'000
                            
                            
                            RMB'000December
      31, 2008
                            
                            
                            184,424
                            
                            
                            
                            90,415
                            
                            
                            
                            9,956
                            
                            
                            
                            -
                            
                            
                            
                            100,371
                            
                            
                            
                            284,795December
      31, 2009
                            
                            
                            808,631
                            
                            
                            
                            4,116
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            4,116
                            
                            
                            
                            812,747USD'000
                            
                            
                            USD'000
                            
                            
                            USD'000
                            
                            
                            USD'000
                            
                            
                            USD'000
                            
                            
                            USD'000December
      31, 2009
                            
                            
                            118,465
                            
                            
                            
                            603
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            603
                            
                            
                            
                            119,068





Receivables
that were neither past due nor impaired relate to customers with no recent
history of default.





Receivables
that were past due but not impaired relate to a number of independent customers
that have a good repayment record with the Group.  Based on past
experience, the directors of the Company are of the opinion that no impairment
allowance is necessary in respect of these balances as there has not been a
significant change in credit quality and the balances are still considered fully
recoverable. The Group does not hold any collateral or other credit enhancements
over these balances.





The
carrying amounts of trade receivables approximate to their fair
values.


40


EXCEED
COMPANY LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





December
31, 2009





16.
            PREPAYMENTS,
      DEPOSITS AND OTHER RECEIVABLES





2009
                  
                  
                  2009
                  
                  
                  2008USD'000
                  
                  
                  RMB'000
                  
                  
                  RMB'000Prepaid
      advertising expenses
                  
                  
                  2,311
                  
                  
                  
                  15,777
                  
                  
                  
                  2,752Prepaid
      expenses
                  
                  
                  371
                  
                  
                  
                  2,532
                  
                  
                  
                  1,268Prepaid
      land-lease payments
                  
                  
                  95
                  
                  
                  
                  646
                  
                  
                  
                  646Rental
      deposits
                  
                  
                  4
                  
                  
                  
                  30
                  
                  
                  
                  -Other
      receivables
                  
                  
                  125
                  
                  
                  
                  855
                  
                  
                  
                  7552,906
                  
                  
                  
                  19,840
                  
                  
                  
                  5,421





The
carrying amount of prepayments, deposits and other receivables approximate to
their fair value.





None of
the above assets is either past due or impaired.  The financial assets
(Note 30) included in the above balances relate to receivables for which there
was no recent history of default.





17.          PLEDGED
DEPOSITS





The
pledged deposits were used to secure the bills payables of the Group (Note
19).





18.          CASH
AND BANK BALANCES





At the
end of reporting period, the cash and bank balances of the Group denominated in
RMB amounted to RMB205,209,000 (2008: RMB118,673,000).  RMB is not
freely convertible into other currencies, however, under Mainland China's
Foreign Exchange Control Regulations and Administration of Settlement, Sale and
Payment of Foreign Exchange Regulations, the Group is permitted to exchange RMB
for other currencies through banks authorized to conduct foreign exchange
business.





Cash at
banks earns interest at floating rates based on daily bank deposit rates. The
bank balances and pledged bank deposits (Note 17) are deposited with
creditworthy banks with no recent history of default. The carrying amounts of
cash and bank balances approximate to their fair values.


41


EXCEED
COMPANY LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





December
31, 2009





19.
            TRADE
      AND BILLS PAYABLES





An aging
analysis of the Group's trade and bills payables as of December 31, 2009, based
on the invoice date, is as follows:





2009
                  
                  
                  2009
                  
                  
                  2008USD'000
                  
                  
                  RMB'000
                  
                  
                  RMB'000Within
      90 days
                  
                  
                  23,519
                  
                  
                  
                  160,538
                  
                  
                  
                  116,08191
      to 180 days
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -181
      to 360 days
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Over
      360 days
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Trade
      payables
                  
                  
                  23,519
                  
                  
                  
                  160,538
                  
                  
                  
                  116,081Bills
      payables
                  
                  
                  5,127
                  
                  
                  
                  35,000
                  
                  
                  
                  11,500Trade
      and bills payables
                  
                  
                  28,646
                  
                  
                  
                  195,538
                  
                  
                  
                  127,581





The trade
payables are non-interest-bearing and are normally settled on 30- to 90-day
terms.  Starting from 2009, the credit period has been extended up to
four months by the suppliers.  The carrying amounts of trade and bills
payables approximate to their fair values.





Bills
payables as of December 31, 2009 and 2008 were secured by pledged bank deposits
(Note 17) and certain personal and corporate guarantees (Note
21).


42


EXCEED
COMPANY LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





December
31, 2009





20.
            DEPOSITS
      RECEIVED, OTHER PAYABLES AND
ACCRUALS





2009
                  
                  
                  2009
                  
                  
                  2008USD'000
                  
                  
                  RMB'000
                  
                  
                  RMB'000Deposits
      received
                  
                  
                  2,051
                  
                  
                  
                  14,000
                  
                  
                  
                  11,500Accrued
      liabilities
                  
                  
                  3,521
                  
                  
                  
                  24,040
                  
                  
                  
                  14,009Accrued
      IPO expenses
                  
                  
                  486
                  
                  
                  
                  3,313
                  
                  
                  
                  16,435Accrued
      interest on preferred shares
                  
                  
                  1,007
                  
                  
                  
                  6,875
                  
                  
                  
                  21,795Value
      added tax payables
                  
                  
                  2,141
                  
                  
                  
                  14,614
                  
                  
                  
                  4,6399,206
                  
                  
                  
                  62,842
                  
                  
                  
                  68,378





Other
payables and value added tax payables are non-interest-bearing and have an
average term of three months.





The
carrying amount of deposits received, other payables and accruals approximate to
their fair value.





Deposits
received primarily relate to deposits made by distributors in accordance with
the distributorship agreements.  Each distributor must pay the Group a
fixed sum of RMB500,000 as security for the performance of their obligations
under the distributorship agreement.  The Group has the right not to
refund the deposit to the distributors if they do not comply with the terms
stipulated in the distributorship agreements.  The Group will refund
the deposit to a distributor upon the expiration of the distributorship
agreement should either party decides not to renew the agreement. During
the term of the distribution agreement, the Group has the right to terminate the
distribution agreement, at its sole discretion and at anytime, if the
distributions cannot meet certain sales target and payment
requirements.  Accordingly, management considers it more appropriate
to classify the deposits from the Group’s distributors as a current
liability.





21.
            INTEREST-BEARING
      BANK BORROWINGS





2009
                  
                  
                  2009
                  
                  
                  2008USD'000
                  
                  
                  RMB'000
                  
                  
                  RMB'000CurrentBank
      loans - secured and repayable within one year
                  
                  
                  8,497
                  
                  
                  
                  58,000
                  
                  
                  
                  20,000


43


EXCEED
COMPANY LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





December
31, 2009





21.
            INTEREST-BEARING
      BANK BORROWINGS (continued)





2009
                              
                              
                              
                              2008Maturity
                                date
                              
                              RMB'000
                              
                              Maturity
                                date
                              
                              RMB'000CurrentBank
      loans - secured and
                              May
      31, 2010
                              
                              
                              10,000
                              
                              Jun
      14, 2009
                              
                              
                              20,000repayable
                              Jun
      7, 2010
                              
                              
                              8,000Jun
      17, 2010
                              
                              
                              6,000Jun
      17, 2010
                              
                              
                              34,00058,000
                              
                              
                              
                              
                              20,000





The
      above bank loans were denominated in RMB. The bank loans bore fixed
      interest rates ranging from 5.310% to 6.372% per annum for the year (2008:
      7.47% per annum).  Because of the short maturity, the carrying
      amounts of current bank loans approximate to their fair
      values.





The bank
loans of RMB58,000,000 as of December 31, 2009 were secured by:





(i)
            personal
      guarantee of RMB60,000,000 from Mr. Lin Shuipan (Note 11 (a)) and Ms. Chen
      Xiayu, the spouse of Mr. Lin Shuipan;
and


(ii)
            mortgages
      over certain buildings and land use rights of the Group situated in
      Mainland China (Note 12 and 13).





The
personal guarantees provided by Mr. Lin Shuipan and Ms. Chen will expire upon
repayment of the respective bank loans by the Group in June 2010.





The bank
loans and bills payables of RMB20,000,000 and RMB11,500,000 (Note 19),
respectively,  as of December 31, 2008 were secured by:





(i)
            personal
      guarantee of RMB60,000,000 from Mr. Lin Shuipan (Note 11 (b)) and Ms. Chen
      Xiayu, the spouse of Mr. Lin Shuipan;
and


(ii)
            mortgages
      over certain buildings and land use rights of the Group situated in
      Mainland China (Notes 12 and 13).





22.          AMOUNT
DUE TO A DIRECTOR





The
balance is unsecured, interest-free and is due on demand. The carrying amount of
this balance approximates to its fair value because of its short
term.  The amount has been fully settled as of the report
date.


44




EXCEED
COMPANY LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





December
31, 2009





23.
            PREFERRED
      SHARES





On March
28, 2008, Windrace, Mr. Lin Shuipan and Elevatech Limited (the "GS Investor")
entered into a subscription agreement (the "Subscription Agreement") under which
GS Investor agreed to subscribe for 2,500 preferred shares representing 2.5% of
the total issued share capital of the Windrace after the issue and allotment of
preferred shares under the Subscription Agreement (the
"Subscription").  The consideration for the Subscription was HKD95.71
million (equivalent to RMB85,135,000).





On March
28, 2008, Mr. Lin Shuipan, RichWise International Investment Group Limited
("RichWise"), Mr. Shi Jinlei (the sole beneficial owner of RichWise), Windrace
and GS Investor entered
into a share purchase agreement (the "SPA") under which Mr. Lin Shuipan and RichWise
agreed to transfer 2,000 and 3,500 preferred shares (the “sale shares”)
representing 2.0% and 3.5%, respectively, of the issued share capital of
Windrace as enlarged by the Subscription by GS Investor.  The
consideration for the acquisition of the sale shares under the SPA amounting to
HKD210.56 million (equivalent to RMB189,504,000), was made to Mr. Lin Shuipan
and Richwise. Therefore, the amount was treated as a form of distribution to Mr.
Lin Shuipan and Richwise and was charged to the stockholders’ equity by debiting
“other reserve” account.





Pursuant
to the SPA, Mr. Lin Shuipan and RichWise (collectively, the "Selling Parties")
but not Windrace granted GS Investor certain rights for the adjustment of the
total consideration and/or consideration per share upon the occurrence of
certain adjustment events.





Pursuant
to the Subscription Agreement and SPA, the preferred shares:





(i)
            are
      convertible at the option of GS Investor into the ordinary shares of
      Windrace on an one-to-one basis (the "Conversion Ratio"), subject to the
      adjustment under the anti-dilution
clause.





(ii)
            will
      be converted automatically into ordinary shares of Windrace at the
      Conversion Ratio immediately upon the completion of the global offering of
      the Group; and





(iii)
            are
      redeemable at the option of the GS Investor if one of the following events
      occurs:





(1)
            any
      event has occurred giving rise to a right to terminate the Subscription
      Agreement and SPA; or





(2)
            Windrace
      does not complete a public offering satisfying certain conditions in
      relation to the venue of listing, market capitalization of at least USD650
      million or a deemed satisfaction with the market capitalization
      requirement by GS Investor and the percentage of public float prior to
      December 31, 2009.





GS
Investor shall have the right to require Windrace to redeem any part or all of
the preferred shares in cash for an amount equal to the consideration as stated
in the Subscription Agreement.  In addition, pursuant to the SPA, upon
the redemption of the preferred shares, the Selling Parties will make a payment
to GS Investor in respect of the sum of the issue price for each preferred
share, plus 12% of internal rate of return (“IRR”) from the initial issuance
date until redemption date of the preferred shares.


45


EXCEED
COMPANY LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





December
31, 2009





23.
            PREFERRED
      SHARES (continued)





As the
issuance currency of the preferred shares (HKD) is not the same as the
functional currency of the Group (RMB), the ‘fixed for fixed’ requirement is
violated, the fixed amount of the issuance currency of the preferred shares is
distinguished and the conversion option for the classification of derivative
component as equity is precluded.  The preferred shares are classified
as financial liability under IAS 32 and are subject to IAS 39 for recognition
and measurement.





Although
it may be within Windrace’s control to determine whether the IPO should be
attempted, market and regulatory forces will determine whether the attempt will
be successful.  These forces are beyond the control of Windrace,
therefore the redemption upon IPO event not occurring meets the definition of a
contingent settlement event in accordance with paragraph 25 of IAS32 paragraph
25 and results in the PS being classified as a financial liability from
inception.





The 12%
IRR represents the market interest rate or covers the market interest rate. The
carrying value of the preferred shares of RMB272,432,000 represents the fair
value of the financial liability at the insurance date, at December 31, 2008 and
subsequent periods, adjusted only for foreign exchange rate
changes.





Per the
Subscription Agreement and the SPA executed by Windrace, the GS Investor and the
Selling Parties, upon redemption of the preferred share, the Selling Parties
will make a payment to the GS Investor at 12% IRR on the preferred shares.
Accordingly, the payment of the interest by the Selling Parties, who are also
stockholders of Windrace, will be treated as a form of capital contribution .
The monthly interest accrual of the 12% IRR is credited to other payable. During
the year ended December 31, 2009, interest of RMB54,381,000 (2008:
RMB21,795,000) has been credited to other payable.





A letter
agreement and a redemption agreement were signed on May 8, 2009 and July 27,
2009, respectively, in which all of the outstanding preferred shares of Windrace
will be redeemed simultaneously with the Acquisition (as defined in Note
1).





Pursuant
to the letter agreement and the redemption agreement, all of the outstanding
preferred shares of Windrace will be redeemed simultaneously with the
Acquisition. As consideration for the redemption of the preferred shares, the
sole preferred shareholder, Elevatech, will receive a promissory note from
Windrace providing for (i) the payment of HKD306.2 million (RMB272.5 million) on
the earlier of the fifth business day following the date of issue of the
promissory note and October 31, 2009 and (ii) an additional payment of USD1.0
(RMB 6.9 million) million on June 30, 2010. Following the issuance of the
promissory note, the original terms of the preferred shares will be superseded
by the terms of the promissory note, and Windrace's due payment thereunder will
represent a full settlement of its obligations under the preferred shares.
However, if Windrace defaults on its payment obligations under the promissory
note, Elevatech will have the option to convert the overdue amount into
preference shares with the same terms as the preferred shares. Further, if the
Acquisition is consummated on or prior to October 31, 2009, any preferred shares
or preference shares issued and outstanding following the consummation of the
Acquisition will be immediately redeemable under their original terms at the
option of Elevatech.  Finally, if the Acquisition is not consummated
by October 31, 2009, the letter agreement will have no further effect, and the
preferred shares will remain outstanding under their original
terms.


46


EXCEED
COMPANY LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





December
31, 2009





23.
            PREFERRED
      SHARES (continued)





In
addition, Mr. Lin Shuipan and RichWise agreed to enter into a guarantee in
respect of the obligations of Windrace to pay USD1.0 million (RMB 6.9 million)
and any interest at a rate of 8.25% per annum on the overdue principal amount
under the promissory note issued by Windrace to the GS Investor. However, any
obligation to pay under the guarantee only covers the portion of the amounts
Windrace has defaulted. Moreover, any obligation to pay the unpaid portion of
the USD1.0 million (RMB 6.9 million) under the guarantee will be several and not
joint and will be allocated between Mr. Lin Shuipan and RichWise at the
ratio of 0.5625 to 0.4375. Further any obligation to pay the unpaid interest
under the guarantee will be limited to Mr. Lin Shuipan only. RichWise will
not be obligated to pay the unpaid interest under the guarantee.





On
October 23, 2009, the initial valuation of the preferred shares of HKD306.27
million (equivalent to RMB269,960,000) was fully repaid to the GS
investors.





As the
accrued interest of RMB41,060,000 has been waived, the amount was treated as a
gain to Windrace and was charged to the stockholders’ equity by crediting “other
reserve” account.





Details
of the net proceeds received from the issue of the preferred shares are analyzed
as follows:





Preferred Shares
                  
                  USD’000
                  
                  
                  RMB'000Nominal
      value of the 8,000 Preferred Shares issued and liability component at the
      issuance date
                  
                  
                  40,235
                  
                  
                  
                  274,639Exchange
      rate effect
                  
                  
                  (323
                  )
                  
                  
                  (2,207
                  )Liability
      component as December 31, 2008
                  
                  
                  39,912
                  
                  
                  
                  272,432Redemption
      of preferred shares
                  
                  
                  (39,912
                  )
                  
                  
                  (272,432
                  )Liability
      component as December 31, 2009
                  
                  
                  -
                  
                  
                  
                  -


47


EXCEED
COMPANY LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





December
31, 2009





24.
            SHAREHOLDERS’
      EQUITY





Common
Stock


On
October 21, 2009, the Company acquired 100% equity interest of Windrace by
issuing an aggregate of 17,008,633 new ordinary shares (the “Additional Shares”)
to the Sellers.





Subject
to an escrow agreement to be entered into among 2020, Windrace, the Company, the
Sellers and the escrow agent and the Purchase Agreement, a portion of the
Additional Shares will be held in escrow and released by installment subject to
audited profit after tax of Exceed of USD38,067,350 in 2009, USD49,487,555 in
2010 and USD64,333,821.





If the
Company achieves earnings of USD64,333,821 according to the 2011 audit,
2,212,789 additional new ordinary shares of Exceed shall be issued to the
Sellers as earn-out shares.





On July
27, 2009, Windrace entered into an Investment Agreement (the “Investment
Agreement”) and an escrow agreement (the “Escrow Agreement”) with Wisetech
Holdings Limited (“Wisetech”), Windtech Holdings Limited (“Windtech” and,
collectively with Wisetech, the “Investors”) and Mr. Lin Shuipan, and as amended
by a supplemental agreement dated on November 30, 2009, the Investors invested
an aggregate of USD30,000,000 in Windrace in two installments. Upon the
completion of the Business Combination, the Company issued 3,627,968 new
ordinary shares to the Investors (equal to $27,500,000 divided by $7.58 per
share. On November 30, 2009, the Company issued 329,816 new ordinary shares to
the Investors (equal to $2,500,000 divided by $7.58 per share).





Issued preferred
shares


The
preferred shares are presented as current liabilities in the consolidated
statements of financial position and the related movement is set out in Note 23
of the financial statements.





Common stock
warrants


2020
issued common stock warrants in November 2007 as part of its initial public
offering. Each warrant entitled the holder to purchase from 2020 one share of
common stock at an exercise price of USD5.25 commencing on the later of (i)
November 8, 2008 or (ii) the completion of the Business Combination with a
target business, and expires on November 8, 2011. The warrants would be
redeemable, at a price of USD0.01 per warrant upon 30 days prior notice after
the warrants become exercisable, only in the event that the last sale price of
the common stock was at least $11.50 per share for any 20 trading days within a
30 trading day period ending on the third day prior to the date on which notice
of redemption is given.





At of
December 31, 2009, the Company had 10,890,000 warrants outstanding (2008:
10,890,000). The common stock warrants remain as equity instrument according to
IAS 32 paragraph 22.


48


EXCEED
COMPANY LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





December
31, 2009





24.
            SHAREHOLDERS’
      EQUITY (continued)





Unit Purchase
Option


In
November 2007, a unit purchase option (“UPO”) was issued to Morgan Joseph &
Co. Inc. (“Morgan Joseph”) for USD100 by 2020, as partial consideration for
Morgan Joseph’s services as underwriter of the initial public offering of
2020.  The UPO comprises an option to purchase up to an aggregate of
550,000 units of the Company, with each unit consisting of one share of the
Company’s common stock and one warrant to purchase a share of common stock of
Company.





On
December 8, 2009, the Company has completed the purchase of the UPO from Morgan
Joseph for cash consideration of USD2,500,000.  The UPO has been
retired and cancelled.





The
Company paid the cash consideration to Morgan Joseph out of the proceeds of a
subscription in the aggregate amount of US $2,500,000 by the Investors for
shares of the Company’s common stock. The subscription was completed on November
30, 2009 as the final investment (as stated in Note 24 – Common
Stock).





Reserves


The
amounts of the Group's reserves and the movements therein for the current and
prior years 2009 are presented in the consolidated statements of changes in
equity.  In accordance with the relevant regulations applicable in the
PRC, subsidiaries established in the PRC are required to transfer a certain
percentage of their statutory annual profits after tax (after offsetting any
prior years’ losses), if any, to the statutory surplus fund until the balance of
the fund reaches 50% of their respective registered capital. Subject to certain
restrictions as set out in the relevant PRC regulations, the statutory surplus
fund may be used to offset against accumulated losses of the respective PRC
subsidiaries. The amount of the transfer is subject to the approval of the board
of directors of the respective PRC subsidiaries.


49


EXCEED
COMPANY LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





December
31, 2009





25.
            EARNINGS
      PER SHARE





The
calculation of the basic and diluted earnings per share attributable to the
ordinary equity holders of the Company is based on the following
data:





December
      312009
                      
                      
                      2009
                      
                      
                      2008
                      
                      
                      2007USD'000
                      
                      
                      RMB'000
                      
                      
                      RMB'000
                      
                      
                      RMB'000EarningsEarnings
      for the purposes of basic earnings per share
                      
                      
                      36,335
                      
                      
                      
                      248,019
                      
                      
                      
                      168,528
                      
                      
                      
                      134,785Effect
      of dilutive potential ordinary shares Interest on preferred
      shares
                      
                      
                      3,859
                      
                      
                      
                      26,338
                      
                      
                      
                      21,795
                      
                      
                      
                      -Earnings
      for the purposes of diluted earnings per share
                      
                      
                      40,194
                      
                      
                      
                      274,357
                      
                      
                      
                      190,323
                      
                      
                      
                      134,785Number
      of sharesWeighted
      average number of ordinary shares for the purposes of basic earnings per
      share
                      
                      
                      8,292,331
                      
                      
                      
                      8,292,331
                      
                      
                      
                      5,741,466
                      
                      
                      
                      5,741,466Effect
      of dilutive potential ordinary sharesEscrow
      shares in relation to 2009 profit
                      
                      
                      1,097,500
                      
                      
                      
                      1,097,500
                      
                      
                      
                      -
                      
                      
                      
                      -Preferred
      shares
                      
                      
                      3,335,426
                      
                      
                      
                      3,335,426
                      
                      
                      
                      1,127,444
                      
                      
                      
                      -Weighted
      average number of ordinary shares for the purposes of diluted earnings per
      share
                      
                      
                      12,725,257
                      
                      
                      
                      12,725,257
                      
                      
                      
                      6,868,910
                      
                      
                      
                      5,741,466Earnings
      per shareBasic
                      
                      USD4.38
                      
                      
                      RMB29.91
                      
                      
                      RMB29.35
                      
                      
                      RMB23.48Diluted
                      
                      USD3.16
                      
                      
                      RMB21.56
                      
                      
                      RMB27.71
                      
                      
                      RMB23.48





The
weighted average numbers of shares outstanding during 2008 have been restated to
reflect the recapitalization on October 21, 2009.





The
effect of earn-out shares that have yet to be earned (as described in Note 24 –
Common Stock) have not been considered in the diluted earnings per share
calculation since the shares are contingently issuable.


50


EXCEED
COMPANY LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





December
31, 2009





26.    
     INTERESTS IN JOINTLY-CONTROLLED
ENTITY





2009
                  
                  
                  2009
                  
                  
                  2008USD'000
                  
                  
                  RMB'000
                  
                  
                  RMB'000As
      of January 1
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Unlisted
      investments , at cost
                  
                  
                  -
                  
                  
                  
                  1
                  
                  
                  
                  -Share
      of loss
                  
                  
                  (2
                  )
                  
                  
                  (16
                  )
                  
                  
                  -Loans
      to jointly-controlled entity
                  
                  
                  2
                  
                  
                  
                  15
                  
                  
                  
                  -As
      of December 31
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -





The loans to the jointly-controlled
entity is unsecured, interest-free and have no fixed terms of
repayment.  The loans to jointly-controlled entity of RMB16,000
represent in substance part of the investments in jointly-controlled entity as
they are unlikely to be repaid in the foreseeable future, a full provision of
RMB16,000 was provided for impairment loss.  Particulars of the
jointly-controlled entity is as follows:





Particulars
                      
                      Place and
                      
                      Percentage ofof issued
                      
                      date of
                      
                      Ownership
                      
                      
                      Voting
                      
                      
                      Profit
                      
                      PrincipalName
                      
                      shares held
                      
                      incorporation
                      
                      interest
                      
                      
                      power
                      
                      
                      sharing
                      
                      activitiesExceed Brand
                      
                      Registered
                      
                      British Virgin Islands
                      
                      
                      50
                      
                      
                      
                      50
                      
                      
                      
                      50
                      
                      DormantManagement
                      
                      capital of
                      
                      Dec 3, 2009
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      company(BVI) Limited
                      
                      USD1 each





The above
investment in jointly-controlled entity is indirectly held by the
Company.





The
following table illustrates the summarized financial information of the Group's
jointly-controlled entity:





2009
                  
                  
                  2009
                  
                  
                  2008USD'000
                  
                  
                  RMB'000
                  
                  
                  RMB'000Share
      of the jointly-controlled entity' assets and liabilities:Current
      assets
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Non-current
      assets
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Current
      liabilities
                  
                  
                  (1
                  )
                  
                  
                  (4
                  )
                  
                  
                  -Non-current
      liabilities
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Net
      liabilities
                  
                  
                  (1
                  )
                  
                  
                  (4
                  )
                  
                  
                  -


51


EXCEED
COMPANY LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





December
31, 2009





26.
            INTERESTS
      IN JOINTLY-CONTROLLED ENTITY
(continued)





2009
                  
                  
                  2009
                  
                  
                  2008USD'000
                  
                  
                  RMB'000
                  
                  
                  RMB'000Share
      of the jointly-controlled entity' results:Revenue
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Other
      income
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  --
                  
                  
                  
                  -
                  
                  
                  
                  -Total
      expenses
                  
                  
                  (1
                  )
                  
                  
                  (5
                  )
                  
                  
                  -Tax
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Loss
      after tax
                  
                  
                  (1
                  )
                  
                  
                  (5
                  )
                  
                  
                  -





27.
            CONTINGENT
      LIABILITIES





At the
end of reporting period, the Group are not aware of any significant contingent
liabilities (2008: Nil).





28.
            OPERATING
      LEASE ARRANGEMENTS





The Group
leases certain of its production facilities and office premises under operating
lease arrangements.  Leases for these properties are negotiated for
terms ranging from 1 to 2 years.





As of the
end of reporting period, the Group had total future minimum lease payments under
non-cancellable operating leases falling due as follows:





December 312009
                  
                  
                  2009
                  
                  
                  2008USD'000
                  
                  
                  RMB'000
                  
                  
                  RMB'000Within
      one year
                  
                  
                  25
                  
                  
                  
                  173
                  
                  
                  
                  704In
      the second to fifth years, inclusive
                  
                  
                  2
                  
                  
                  
                  15
                  
                  
                  
                  27427
                  
                  
                  
                  188
                  
                  
                  
                  978


52


EXCEED
COMPANY LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





December
31, 2009





29.
            COMMITMENTS





(a) Capital
commitments





At the
end of reporting period, the Group are not aware of any significant capital
commitments (2008: Nil).





(b) Other
commitments





As of
December 31, 2009, total commitments under these arrangements were as
follows:





December
      312009
                  
                  
                  2009
                  
                  
                  2008USD'000
                  
                  
                  RMB'000
                  
                  
                  RMB'000Advertising
      and promotional expenses2009
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  21,9002010
                  
                  
                  3,555
                  
                  
                  
                  24,267
                  
                  
                  
                  -3,555
                  
                  
                  
                  24,267
                  
                  
                  
                  21,900Research
      and development (Note)2009
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  5002010
                  
                  
                  73
                  
                  
                  
                  500
                  
                  
                  
                  50073
                  
                  
                  
                  500
                  
                  
                  
                  1,0003,628
                  
                  
                  
                  24,767
                  
                  
                  
                  22,900





Note:
            Under
      the agreement with the China Institute of Sport Science, the Group has
      committed to pay predetermined annual fees of RMB500,000 to the China
      Institute of Sport Science for each of the years in the period from
      October 2006 to October 2011 for their assistance with the research and
      development of technology for its sports footwear and apparel, and the
      promotion of the technology content of its
  products.


53


EXCEED
COMPANY LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





December
31, 2009





30.
            FINANCIAL
      INSTRUMENTS BY CATEGORY





The
carrying amounts of each of the categories of financial instruments as of the
end of reporting period are as follows:





Financial
assets – Loans and receivables





2009
                        
                        
                        2009
                        
                        
                        2008USD'000
                        
                        
                        RMB'000
                        
                        
                        RMB'000Trade
      receivable
                        
                        
                        119,068
                        
                        
                        
                        812,747
                        
                        
                        
                        284,795Other
      receivables
                        
                        
                        1
                        
                        
                        
                        6
                        
                        
                        
                        6Pledged
      deposits
                        
                        
                        2,198
                        
                        
                        
                        15,000
                        
                        
                        
                        2,300Cash
      and cash equivalents
                        
                        
                        38,413
                        
                        
                        
                        262,204
                        
                        
                        
                        120,068159,680
                        
                        
                        
                        1,089,957
                        
                        
                        
                        407,169Financial
      liabilitiesAt
      amortised cost2009
                        
                        
                        2009
                        
                        
                        2008USD'000
                        
                        
                        RMB'000
                        
                        
                        RMB'000Trade
      and bills payables
                        
                        
                        28,646
                        
                        
                        
                        195,538
                        
                        
                        
                        127,581Other
      payables
                        
                        
                        6,116
                        
                        
                        
                        41,745
                        
                        
                        
                        58,227Due
      to a director
                        
                        
                        247
                        
                        
                        
                        1,687
                        
                        
                        
                        890Preferred
      shares
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        272,432Interest-bearing
      bank borrowings
                        
                        
                        8,497
                        
                        
                        
                        58,000
                        
                        
                        
                        20,00043,506
                        
                        
                        
                        296,970
                        
                        
                        
                        479,130





31.
            FINANCIAL
      RISK MANAGEMENT OBJECTIVES AND
POLICIES





The
Group's principal financial instruments comprise bank borrowings and cash and
bank balances.  The main purpose of these financial instruments is to
fund the Group's operations.  The Group has various financial assets
and liabilities such as trade receivables and trade and bills payables, which
arise directly from its operations.





It is,
and has been, throughout the reporting periods, the Group's policy that no
trading in financial instruments shall be undertaken.





The main
risks arising from the Group's financial instruments are foreign currency risk,
credit risk, interest rate risk, commodity price risk and liquidity
risk.  The board of directors reviews and agrees policies for managing
each of these risks and they are summarized below:


54


EXCEED
COMPANY LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





December
31, 2009





31.
            FINANCIAL
      RISK MANAGEMENT OBJECTIVES AND POLICIES
  (Continued)





Foreign
currency risk





The Group
mainly operates in Mainland China with most of the transactions settled in
RMB.  The Group's assets and liabilities, and transactions arising
from its operations are mainly denominated in RMB.  The Group has not
used any forward contract or currency borrowing to hedge its exposure as foreign
currency risk is considered minimal.





Credit
risk





The Group
trades only with recognized and creditworthy customers.  It is the
Group's policy that all customers who wish to trade on credit terms are subject
to credit verification procedures.  In addition, receivable balances
are monitored on an ongoing basis and the Group's exposure to bad debts is not
significant.





Since the
Group trades only with recognized and creditworthy third parties, there is no
requirement for collateral.





The
credit risk of the Group's other financial assets, which comprise deposits,
other receivables, pledged bank deposits and cash and bank balances, arises from
potential default of the counterparties, with a maximum exposure equal to the
carrying amounts of these instruments.





The
Group’s exposure to credit risk is influenced mainly by the individual
characteristics of each customer. The default risk of the overall industry in
which customers operate also has an influence on credit risk but to a lesser
extent. As of December 31, 2009, the Group had 22 distributors as customers.
(2008: 22 distributors) At the end of reporting period, the Group is exposed to
certain credit risks as 48.10%  (2008: 41.55%) of the total trade and
other receivables were due from the Group’s five largest customers.





The
maximum exposure to credit risk is represented by the carrying amount of each
financial asset. The Group does not provide any guarantees which would expose
the Group or the Company to credit risk.





Further
quantitative disclosures in respect of the Group’s exposure to credit risk
arising from trade receivables are set out in Note 15.





Interest
rate risk





The Group
does not have any significant exposure to risk of changes in market interest
rates as the Group's debt obligations were all with fixed interest
rates.





Commodity
price risk





The major
raw materials used in the production of the Group's products included rubber and
plastics.  The Group is exposed to fluctuation in the prices of these
raw materials which are influenced by global as well as regional supply and
demand conditions.  Fluctuations in the prices of raw materials could
adversely affect the Group's financial performance.  The Group
historically has not entered into any commodity derivative instruments to hedge
the potential commodity price changes.


55


EXCEED
COMPANY LTD. AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





December
31, 2009





31.
            FINANCIAL
      RISK MANAGEMENT OBJECTIVES AND POLICIES
  (Continued)





Liquidity
risk





The Group
monitors risk of a shortage of funds by considering the maturity of both its
financial assets and projected cash flows from operations.  The
Group's objective is to maintain a balance between continuity of funding and
flexibility through use of bank borrowings and other borrowings to meet its
working capital requirements.





The table
below summarizes the maturity profile of the Group's financial liabilities as of
the end of reporting period based on contractual undiscounted cash
flow.





December 31, 2009
                      
                      On demand
                      
                      
                      Less than
                        3 months
                      
                      
                      3 to 12
                        months
                      
                      
                      Total
                      
                      
                      Carrying amountRMB'000
                      
                      
                      RMB'000
                      
                      
                      RMB'000
                      
                      
                      RMB'000
                      
                      
                      USD'000
                      
                      
                      RMB'000
                      
                      
                      USD'000Interest-bearing
      bank borrowings
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      59,544
                      
                      
                      
                      59,544
                      
                      
                      
                      8,723
                      
                      
                      
                      58,000
                      
                      
                      
                      8,497Other
      financial liabilities
                      
                      
                      15,687
                      
                      
                      
                      20,870
                      
                      
                      
                      6,875
                      
                      
                      
                      43,432
                      
                      
                      
                      6,363
                      
                      
                      
                      43,432
                      
                      
                      
                      6,363Trade
      and bills payables
                      
                      
                      -
                      
                      
                      
                      195,538
                      
                      
                      
                      -
                      
                      
                      
                      195,538
                      
                      
                      
                      28,646
                      
                      
                      
                      195,538
                      
                      
                      
                      28,64615,687
                      
                      
                      
                      216,408
                      
                      
                      
                      66,419
                      
                      
                      
                      298,514
                      
                      
                      
                      43,732
                      
                      
                      
                      296,367
                      
                      
                      
                      43,506





December 31, 2008
                  
                  
                  
                  
                  Less than
                  
                  
                  3 to 12
                  
                  
                  
                  
                  
                  CarryingOn demand
                  
                  
                  3 months
                  
                  
                  months
                  
                  
                  Total
                  
                  
                  amountRMB'000
                  
                  
                  RMB'000
                  
                  
                  RMB'000
                  
                  
                  RMB'000
                  
                  
                  RMB'000Interest-bearing
      bank borrowings
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  20,685
                  
                  
                  
                  20,685
                  
                  
                  20,000Preferred
      shares
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  272,432
                  
                  
                  
                  272,432
                  
                  
                  272,432Other
      financial liabilities
                  
                  
                  34,184
                  
                  
                  
                  24,933
                  
                  
                  
                  -
                  
                  
                  
                  59,117
                  
                  
                  
                  59,117Trade
      and bills payables
                  
                  
                  -
                  
                  
                  
                  127,581
                  
                  
                  
                  -
                  
                  
                  
                  127,581
                  
                  
                  
                  127,58134,184
                  
                  
                  
                  152,514
                  
                  
                  
                  293,117
                  
                  
                  
                  479,815
                  
                  
                  
                  479,130


56


EXCEED
COMPANY LTD.AND SUBSIDIARIES





NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





December
31, 2009





31.          FINANCIAL
RISK MANAGEMENT OBJECTIVES AND POLICIES (continued)





Capital
Management





The
primary objective of the Group's capital management is to ensure that it
maintains healthy capital ratio in order to support its business. The Group
manages its capital structure and makes adjustment to it in light of changes in
economic conditions and the risk characteristics of the underlying
assets.  In order to maintain or adjust the capital structure, the
Group may adjust the amount of dividends paid to shareholders, return capital to
shareholders, or issue new shares. No changes were made in the objectives or
policies during the reporting periods.





The Group
monitors capital on the basis of debt-to-adjusted capital ratio, which is
calculated as the net debt divided by adjusted capital. The debt-to-adjusted
capital ratios as of the end of reporting period were as follows:





2009
                  
                  
                  2009
                  
                  
                  2008USD'000
                  
                  
                  RMB'000
                  
                  
                  RMB'000Interest-bearing
      bank borrowings
                  
                  
                  8,497
                  
                  
                  
                  58,000
                  
                  
                  
                  20,000Trade
      and bills payables
                  
                  
                  28,647
                  
                  
                  
                  195,538
                  
                  
                  
                  127,581Less: 
      Cash and bank balances
                  
                  
                  ( 38,413
                  )
                  
                  
                  (262,204
                  )
                  
                  
                  (120,068
                  )Pledged
      deposits
                  
                  
                  (2,198
                  )
                  
                  
                  ( 15,000
                  )
                  
                  
                  (2,300
                  )Net
      debt/(cash)
                  
                  
                  (3,467
                  )
                  
                  
                  (23,666
                  )
                  
                  
                  25,213Total
      equity
                  
                  
                  168,246
                  
                  
                  
                  1,148,432
                  
                  
                  
                  325,838Add:
      Amount due to a director
                  
                  
                  247
                  
                  
                  
                  1,687
                  
                  
                  
                  890Adjusted
      capital
                  
                  
                  168,493
                  
                  
                  
                  1,150,119
                  
                  
                  
                  326,728Debt/(cash)-to-adjusted
      capital ratio
                  
                  
                  N/A
                  
                  
                  
                  N/A
                  
                  
                  
                  0.08





32.
            POST
      BALANCE SHEET EVENTS





Management
determined and concluded that other than those events disclosed in this note and
elsewhere in this report, no other significant events took place subsequent to
April 7, 2010.





33.
            APPROVAL
      OF FINANCIAL STATEMENTS





The
financial statements were approved and authorised for issue by the board of
directors on April 7, 2010.


57