U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
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o
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REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934
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OR
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2009
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
Commission file number 0-29946
OR
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o
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SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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Date of event requiring this shell company report
QIAO XING UNIVERSAL RESOURCES, INC.
(Exact name of Registrant as specified in its charter)
QIAO XING UNIVERSAL RESOURCES, INC.
(Translation of Registrants name into English)
British Virgin Islands
(Jurisdiction of incorporation or organization)
Qiao Xing Science Industrial Park
Tang Quan
Huizhou City, Guangdong,
Peoples Republic of China 516023
(Address of principal executive offices)
Aijun Jiang, CFO
011-86-752-2820-268 (telephone)
jiangaijun@qiaoxing.com.hk (email)
011-86-752-2820-268 (facsimile)
Qiao Xing Science Industrial Park
Tang Quan
Huizhou City, Guangdong,
Peoples Republic of China 516023
(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.
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Title of each
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Name of each exchange
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class
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on which registered
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US$.001 Par Value Common Stock
(Common Stock)
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NASDAQ
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Securities registered or to be registered pursuant to Section 12(g) of the Act.
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
Indicate the number of outstanding shares of each of the issuers classes of capital or common
stock as of the close of the period covered by the annual report:
82,327,993 Shares of Common Stock as of December 31, 2009
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
Yes
o
No
þ
If this report is an annual or transition report, indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes
o
No
þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes
o
No
o
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer.
See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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Accelerated filer
þ
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Non-accelerated filer
o
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Indicate by check mark which basis of accounting the registrant has used to prepare the financial
statements included in this filing:
þ
U.S. GAAP
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International Financial Reporting Standards as issued by the International Accounting Standards Board
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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.
o
Item 17
o
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
o
No
þ
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be
filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Not Applicable.
TABLE OF CONTENTS
SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS
This annual report contains forward-looking statements that involve risks and uncertainties.
These include statements about our expectations, plans, objectives, assumptions or future events.
In some cases, you can identify forward-looking statements by terminology such as anticipate,
estimate, plans, potential, projects, continuing, ongoing, expects, management
believes, we believe, we intend and similar expressions. These statements involve estimates,
assumptions and uncertainties that could cause actual results to differ materially from those
expressed for the reasons described in this annual report. You should not place undue reliance on
these forward-looking statements.
Forward-looking statements include all statements other than statements of historical facts,
such as statements regarding anticipated mining production volumes, unit net costs of mining
production, mining sales volumes, ore grades, molybdenum and other commodity prices, mine
development and capital expenditures, mine production and development plans, availability of power,
water, labor and equipment, environmental reclamation and closure costs and plans, environmental
liabilities and expenditures, litigation liabilities and expenses, dividend payments, estimates of
proven and probable reserves and other mineralized material, political, economic and social
conditions in the areas of the Companys operations and exploration efforts and results. Readers
are cautioned that forward-looking statements are not guarantees of future performance and actual
results may differ materially from those projected, anticipated or assumed in the forward-looking
statements. Important factors that could cause the Companys actual results to differ materially
from those anticipated in the forward-looking statements include the following:
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Fluctuations in the market price of molybdenum could adversely affect the Companys
financial condition, results of operations and cash flows.
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Estimates of proven and probable mineral reserves and other mineralized material may
prove to be inaccurate.
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The Companys exploration activities may not result in discoveries of proven and
probable reserves and commercial quantities of molybdenum.
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The Companys revenues for its mining operations are primarily dependent on its
production of molybdenum. The Companys ability to sustain current molybdenum production
levels or to increase molybdenum production levels depends on its ability to bring new
mines into production or to expand proven and probable reserves at the existing mine.
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Mining operations are subject to conditions or events beyond the Companys control which
could have a material adverse effect on the Companys financial condition, results of
operations and cash flows from operations. The Companys insurance policies may not cover
all these risks and hazards adequately.
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The Company may not be able to acquire desirable mining assets in the future.
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The development of mining projects is inherently risky and may require more capital than
anticipated which could adversely affect the cash flows of the Company.
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Intense competition in the mining industry could reduce the Companys market share or
harm its financial condition, results of operations and cash flows.
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The temporary shutdown of the Companys mining operations could expose it to significant
costs and adversely affect its access to skilled labor.
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The Companys mining operations give rise to environmental risk.
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Mineral ores and mineral products, including molybdenum ore and molybdenum products,
contain naturally occurring impurities and toxic substances.
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1
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Reclamation and mine closure costs could adversely affect the Companys financial
position, results of operations and cash flows.
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Title to some of the Companys exploration and mining rights could be challenged or
defective.
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The Company is required to obtain government permits in order to conduct mining
operations.
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Increased energy prices or a disruption of energy supply could adversely affect the
Companys operations.
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Disruption of transportation services or increased transportation costs could have a
material adverse effect on the Companys financial position, results of operations and cash
flows.
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The Companys mining business depends on good relations with its employees.
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You should also consider carefully the statements under Risk Factors and other sections of
this annual report, which address additional factors that could cause our actual results to differ
from those set forth in the forward-looking statements and could materially and adversely affect
our business, operating results and financial condition. All subsequent written and oral
forward-looking statements attributable to us or persons acting on our behalf are expressly
qualified in their entirety by the applicable cautionary statements.
The forward-looking statements speak only as of the date on which they are made, and, except
to the extent required by federal securities laws, we do not intend, and we undertake no
obligation, to update any forward-looking statement to reflect events or circumstances after the
date on which the statement is made or to reflect the occurrence of unanticipated events. In
addition, we cannot assess the impact of each factor on our business or the extent to which any
factor, or combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
We may use data and industry forecasts in this annual report which we have obtained from
internal surveys, market research, publicly available information and industry publications.
Industry publications generally state that the information they provide has been obtained from
sources believed to be reliable but that the accuracy and completeness of such information is not
guaranteed. Similarly, we believe that the surveys and market research we or others have performed
are reliable, but we have not independently verified this information.
2
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
A. SELECTED FINANCIAL DATA.
We prepare our consolidated financial statements in accordance with United States Generally
Accepted Accounting Principles (US GAAP). The following summary consolidated statements of
operations data for the years ended December 31, 2007, 2008 and 2009 and the consolidated balance
sheet data as of December 31, 2008 and 2009 were derived from our audited financial statements
included elsewhere in this annual report and should be read in conjunction with such financial
statements. The following summary consolidated statements of operations data for the years ended
December 31, 2005 and 2006 and the consolidated balance sheet data as of December 31, 2005, 2006
and 2007 were derived from our audited financial statements not included elsewhere in this annual
report and have been prepared in accordance with US GAAP. The following summary financial data
should be read in conjunction with Item 5. Operating and Financial Review and Prospects and the
consolidated financial statements and the notes thereto included elsewhere in this annual report.
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2005
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2006
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2007
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2008
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2009
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Rmb000
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Rmb000
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Rmb000
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Rmb000
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Rmb000
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US$000
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Net sales
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2,635,184
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3,221,212
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3,141,094
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2,153,873
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1,826,799
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267,628
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Cost of goods sold
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(2,156,798
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)
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(2,651,392
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)
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(2,255,844
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)
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(1,287,096
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)
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(1,474,930
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(216,078
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)
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Gross profit
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478,386
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569,820
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885,250
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866,777
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351,869
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51,550
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Operating expenses:
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Selling expenses
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(24,726
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)
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(28,401
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)
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(36,322
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)
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(146,551
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)
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(110,444
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)
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(16,180
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)
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General and
administrative expenses
Including stock-based
compensation
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(55,341
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)
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(126,076
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)
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(86,479
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)
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(59,794
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)
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(114,807
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(16,819
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)
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Research and development
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(20,694
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(30,747
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(18,599
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)
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(29,242
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)
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(36,404
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)
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(5,334
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)
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In process research and
development
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(41,739
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)
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Amortization of acquired
intangible assets
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(11,880
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)
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(15,178
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)
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(32,281
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)
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(11,727
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)
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(4,733
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)
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(693
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)
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Impairment of acquired
intangible asset
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(26,235
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)
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(13,600
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)
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(1,992
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)
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Impairment of assets
held for sale
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(5,957
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)
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(873
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)
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Income from operations
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365,745
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|
327,679
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711,569
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593,228
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|
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|
65,924
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|
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|
9,659
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Interest income
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|
7,130
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|
|
8,108
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|
28,441
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54,821
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|
|
|
28,641
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|
|
4,196
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|
3
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2005
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2006
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2007
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2008
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2009
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|
Rmb000
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Rmb000
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Rmb000
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Rmb000
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|
Rmb000
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US$000
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Exchange gain (loss), net
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(2,659
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)
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|
3,225
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15,168
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(16,971
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)
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|
406
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|
60
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Interest expense
|
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|
(41,752
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)
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(100,432
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)
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|
(240,498
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)
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(311,710
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)
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(222,804
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)
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(32,641
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)
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(Loss) gain on
re-measurement of
embedded derivatives
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(134,439
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)
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(129,084
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)
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160,036
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(8,258
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)
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(1,210
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)
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Loss on extinguishment
of convertible debt
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(142,090
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)
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(10,634
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)
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(15,261
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)
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(2,236
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)
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Gain on disposal of
interests in
subsidiaries
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10,307
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482,614
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2,269
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Gain on issue/repurchase
of stocks by subsidiary
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383,965
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4,351
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Provision for litigation
settlement
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(15,319
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)
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Impairment of investment
at cost
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(7,348
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)
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(2,802
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)
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(411
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)
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Unrealized (loss) on
derivatives
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(4,673
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)
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(685
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)
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Other income (loss), net
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|
640
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|
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|
4,453
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|
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6,462
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(3,700
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)
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|
166
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|
24
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Income before income tax
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|
332,063
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|
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|
108,594
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1,101,228
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471,690
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|
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(158,661
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)
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|
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(23,244
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)
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Provision for income tax
|
|
|
(25,486
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)
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|
|
(58,192
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)
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|
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(113,377
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)
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|
|
(155,717
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)
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|
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(43,939
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)
|
|
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(6,437
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)
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Income after income tax
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|
|
306,577
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|
|
50,402
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|
|
|
987,851
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315,973
|
|
|
|
(202,600
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)
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|
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(29,681
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)
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Discontinued operations,
net of tax
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|
|
|
|
|
|
|
|
|
|
63,033
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|
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|
(290,953
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)
|
|
|
(139,782
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)
|
|
|
(20,478
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)
|
Extraordinary gain on
acquisition of minority
interests
|
|
|
37,592
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|
|
|
14,237
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|
|
|
28,689
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|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) for
the year
|
|
|
344,169
|
|
|
|
64,639
|
|
|
|
1,079,573
|
|
|
|
25,020
|
|
|
|
(342,382
|
)
|
|
|
(50,159
|
)
|
Net income (loss)
attributable to
noncontrolling interest
|
|
|
(99,270
|
)
|
|
|
(84,473
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)
|
|
|
(175,625
|
)
|
|
|
(161,814
|
)
|
|
|
82,486
|
|
|
|
12,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
|
244,899
|
|
|
|
(19,834
|
)
|
|
|
903,948
|
|
|
|
(136,794
|
)
|
|
|
(259,896
|
)
|
|
|
(38,075
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustments
|
|
|
1,821
|
|
|
|
7,203
|
|
|
|
(50,106
|
)
|
|
|
(33,815
|
)
|
|
|
(85,883
|
)
|
|
|
(12,582
|
)
|
Comprehensive income
(loss)
|
|
|
246,720
|
|
|
|
(12,631
|
)
|
|
|
853,842
|
|
|
|
(170,609
|
)
|
|
|
(345,779
|
)
|
|
|
(50,657
|
)
|
Basic earnings (loss)
per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
11.32
|
|
|
|
(1.44
|
)
|
|
|
22.73
|
|
|
|
4.98
|
|
|
|
(1.91
|
)
|
|
|
(0.28
|
)
|
Discontinuing operations
|
|
|
|
|
|
|
|
|
|
|
1.73
|
|
|
|
(9.40
|
)
|
|
|
(2.22
|
)
|
|
|
(0.33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extraordinary gain
|
|
|
2.05
|
|
|
|
0.60
|
|
|
|
0.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
13.37
|
|
|
|
(0.84
|
)
|
|
|
24.95
|
|
|
|
(4.42
|
)
|
|
|
(4.13
|
)
|
|
|
(0.61
|
)
|
Diluted earnings (loss)
per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
11.32
|
|
|
|
(2.03
|
)
|
|
|
22.45
|
|
|
|
3.51
|
|
|
|
(1.91
|
)
|
|
|
(0.28
|
)
|
Discontinuing operations
|
|
|
|
|
|
|
|
|
|
|
1.72
|
|
|
|
(9.40
|
)
|
|
|
(2.22
|
)
|
|
|
(0.33
|
)
|
Extraordinary gain
|
|
|
2.05
|
|
|
|
0.59
|
|
|
|
0.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
|
Rmb000
|
|
Rmb000
|
|
Rmb000
|
|
Rmb000
|
|
Rmb000
|
|
US$000
|
After extraordinary gain
|
|
|
13.37
|
|
|
|
(1.44
|
)
|
|
|
24.65
|
|
|
|
(5.89
|
)
|
|
|
(4.13
|
)
|
|
|
(0.61
|
)
|
Weighted average number
of shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Basic (2)
|
|
|
18,319,000
|
|
|
|
23,712,000
|
|
|
|
29,836,000
|
|
|
|
30,949,000
|
|
|
|
62,837,000
|
|
|
|
62,837,000
|
|
- Diluted (2)
|
|
|
18,320,000
|
|
|
|
24,016,000
|
|
|
|
30,200,000
|
|
|
|
30,949,000
|
|
|
|
62,837,000
|
|
|
|
62,837,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
|
Rmb000
|
|
Rmb000
|
|
Rmb000
|
|
Rmb000
|
|
Rmb000
|
|
US$000
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and bank deposits
|
|
|
391,660
|
|
|
|
1,096,477
|
|
|
|
3,033,010
|
|
|
|
2,908,343
|
|
|
|
3,709,503
|
|
|
|
543,445
|
|
Working capital
|
|
|
856,839
|
|
|
|
1,498,715
|
|
|
|
3,946,468
|
|
|
|
3,552,070
|
|
|
|
3,400,841
|
|
|
|
498,226
|
|
Property, machinery and
equipment, net
|
|
|
52,664
|
|
|
|
209,542
|
|
|
|
192,601
|
|
|
|
167,366
|
|
|
|
170,485
|
|
|
|
24,976
|
|
Proven and probable reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
712,121
|
|
|
|
104,326
|
|
Construction in progress
|
|
|
59,105
|
|
|
|
60,295
|
|
|
|
|
|
|
|
|
|
|
|
86,591
|
|
|
|
12,685
|
|
Lease prepayments, net
|
|
|
173,161
|
|
|
|
207,206
|
|
|
|
36,106
|
|
|
|
35,305
|
|
|
|
|
|
|
|
|
|
Value beyond proven and
probable reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67,295
|
|
|
|
9,859
|
|
Debt issuance cost, net
|
|
|
|
|
|
|
31,845
|
|
|
|
|
|
|
|
34,689
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
2,534,547
|
|
|
|
4,177,986
|
|
|
|
6,378,841
|
|
|
|
7,081,088
|
|
|
|
5,910,631
|
|
|
|
865,912
|
|
Short-term-debts
|
|
|
754,212
|
|
|
|
1,155,290
|
|
|
|
1,471,454
|
|
|
|
3,086,163
|
|
|
|
1,381,807
|
|
|
|
202,436
|
|
Long-term-debts
|
|
|
7,959
|
|
|
|
229,784
|
|
|
|
196,854
|
|
|
|
7,049
|
|
|
|
330,934
|
|
|
|
48,482
|
|
Total liabilities
|
|
|
1,316,418
|
|
|
|
2,192,713
|
|
|
|
2,260,956
|
|
|
|
3,093,212
|
|
|
|
1,712,741
|
|
|
|
250,918
|
|
Noncontrolling interests (1)
|
|
|
220,832
|
|
|
|
115,224
|
|
|
|
1,095,917
|
|
|
|
1,006,546
|
|
|
|
1,156,086
|
|
|
|
169,368
|
|
XINGs equity
|
|
|
997,297
|
|
|
|
1,870,049
|
|
|
|
3,021,968
|
|
|
|
2,981,330
|
|
|
|
3,041,804
|
|
|
|
445,626
|
|
Cash flows data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating
activities
|
|
|
116,682
|
|
|
|
(156,840
|
)
|
|
|
954,654
|
|
|
|
(222,888
|
)
|
|
|
872,578
|
|
|
|
127,833
|
|
Cash flows from investing
activities
|
|
|
(3,822
|
)
|
|
|
(603,009
|
)
|
|
|
(650,317
|
)
|
|
|
340,322
|
|
|
|
(597,861
|
)
|
|
|
(87,587
|
)
|
Cash flows from financing
activities
|
|
|
136,505
|
|
|
|
1,465,657
|
|
|
|
1,675,920
|
|
|
|
(11,557
|
)
|
|
|
310,058
|
|
|
|
45,424
|
|
|
|
|
(1)
|
|
Mr. Rui Lin Wu and Mr. Zhi Yang Wu own minority equity interests in certain
subsidiaries of our company.
|
|
(2)
|
|
Earnings per share is computed by dividing net income for 2005 by 18,319,000 shares, for 2006
by 23,712,000 shares, for 2007 by 29,836,000 shares, for 2008 by 30,949,000 shares and for
2009 by 62,837,000 shares. Diluted earnings per common share is computed by using the weighted
average number of common shares outstanding adjusted to include the potentially dilutive
effect of outstanding stock options, warrants and convertible debentures, to the extent such
instruments were dilutive during the period.
|
|
(3)
|
|
Translation of amounts from Renminbi (Rmb) into United States dollars (US$) is
for the convenience of readers and has been made at the noon buying rate in New York City for
cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve
Bank of New York on December 31, 2009 of
|
5
|
|
|
|
|
US$1.00 = Rmb 6.8259. No representation is made that the Renminbi amounts could have been,
or could be, converted into United States dollars at that rate or at any other rate.
|
Exchange Rate Information
We have prepared our consolidated financial statements in accordance with United States
Generally Accepted Accounting Principles consistently applied and publish such statements in
Renminbi, the functional currency of our subsidiaries and the legal tender currency of China. All
references to Renminbi or Rmb are to Renminbi. All references to U.S. Dollars, dollars,
US$ or $ are to United States dollars.
The following table sets forth certain information concerning exchange rates between Renminbi
and U.S. dollars for the periods indicated:
|
|
|
|
|
|
|
Noon Buying Rate(1)
|
Calendar Year
|
|
Average(2)
|
|
|
(Rmb per US$)
|
2005
|
|
|
8.1936
|
|
2006
|
|
|
7.9723
|
|
2007
|
|
|
7.6058
|
|
2008
|
|
|
6.9477
|
|
2009
|
|
|
6.8307
|
|
|
|
|
(1)
|
|
The noon buying rate in New York for cable transfers payable in foreign currencies as
certified for customs purposes by the Federal Reserve Bank of New York. Since April 1994, the
noon buying rate has been based on the PBOC Rate. As a result, since April 1994, the noon
buying rate and the PBOC Rate have been substantially similar.
|
|
(2)
|
|
Annual averages are calculated from the month-end rates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calendar Month
|
|
High
|
|
Low
|
|
Average
|
January 2010
|
|
|
6.8295
|
|
|
|
6.8258
|
|
|
|
6.8269
|
|
February 2010
|
|
|
6.8330
|
|
|
|
6.8258
|
|
|
|
6.8285
|
|
March 2010
|
|
|
6.8270
|
|
|
|
6.8254
|
|
|
|
6.8262
|
|
April 2010
|
|
|
6.8275
|
|
|
|
6.8229
|
|
|
|
6.8256
|
|
May 2010
|
|
|
6.8310
|
|
|
|
6.8245
|
|
|
|
6.8275
|
|
June 2010
|
|
|
6.8323
|
|
|
|
6.7815
|
|
|
|
6.8184
|
|
As of July 9, 2010, being the latest practicable date, the exchange rate was US$1.00 =
Rmb6.7720.
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, all translations from
Renminbi to U.S. dollars were made at the noon buying rate in the City of New York for cable
transfers in Renminbi per U.S. dollar as certified for customs purposes by the Federal Reserve Bank
of New York as of December 31, 2009, which was Rmb6.8259 to US$1.00. No representation is made
that the Renminbi amounts referred to in this annual report could have been or could be converted
into U.S. dollars at any particular rate or at all.
The Peoples Bank of China, or PBOC, issued a public notice on July 21, 2005 increasing the
exchange rate
6
of the Renminbi against the U.S. dollar by approximately 2% to Rmb8.11 per US$1.00. Further
to this notice, the PRC government has reformed its exchange rate regime by adopting a managed
floating exchange rate regime based on market supply and demand with reference to a portfolio of
currencies. Under this new regime, the Renminbi is no longer pegged to the U.S. dollar. This
change in policy has resulted in a more than 15.4% appreciation of the Renminbi against the U.S.
dollar. The PRC government may decide to adopt an even more flexible currency policy in the
future, which could result in a further and more significant appreciation of the Renminbi against
the U.S. dollar.
B. CAPITALIZATION AND INDEBTEDNESS.
Not applicable.
C. REASONS FOR THE OFFER AND USE OF PROCEEDS.
Not applicable.
D. RISK FACTORS
The current financial crisis and economic downturn may have a material and adverse effect on our
businesses, results of operations and financial condition.
The current global financial crisis and economic downturn have adversely affected economies
and businesses around the world, including in China. Due to the global economical downturn and a
decrease in consumer demand, the economic situation in China has been quite severe since the second
half of 2008. This change in the macro-economic conditions has and is expected to continue to have
an adverse impact on our business and operations. The financial and economic situation may also
have a negative impact on third parties with whom we do, or may do, business. As a result, our
results of operations, financial condition and liquidity could be materially and adversely
affected.
Our future revenues and operating results are inherently unpredictable, and as a result, we may
fail to meet the expectations of securities analysts or investors, which could cause our stock
price to decline.
Our revenues and operating results have fluctuated significantly from quarter-to-quarter in
the past, and may continue to fluctuate significantly in the future. Factors that are likely to
cause these fluctuations, some of which are outside of our control, include, without limitation,
the following:
|
|
|
the current economic environment and other developments in the telecommunications
industry;
|
|
|
|
|
the mix of our products sold, including inventory items with low product costs;
|
|
|
|
|
our ability to control expenses;
|
|
|
|
|
fluctuations in demand for and sales of our products, the acceptance of our products
in the marketplace, and the general level of spending in the telecommunications
industry;
|
|
|
|
|
our ability to maintain appropriate manufacturing capacity, and particularly to
limit excess capacity commensurate with the volatile demand levels for our products;
|
|
|
|
|
our ability to successfully complete a transition to an outsourced manufacturing
model;
|
|
|
|
|
the ability of our outsourced manufacturers to timely produce and deliver
subcomponents, and possibly complete products in the quantity and of the quality we
require;
|
|
|
|
|
competitive factors, including the introduction of new products and product
enhancements by competitors and potential competitors, pricing pressures, and the
competitive environment in the markets into which we sell our products, including
competitors with substantially greater resources than we have;
|
|
|
|
|
our ability to effectively develop, introduce, manufacture, and ship new and
enhanced products in a timely manner without defects;
|
|
|
|
|
the availability and cost of components for our products;
|
|
|
|
|
new product introductions that may result in increased research and development
expenses and sales and marketing expenses that are incurred in one quarter, with
revenues, if any, that are not recognized until a subsequent or later quarter; and
|
7
|
|
|
the unpredictability of consumer demand and difficulties in meeting such demand.
|
A high percentage of our expenses, including those related to manufacturing, engineering,
sales and marketing, research and development, and general and administrative functions, is fixed
in the short term. As a result, if we experience delays in generating and recognizing revenue, our
quarterly operating results are likely to be seriously harmed.
Due to these and other factors, we believe that quarter-to-quarter comparisons of our
operating results may not be meaningful. Our results for one quarter should not be relied upon as
any indication of our future performance. It is possible that in future quarters our operating
results may be below the expectations of public market analysts or investors. If this occurs, the
price of our common stock would likely decrease.
Our stock price is highly volatile.
The trading price of our common stock has fluctuated significantly since our initial public
offering in February 1999, and is likely to remain volatile in the future. The trading price of
our common stock could be subject to wide fluctuations in response to many events or factors,
including the following:
|
|
|
quarterly variations in our operating results;
|
|
|
|
|
significant developments in the businesses of other telecommunications companies;
|
|
|
|
|
changes in financial estimates by securities analysts;
|
|
|
|
|
changes in market valuations or financial results of telecommunications-related
companies;
|
|
|
|
|
announcements by us or our competitors of technology innovations, new products, or
significant acquisitions, strategic partnerships or joint ventures;
|
|
|
|
|
any deviation from projected growth rates in revenues;
|
|
|
|
|
any loss of a major customer or a major customer order;
|
|
|
|
|
additions or departures of key management or engineering personnel;
|
|
|
|
|
any deviations in our net revenue or in losses from levels expected by securities
analysts;
|
|
|
|
|
activities of short sellers and risk arbitrageurs;
|
|
|
|
|
future sales of our common stock; and
|
|
|
|
|
volume fluctuations, which are particularly common among highly volatile securities
of telecommunications-related companies.
|
In addition, the stock market has experienced volatility that has particularly affected the
market prices of equity securities of many high technology companies, which often has been
unrelated or disproportionate to the operating performance of these companies. These broad market
fluctuations may adversely affect the market price of our common stock.
We experience intense competition with respect to our products.
Some of our competitors have longer operating histories and significantly greater financial,
technical, marketing and other resources than we have. As a result, some of these competitors are
able to devote greater resources to the development, promotion, sale, and support of their
products. In addition, our competitors that have larger market capitalization or cash reserves are
better positioned than we are to acquire other companies in order to gain new technologies or
products that may displace our product lines.
We are subject to a concentration of credit risk.
We perform ongoing credit evaluations of each customers financial condition. We maintain
reserves for potential credit losses and such losses in the aggregate have not exceeded
managements projections. As of December 31, 2008 and 2009, our five largest accounts receivable
accounted for approximately 60.7% and 93.7% of our total accounts receivable.
8
The economy of China differs from the economies of most countries and creates significant risks.
Although the majority of productive assets in China are still owned by the government,
economic reform policies since 1978 have emphasized decentralization and the utilization of market
mechanisms in the development of the Chinese economy. We have significantly benefited from such
reforms, as the Ministry of Post and Telecommunications since 1994 has opened the
telecommunications equipment market of China to all kinds of manufacturers. Our management
believes that the basic principles underlying the reforms will continue to provide an acceptable
framework of the PRCs political and economic systems. In addition, we currently see no evidence
that this refinement and readjustment process may adversely affect, directly or indirectly, the
Companys operations in the future.
As substantially all of our operations are conducted in Mainland China, we are subject to
special considerations and significant risks not typically associated with companies operating in
North America and Western Europe. These include risks associated with, among others, the
political, economic and legal environments and foreign currency exchange. Our results may be
adversely affected by changes in the political and social conditions in Mainland China, and by
changes in governmental policies with respect to laws and regulations, anti-inflationary measures,
currency conversion and remittance abroad, and rates and methods of taxation, among other things.
In addition, substantially all of our revenue is denominated in Renminbi (Rmb) which must be
converted into other currencies before remittance outside Mainland China. Both the conversion of
Renminbi into foreign currencies and the remittance of foreign currencies abroad require the
approval of the Mainland Chinese government.
Our currency is not freely convertible.
The State Administration for Exchange Control (SAEC), under the authority of the Peoples
Bank of China (the PBOC), controls the conversion of Renminbi into foreign currency. The value
of the Renminbi is subject to changes in central government policies and to international economic
and political developments affecting supply and demand in the China Foreign Exchange Trading System
(CFETS) market. Since substantially all of our raw materials are provided by local suppliers
using Renminbi and the majority of our expenses are denominated in Renminbi, restrictions on
currency conversions did not materially affect our operations. Also, since we do not expect to
require any raw material that are not permitted or are limited to purchase using foreign
currencies, our management believes that such restriction will not materially affect our operations
in the future. However, our ability to pay dividends and meet other obligations depends upon the
receipt of dividends or other payments from our operating subsidiaries and our other holdings and
investments, and our operating subsidiaries located in China may be subject to restrictions on the
conversion of Renminbi to U.S. dollars and, as a result, may be restricted to make distributions to
us.
We may not maintain adequate insurance coverage for damage to our Chinese factories.
We have no direct business operation, other than our ownership of our subsidiaries located in
China, and our results of operations and financial condition are currently solely dependent on our
subsidiaries factories in China. We currently maintain fire, casualty and theft insurance
covering various of our stock in trade, goods and merchandise, furniture and equipment, and factory
buildings in China. The proceeds of this insurance may not sufficiently cover material damage to,
or the loss of, any of our factories due to fire, severe weather, flooding or other cause, and such
damage or loss would have a material adverse effect on our financial condition, business and
prospects. However, we have not materially suffered from such damage or loss to date.
The discontinuation of the preferential tax treatment currently available to our PRC subsidiary,
CEC Telecom Co., Ltd., could materially adversely affect our results of operations.
Our PRC operating subsidiary, CEC Telecom Co., Ltd. (CECT), was subject to the PRC
Enterprise Income Tax Law Concerning Foreign-Invested Enterprises and Foreign Enterprises. CECT, as
a foreign-invested enterprise,
9
was generally subject to enterprise income tax at a statutory rate of 33% (30% national income
tax plus 3% local income tax) through 2007 under this law and its related regulations, and 25% from
January 1, 2008 under the new tax law described below. However, as a high-tech enterprise formed
in the Zhongguancun Science Park high technology zone in Beijing, CECT enjoyed preferential tax
treatment through 2007. In particular, CECT was exempted from enterprise income tax from May 22,
2000 to December 31, 2002 and was entitled to preferential enterprise income tax rates of 7.5% from
January 1, 2003 to December 31, 2005 and 15% from January 1, 2006 to December 31, 2007.
On March 16, 2007, the National Peoples Congress of the PRC passed the PRC Enterprise Income
Tax Law, which law took effect as of January 1, 2008. In accordance with the new tax law, a unified
enterprise income tax rate of 25% and unified tax deduction standards will be applied equally to
both domestic-invested enterprises and foreign-invested enterprises such as CECT. However, certain
qualifying high-technology enterprises may still benefit from a preferential tax rate of 15% under
the new tax law if they meet the definition of qualifying high-technology enterprise to be set
forth in the more detailed implementing rules when they are adopted. As a result, if CECT qualifies
as a qualifying high-technology enterprise, it will continue to benefit from a preferential tax
rate of 15%. Before being qualified as a qualifying high-technology enterprise under the new tax
law, CECTs applicable tax rate increased from its then existing tax rate of 15% to the unified tax
rate of 25% effective January 1, 2008. The Chinese tax authorities issued Circular 362 (Guo Ke Fa
Huo [2008] No. 362) on 11 July 2008 (Circular 362) that provides detailed implementation
guidance on identifying and approving qualifying high-technology enterprise status. Circular 362
follows the April 2008 issuance of Circular 172 (Guo Ke Fa Huo [2008] No. 172), Chinas first
step in creating a mechanism to identify and approve qualifying high-technology enterprise
status. CECT is currently in the process of applying for the status of qualifying high-technology
enterprise. If the application is approved, CECT will be qualified to apply for a preferential
enterprise income tax rate of 15%.
We cannot assure you that CECT will qualify as a qualifying high-technology enterprise under
the new tax law, and even if CECT successfully obtains this high-tech enterprise status, its
preferential tax treatment may be discontinued by the tax authorities at their discretion or
pursuant to any future changes in PRC tax laws, rules or regulations. Before being qualified as a
qualifying high-technology enterprise under the new tax law, CECT is subject to a 25% rate from
January 1, 2008 under the new tax law described above, which significantly increases our effective
tax rate and materially adversely affects our operating results.
The dividends that our BVI-incorporated investment holding subsidiaries receive from their
subsidiaries in the PRC and our global income may be subject to PRC tax under the new PRC
Enterprise Income Tax Law, which would have a material adverse effect on our results of operations.
In addition, our foreign corporate holders of ordinary shares may be subject to a PRC withholding
tax upon any dividends payable by us and upon gains realized on the sale of our ordinary shares, if
we are classified as a PRC resident enterprise.
Under the new PRC Enterprise Income Tax Law, dividends, interests, rent, royalties and gains
on transfers of property payable by a foreign-invested enterprise in the PRC to its foreign
investor who is a non-resident enterprise will be subject to a 10% withholding tax, unless such
non-resident enterprises jurisdiction of incorporation has a tax treaty with the PRC that provides
for a reduced rate of withholding tax. The British Virgin Islands, where our investment holding
subsidiaries are incorporated, does not have such a tax treaty with the PRC. If these
BVI-incorporated investment holding subsidiaries are considered non-resident enterprises, this new
10% withholding tax imposed on their dividend income received from their PRC subsidiaries would
reduce our net income and have an adverse effect on our operating results.
Under the new tax law, an enterprise established outside the PRC with its de facto management
body within the PRC is considered a resident enterprise and will be subject to the enterprise
income tax at the rate of 25% on its worldwide income. The de facto management body is defined as
the organizational body that effectively exercises overall management and control over production
and business operations, personnel, finance and accounting, and properties of the enterprise. It
remains unclear how the PRC tax authorities will interpret such a broad definition.
Substantially all of our management members are based in the PRC. If the PRC tax authorities
subsequently determine that we should be classified as a resident enterprise, then our worldwide
income will be subject to income tax at a uniform rate of 25%, which may have a material adverse
effect on our financial condition and results of operations. Notwithstanding the foregoing
provision, the new tax law also provides that, if a resident enterprise directly invests in another
resident enterprise, the dividends received by the investing resident enterprise from the invested
enterprise are exempted from income tax, subject to certain conditions. Therefore, if our
BVI-incorporated investment holding
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subsidiaries are classified as resident enterprises, the dividends they receive from their PRC
subsidiaries may be exempted from income tax.
In addition, under the new tax law, foreign corporate holders of our ordinary shares may be
subject to a 10% withholding tax upon dividends payable by us and gains realized on the sale or
other disposition of ordinary shares, if such income is sourced from within the PRC. Although we
are incorporated in the British Virgin Islands, it remains unclear whether the dividends payable by
us or the gains our foreign corporate holders may realize will be regarded as income from sources
within the PRC if we are classified as a PRC resident enterprise. Any such tax may reduce the
return on an investment in our ordinary shares by a foreign corporation.
We depend upon certain key personnel to manage our company.
Our ability to successfully carry out our business plans continues to be largely dependent
upon the efforts of our senior management and executive officers, particularly our chairman, Rui
Lin Wu. We have not entered into an employment agreement with Mr. Wu and the loss of his services
would have a material adverse effect on our ability to achieve our business objectives. Further,
we do not maintain any key-person life insurance policy on his life.
We are controlled by one of our shareholders, whose interests may differ from other shareholders.
Rui Lin Wu, our chief executive officer and chairman, and members of his family beneficially
own or control approximately 43.2% of our outstanding shares as of June 30, 2010. Accordingly, he
has substantial control and influence in determining the outcome of any corporate transaction or
other matter submitted to the shareholders for approval, including mergers, consolidations and the
sale of all or substantially all of our assets, election of directors and other significant
corporate actions. He also has the power to prevent or cause a change in control. In addition,
without his consent, we could be prevented from entering into transactions that could be beneficial
to us. The interests of this shareholder may differ from the interests of the other shareholders.
Our holding company structure creates restrictions on the payment of dividends.
We have no direct business operations, other than our ownership of our subsidiaries. While we
have no current intention of paying dividends, should we decide in the future to do so, as a
holding company, our ability to pay dividends and meet other obligations depends upon the receipt
of dividends or other payments from our operating subsidiaries and other holdings and investments.
In addition, our operating subsidiaries, from time to time, may be subject to restrictions on their
ability to make distributions to us, including as a result of restrictive covenants in loan
agreements, restrictions on the conversion of local currency into U.S. dollars or other hard
currency and other regulatory restrictions. If future dividends are paid in Renminbi, fluctuations
in the exchange rate for the conversion of Renminbi into U.S. dollars may adversely affect the
amount received by U.S. shareholders upon conversion of the dividend payment into U.S. dollars.
As a foreign private issuer, we are not subject to certain rules promulgated by Nasdaq that other
Nasdaq-listed issuers are required to comply with.
Our common shares are currently listed on the Nasdaq Global Market and, for so long as our
securities continue to be listed, we will remain subject to the rules and regulations established
by Nasdaq applicable to listed companies. As permitted under Nasdaq rules applicable to foreign
private issuers, we have determined not to comply with the following Nasdaq rules:
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our independent directors do not hold regularly scheduled meetings in executive
session;
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the compensation of our executive officers is not determined by an independent
committee of the board or by the independent members of the board of directors, and our
CEO may be present and participate in the deliberations concerning his compensation;
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related party transactions are not required to be reviewed or approved by our audit
committee or other independent body of the board of directors; and
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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.
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We may in the future determine to voluntarily comply with one or more of the foregoing provisions.
It may be difficult to serve us with legal process or enforce judgments against us or our
management.
We are a British Virgin Islands holding company, and all or a substantial portion of our
assets are located in China. In addition, all of our directors and officers are non-residents of
the United States, and all or a substantial portion of the assets of such non-residents are located
outside the United States. As a result, it may not be possible to effect service of process within
the United States upon them. Moreover, there is doubt as to whether the courts of the British
Virgin Islands or China would enforce:
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judgments of United States courts against us, our directors or our officers based on
the civil liability provisions of the securities laws of the United States or any
state; or
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in original actions brought in the British Virgin Islands or China, liabilities
against us or non-residents based upon the securities laws of the United States or any
state.
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Some information about us may be unavailable due to exemptions under the Exchange Act for a foreign
private issuer.
We are a foreign private issuer within the meaning of the rules under the Exchange Act. As
such, we are exempt from certain provisions applicable to United States domestic public companies,
including:
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the rules under the Exchange Act requiring the filing with the Securities and
Exchange Commission of quarterly reports on Form 10-Q or current reports on Form 8-K;
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the provisions of Regulation FD aimed at preventing issuers from making selective
disclosures of material information;
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the sections of the Exchange Act regulating the solicitation of proxies, consents or
authorizations in respect of a security registered under the Exchange Act; and
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the sections of the Exchange Act requiring insiders to file public reports of their
stock ownership and trading activities and establishing insider liability for profits
realized from any short-swing trading transaction.
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Because of these exemptions, investors are not provided with the same information which is
generally available about domestic public companies organized in the United States.
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 most 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 U.S. jurisdictions.
In addition, the circumstances in which a shareholder of a BVI company may sue the company
derivatively, and the procedures and defenses that may be available to the company, may result in
the rights of shareholders of a BVI company being more limited than those of shareholders of a
company organized in the U.S.
Furthermore, our directors have the power to take certain actions without shareholder approval
which would require shareholder approval under the laws of most U.S. jurisdictions. The directors
of a BVI corporation, subject in
12
certain cases to court approval but without shareholder approval, may implement a
reorganization, merger or consolidation, the sale of any assets, property, part of the business, or
securities of the corporation. Our ability to amend our Memorandum of Association and Articles of
Association without shareholder approval could have the effect of delaying, deterring or preventing
a change in our control without any further action by the shareholders, including a tender offer to
purchase our common stock at a premium over then current market prices.
Risk Factors Regarding Our Mining Operations in China
Fluctuations in the market price of molybdenum could adversely affect the Companys financial
condition, results of operations and cash flows from operations
.
The Companys financial condition, results of operations and cash flows depend significantly
upon the market price of molybdenum, which has historically fluctuated considerably. Molybdenum
prices depend primarily on the demand in the end-user markets in which molybdenum is used. The
end-user markets for molybdenum are primarily the steel and chemical industries. These industries,
as well as other industries that use molybdenum, exhibit a cyclical business cycle. Many of the
factors that affect the demand for molybdenum are beyond the Companys control, including the
general level of industrial production in the PRC and other countries, interest rates, the rate of
inflation and the stability of exchange rates. Such external factors are influenced by changes in
international investment markets, international monetary systems and internal and external
political developments. The volatility in molybdenum prices is illustrated by the range of average
molybdenum prices from 1999 to 2009 from a low of US$2.35 per pound to a high of $31.98 per pound
of molybdenum.
Future declines in the price of molybdenum could materially reduce the Companys working
capital, profitability and cash flows from operations. Severe declines in the molybdenum price
could cause the Company to temporarily close its molybdenum mine and plant facilities.
Furthermore, a significant decrease in molybdenum prices could require the Company to revise its
mineral reserve calculations and life-of-mine plans. Such a revision could result in material
write-downs of the Companys proven and probable reserves and other long-lived assets and have a
material adverse effect on its financial position, results of operations and cash flows.
Estimates of proven and probable mineral reserves and other mineralized material may prove to be
inaccurate
.
Estimates of proven and probable reserves and other mineralized material involve numerous
assumptions and are subject to numerous uncertainties. The estimates of proven and probable
reserves and other mineralized material disclosed herein are, therefore, only estimates.
Therefore, the Company cannot provide assurance that its estimates of tonnages, grade and contained
molybdenum of proven and probable reserves and tonnages and grade of other mineralized material
will be achieved in the future, that the indicated level of recovery will be realized or that the
Company can mine and process the estimated proven and probable reserves and other mineralized
material profitably. The actual production of proven and probable reserves and other mineralized
material depends on a number of factors including, among others, geological and mining conditions,
the effects of government regulation, prevailing molybdenum prices, exchange rates, interest rates
and inflation rates, operating costs, development costs, equipment and plant maintenance costs,
site restoration costs and the availability and cost of labor, equipment, raw materials and other
services required to mine and process the ore. Furthermore, the Company cannot provide assurance
that the recovery rates it produced in small-scale laboratory tests can be duplicated in on-site
conditions during production. Estimates of proven and probable reserves and other mineralized
material, including the classifications thereof based on probability of recovery, may vary
substantially if prepared by different engineers or by the same engineers at different times. If
the Companys actual proven and probable reserves and other mineralized material are less than its
estimates disclosed herein, the Companys financial condition, results of operations and cash flows
may be materially impaired.
The Companys exploration activities may not result in discoveries of proven and probable reserves
and commercial quantities of molybdenum
.
Exploration and development of mineral deposits involves substantial risks. Only a few
properties that are explored are eventually developed into producing mines, and the success of
exploration activities depends on a number of factors, including the attributes of the deposit such
as size and grade, prevailing molybdenum prices and
13
government regulations relating to exploration and mining rights, royalties, etc. Exploration
activities may need to occur for a number of years before commercially viable ore deposits are
discovered and developed, and the Company may incur substantial expenses to locate and establish
proven and probable reserves and to construct mining and processing facilities. The Company cannot
provide assurance that exploration and development activities will give rise to new commercial
mining operations or result in new proven and probable reserves.
The Companys revenues for its mining operations are primarily dependent on its production of
molybdenum. The Companys ability to sustain current molybdenum production levels or to increase
molybdenum production levels depends on its ability to bring new mines into production or to expand
proven and probable reserves at the existing mine
.
The Company generates revenues from its mining operations primarily through the production and
sale of molybdenum. Without any future expansion or other development, production from the
existing mine is expected to decline over the life of the mine. Furthermore, the production
estimates in the life-of-mine plan for its existing mining operation may vary materially from the
actual production because the feasibility of extracting and processing proven and probable reserves
and other mineralized material is dependent on market conditions, the regulatory environment and
available technology. Therefore, the Companys ability to maintain its current production or
increase its annual production of molybdenum and generate revenues depends to a large extent on its
ability to discover or acquire new proven and probable reserves and other mineralized material, to
bring new mines into production and to expand the proven and probable reserves and other
mineralized material at its existing mine.
Mining operations are subject to conditions or events beyond the Companys control which could have
a material adverse effect on the Companys financial condition, results of operations and cash
flows from operations. The Companys insurance policies may not adequately cover all these risks
and hazards
.
Mining operations, including the exploration and development of mineral deposits, involve a
high degree of risk. The Companys operations are subject to a host of hazards and risks normally
associated with the exploration, development and production of molybdenum. These hazards and risks
include, among others, adverse environmental conditions, hazardous or inclement weather conditions,
accidents, metallurgical and other processing problems, unusual or unexpected geologic formations,
ground or slope failures, structural cave-ins or slides, flooding or fires, seismic activity and
equipment failures.
These hazards and risks could give rise to, among other impacts, damage to, or destruction of,
the mine, processing facilities and equipment. The hazards and risks could also cause personal
injury or death, delays in mining, monetary losses and potential legal liability.
The Companys insurance will not cover all the potential risks associated with its mining
operations. Certain of the Companys risks are insurable, but it may be unable to maintain
insurance to cover the hazards and risks at affordable premiums. Furthermore, insurance to cover
risks such as environmental pollution or other hazards as a result of mining or processing
operations is generally not available on acceptable terms. The Company could, therefore, become
subject to liability for pollution or other risks for which it does not have insurance or against
which the Company elects not to obtain insurance because of premium costs or other factors.
Uninsured risks may cause the Company to incur significant costs that could have a material impact
on its financial position, results of operations or cash flows.
The Company may not be able to acquire desirable mining assets in the future
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The Company intends to grow its business by selectively acquiring attractive and high-quality
mining assets in the future through strategic acquisitions, but there is no assurance the Company
will be able to identify suitable acquisition opportunities. The Companys ability to acquire and
integrate future acquisitions on terms that are favorable to the Company may be limited by the
number of desirable acquisition targets, internal demands on its resources, competition from other
mining companies and its ability to finance such acquisitions on satisfactory terms.
The development of mining projects is inherently risky and may require more capital than
anticipated, which could adversely affect the cash flows of the Company
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There are many risks and uncertainties inherent in all mining development projects, including
the ongoing development of the Companys underground mine. The economic feasibility of mining
development projects is dependent on many factors, including the accuracy of estimated proven and
probable reserves and other mineralized material, metallurgical recoveries, capital and operating
costs and the future prices of the relevant minerals. The capital expenditures and time required
to develop new mines or infrastructure in existing mines are considerable, and changes in costs or
construction schedules can affect project economics. It is, therefore, possible that the actual
costs and economic returns on mining development projects may differ materially from our estimates.
New mining development projects have no operating history upon which to base estimates of
future cash flow. Mining development projects also require the successful completion of
feasibility studies, the acquisition of government permits, the acquisition of exploration or
mining rights, negotiating energy and water supplies and other factors. It is possible that the
Company could fail to successfully complete these and other factors associated with a mine
development project, in which case the project may not proceed, either on its original timing or at
all. It is not unusual for new mining operations to experience problems during the development or
start-up phases of the project, resulting in delays in producing revenue and increases in invested
capital.
Intense competition in the mining industry could reduce the Companys market share or harm its
financial condition, results of operations and cash flows
.
The mining industry is extremely competitive, and the Company competes with many mining
companies that possess greater financial and technical resources. Because mineral rights have a
limited life, the Company must compete with other mining companies who also seek to increase their
mineral reserves through the acquisition of exploration and mining rights. Furthermore, the
Company competes with other mining companies for the technical expertise to find, develop and
operate its mining properties, for skilled labor, for equipment and spare parts and for the capital
to fund the acquisition, development and operation of its properties. Existing or future
competition in the mining industry could adversely affect the Companys financial position, results
of operations and cash flows.
The temporary shutdown of the Companys mining operations could expose it to significant costs and
adversely affect its access to skilled labor
.
The Company may have to temporarily shut down its mine from time to time if it no longer
considers the mine to be commercially viable. There are a number of factors that may cause the
Company to reach a conclusion that the operation of the mine is no longer commercially viable, many
of which are beyond the Companys control. These factors include adverse changes in interest rates
or currency exchange rates, decreases in the prevailing price of molybdenum or the market rates for
treatment and refining charges and increases in transportation and labor costs. During a temporary
shutdown of its mine, the Company would have to continue to expend capital to maintain the plant
and equipment. The Company may incur significant labor costs as a result of a temporary shutdown
if it is required to give employees notice prior to any layoff or to pay severance for an extended
layoff. In addition, temporary shutdowns may adversely affect the Companys future access to
skilled labor, as employees who are laid off may seek employment elsewhere. Furthermore, if the
Companys mining operations are shut down for an extended period of time, it may be required to
engage in environmental remediation of the plant and mine sites, which would result in the Company
incurring additional costs. Taking into consideration the costs of a temporary shutdown, the
Company may choose to operate the mine at a loss rather than shut down the property. Either a
temporary shutdown or continuing to operate the mine at a loss could have a material adverse effect
on the Companys financial position, results of operations or cash flows.
The Companys mining operations give rise to environmental risk
.
All of the Companys mining operations are subject to environmental regulation in the PRC.
Environmental regulation is evolving in the PRC and may in the future require stricter standards
and enforcement, increased fines and penalties for non-compliance, more stringent environmental
assessments of proposed projects and a heightened degree of responsibility for companies and their
officers, directors and employees. The Company can provide no assurance that existing or future
environmental regulation will not have a material adverse effect on the Companys financial
condition, results of operations and cash flows. The Company owns or has control of properties
that may result in a requirement to remediate such properties that could involve material costs.
Furthermore, environmental hazards may exist on the properties on which it holds interests that are
unknown to the Company at the present time that have been
15
caused by previous owners or operators of the properties. The Company may also acquire properties
in the future that pose environmental risks.
Failure to comply with applicable laws, regulations and permitting requirements in the PRC may
result in enforcement actions, including orders issued by regulatory or judicial authorities
causing operations to cease or be curtailed, and may include corrective action requiring capital
expenditures, installation of additional equipment, or remedial actions. The Company may be
required to compensate those suffering loss or damage from the mining operations and may have civil
or criminal fines or penalties imposed for violations of applicable laws or regulations..
Future changes to current laws, regulations and permits governing the operations and
activities of mining companies in the PRC, or more stringent implementation thereof, could have a
material adverse effect on the Companys financial position, results of operations and cash flows.
Such changes could result in increases in exploration expenses, remedial and reclamation
obligations, capital expenditures or production costs, reductions in the levels of production at
the producing mine or abandonment or delays in the development of new mining properties or the
expansion of the existing property.
Mineral ores and mineral products, including molybdenum ore and molybdenum products, contain
naturally occurring impurities and toxic substances
.
The Company has implemented procedures designed to identify, isolate and safely remove or
reduce impurities or toxic substances that are naturally occurring in molybdenum ore and molybdenum
products. Such procedures require strict adherence, and the Company cannot provide assurance that
employees, contractors or other parties will adhere to these procedures or will not be exposed to
or affected by such impurities and toxic substances. Employees, contractors and other parties who
are exposed to or affected by these impurities and toxic substances may give rise to liabilities by
the Company. Even if procedures are strictly adhered to by employees, contractors and other
parties, there is still a risk that they will be exposed to or affected by impurities and toxic
substances in the course of operations of the mine. Such incidences may result in requirements
that the Company take remedial action, may result in the curtailment of mining operations and may
have a materially adverse effect on the Companys financial position, results of operations and
cash flows.
Reclamation and mine closure costs could adversely affect the Companys financial position, results
of operations and cash flows
.
Currently in the PRC, mining companies are required to make payments to government entities
for reclamation and mine closure costs. The government entities actually perform the reclamation
and mine closure work to restore the mine site. Presently, mining companies must pay a sewage
charge to the Mongolia Environmental Protection Bureau at a rate of RMB15 per ton of extracted ore,
multiplied by 0.94. Mining companies must pay a one-time fee to the State Treasury equal to
Rmb15,000 Rmb75,000/ hectare as determined through negotiations with government authorities and
based upon the underground areas which have been mined and the nature of the mine. The Company
cannot provide assurance that national or regional governments in the PRC will not increase these
charges or create laws or regulations to make additional charges on mining companies in the future.
National or regional governments may also create laws or regulations to require mining companies
to perform some or all of the reclamation and closure activities themselves in the future. Future
changes to reclamation and mine closure requirements in the PRC may have a material adverse effect
on the Companys financial position, results of operations or cash flows.
Title to some of the Companys exploration and mining rights could be challenged or defective
.
The acquisition of title to exploration and mining rights in the PRC is a very detailed and
time-consuming process, and title to such rights may be disputed, challenged or impaired. Third
parties may assert valid claims to some of the Companys interests in exploration and mining
rights. As a result, the Company may be impaired in its ability to explore or mine on its
properties or unable to enforce its rights with respect to such properties. An impairment to, or
defect in, the Companys title to its exploration and mining rights could, therefore, have a
material adverse effect on its financial condition, results of operations and cash flows.
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The Company is required to obtain government permits in order to conduct mining operations
.
The Company must currently obtain government approvals and permits to operate its mine in the
PRC. Further approvals and permits may be required in the future. The ability of the Company to
obtain permits from the government of the PRC is contingent upon many factors outside of its
control. Obtaining governmental permits may increase costs and cause delays depending on the
nature of the activity to be permitted and the interpretation of applicable requirements by
government authorities. The Company cannot provide assurance that it will be able to obtain all
necessary permits for its mining operations in the future, and if it obtains them, that the costs
involved will not exceed the Companys estimates. To the extent the Company is unable to obtain or
renew required permits, its mining operations may be curtailed, or the Company may not be able to
proceed with planned exploration, development or operation of mineral properties.
Increased energy prices or a disruption of energy supply could adversely affect the Companys
operations
.
Mining operations, plant and facilities are intensive users of electricity and carbon-based
fuels. Numerous factors beyond the Companys control influence energy prices, including global and
regional supply and demand, political and economic conditions and applicable regulatory regimes.
The prices of various sources of energy may increase significantly compared to current levels, and
such an increase could adversely affect the Companys financial condition, results of operations
and cash flows. A disruption in the transmission of energy to the mine site, the lack of sufficient
energy transmission infrastructure or the termination of energy supply contracts could interrupt
the Companys energy supply and adversely affect mining operations. An interruption of the
Companys energy supply could have a material adverse effect on the Companys financial position,
results of operations and cash flows.
Disruption of transportation services or increased transportation costs could have a material
adverse effect on the Companys financial position, results of operations and cash flows
.
Disruption of transportation services due to weather-related problems, strikes, lock-outs or
other events could have a material adverse effect on the Companys mining operations. If
transportation of the Companys molybdenum and other mineral products becomes unavailable, the
Companys ability to market its products would be diminished. Furthermore, increases in the
Companys transportation costs relative to those of its competitors could make the Companys mining
operations less competitive. Disruption of transportation services or increases in transportation
costs could have a material adverse effect on the Companys financial position, results of
operations and cash flows.
The Companys mining business depends on good relations with its employees
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Production at the Companys mining operations depends on the efforts of its employees.
Changes in labor laws or in the Companys relationships with its employees could result in strikes,
lockouts or other work stoppages, any of which could have a material adverse effect on the
Companys financial condition, results of operations and cash flows.
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ITEM 4. INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT OF THE COMPANY.
From our inception through December 31, 2002, Qiao Xing Universal Resources, Inc. (Qiao Xing
or we) was principally engaged in the manufacturing and sales of telecommunication terminals and
equipment, including corded and cordless telephone sets, in China. Our history dates back to April
1992 when Mr. Rui Lin Wu, our founder and chief executive officer, established Qiao Xing
Telecommunication Industry Co. Ltd. in Huizhou, Peoples Republic of China (PRC or China). We
initially were engaged in the original design and manufacturing of corded telephones, whereby
products are designed and manufactured to the customers requirements and instructions and are
marketed under the customers designated brand name or without a designated brand name.
Our company, formerly known as Pastiche Investments Limited, was incorporated as an
international business company under the International Business Companies Act of the British Virgin
Islands on December 6, 1994. As of July 10, 2010, we owned 61.1% of Qiao Xing Mobile Communication
Co. Ltd. (QX Mobile), an international business company incorporated in the British Virgin
Islands on January 31, 2002. QX Mobile owns 96.55% of CEC Telecom Co., Ltd., a limited liability
company established in China (CECT). In addition, we own 100% of China Luxuriance Jade Company,
Ltd. (China Luxuriance or CLJC), which is the sole shareholder of China Huizhou Taiherui
Information Technology Co., Ltd. (Taiherui). Taiherui is the sole shareholder of Chifeng
Zhongtai Mining Company Ltd.
Fiscal year 2009 represented a critical year for the Company as we transitioned our business
focus from telecommunication terminals to the mineral resources industry, with a focus on several
strategically important nonferrous metal mines. In April 2009, we acquired China Luxuriance Jade
Co., Ltd. to enter the molybdenum mining and processing industry. In July 2009, we started
commercial production of molybdenum concentrate at our molybdenum mine, generating sales revenue of
Rmb193.9 million (US$28.4 million) and net income of Rmb64.2 million (US$9.4 million) in the second
half of the year.
Based on the initial success of our molybdenum business as well as an extensive study of
Chinas macro economic trends, we are further consolidating our strategy to become a pure resources
company with meaningful scale and a focus on strategically important metals. As a result of our new
strategic direction, we divested our fixed line and low-end mobile phone business on November 30,
2009 and officially changed our corporate name to Qiao Xing Universal Resources, Inc. effective
January 28, 2010.
For 2007, our total capital expenditure was about Rmb7.0 million, which primarily included:
1)Rmb6.5 million for acquisition of property, machinery and equipment; and 2)Rmb0.5 million for
construction in progress.
For 2008, our total capital expenditure was about Rmb20 million for property, machinery and
equipment.
For
2009, our total capital expenditure was about Rmb114.3 million (US$ 16.7 million) for
property, machinery, equipment and construction-in-progress.
Our principal place of business and our executive office is the Qiao Xing Science Industrial
Park, Tang Quan, Huizhou City, Guangdong, Peoples Republic of China, 516023, telephone: (011)
86-752-2820-268. We have designated Andrew N. Bernstein, 5445 DTC Parkway, Suite 520, Greenwood
Village, Colorado 80111 as our agent for service of process in the United States.
Initial Public Offering of QX Mobile Shares And Non-Competition Arrangement
QX Mobile conducted an initial public offering of 12,500,000 of its ordinary shares (the QXM
IPO). The initial offering price of the QX Mobile Shares was US$12.00 per share and the shares
were listed for trading on the New York Stock Exchange under the symbol QXM on May 2, 2007.
In connection with the QXM IPO, we entered into a non-competition agreement with QX Mobile and
Mr. Rui Lin Wu, which became effective upon the completion of the QXM IPO and will remain valid
until we or Mr. Rui Lin Wu or any family member of Mr. Rui Lin Wu does not directly or indirectly
own any QX Mobile shares, or until
18
termination of such agreement through the written consent of the parties. The agreement
provides that we and Mr. Rui Lin Wu will not, and will procure our subsidiaries and Mr. Wus family
members to not, solely or jointly, or through any person, company, enterprise or unit other than QX
Mobile and its subsidiaries, develop, carry on, participate in, engage in, or be involved in any
business or activities that result in or may result in direct or indirect competition with QX
Mobiles business.
Acquisition of China Luxuriance Jade Company, Ltd. and commencement of diversification into the
resources industry
On April 6, 2009, the Company acquired a 100% equity interest in CLJC in a cash-and-stock
transaction from Mr. Wu Rui Lin, the president of the Company. CLJC was valued at approximately
US$110 million. The Company paid US$30 million in cash and issued 40,000,000 shares of the
Companys common stock valued at US$2.00 per share to Mr. Wu Rui Lin. The closing share price of
the Companys common stock as of the acquisition date was US$1.73 per share. The Company also
issued 2,100,000 shares to a financial consulting firm and 100,000 shares to a law firm for
services in connection with the acquisition.
China Luxuriance, through its wholly owned Chinese subsidiaries, owns the right to receive the
expected residual returns from Chifeng Haozhou Mining Co., Ltd. (Haozhou Mining), a large
copper-molybdenum poly-metallic mining company in China. Haozhou Mining owns the exploration
license of a mine covering 53.9 square kilometers (the Mine) in the Inner Mongolia Autonomous
Region in the Peoples Republic of China. Through exploration of 32.34 square kilometers, it was
concluded that there is a reserve of 30,985 tons of molybdenum metal and an abundance of other
types of mineralization, which was supported by the Technical Report issued by Behre Dolbear Asia,
Inc. Haozhou intends to explore for additional mineralization on the remaining 21.56 square
kilometers in the future.
The Mine is located in Chifeng, which is a strategically important base for Chinas mineral
resources industry; the average grade of the molybdenum reserves of the Mine is 0.40%, which is
very high compared with the global average for molybdenum mines; transportation, supply of water
and electricity are economically accessible; Chifeng Haozhou is managed by a team of mining experts
with proven experience who are capable of operating a mining business; it has all necessary
permits, approval from the PRC government authorities to explore and extract the mines, as well as
environment protection permits and safety permits; the infrastructure and the initial production
facility (the Initial Project) are believed to be sufficient to support the capacity of
processing 435,000 tons of ores and producing 2,817 tons of molybdenum concentrate product annually
(equivalent to 1,378 tons of molybdenum metal). The Mine commenced commercial operations in July
2009. It is planned that, as of 2011, the production capacity will eventually increase to a level
to process 540,000 tons of ores and produce 3,526 tons of molybdenum concentrate on an annual
basis.
Since the Acquisition would constitute a material related party transaction, the Board of
Directors of the Company determined to establish the Special Acquisition Committee (the
Committee) to deal with this Acquisition. In order to maintain the independence of the Committee,
Mr. Rui Lin WU (our Chairman and CEO) and Mr. Zhi Yang WU (our Vice Chairman and eldest son of Rui
Lin WU) were excluded from membership on the Committee.
The members of the Committee and their respective relationships with the Company and our Board
of Directors is as follows:
(i) Mr. Qian Mao Gen, senior geological engineer, was engaged as a consultant to the Company in
connection with the Companys diversification efforts into the resources industry in 2007 and was
appointed as a member of the Committee in February 2009.
(ii) Mr. Peng Bin, geological engineer, was engaged as a consultant to the Company in connection
with the Companys diversification efforts into the resources industry in 2007 and appointed as a
member of the Committee in February 2009.
(iii) Dr. Edward Tsai was elected as a non-executive director of the Company and appointed as a
member of the Companys audit committee in December 2007 and was appointed as a member of the
Committee in February 2009.
19
(iv) Professor Yi Hong Zhang was elected as a non-executive director of the Company and appointed
as a member of the Companys audit committee in December 2004 and was appointed as a member of the
Committee in February 2009.
(v) Mr. Ze Yun Mu was elected as a non-executive director of the Company and appointed as a member
of the Companys audit committee in September 2003 and was appointed as a member of the Committee
in February 2009.
Mr. WU and the Committee agreed that the consideration for the Acquisition should be based on
the valuation report of a reputable valuation firm. The management of the Company recommended
American Appraisal China Limited to the Committee. The Committee had a discussion with Mr. WU, and
both parties agreed to engage American Appraisal China Limited to serve as the internal valuator
for the Acquisition and required American Appraisal China Limited to provide to the Committee a
price range in its valuation report to facilitate the negotiation between the Committee and Mr. WU.
American Appraisal is a large independent worldwide valuation consulting firm with more than 50
offices in five continents, providing multi-disciplined appraisal services in business, real estate
and industrial valuation. American Appraisal China Limited does not have any past and present
affiliations with the Company other than prior valuation projects which it performed for the
Company in the past.
The US$110,000,000 purchase price for the Acquisition was reached by negotiations between Mr.
WU and the Committee based primarily on the valuation report of American Appraisal China Limited as
of November 30, 2008 which established a valuation range of US$77,013,000 to US$128,957,000. The
appraisal report served as an internal reference for the negotiation of the purchase price of the
Acquisition.
For more than ten years, Qiao Xing and its subsidiaries had achieved great success in the
telecommunication terminal industry. However, due to the significant shrinkage in the indoor phone
business industry and the intense pricing competition war in the mobile phone market, another
subsidiary of ours, Huizhou Qiao Xing Communication Industry Co., Ltd., a company specializing in
the indoor phone and lower-end mobile phone business, was now facing a threat of loss. In order to
maintain our long term growth momentum and sustained profitability, roughly three years ago, our
management team started to explore the opportunities and arenas for our diversification strategy.
Upon completion of our due diligence and market research, we selected this copper-molybdenum
poly-metallic mining company as our first diversification target.
As a rare metal and a non-renewable resource of great strategic importance, molybdenum is
widely used in many areas, including the iron and steel melting industries. In the
recently-announced RMB 4 trillion stimulus package launched by the Chinese Government, nearly RMB
1.8 trillion will be spent in the construction of railway, highway, airport and power grid, which
is expected to have a very positive effect on the cement, iron and steel industries. We expect
that the good opportunities for the iron and steel melting industries will further stimulate the
demands for molybdenum concentrate products.
We believe that our diversification into the mineral resources industry was one of the major
strategic measures we have implemented to ensure our continued sustainable development into the
future.
Purchase of US$30,000,000 of Convertible Notes of QX Mobile
We entered into a Sales and Purchase Agreement dated March 31, 2009 with DKR SoundShore Oasis
Holding Fund, Ltd., CEDAR DKR Holding Fund Ltd. and Chestnut Fund Ltd. pursuant to which we
purchased US$30,000,000 aggregate principal amount of Convertible Notes (the Notes) of QX Mobile
from these three non-affiliated original purchasers of the Notes. The three non-affiliated
original purchasers of the Notes are sister funds of a hedge fund and, due to their need for and
lack of liquidity regarding the Notes, had approached us in late 2008 early 2009 and offered to
sell the Notes to us at a discounted aggregate purchase price of US$24,000,000.
In accordance with the terms of the Notes, the holders of the Notes have the right of optional
redemption on November 15, 2009.
We believed that, with the purchase of the Notes for an aggregate consideration of
US$24,000,000, we would be able to receive US$30,000,000 plus US$1,790,081 of accrued interest and
foreign exchange expenses on the
20
optional redemption date of November 15, 2009. The holding period for the Notes would be only seven
and half months, and the nominal return on this investment would be approximately 32%. Thus, we
believed that such a purchase would be in the economic best interests of our shareholders and could
provide us with additional cash reserves for potential future acquisitions.
We exercised our right of optional redemption in November 2009 and received the expected
return on the investment.
Disposal of Qiao Xing Communication Holdings Limited
On November 30, 2009, the Company sold 100% of its equity interest in Qiao Xing Communication
Holdings Limited (QXCH) to Dragon Fu Investment Limited (DFIL) for a total consideration of
Rmb75,000,000 (US$10,989,000), resulting in a gain on disposal of discontinued operations of
Rmb144.2 million (US$21.1 million). The total purchase price consideration was based upon an
appraisal report to the Company, as well as negotiations between the parties. In addition, in
accordance with the sales agreement, DFIL undertook to repay as a primary obligor, or to cause
QXCHs subsidiary to repay, the outstanding loan of RMB236,102,000 which is due from a QXCH
subsidiary to the Company, in three installments but no later than November 30, 2010. As of
December 31, 2009, this outstanding loan amounted to Rmb200,000,000.
We owned 100% of Qiao Xing Communication Holdings Limited, which owned 90% of Huizhou Qiao
Xing Communication Industry Co., Ltd. (HZQXCI). HZQXCIs principal business was the manufacture
and sale of COSUN branded economy mobile handsets for the PRC market. Through HZQXCI, we had
conducted the business of research and development and distribution of mobile phones and the design
and distribution of fixed line telephones, wireless telephones and fax machines.
Restructured 2006 Unsecured Convertible Notes (2006 Notes)
On November 3, 2009, the Company signed an Amendment and Exchange Agreement with two
institutional investors that owned US$26 million principal amount of 2006 Notes issued by the
Company in October 2006, and issued US$24 million aggregate principal amount of 0% unsecured
restated senior convertible notes (0% Restated Notes) to these two institutional investors in
exchange for the 2006 Notes. In addition, the Company issued 2,400,000 shares of common stock of
the Company to these two institutional investors. The institutional investors have also waived the
interest accrued on the 2006 Notes over the first four months of 2009 as part of the restructuring.
The Company and the two holders of the 2006 Notes started negotiations with respect to the
restructuring prior to the Maturity Date and agreed to the basic terms and conditions for the
restructuring in June 2009 (June Terms).
Pursuant to the Amendment and Exchange Agreement, the 0% Restated Notes could be converted
into the Companys common stock by the note holders. The Company was obligated to repay the
principal of the 0% Restated Notes in eight installments prior to July 3, 2010, in the form of, at
the Companys option, cash or common stock.
Repayment of Outstanding 0% Restated Notes
In 2009, the holders of the 0% Restated Notes exercised the option to convert an aggregate of
US$6,000,000 of the principal amount of the notes into 3,319,171 shares of the Company at an
average conversion price of US$1.81 per share.
In 2010, the holders of the 0% Restated Notes exercised the option to convert an aggregate of
US$17,220,000 of the principal amount of the notes into 9,077,280 shares of the Company at an
average conversion price of US$1.90 per share.
In May 2010, the Company repaid the remaining outstanding US$780,000 of the principal amount
of the 0% Restates Notes and the 0% Restated Notes have been cancelled and retired.
21
Recent Developments
On May 26, 2010, the Companys subsidiary signed a letter of intent with Chifeng Xingu Mining
Co., Ltd. (Chifeng Xingu), a non-affiliated third party, to acquire the 100% equity interest in
Balinzuo Banner Xinyuan Mining Co., Ltd. (Xinyuan Mining or the Mining Company). Xinyuan Mining
owns a relatively large-scale lead-zinc mine in Balinzuo Banner, in the Inner Mongolia Autonomous
Region of the Peoples Republic of China (the Xinyuan Lead-zinc Mine or the Mine). Based on the
preliminary due diligence and domestic geological exploration materials, Xinyuan Mining owns the
mining license of the Xinyuan Lead-zinc Mine, covering 3.3233 square kilometers. The reserves of
lead-zinc metal and copper metal, which are subject to verification, are estimated to be 825,000
tons and 109,000 tons, respectively, with average grade at 7.60% for lead-zinc and 1.01% for
copper. The Mine has current production capacity for processing 500 tons of ores per day, and is
now at the stage of trial operation. The Company will use its best efforts to complete the
acquisition of the Mining Company during 2010.
B. BUSINESS OVERVIEW.
Prior to fiscal year 2009, we were principally engaged in the design, manufacture and sale of
telecommunication terminals and equipment in the PRC, including primarily in-house corded and
cordless telephone sets under the trademark of Qiao Xing.
For the fiscal year ended December 31, 2009, we classified our products into two core business
segments, mobile phones and mining. In view of the fact that we operate principally in Mainland
China, no geographical segment information is presented. Sales in the PRC market accounted for
approximately 94% and 100% of our total revenues for the fiscal years ended December 31, 2008 and
2009, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2008
|
|
2009
|
|
|
Rmb000
|
|
Rmb000
|
|
Rmb000
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobile phones
|
|
|
3,141,094
|
|
|
|
2,153873
|
|
|
|
1,632,912
|
|
Mining business
|
|
|
|
|
|
|
|
|
|
|
193,887
|
|
Indoor phones
|
|
|
733,013
|
|
|
|
441,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,874,107
|
|
|
|
2,594,948
|
|
|
|
1,826,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
QX Mobile and Its Subsidiary CECTs Business Overview
QX Mobile is a domestic manufacturer of mobile handsets in China. It manufactures and sells
mobile handsets based primarily on the GSM global cellular technologies. QX Mobile operates its
business primarily through CECT, its 96.6% owned subsidiary in China. QX Mobiles products have
historically been sold primarily under the CECT brand name, and beginning in May 2008, under the
new VEVA brand.
QX Mobile develops, produces and markets a wide range of mobile handsets, with increasing
focus on differentiated products that generally generate higher profit margins. QX Mobile sold
approximately 2.71 million and 2.12 million handset products in 2008 and 2009, respectively. The
average selling price of QX Mobiles handsets was RMB 788 in 2008 and RMB 735 ($108) in 2009.
QX Mobiles in-house handset development teams are based in two research and development
centers in Beijing and Huizhou. QX Mobiles Beijing research center focuses on developing
higher-end and differentiated products, while its Huizhou research center concentrates on
developing handsets targeted at the mid-range and economy markets based on existing technologies.
Its in-house research and development teams developed a number of handset designs and certain
technologies used in producing its handsets, such as mobile phone application software,
user-friendly product interfaces and printed circuit board designs, including baseband designs and
radio frequency circuit designs that contribute to its ability to produce differentiated handsets.
QX Mobile also sources certain software and hardware designs used in producing its handsets from
third-party designers to complement its in-house development capabilities.
22
QX Mobile currently has one main handset manufacturing facility in Huizhou City, Guangdong
Province, China. This facility is equipped with three SMT lines and seven assembly and testing
lines. It historically outsourced and continues to outsource the manufacturing of a substantial
portion of QX Mobiles products to EMS providers. QX Mobile produced approximately 0.71 million
units in its Huizhou facility in 2008 and 0.21 million units in 2009. It sourced approximately 2.04
million units in 2008 and 1.91 million units in 2009 through EMS providers.
Substantially all of its products are sold in China. QX Mobile sells its products primarily to
its national distributors, provincial distributors and TV direct sales distributors, which resell
its products to end customers either directly or through their own distribution networks, which are
typically composed of local distributors and retail outlets. As of July 10, 2010, QX Mobiles
distribution network included four national distributors, 58 provincial distributors and three TV
direct sales distributors.. In addition, certain of its distributors and other third parties
provide repairs and other after-sales services to its end customers through after-sales service
centers located throughout China. In November 2008, QX Mobile also began the online retailing of
its VEVA branded handsets directly to end customers at its website, www.vevago.com. Since the
beginning of 2009, it has also started to build and operate its own specialty retail stores to
market and sell its VEVA branded handsets directly to end customers. As of July 10, 2010, QX Mobile
operates six VEVA retail stores in Beijing, China.
23
CLJC and Its Subsidiary Haozhous Business Overview
CLJC, through its wholly owned Chinese subsidiaries, owns the right to receive the expected
residual returns from Chifeng Haozhou Mining Company Limited (Haozhou), a company that owns 100%
interest in the Erdaoyingzi molybdenum mining property in China. Haozhou owns the exploration
license of a mine covering 53.9 square kilometers (the Mine) in the Inner Mongolia Autonomous
Region in the PRC about 745 km northeast of Beijing.
Through exploration of 32.34 square kilometers of this property in 2007, Haozhou estimates
that the Mine has a reserve of approximately 30,985 tonnes of molybdenum metal with an average
grade of 0.40% and an abundance of other types of minerals. Haozhou expects to continue to explore
the remaining 21.56 square kilometers of the property in the future.
General description
Under the Mineral Resource Law of the PRC, the state owns all mineral resources. Parties
can obtain mining or exploration permits for conducting such activities in a specific area during a
specified license period. The permits are generally extendable at the end of the permit period.
Haozhou initially obtained an exploration permit for an area of 27 square kilometers. Haozhou
obtained an expansion to this permit to the present-day 53.9 square kilometers in 2008. In June
2009, Haozhou obtained a mining permit authorizing extraction for a 4.8 square kilometer area to a
subsurface elevation of 279 meters. The exploration license is valid from October 2008 to October
2010, and the mining permit is valid from March 2010 to March 2013. Haozhou fully expects to be
able to extend these permits when they expire. The permitted mining area includes the West District
containing Deposits I, II and III, and the East District, containing Deposit IV. The two districts
are about 5 kilometers apart and are connected by a paved highway.
A regional mineral resource investigation conducted by a state exploration entity in the late
1970s and early 1980s discovered molybdenum mineralization in the East District. After a period of
inactivity, Mr. Guo Yongfa, a local prospector, obtained an exploration permit for the area in
2002. Mr. Yongfa sold the property to Lindong Yongsheng Mining Company Limited in early 2003, who
then sold it to Haozhou in December 2003. Haozhou then proceeded with exploration activities,
including geological mapping, surface trenching and underground drifting.
A local prospector, Mr. Li Honglin, discovered molybdenum mineralization in the West District
in 2001. Haozhou purchased the property in 2002 and proceeded with exploration activities on the
property, including geological mapping, surface trenching and underground drifting.
Mr. Wu Ruilin acquired Haozhou in 2006 and proceeded with additional exploration activities in
2006 and 2007, including further geological mapping, surface trenching and underground drifting, as
well as drilling. In April 2009, the Company, through its wholly owned Chinese subsidiaries,
acquired the right to receive the expected residual returns from Haozhou.
Haozhou completed a feasibility study for the project in September 2007 and commenced
construction and development of the mining and plant infrastructure shortly thereafter. Haozhou
employs underground mining techniques and a flotation processing plant at the Mine to produce
molybdenum concentrate for sale to smelters in various areas of China.
Molybdenum mineralization at the Mine occurs as molybdenite bearing quartz veins and veinlets
that follow shear zones associated with the Yanshan Period faulting. Molybdenum values are sharply
controlled by the vein boundaries, with essentially no value falling outside of the vein
structures.
24
Haozhou is currently using a contractor for mining extraction operations at the Mine. Ore
extracted from the Mine is transported to the processing plant where it is crushed in primary and
secondary crushers and then passed through a ball mill for grinding. The ore then passes through
flotation and filters to produce the molybdenum concentrate.
Location, access and traffic, climate, physiography and infrastruture
Haozhou is located within the administrative area of the Balinzuo Banner of Chifeng City.
Chifeng City is located in the eastern portion of the Inner Mongolia Autonomous Region in China and
approximately 500 kilometers (km) northeast of Beijing, the capital city of China. Chifeng City
and is well connected with Beijing and other major cities in China through well-developed highway
systems and railroads. There is also a regional airport in Chifeng City, with flights to Beijing
and other major cities in the surrounding areas.
Haozhou is located approximately 245 km north-northeast of Chifeng City and approximately 50
km north-northwest of the town of Lindong. Road distance from Chifeng City to Lindong is currently
approximately 370 km and the road is generally well-maintained highways. Road distance from Lindong
to the mine is approximately 85 km. The first 80 km is a paved highway, and the remaining are
gravel and dirt roads. Haozhou transports its molybdenum concentrate product to smelters
primarily via truck.
Haozhou is located in a low-mountain-range and rolling-hill region and on an east-facing slope
at the southwestern section of the Daxinganling Mountains. Local elevation difference is
approximately 300 meters (m) and surface elevation ranges from approximately 700 m to 1,000 m.
The hills near the project are generally barren with few shrubs, whereas land in the valleys is
generally used for agricultural purposes. Primary crops in the area include corn, millet, sorghum
and soybean. Ranching of cattle, goats and sheep is also an important part of the local economy.
Climate is semi-arid continental with clear seasonal alternation in the area. Summer is hot
with a maximum temperature of approximately 36ºC; winter is extremely cold with a minimum
temperature of approximately -30ºC. Average annual temperature ranges from 3ºC to 7ºC. May to
August is the frost-free season in the area. Annual precipitation averages approximately 450
millimeters (mm), and July and August is the rainy season. The annual evaporation rate is much
higher than annual precipitation.
Electricity supply in the Chifeng District is generally in surplus at present. Electricity for
Haozhou is supplied by the local power grid. A power line has been constructed to the West district
of Haozhou. It was used for construction and production.
Water supply for mine and mill production at Haozhou consist of pumped ground water from wells
drilled in a nearby valley and limited amounts of underground mine water. Water from the tailings
ponds is also recycled for production. Water supply at Haozhou is sufficient for production needs.
25
Location Map of the Erdaoyingzi Molybdenum Project
26
Uses of molybdenum and other products
Haozhou produces molybdenum concentrates and sells to molybdenum smelters. Molybdenums most
common mineral form is MoS
2
which is mined as a primary ore or a secondary mineral in
copper mining. Approximately 75% of molybdenum is used as an alloy in steels especially where
high-strength, temperature resistant or corrosive resistant properties are sought. The addition of
molybdenum enhances the strength, toughness, and wear or corrosion resistance of alloys. Molybdenum
is used in major industries, including transportation, process equipment manufacturing, oil well
drilling and the manufacturing of petroleum and gas pipelines. Molybdenum metal and superalloys are
used in applications which require materials with high melting points, high-temperature structural
strength and corrosion resistance. Such applications include industrial furnaces, lighting
components, aircraft and stationary turbine engines. The molybdenum chemicals produced are used as
catalysts, lubricants, flame-retardants, corrosion inhibitors and pigments. One catalyst which is
growing in importance is used in the de-sulphurization and de-metallization of crude oils as they
are being refined.
Molybdenum is a key alloying element in steel and the raw material for several chemical-grade
products used in catalysts, lubrication, smoke suppression, corrosion inhibition and pigmentation.
Molybdenum as a high-purity metal is also used in electronics such as flat-panel displays, heat
sinks, and wiring.
Marketing
Challenges to the real economy remained as the aftermath of the global financial crisis
lingered in 2009. As the economic stimulus packages adopted by international governments have
gradually come to effect since May, the worlds and Chinas economy showed signs of slow recovery,
yet on a shaky foundation. As such, the price of molybdenum products stayed low.
In retrospect, the price of molybdenum in year 2009 basically experienced three stages, with a
slump during January to April, followed by a surge during May to August and ended with a modest
fall during September to December. Looking into the case of Europes ferromolybdenum price, it
dropped from US$24/kg in January to US$20/kg in April during the first phase, rallied from US$23/kg
in May to US$41/kg in August during the second phase and dropped from US$33/kg in September to
US$27/kg in December during the third phase. The price of year 2009 bottomed in April, which was
mainly attributable to the low production capacity of domestic and overseas steel factories which
were on the verge of suspension, and the extremely quiet trading. The upsurge recorded in August
was also driven by downstream steel factories. As factories all over the globe increased their
production capacity with inventories running out and traders flocking to the market, the molybdenum
price swiftly increased.
As for the domestic molybdenum market in China, the domestic price in year 2009 was basically
in line with the international price, lingering at a low price level. The average price of
ferromolybdenum over the year was Rmb126,900/tonne, hitting its bottom at Rmb100,000/tonne in April
and its peak at Rmb169,000/tonne in August. The average price of molybdenum concentrates was
Rmb1,876/metric tonne unit, with the lowest at Rmb1,500/metric tonne unit in April and the highest
at Rmb2,529/metric tonne unit in August. The domestic and overseas markets have the same reasons
for the ups and downs in molybdenum prices.
Haozhou entered into a sales agreement with a third party molybdenum metal producer and sells
all of its molybdenum concentrates to this third party at the market price of molybdenum
concentrates on a Rmb/metric tonne unit basis. The table below shows the high, low and average
prices of molybdenum concentrate sold by Haozhou on the Rmb/metric tonne unit basis for the six
months ended of December 31, 2009:
27
|
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|
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|
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|
|
|
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|
Period
|
|
Low
|
|
High
|
|
Average
|
|
|
Rmb/
|
|
Rmb/
|
|
Rmb/
|
|
|
metric tonne
|
|
metric tonne
|
|
metric tonne
|
|
|
unit
|
|
unit
|
|
unit
|
July, 2009
|
|
|
2,000
|
|
|
|
2,300
|
|
|
|
2,147
|
|
August, 2009
|
|
|
2,580
|
|
|
|
2,650
|
|
|
|
2,611
|
|
September, 2009
|
|
|
2,350
|
|
|
|
2,400
|
|
|
|
2,374
|
|
October, 2009
|
|
|
1,950
|
|
|
|
2,200
|
|
|
|
2,071
|
|
November, 2009
|
|
|
1,920
|
|
|
|
1,970
|
|
|
|
1,945
|
|
December, 2009
|
|
|
1,950
|
|
|
|
1,980
|
|
|
|
1,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
1,950
|
|
|
|
2,650
|
|
|
|
2,160
|
|
Haozhou started its commercial production of molybdenum concentrate in July 2009. Consolidated
revenues from CJLC for 2009 were Rmb193.9 million (US$28.4 million). During the second half of
2009, 1,920 tonnes of molybdenum concentrate containing 925 tonnes of molybdenum metal were sold at
an average sales price of Rmb2,160/metric tonne unit [equal to Rmb209,700 (US$30,700) per tonne of
molybdenum metal (also equal to US$13.96 per pound of molybdenum metal contained)].
Summary of ore reserves and mineralized material
Recoverable proven and probable reserves summarized below have been calculated as of December
31, 2009, in accordance with Industry Guide 7 as required by the Securities Exchange Act of 1934.
Proven and probable reserves may not be comparable to similar information regarding mineral
reserves disclosed in accordance with the guidance in other countries. Proven and probable
reserves were determined by the use of mapping, drilling, sampling, assaying and evaluation methods
generally applied in the mining industry, as more fully discussed below. The term reserve, as
used in the reserve data presented here, means that part of a mineral deposit that can be
economically and legally extracted or produced at the time of the reserve determination. The term
proven reserves means reserves for which quantity is computed from dimensions revealed in
outcrops, trenches, workings or drill holes and grade and/or quality are computed from the results
of detailed sampling from sites where inspection, sampling and measurements are spaced so closely
and the geologic character is sufficiently defined that size, shape, depth and mineral content of
the reserves are well established. The term probable reserves means reserves for which quantity
and grade are computed from information similar to that used for proven reserves but the sites for
sampling are farther apart or are otherwise less adequately spaced. The degree of assurance,
although lower than that for proven reserves, is high enough to assume continuity between points of
observation.
Ore reserve estimates are based on the latest available geological and geotechnical studies.
We conduct ongoing studies of our ore bodies to optimize economic values and to manage risk. We
revise our mine plans and estimates of proven and probable mineral reserves as required in
accordance with the latest available studies. The following estimate of proven and probable
reserves is based on an Independent Technical Review dated December 29, 2007 prepared by Behre
Dolbear Asia, Inc., independent experts in mining, geology and reserve determination. Since
December 29, 2007, there have not been significant exploration activities on the Erdaoyingzi
Molybdenum Mining Property. The estimate of proven and probable reserves at December 31, 2009 has
been prepared by the Companys employees taking into account the amount of reserves produced
commencing in June 2009 and by updating the assumptions in the Companys mine plan for the
property. Estimated proven and probable reserves at December 31, 2009 were determined using a
long-term average molybdenum concentrate price of Rmb2,146/metric tonne unit, which equals to
US$17.0 per pound of molybdenum metal. The average molybdenum price during the last three years
28
has averaged US$23.32 per pound according to
Platts Metals Week.
In defining our underground
mineral reserves, we use a break-even cut-off grade to define the in-situ reserves. The cut-off
grade of the molybdenum ore in the Companys estimated proven and probable reserves is 0.06%.
Erdaoyingzi Molybdenum Recoverable Ore Reserve Summary at December 31, 2009
|
|
|
|
|
|
|
Ore Reserve
|
|
Tonnage
|
|
|
|
Contained Mo
|
Category
|
|
(kt)
|
|
Mo Grades (%)
|
|
Metals (t)
)
|
Proved
|
|
2,610.4
|
|
0.40
|
|
10,442
|
Probable
|
|
5,083.0
|
|
0.38
|
|
19,547
|
Total
|
|
7,693.4
|
|
0.39
|
|
29,989
|
Recoverable proven and probable reserves are estimated metal quantities from which we expect
to be paid after application of estimated metallurgical recovery rates. Recoverable reserves are
that part of a mineral deposit that we estimate can be economically and legally extracted or
produced at the time of the reserve determination.
Other Erdaoyingzi Molybdenum Mineralized Material
The Erdaoyingzi Molybdenum Mining Property contains mineralized material that we believe could
be brought into production should market conditions warrant. However, permitting and significant
capital expenditures would be required before operations could commence on this mineralized
material. Mineralized material is a mineralized body that has either been delineated by
appropriately spaced drilling and/or underground sampling to support the reported tonnage and
average metal grades. Such a deposit may not qualify as recoverable proven and probable reserves
until legal and economic feasibility are confirmed based upon a comprehensive evaluation of
development costs, unit costs, grades, recoveries and other material factors.
Furthermore, the Company has identified other mineralized material for which quantity and
grade can be estimated and reasonably assumed on the basis of geological evidence and limited
sampling, but for which geological and grade continuity cannot be verified. The estimate is based
on limited information and sampling gathered through appropriate techniques from drill holes or
other sampling procedures.
Erdaoyingzi Molybdenum Mineralized Material Summary at December 31, 2009
|
|
|
Tonnage
|
|
Mo Grades
|
(kt)
|
|
(%)
|
1,958.6
|
|
0.37
|
29
Mining operation
Currently on site, there is a concentrator with a design capacity of 1,500 tonnes per day,
crushing facilities, dry facilities, various offices, one rock dump with sand dams, a tailings
management facility and the Erdaoyingzi underground mine.
In 2009, Haozhou completed the access to Deposits I, II and III in East District and reached
mining capacity of 1,500 tonnes per day. Haozhou plans to increase the mining capacity to 1,800
tonnes per day by the end of September 2010. Haozhou is also working on the stripping of Deposit IV
and expects to expand the access to Deposit IV in 2011.
In April 2009, Haozhou completed the building of a concentrator with a design capacity of
1,500 tonnes per day. Currently, Haozhou is improving its milling plant and expects to expand the
processing capacity to 1,800 tonnes per day by the end of 2010.
As at December 31, 2009, net book value of Haozhou amounted to Rmb742.7 million (US$108.8
million).
With commercial production of molybdenum concentrate started in July 2009, the total cost of
sales incurred in Haozhou for the second half of 2009 amounted to Rmb93.3 million (US$13.7
million). During the second half of 2009, Haozhou produced 263,000 tonnes of ore and milled 262,000
tonnes. The average grade of the ore produced was 0.402%. 1,930 tonnes of molybdenum concentrate
containing 930 tonnes of molybdenum metal were produced. The average recovery rate of the ore
milled was 88.44%. Average cost of sales per tonne of molybdenum metal produced for 2009 was
Rmb100,360 (US$14,703), which equals to Rmb45.62(US$6.68) per pound.
Geology
Molybdenum mineralization at Erdaoyingzi consists of quartz veins, veinlets and disseminated
molybdenite along northwest-trending altered shear structures hosted by Yanshanian granitic
intrusives.
Stratigraphy outcropping in the Erdaoyingzi area includes the Lower Permian Qingfengshan
Formation and Dashizhai Formation as well as Quaternary alluvium. The Qingfengshan Formation is
subdivided into a lower member of meta-quartzites, arkoses, siltstones and slates, a middle member
of carbonaceous slates, spotted slates, calcareous siltstones and a lower member of
meta-sandstones, siltstones and slates. The Dashizhai Formation is subdivided into a lower member
of submarine intermediate volcanic flows and tuffs with some slates and marble lenses and an upper
member of meta-tuffaceous sandstones, tuffaceous siltstones, conglomerates and marbles. The
stratigraphy was intruded by multiple-stage Yanshanian granitic intrusives. The Stage 3 Yanshanian
fine-grained biotite granite is the host for the molybdenum mineralization in the West District,
whereas the State 4 Yanshanian biotite granite is the host for the molybdenum mineralization in the
East District.
The following table is a geological plan map of the Erdaiyingzi molybdenum deposit showing the
distribution of the four ore bodies.
30
Exploration
The Company acquired CJLC in April 2009 and focused on the commencement of operations of the
molybdenum mine. No further exploration was conducted on the Mine during 2009. The Company expects
to explore the remaining 21.56 square kilometers of the property in the future.
Government regulations
The following is a summary of the principal governmental laws and regulations that are or may
be applicable to our operations in the PRC. The scope and enforcement of many of the laws and
regulations described below are uncertain. We cannot predict the effect of further developments in
the Chinese legal system, including the promulgation of new laws, changes to existing laws or the
interpretation or enforcement of laws.
The mining industry, including certain exploration and mining activities, is highly regulated
in the PRC. Regulations issued or implemented by the State Council, the Ministry of Land and
Resources, and other relevant government authorities cover many aspects of exploration and mining
of natural resources, including entry into the mining industry, the scope of permissible business
activities, interconnection and transmission line arrangements, tariff policy and foreign
investment.
The principal regulations governing the mining business in the PRC include:
o
|
|
China Mineral Resources Law, which requires a mining business to have
exploration and mining licenses from provincial or local land and
resources agencies.
|
|
o
|
|
China Mine Safety Law, which requires a mining business to have a safe
production license and provides for
|
31
|
|
random safety inspections of
mining facilities.
|
|
o
|
|
China Environmental Law, which requires a mining project to obtain an
environmental feasibility study of the project.
|
The Guidance to Businesses by Foreign Investments revised in 2007 by the Chinese government
does not allow foreign investments into the fields of exploration, development and mining of
molybdenum in China. According to this regulation, a molybdenum mine can not be owned directly by
foreign companies. Accordingly, the Company could not acquire Haozhou directly.
On November 27, 2008 and November 28, 2008, Haozhou signed a Long-term Cooperation Agreement
and a Supplemental Agreement to Long-term Cooperation Agreement with Chifeng Zhongtai Mining
Company Ltd. (Zhongtai). According to these agreements, Zhongtai will provide Rmb300 million
working capital to Haozhou and Haozhou agreed to sell all of its products to Zhongtai at cash cost.
Furthermore, all cash flows generated from the operation and disposal of Haozhou will belong to
Zhongtai. Thus, all cash flow and profits generated from Haozhou will belong to the Company
indirectly.
Sustainable development
The Company has conducted a mine life analysis for the Erdaoyingzi mining property based on
the December 31, 2009 ore reserve estimates and the anticipated 2011 full production rate at the
full designed capacity. It can be seen that the ore reserves are sufficient to support production
at the anticipated 2011 production level for 14.2 years for the Erdaoyingzi deposit. This ore
reserve mine life may change significantly in the future.
Closure and Rehabilitation
Pursuant
to the requirements under the Law on Prevention of Water
Pollution of the PRC,
Law on Prevention of Air Pollution of the PRC and Administrative Regulations on Levy and
Utilization of Sewage Charge, enterprises which discharge water or air pollutants shall pay
discharge fees pursuant to the types and volume of pollutants discharged. The discharge fees are
calculated by the local environmental protection authority which shall review and verify the types
and volume of pollutants discharged. Once the discharge fees have been calculated, a notice on
payment of discharge fees shall be issued to the relevant enterprises.
According to the Sewage Charge Fee Table and Calculation Basis issued by the Inner Mongolia
Environmental Protection Bureau, mining companies need to pay to the State Treasury a sewage charge
at RMB15*0.94 per tonne of ore produced. During 2009, Haozhou recorded a total output of about
262,703 tonnes of ores and, accordingly, its sewage charges totaled RMB 3,688,613 (US$540,385) for
the year. As of July 15, 2010, the Company has not received the notice on payment of discharge fees
from Inner Mongolia Environmental Protection Bureau yet.
Pursuant
to the Mineral Resources Law, Land Administration
Law of the PRC and
Rules on Land Rehabilitation, exploitation of mineral resources shall be conducted in
compliance with the legal requirements on environmental protection so as to prevent environmental
pollution. With respect to any damage caused to cultivated land, grassland or forest as a result of
exploration or mining activities, mining enterprises shall restore the land to a state appropriate
for use by reclamation, re-planting trees or grasses or such other measures as are
appropriate to the local conditions. In the event that the mining enterprise is unable to
rehabilitate or the rehabilitation does not comply with the relevant requirements, the mining
enterprise shall pay a fee for land rehabilitation. Upon the closure of a mine, a
report in relation to land
32
rehabilitation and environmental protection shall be submitted for approval. Enterprises that fail
to perform or satisfy the requirements on land rehabilitation will be penalized by the relevant
land administration authority. In Chifeng City, mining companies pay a one-time fee to the State
Treasury equal to Rmb15,000 Rmb75,000/ hectare as determined through negotiations with
government authorities and based upon the underground areas which have been mined and the nature of
the mine. Haozhou recorded a liability for mine restoration of Rmb324,750 (US$47,576) based on
4.33/hectare of mining areas (the areas being mined in 2009) at RMB75,000/hectare.
In accordance with the ''Law on Prevention of Environmental Pollution Caused by Solid Waste
of the PRC, entities and individuals collecting, storing, transporting, utilizing or
disposing of solid waste shall take precautions against the spread, loss and leakage of such
solid waste or adopt such other measures for preventing such solid waste from polluting the
environment. The operations of Haozhou do not cause any release of solid waste to the
environment.
The penalties for breaches of the environmental protection laws vary from warnings
and fines to administrative sanctions, depending on the degree of damage. Any entity whose
construction projects fail to satisfy the requirements on pollution prevention may be ordered to
suspend its production or operation and be subject to a fine. The person responsible for the
entity may be subject to criminal liability for serious breaches resulting in significant damage
to private or public property or personal death or injury. Haozhou believes that its current
production and operating activities are in compliance with the relevant requirements on
environmental protection. Haozhou has not been penalized as a result of breaching any environment
protection laws and regulations.
33
C. ORGANIZATIONAL STRUCTURE AS OF JULY 10, 2010:
34
D. PROPERTY, PLANT AND EQUIPMENT.
Our principal executive offices are located at Qiao Xing Science Industrial Park, Tang Quan,
Huizhou City, Guangdong, PRC. For telecommunication business, our main manufacturing facility is
located on a leased property of approximately 3,700 square meters in Huizhou. For mining business,
our plants and mine properties are located within the administrative area of the Balinzuo Banner of
Chifeng City, Inner Mongolia Autonomous Region in PRC. We believe that our existing facilities are
adequate and suitable to meet our present and foreseeable needs.
35
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following managements discussion and analysis of financial condition and results of
operations should be read in conjunction with the Consolidated Financial Statements and notes
thereto and Item 3.A. Selected Financial Data. The amounts reflected in the following discussion
are in Renminbi (Rmb). Translation of amounts for 2009 from Rmb into United States dollars
(US$) is for the convenience of readers and has been made at the noon buying rate in New York
City for cable transfers in foreign currencies as certified for customs purposes by the Federal
Reserve Bank of New York of US$1.00 = Rmb6.8259 on December 31, 2009.
The Company was incorporated in the British Virgin Islands (the BVI). The Company and its
subsidiaries (the Group) are principally engaged in (i) the production and sale of mobile phones
and accessories in the Peoples Republic of China (the PRC); and (ii) the production and sale of
molybdenum concentrates in the PRC.
HIGHLIGHTS
|
-
|
|
Net loss for 2009 was Rmb259.9 million
(US$38.1 million), or Rmb4.13 (US$0.61) per
basic and diluted common share, which included a non-cash unrealized loss on common share
purchase warrants of Rmb4.7 million (US$0.7 million), or Rmb0.07 (US$0.01) per basic and
diluted common share. Total net loss from discontinued operations was Rmb139.8 million
(US$20.5 million), or Rmb2.22 (US$0.33) per basic and diluted common share.
|
|
|
-
|
|
Non-cash unrealized loss on common stock purchase warrants of Rmb4.7 million (US$0.7
million) for 2009 was the result of a requirement under US GAAP to account for the
Companys outstanding common stock purchase warrants as a derivative, with changes in the
fair value recorded in net income (loss).
|
|
|
-
|
|
Net of tax operating result of QXCH Group amounted to Rmb372.2 million (US$54.5
million). The Company disposed QXCH Group on November 30, 2009 and recorded a gain on the
disposal at amount of Rmb144.2 million (US$21.1 million). The disposal of QXCH resulted in
a realized foreign currency gain related to loans from the Group to QXCH at an amount of
Rmb88.2 million (US$12.9 million). Total net loss from discontinued operations amounted to
Rmb139.8 million (US$20.5 million).
|
|
|
-
|
|
Consolidated revenues for 2009 were Rmb1,826.8 million (US$267.6 million). Among them,
Rmb1,632.9 million (US$239.2 million) were contributed by the telecommunication business of
QXMC, down approximately 24.2%; Rmb193.9 million (US$28.4 million) were contributed by the
mining business of CLJC.
|
|
|
-
|
|
Operating cash flows were Rmb872.6 million (US$127.8 million). Total cash and cash
equivalents at December 31, 2009 were Rmb3,709.5 million (US$543.4 million), compared to
Rmb3,117.5 million as of December 31, 2008.
|
|
|
-
|
|
Highlights of the mining business:
|
|
i)
|
|
Commercial production of the Companys molybdenum mine started in July 2009.
Consolidated revenues from the mining business for 2009 were Rmb193.9 million (US$28.4
million); the business generated a gross profit of Rmb100.6 million (US$14.7 million)
and net income of Rmb64.2 million (US$9.4 million).
|
|
|
ii)
|
|
Molybdenum concentrate production in 2009 was 1,929.6 tonnes, which contained
929.9 tonnes (2.05 million pounds) of molybdenum metal.
|
36
|
iii)
|
|
Average cost of sales per tonne of molybdenum metal produced for 2009 was
Rmb100,360 (US$14,703), which equals to Rmb45.62(US$6.68) per pound. (The final mining
product of the
Company is molybdenum concentrate, so the cash cost does not include the cost of
smelting since the Company does not engage in smelting operations).
|
|
|
iv)
|
|
Capital expenditures incurred in the mining business for 2009 were Rmb113.0
million (US$16.6 million), comprised Rmb94.0 million (US$13.8 million) for the mines and
Rmb19.0 million (US$2.8 million) for the mill.
|
OUTLOOK
Telecommunication business of QXMC
Industry growth
In recent years, Chinas mobile handset market has experienced rapid growth and development.
We believe that China will continue to play a key role in the development of the global
telecommunication industry and remain one of the largest wireless subscriber markets in the world
for the foreseeable future.
Moreover, Chinas mobile telecommunication operators have upgraded their networks to offer 3G
wireless telecommunication services. 3G technology is expected to enable users to transmit larger
volumes of data and more sophisticated content, such as streaming media and multi-player games,
more quickly. In January 2009, MIIT issued 3G licenses to China Mobile (TD-SCDMA), China Unicom
(CDMA2000) and China Telecom (WCDMA). The more extensive use of data transmission, as facilitated
by new and upgraded technologies and networks, is expected to lead to increased demand for enhanced
wireless value-added services and, therefore, increased demand for mobile phones with more advanced
technologies in China.
The mobile phone penetration rate in China is still considerably lower than most of the more
developed countries and we believe that it has the potential to increase significantly in the next
several years. Historically, the mobile telecommunication subscription and handset demand growth
took place in Chinas large cities, such as Beijing, Shanghai and Guangzhou. More recently,
however, the demand growth is increasingly driven by medium and small cities and rural areas, which
still have low penetration rates and benefit from favorable government policies, such as universal
service obligations imposed upon mobile telecommunication operators in China, and the increasing
affordability of handsets, mainly due to the higher average standard of living across China.
Competition and market position
While Chinas mobile handset market is expected to grow significantly, competition is intense.
The market has become highly fragmented in recent years as an increasing number of handset
producers have entered the market.
We face significant competition from domestic and multinational mobile handset producers. A
small number of multinational players have gained significant market share in China based on
greater brand name recognition among Chinese consumers. In addition, competition from domestic
handset makers has intensified in recent years.
We focus on developing and marketing differentiated products for the Chinese handset market.
By leveraging our in-house research and development capabilities and operational cost advantages,
we have been able to offer consumers handsets with more attractive features at relatively lower
prices. This strategy has allowed us to maintain our market position while avoiding direct
competition with mass market competitive products.
Product offerings and pricing
The mobile handset market in China, as well as globally, is characterized by rapidly changing
technical standards and increasing demand for handsets with more functions and personalized
features and shortening product
37
life cycles. Pricing of mobile handsets depends principally on manufacturing costs, overall market
demand, competition and, increasingly, costs associated with licensing fees, royalties and other
payments for technology
improvements. Increased economies of scale, technology advancements, and intensified market
competition among material and component suppliers have led to significant reductions in handset
prices. The selling price and corresponding gross profit margin for a particular mobile handset
model typically declines over time as it reaches maturity in the product life cycle. The product
life cycle for our most successful handsets has been approximately 12 to 15 months and four to six
months for other handset products.
Our success depends on our ability to satisfy market demand by continually and successfully
introducing new product offerings tailored towards local consumers and changing trends.
Historically, we have been able to limit the decline in our average selling prices and reduce the
impact on our overall margins by successfully introducing popular new products with increased
features and designs. For example, in 2007, we released a series of products with enhanced
functions, such as the fingerprint recognition information security phone and the wrist watch
phone. In 2008, we released our new VEVA-branded mobile handsets to target the fashion-conscious
professional men and women. The VEVA mobile handsets not only took our products overall design and
functionality to a new level, but also gave value-conscious shoppers an attractive
performance-price value proposition. Our ability to continually introduce new product offerings
with attractive features has allowed us to achieve higher average selling prices and consistently
achieve relatively higher profit margins.
We also expect to continue to incur costs to license third-party technologies used in our
products, as well as for royalties and other fees we may be required to pay in order to use 3G or
other technologies used in our handset products.
Cost management
We have adopted various measures to control our development and production costs, including
utilizing locally sourced raw materials and components, focusing on in-house design and
manufacturing and utilizing a limited number of core handset platform designs for developing and
producing a wide range of products with varying features. We also achieved greater economies of
scale by significantly increasing our total sales while containing the increases in operating
expenses such as selling and distribution expenses, and general and administrative expenses.
Working capital management
We believe our success also depends on our ability to effectively manage our inventory levels,
trade-related receivables and payables and other working capital needs. We communicate regularly
with our distributors to collect timely feedback from end users and through other channels
regarding demand for particular products and project our production volumes and inventory levels
based on our analysis of this feedback. As a result, this careful monitoring helps us better manage
our working capital requirements. However, we depend on timely and accurate market feedback and a
good relationship with our distributors to achieve these added efficiencies. Any failure to obtain
timely and accurate market feedback or to correctly estimate demand for our products could result
in lost sales opportunities, potential inventory related charges or reduced sales prices and gross
margins for our products. We also closely monitor the level of trade-related receivables and
payables to effectively anticipate and manage working capital needs.
38
Mining business of CJLC
Molybdenum market
In 2008, the average price for molybdenum oxide was over US$30 per pound. The price declined
dramatically during the fourth quarter of 2008 and the first four months of 2009, reaching a low of
US$7.70 per pound in April 2009. This decline was primarily due to the collapse in demand from the
steel industry for molybdenum bearing grades of steel. During June through August of 2009, the
price of molybdenum rose sharply, reaching a year-to-date high of US$18.30 per pound in August
2009. The price of molybdenum was volatile during the remainder of 2009, with the average price for
molybdenum oxide of US$11.53 per pound for the fourth quarter of 2009 and US$11.29 per pound for
the month of December 2009. Accordingly, the price of molybdenum concentrate was volatile during
2009 also.
At the start of 2010, the molybdenum price began to increase. By March 8, 2010, the price for
molybdenum oxide had increased to US$18.00 per pound, and for the week of June 4, 2010, the average
price for molybdenum oxide was US$15.40 per pound.
The Company expects that demand will continue to improve. The Company believes that the price
of molybdenum will depend on the pace of re-supply from Chinese mines in addition to the pace of
improving demand from Western and Japanese steel mills. Nonetheless, the Company expects that the
demand and sales price for molybdenum will increase within the next 18 months and, for this reason
among others, the Company has decided to look for other acquisition opportunities in the PRC.
There can be no assurance, however, that molybdenum demand will strengthen or that
molybdenum prices will further improve. Any significant weakness in demand or reduction in
molybdenum prices may have a material adverse effect on the Companys results of operations,
financial condition and cash flows. For every US$1 increase in the molybdenum price, the results of
operations for 2009 would have increased US$1,277,000. For every US$1 decrease in the molybdenum
price, the results of operations for 2009 would have decreased US$1,277,000.
Operations
For 2010, the Company expects the molybdenum concentrates production volume to be 3,600
tonnes (1,740 tonnes of contained molybdenum metal) to 3,800 tonnes (1,820 tonnes of contained
molybdenum metal). For 2010, anticipated average costs per tonne of molybdenum metal produced
(excluding the cost of smelting since the Company does not engage in smelting operations) is
expected to be Rmb100,300 (US$14,694) to Rmb103,000 (US$15,909), equivalent to US$6.68 to US$6.86
per pound.
Capital expenditures for 2010 are expected to be Rmb94.6 million (US$13.9 million), comprised
of Rmb89.3 million (US$13.1 million) in capital expenditures for the mines and Rmb5.3 million
(US$0.8 million) for the mill.
Anticipated productive lives of mineral properties, facilities and equipment
The Company has conducted a mine life analysis for the Haozhou Mine based on the December 31,
2009 ore reserve estimates and the anticipated 2011 full production rate at the full designed
capacity. It can be seen that the ore reserves are sufficient to support production at the
anticipated 2011 production levels for 14.2 years for the Erdaoyingzi deposit. This ore reserve
mine life may change significantly in the future due to the following reasons:
39
|
1.
|
|
Additional exploration and development of the mines could convert some of the existing
mineralized material to proven and probable ore reserves. These new ore reserves would
increase the mine life.
|
|
|
2.
|
|
Additional exploration may also find additional proven and probable reserves or
mineralized material resources within the exploration license areas. Some of these
additional mineral resources might be converted to ore reserves, which would extend the
mine life.
|
|
|
3.
|
|
Changes in the production rate would also change the mine life. The mine life would be
shortened if the production rate is increased to a higher level than the anticipated
production level for 2011.
|
|
|
4.
|
|
Changes in the assumptions in the mining plan such as the long-term molybdenum price,
mining costs, processing costs, fuel, electric power, etc. Changes in these assumptions
could impact the cut-off grade determined in the mining plan.
|
Anticipated assets retirement costs
In connection with the mining operation, the Company is required to make payments for
restoration and rehabilitation.
According to the Sewage Charge Fee Table and Calculation Basis issued by the Inner Mongolia
Environmental Protection Bureau, mining companies need to pay to the State Treasury a sewage charge
at RMB15*0.94 per tonne of ore produced. During 2009, Haozhou recorded a total output of about
262,703 tonnes of ores, and, accordingly, its sewage charges totaled RMB 3,688,613 (US$540,385) for
the year.
In Chifeng City, mining companies pay a one-time fee to the State Treasury equal to Rmb15,000
Rmb75,000/ hectare as determined through negotiations with government authorities and based upon
the underground areas which have been mined and the nature of the mine. Haozhou recorded a
liability for mine restoration of Rmb324,750 based on 4.33/hectare of mining areas (the areas being
mined in 2009) at RMB75,000/hectare.
40
A. OPERATING RESULTS.
Fiscal 2009 compared to Fiscal 2008
Our
net loss increased by Rmb123.1 million (US$18.0 million) from a net loss of
Rmb136.8 million in 2008 to a net loss of Rmb259.9 million
(US$38.1 million) in 2009. This was
mainly due to:
|
-
|
|
Decrease of gross profit by Rmb514.9 million (US$75.4 million) mainly due to the
decreased net sales and increased cost of sales in QXMC;
|
|
|
-
|
|
Decrease of selling expenses by Rmb36.1 million (US$5.3 million);
|
|
|
-
|
|
Increase of general and administrative expenses by Rmb55.0 million (US$8.1 million);
|
|
|
-
|
|
Decrease of gain from remeasurement of embedded derivatives at amount of Rmb168.3
million (US$24.7 million);
|
|
|
-
|
|
Decrease of interest expense by Rmb88.9 million (US$13.0 million);
|
|
|
-
|
|
Decrease of net loss from discontinued operations at amount of Rmb139.8 million (US$20.5 million);
|
The
Company acquired CLJC on April 6, 2009. The operating results of CLJC have been
consolidated with those of the Group since April 6, 2009, when the Company acquired CLJC from Mr.
Wu Ruilin.
On November 30, 2009, the Company disposed of QXCH to Dragon Fu Investment Limited. The
Company has accounted for the QXCH business in the consolidated financial statements as a
discontinued operation. Accordingly, assets and liabilities, revenues and expenses, and cash flows
related to the QXCH business have been appropriately reclassified in the consolidated financial
statements as discontinued operations for all periods presented.
The details are as follows:
(i) Net sales
Analysis of our sales revenue by business segment for fiscal year 2009 and 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Rmb000
|
|
|
%
|
|
|
Rmb000
|
|
|
%
|
|
Mobile telephones of QXMC
|
|
|
1,632,912
|
|
|
|
89
|
|
|
|
2,153,873
|
|
|
|
100
|
|
Mining business of CLJC
|
|
|
193,887
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,826,799
|
|
|
|
100
|
|
|
|
2,153,873
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales revenue decreased by Rmb327.1million from Rmb2,153.9 million for fiscal year 2008 to
Rmb1,826.8 million (US$267.6 million) for fiscal year 2009, representing a decrease of 15.2%. The
decrease was primarily due to a decline of sales in QXMC at amount of Rmb521.0 million (US$76.3
million).
Revenue from QXMC decreased by 24.2% from Rmb2,153.9 million in 2008 to Rmb1,632.9 million
(US$239.2 million) in 2009. The decrease was primarily due to a decline in our handsets and
accessories revenue, which accounted for 99.4% and 99.5% of QXMCs total revenues in 2008 and 2009,
respectively.
41
Revenue from the sale of handsets and accessories decreased by 24.1% from Rmb2,140.3 million
in 2008 to Rmb1,624.3 million (US$238.0 million) in 2009, primarily due to lower handset shipments
and a decrease in the average selling price of handsets sold in 2009. Our handset shipment
decreased by 21.8% from 2,714,000 units in 2008 to 2,123,000 units in 2009. The decrease in our
handset shipments in 2009 was primarily due to fewer new model
launches and a slow-down in shipments amid intense competition in the handset market. The
average selling price of our handsets decreased from Rmb788 per unit in 2008 to Rmb734 (US$108) per
unit in 2009, primarily due to the launch of lower-priced VEVA-series products to target the
lower-end market and more aggressive pricing to drive sales in an increasingly competitive and
deteriorated uncertain economic environment. Average sale price was also affected by a decline in
the use of the TV infomercial arrangement under which handsets were sold to infomercial companies
at a higher price, but in return, we had to bear the airtime and logistic costs.
CLJC started its commercial production of molybdenum concentrate in July 2009. Consolidated
revenues from CLJC for 2009 were Rmb193.9 million (US$28.4 million). During the second half of
2009, 1,920 tonnes of molybdenum concentrate containing 925 tonnes of molybdenum metal were sold at
an average sales price of Rmb209,700 (US$30,700) per tonne of molybdenum metal (equal to US$13.96
per pound of contained molybdenum metal).
(ii) Cost of Goods Sold
Analysis of our cost of goods sold by business segment for fiscal years 2009 and 2008 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Rmb000
|
|
|
%
|
|
|
Rmb000
|
|
|
%
|
|
Mobile telephones of QXMC
|
|
|
1,381,595
|
|
|
|
94
|
|
|
|
1,287,096
|
|
|
|
100
|
|
Mining business of CLJC
|
|
|
93,335
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,474,930
|
|
|
|
100
|
|
|
|
1,287,096
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold increased by Rmb187.8 million from Rmb1,287.1 million for fiscal year 2008
to Rmb1,474.9 million (US$216.1 million) for fiscal year 2009, representing an increase of 14.6%.
In 2009, the cost of goods sold for QXMC was Rmb1,381.6 million (US$202.4 million), while it
amounted to Rmb1,287.0 million in 2008, representing an increase of Rmb94.6 million. QXMCs cost
of goods sold increased by 7.3% primarily driven by the increased percentage sales of VEVA
products, which resulted in, among others, a Rmb67.8 million increase in raw materials and
components cost. In addition, inventory write-downs also increased from RMB6.6 million in 2008 to
Rmb18.0 million (US$2.6 million) in 2009. The cost of goods sold in QXMC as a percentage of revenue
increased from 59.8% in 2008 to 84.6% in 2009, primarily due to more aggressive pricing in 2009.
With the commercial production of molybdenum concentrate starting in July 2009, the total cost
of sales incurred in CLJC for the second half of 2009 amounted to Rmb93.3 million (US$13.7
million). During the second half of 2009, CLJC produced 263,000 tonnes of ore and milled 262,000
tonnes. The average grade of the ore produced was 0.402%. 1,930 tonnes of molybdenum concentrate
containing 930 tonnes of molybdenum metal was produced. The
42
average recovery rate of the ore milled was 88.44%. Average cost of sales per tonne of
molybdenum metal produced for 2009 was Rmb100,360 (US$14,703), which equals to Rmb45.62(US$6.68)
per pound. (The final mining product of the Company is molybdenum concentrate, so the cash cost
does not include the cost of smelting since the Company does not engage in smelting operations).
(iii) Gross Profit
Analysis of our gross profit by business segment for fiscal years 2009 and 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Rmb000
|
|
|
%
|
|
|
Rmb000
|
|
|
%
|
|
Mobile telephones of QXMC
|
|
|
251,317
|
|
|
|
71
|
|
|
|
866,777
|
|
|
|
100
|
|
Mining business of CLJC
|
|
|
100,552
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
351,869
|
|
|
|
100
|
|
|
|
866,777
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit for fiscal year 2009 was Rmb351.9 million (US$51.5 million), representing a
decrease of Rmb514.9 million from Rmb866.8 million in fiscal year 2008.
In 2008, the gross profit from QXMC was Rmb866.8 million, while it amounted to Rmb251.3
million (US$36.8 million) in 2009, representing a decrease of 71%. The decrease was primarily due
to the decreased revenue from our mobile handset products. Gross margin of QXMC decreased from
40.2% in 2008 to 15.4% in 2009, primarily due to fewer new model launches and more aggressive
pricing amid increasing competition in the PRC handset market. Gross margin was also affected by a
decline in the use of the TV infomercial arrangement under which handsets were sold to infomercial
companies at a higher price, but in return, we had to bear the airtime and logistic costs.
Gross profit generated from CJLC amounted to Rmb100.5 million (US$14.7 million), representing
a gross profit ratio of 51.8%.
(iv) Selling expenses
Selling expenses decreased by Rmb36.1 million from Rmb146.6 million for fiscal year 2008 to
Rmb110.4 million (US$ 16.2 million) for fiscal year 2009. The decrease was mainly due to decreased
selling and distribution expenses in QXMC.
Selling and distribution expenses in QXMC decreased by 25.2% from Rmb146.6 million in 2008 to
Rmb109.6 million (US$16.1 million) in 2009. The decrease in selling and distribution expenses was
primarily due to the lower airtime costs we incurred on the reduced TV direct sales from Rmb128.2
million in 2008 to Rmb80.0 million (US$11.7 million) in 2009.
Due to the business nature, selling and distribution expenses for the molybdenum mine products
were very low. For the year ended December 31, 2009, only Rmb0.8 million (US$0.1 million) of
selling expenses were recorded in CLJC.
(v) General and administrative expenses including stock-based compensation
Our general and administrative expenses primarily consisted of share-based compensation,
salaries, benefits
and other expenses for our administrative personnel, expenses relating to legal, accounting
and other professional
43
services, travel and entertainment, depreciation and amortization charges
and bad debt provisions. General and administrative expenses increased by Rmb55.0 million from
Rmb59.8 million in fiscal year 2008 to Rmb114.8 million
(US$ 16.8 million) in fiscal year 2009,
representing an increase of 92.0%.
The increase primarily related to the increased general and administrative expenses in QXMC
for 2009.
General and administrative expenses in QXMC increased by 66.4% from Rmb44.2 million in 2008 to
Rmb73.6 million (US$10.8 million) in 2009. The increase was primarily due to the higher share-based
compensation expenses, which increased from Rmb12.2 million in 2008 to Rmb31.0 million (US$4.5
million) in 2009. The increase in share-based compensation expenses in 2009 arose due mainly to the
grant of restricted shares to a director and various employees in December 2009. In addition, bad
debt expense in QXMC also increased from Rmb0.7 million in 2008 to Rmb12.4 million in 2009 (US$1.8
million). As for the percentage of total revenue, general and administrative
expenses of QXMC increased from 2.1% in 2008 to 4.5% in 2009.
In connection with the acquisition of CJLC, the Company issued 2,100,000 shares to a financial
consulting firm and 100,000 shares to a law firm for services in connection with the acquisition.
Accordingly, Rmb26.0 million (US$3.8 million) was recorded in general and administrative expenses
for the year 2009.
General and administrative expenses in CJLC in 2009 amounted to Rmb3.6 million (US$0.5
million). Among this, Rmb1.1 million (US$0.2 million) was incurred for the feasibility study on the
remaining area of the Erdapyingzi Molybdenum mine.
(vi) Research and development expenses
Research and development expenses of QXMC increased by 24.7% from Rmb29.2 million in 2008 to
Rmb36.4 million (US$5.3 million) in 2009. The increase was mainly driven by an increase in material
and software costs, and the write-off of Rmb3.2 million (US$0.5 million) of costs relating to
discontinued development projects in 2009.
(vii) Amortization of intangible assets
Amortization of other intangible assets related to the operations of QXMC. Amortization of
other intangible assets decreased by 59.8% from Rmb11.7 million in 2008 to Rmb4.7 million (US$0.7
million) in 2009 mainly because certain intangible assets had been fully amortized during 2008 and
2009.
(viii) Impairment of acquired intangible assets
Impairment of acquired intangible assets also related to the operations of QXMC. As a result
of our strategic shift to focus more on our high-end VEVA-branded mobile handsets, QXMC made an
impairment charge of Rmb26.2 million (US$3.8 million) on its CECT brand in the year ended
December 31, 2008. In 2009, an impairment charge of Rmb13.6 million (US$2.0 million) on the CECT
brand was further recorded. The value of the CECT brand decreased to Rmb0 as of December 31,
2009.
(ix) Impairment of assets held for sale
In November 2009, QXMC entered into an agreement for the sale of a property and the associated
land use
44
rights to a third party for a total consideration of Rmb163 million (US$23.9 million). The
sale was subsequently completed in the second quarter of 2010. As of December 31, 2009, the land
and property have been reclassified from non-current assets to current assets as assets held for
sale. An impairment charge of Rmb6.0 million (US$0.9 million) was made during the year ended
December 31, 2009 to write down the value of the assets to their fair value which was estimated
based on the expected sales proceeds less costs to sell.
(x) Interest income
Interest income decreased by Rmb26.2 million from Rmb54.8 million in 2008 to Rmb28.6 million
(US$ 4.2 million) in 2009. The decrease was mainly attributable to the decrease in interest rates
in 2009 and the repayment of loans to a third party.
Interest income in 2008 of Rmb36.5 million came from loans to a third party at an interest
rate of 5% per annum. As the loan was repaid in June 2009, only Rmb9.3 million (US$1.4 million)
interest income was recorded in 2009 related to loans to a third party.
(xi) Exchange gain (loss)
Assets and liabilities which are denominated in foreign currencies are translated into the
functional currencies at the rates of exchange prevailing at the balance sheet date. Foreign
currency transactions are translated using the exchange rates prevailing at the date of
transactions. Foreign exchange gains or losses arising from the translation at year-end exchange
rates of foreign currency intercompany balances that are of a long-term investment nature are
included in shareholders equity separately as cumulative translation adjustments. All other
foreign exchange gains or losses resulting from the settlement of foreign currency transactions and
from the translation at financial year-end exchange rates of assets and liabilities denominated in
foreign currencies are included in the consolidated statements of operations.
A realized foreign currency translation gain of Rmb88.2 million (US$12.9 million) was recorded
in 2009 primarily resulting from the disposal of QXCH.
On November 30, 2009, the Company sold QXCH to DFIL for a total consideration of Rmb75,000,000
(US$10,989,000). In addition, in accordance with the sales agreement, DFIL undertook to repay as a
primary obligor, or to cause QXCHs subsidiary to repay, the outstanding loan of Rmb236,102,000
which was due from QXCHs subsidiary to the Company in full to the Company in three installments
but no later than November 30, 2010. In 2008, as these loans to subsidiaries of QXCH were
inter-company loans within the Company, all related foreign exchange gains were recorded in
cumulative translation adjustments. With the disposal of QXCH, cumulative foreign exchange gains
from these loans to the subsidiaries of QXCH at amount of Rmb88.2 million (US$12.9 million) were
recorded as realized foreign currency translation gain in the fiscal year of 2009. This realized
foreign currency translation gain was included in net loss from discontinued operations.
(xii) Interest expense
Interest expenses decreased by Rmb88.9 million from Rmb311.7 million in 2008 to Rmb222.8
million (US$32.6 million) in 2009. The decrease related mainly to the convertible bonds and
interest expenses for bank loans.
In Qiao Xing Universal Resources, Inc (QXUT) for the year 2008, we recorded interest
expenses of Rmb145.8 million relating to two convertible bonds issued in 2006 and 2007. Coupon
interest for these two convertible bonds amounted to Rmb14.2 million in 2008. With repayment of the
2007 convertible bond, we only recorded an interest expense of Rmb4.1 million (US$0.6 million) in
QXUT in 2009, among which, coupon interest
amounted to Rmb3.0 million (US$0.4 million).
45
QXMC issued US$70,000,000 senior convertible notes on May 15, 2008 and recorded interest
expense of Rmb92.9 million in 2008. Coupon interest for these QXMC convertible notes amounted to
Rmb11.6 million in 2008. On March 31, 2009, the Company purchased US$30,000,000 principal amount of
QXMC senior convertible notes from three note holders for an aggregate purchase price of
US$24,000,000. The Company recorded interest expense of Rmb168.3 million (US$24.7 million) related
to the QXMC convertible notes in 2009. Coupon interest for the QXMC convertible notes amounted to
Rmb15.8 million (US$2.3 million) in 2009.
In 2009, interest expense related to bank loans and other bank borrowings amounted to Rmb50.4
million (US$7.4 million), compared to Rmb102.5 million in 2008, mainly attributed to the repayment
of bank borrowings in 2009.
(xiii) Gain (loss) on re-measurement of embedded financial derivatives
We recognized a gain on re-measurement of embedded derivatives relating to the convertible
bonds of Rmb160.0 million in 2008 and a loss of Rmb8.3 million (US$1.2 million) in 2009, the fair
value of the embedded derivative being most sensitive to the market price on the re-measurement
date of the shares of the Company into which the bonds are convertible. The fair values of these
embedded derivatives relating to the convertible bonds were appraised by a third party valuator.
(xiv) Loss on extinguishment of convertible debts
On August 19, 2008, the holders of the QXMC US$70,000,000 senior convertible notes exercised
the option to convert US$8.3 million of the principal amount of the notes and accrued interest
thereon of US$0.5 million into 1,511,397 ordinary shares of QXMC at a conversion price of US$5.49
per share. The extinguishment of the convertible debts that arose from the conversion resulted in
a loss of RMB10.6 million during the year ended December 31, 2008.
In 2009, the holders of the QXMC convertible notes exercised the option to convert
US$16,073,000 of the principal amount of the notes and accrued interest thereon of US$590,000 into
4,114,286 ordinary shares of QXMC at a conversion price of US$4.05 per share. The extinguishment of
the QXMC convertible debts that arose from the conversion resulted in a gain of Rmb46.3 million
(US$6.8 million) for the year ended December 31, 2009.
On March 31, 2009, the Company purchased from three note holders US$30,000,000 of the
outstanding QXMC convertible notes for an aggregate purchase price of US$24,000,000. The carrying
value of the QXMC convertible notes purchased by the Company was estimated to be approximately
Rmb176.3 million on March 31, 2009. The transaction resulted in a loss on the extinguishment of the
US$30,000,000 QXMC convertible notes of Rmb15.1 million (US$2.2 million) for the Group, being the
difference between the purchase price and the carrying value of the debt, the embedded derivatives
and the unamortized deferred debt issuance costs relating to the QXMC convertible notes.
On November 3, 2009, the Company signed an agreement with two institutional investors of the
2006 convertible notes and issued US$24 million aggregate principal amount of 0% unsecured restated
senior convertible notes to these two institutional investors in exchange for the US$26 million
aggregate principal amount of 2006 convertible notes. In addition, the Company has issued 2,400,000
shares of common stock of the Company to these two institutional investors. The institutional
investors have also waived the interest accrued on the 2006 convertible notes over the first four
months of 2009 as part of the restructuring. Loss from the extinguishment of the 2006 convertible
notes included in the consolidated financial statements for the year ended December 31, 2009 was
46
Rmb49.2 million (US$7.2 million).
In 2009, the holders of the 0% Restated Notes exercised the option to convert US$6,000,000 of
the principal amount of the notes into 3,319,171 shares of the Company at an average conversion
price of US$1.81 per share. The extinguishment of the 0% Restated Notes resulted in a gain of
Rmb2.7 million (US$0.3 million) for the year ended December 31, 2009.
As a result, total loss on extinguishment of convertible debts amounted to Rmb15.3 million
(US$2.2 million) in 2009.
(xv) Gain on disposal of interests in subsidiaries
For the year ended December 31, 2008, the Company recorded a gain on disposal of interests in
subsidiaries at an amount of Rmb2.3 million relating to the disposal of subsidiaries by QXMC during
the year ended December 31, 2008.
Gain on disposal of discontinued operations at an amount of Rmb144.2 million (US$21.1 million)
related to the disposal of QXCH was included in net loss from discontinued operations for the year
ended December 31, 2009. No other disposal activity occurred in 2009.
(xvi) Gain on issue/repurchase of stocks by subsidiary
On January 7, 2008, QXMC issued 565,000 new ordinary shares at US$7.50 per share upon the
exercise of share options granted to its director and certain employees. On May 15, 2008, QXMC
repurchased 6,966,666 of its issued ordinary shares at US$6.94 per share from two existing
shareholders of QXMC through the issuance of the
QXMC US$70,000,000 senior convertible notes. All ordinary shares repurchased were subsequently
cancelled.
On August 19, 2008, the holders of the QXMC US$70,000,000 senior convertible notes exercised
the option to convert US$8,251,000 of the principal amount of the notes and accrued interest
thereon of US$46,000 into 1,511,397 ordinary shares of QXMC at a conversion price of US$5.49 per
share.
In 2008, the Company recorded a total gain of Rmb4.4 million on these issuances and repurchase
of stocks transactions by QXMC.
In 2009, the holders of the QXMC convertible notes exercised the option to convert
US$16,073,000 of the principal amount of the notes and accrued interest thereon of US$590,000 into
4,114,286 ordinary shares of QXMC at a conversion price of US$4.05 per share.
On December 4, 2009, QXMC issued 960,884 ordinary shares to its management team in replacement
of all of the outstanding stock options held by the management team.
As a consequence of the QXMC share issue in 2009, the Companys equity interest in QXMC was
decreased to 61.1%. With the implementation of SFAS No. 160, in connection with the conversion of convertible notes and the exchange of stock
option to ordinary shares, the Company charged retained earnings
by Rmb98.1 million (US$14.4 million) in
2009 which was the decline in the Companys share of the carrying value of QXMC as a result of ownership dilution caused
by this transaction.
(xvii) Unrealized gain (loss) on derivatives
Non-cash unrealized loss on common stock purchase warrants of Rmb4.7 million (US$0.7 million)
for 2009 was the result of a requirement under US GAAP to account for the Companys outstanding
common stock purchase warrants as a derivative, with changes in the fair value recorded in net
income (loss).
47
(xviii) Income tax expense
Income tax expense decreased by Rmb111.8 million from Rmb155.7 million in 2008 to Rmb43.9
million (US$6.4 million) in 2009.
Income tax expense of QXMC decreased by Rmb144.1 million from Rmb155.7 million in 2008 to
Rmb11.6 million (US$1.7 million) in 2009, primarily due to decreases in taxable income. In 2009,
CLJC recorded a total income tax expense of Rmb32.3 million (US$4.7 million). Both QXMC and CLJC
are subject to a 25% enterprise income tax rate in 2008 and 2009.
(xix) Discontinued operations, net of tax
On November 30, 2009, the Company sold QXCH to DFIL for a total consideration of Rmb75,000,000
(US$10,989,000), resulting in a gain on disposal of discontinued operations at an amount of
Rmb144.2 million (US$21.1 million). Net loss from the discontinued operations of QXCH for the
eleven months ended November 30, 2009 was Rmb372.2 million (US$54.5 million). The disposal also
resulted in a realized foreign currency translation gain at an amount of Rmb88.2 million (US12.9
million). The total net loss from the discontinued operations of QXCH at an amount of Rmb139.8
million (US$20.5 million) was stated as a separate item in the consolidated financial statements of
the Company in 2009.
In 2008, net of tax loss from the operations of QXCH amounted to Rmb291.0 million. In 2007,
QXCH recorded a net of tax income at an amount of Rmb63.0 million.
(xx) Net income (loss) attributable to the noncontrolling interest
Net income attributable to the noncontrolling interest decreased by Rmb244.3 million from net
income of Rmb161.8 million for 2008 to net loss of Rmb82.5 million (US$12.1 million) for 2009. The
change related to the minority shareholders share of the consolidated results of QXMC. Net results
of QXMC decreased to a net loss of Rmb235.5 million (US$34.5 million). Accordingly, the
noncontrolling interest in QXMC will bear Rmb82.5 million.
The Company owned 67.6% of QXMC for the first 11 months of 2009, while this figure changed to 61.1%
in December 2009.
(xxi) Net results
As
a result of the foregoing, our net earnings decreased by Rmb123.1 million from a net loss
of Rmb136.8 million in 2008 to a net loss of
Rmb259.9 million (US$38.1 million) in 2009. Our total
basic loss per share was Rmb4.42 in 2008, while our total basic loss
per share was Rmb4.13
(US$0.61) in 2009.
48
Fiscal 2008 compared to Fiscal 2007
Our net earnings decreased by Rmb1,040.7 million from a net income of Rmb903.9 million in 2007
to a net loss of Rmb136.8 million in 2008. This was mainly due to:
|
-
|
|
Decrease of gross profit by Rmb99.2 million mainly due to the decreased net sales;
|
|
|
-
|
|
Increase of provision for doubtful accounts by Rmb229.8 million;
|
|
|
-
|
|
Increase of interest expense by Rmb93.6 million;
|
|
|
-
|
|
Decrease of gain from disposal of interests in subsidiaries by Rmb480.3 million;
|
|
|
-
|
|
Decrease of gain on issue/repurchase of stocks by subsidiary by Rmb379.6 million.
|
The details are as follows:
(i) Net sales
Analysis of our sales revenue by business segment for fiscal year 2008 and 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Rmb000
|
|
|
%
|
|
|
Rmb000
|
|
|
%
|
|
Mobile telephones
|
|
|
2,342,754
|
|
|
|
90
|
|
|
|
3,636,431
|
|
|
|
94
|
|
Indoor telephones
|
|
|
252,194
|
|
|
|
10
|
|
|
|
237,676
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,594,948
|
|
|
|
100
|
|
|
|
3,874,107
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales revenue decreased by Rmb1,279.2 million from Rmb3,874.1 million for fiscal year 2007
to Rmb2,594.9 million for fiscal year 2008, representing a decrease of 33.0%. The decrease was
primarily due to a decline in our handsets and accessories revenue.
In 2007, the revenue from the mobile phone business segment was Rmb3,636.4 million, while it
amounted to Rmb2,342.8 million in 2008, representing a decrease of Rmb1,293.6 million. The
decrease was mainly attributable to the decrease in revenue from the sale of CECT-branded handsets
and COSUN-branded lower-end handsets.
Revenue from the sale of CECT-branded handsets and accessories decreased by 31.3% from
Rmb3,113.8 million in 2007 to Rmb2,140.3 million in 2008, primarily due to lower handset shipment
and a decrease in the average selling price of products sold in 2008. Our handset shipments
decreased by 28.9% from 3,816,000 units in 2007 to 2,714,000 units in 2008. Our handset shipment in
2008 was negatively impacted by the earthquake that took place in the Sichuan province of China in
May 2008 (the May earthquake) and the economic downturn in China. In addition, handset shipment
of CECT-branded handsets in 2008 also decreased due to our strategic shift to the niche market of
higher-margin VEVA branded handsets. The average selling price of CECT-branded handsets decreased
from Rmb816 per unit in 2007 to Rmb788 per unit in 2008, primarily due to the sale of a high volume
of ultra-low cost phones, such as the C3100, in the first half of 2008, as well as promotional
sales across our CECT-branded products to deal with the economic slowdown in China in the fourth
quarter of 2008.
Net sales of the COSUN-branded mobile phone handsets for 2008 were Rmb195.3 million,
representing a decrease of 61.7%. The decrease was primarily attributed to the significant decline
in sales volume which was due to the May earthquake and the economic downturn in China. The target
customers of COSUN-branded mobile phone are low-revenue groups. These customers were greatly
influenced by the financial crisis which occurred in 2008. Many of these target customers lost
their jobs due to the shutdown of plants during the financial crisis. Therefore, the sales of
COSUN-branded mobile phones decreased dramatically.
49
In addition, we believe that our sales continue to be adversely affected by illegally produced
and distributed merchandise (commonly referred to as copy-cat or knock-off merchandise). Such
illegal merchandise is believed to be sold at extremely low prices, and therefore such activities
have the effect of diminishing our sales.
Net sales of indoor telephones for 2008 were Rmb252.2 million, representing an increase of
6.1% from 2007. The increase was primarily attributable to the big volume orders received from an overseas
telecommunication operator under the agreement signed in 2007. Domestic sales of indoor phones also
suffered a significant decline in 2008 due to the economic downturn.
(ii) Cost of Goods Sold
Analysis of our cost of goods sold by business segment for fiscal years 2008 and 2007 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Rmb000
|
|
|
%
|
|
|
Rmb000
|
|
|
%
|
|
Mobile telephones
|
|
|
1,496,080
|
|
|
|
87
|
|
|
|
2,692,678
|
|
|
|
93
|
|
Indoor telephones
|
|
|
222,944
|
|
|
|
13
|
|
|
|
206,286
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,719,024
|
|
|
|
100
|
|
|
|
2,898,964
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold decreased by Rmb1,180.0 million from Rmb2,899.0 million for fiscal year
2007 to Rmb1,719.0 million for fiscal year 2008, representing a decrease of 40.7%.
In 2008, the cost of goods sold for the mobile phones business segment was Rmb1,496.1 million,
while it amounted to Rmb2,692.7 million in 2007, representing a decrease of Rmb1,196.6 million.
Our cost of goods sold relating to our CECT-branded mobile phone business decreased by 42.9%
from Rmb2,255.8 million in 2007 to Rmb1, 287.1 million in 2008, primarily driven by the decreased
sales volume of our handset products, which resulted in, among others things, a Rmb885.4 million
decrease in raw materials and components cost. Our product design fees paid to third parties also
decreased by 75.7% from Rmb74.4 million in 2007 to Rmb18.1 million in 2008, as a greater proportion
of product development was done in-house in 2008. The cost of goods sold as a percentage of revenue
decreased from 71.8% in 2007 to 59.8% in 2008, primarily reflecting our strategic shift to the
niche market of higher-margin products and the introduction of VEVA-branded handsets since 2008.
Cost of goods sold for COSUN-branded mobile phones was Rmb215.7 million in 2008, a decrease of
Rmb235.3 million from Rmb451.0 million in 2007. The decrease was primarily attributable to the
significant decrease in sales volume.
Cost of goods sold for indoor phones was Rmb223.0 million, an increase of Rmb15.0 million from
Rmb208.0 million in 2007.
50
(iii) Gross Profit
Analysis of our gross profit by business segment for fiscal years 2008 and 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Rmb000
|
|
|
%
|
|
|
Rmb000
|
|
|
%
|
|
Mobile telephones
|
|
|
846,674
|
|
|
|
97
|
|
|
|
943,753
|
|
|
|
97
|
|
Indoor telephones
|
|
|
29,250
|
|
|
|
3
|
|
|
|
31,390
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
875,924
|
|
|
|
100
|
|
|
|
975,143
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit for fiscal year 2008 was Rmb875.9 million, representing a decrease of Rmb99.2
million from Rmb975.1 million in fiscal year 2007.
In 2007, the gross profit from the mobile phone business segment was Rmb943.8 million, while
it amounted to Rmb846.7 million in 2008, representing a decrease of Rmb97.1 million. The decrease
was mainly attributable to the decrease of gross profit generated from our COSUN-branded mobile
phone business.
Our gross profit from our CECT-branded mobile phone business decreased by 2.1% from Rmb885.3
million in 2007 to Rmb866.8 million in 2008, primarily due to decreased revenue from our mobile
handset products. Our gross margin increased from 28.2% in 2007 to 40.2% in 2008, primarily due to
contributions of the VEVA handset models and a higher percentage of revenue derived from TV direct
sales. Under the TV direct sales arrangement, we were able to sell our handset to infomercial
companies at a higher price, but in return, we had to bear the additional airtime and logistic
costs.
Gross
profit/loss from our COSUN-branded mobile phone business decreased by Rmb80.3 million,
from a gross profit of Rmb60.0 million in 2007 to a gross loss of Rmb20.3 million in 2008. In
order to compete with the copy-cat or knock-off mobile phone producers and strive to maintain our
market share, we were compelled to sell the COSUN-branded mobile handsets at prices below cost.
Gross profit from the indoor telephone business segment decreased by Rmb2.2 million from
Rmb31.4 million in 2007 to Rmb29.2 million in 2008. The decrease was primarily attributable to the
decrease in gross margin from 13.2% in 2007 to 11.6% in 2008, as a result of the decreased gross
margin from the indoor phones export business due to the global financial crisis and the
appreciation of Rmb.
(iv) Selling expenses
Selling expenses increased by Rmb97.2 million from Rmb59.8 million for fiscal year 2007 to
Rmb157.0 million for fiscal year 2008. The increase was mainly due to an increase of Rmb110.3
million relating to the CECT-branded mobile phones. The selling and distribution expenses relating
to the COSUN-branded mobile phones decreased by Rmb13.1 million.
Our selling and distribution expenses relating to the CECT-branded mobile phones increased by
303.9% from Rmb36.3 million in 2007 to RMB146.6 million in 2008, primarily due to the higher
airtime costs incurred on increased TV direct sales and more advertisement on VEVA brand in 2008.
We plan to increase the level of our marketing and promotional activities and recruit additional
sales and marketing personnel to expand our business in the near term. We do not expect the
increase in our sales and marketing efforts to have a material adverse effect on our results of
operations.
The decrease in selling and distribution expenses by 55.6% for the COSUN-branded mobile phones
related mainly to the recession in the economy. With the financial crisis, the revenue of the
target customers of
COSUN-branded
mobile phones, the low-revenue customers, decreased dramatically. The sales of
COSUN-branded
51
mobile phones decreased accordingly, and the selling and distribution expenses on
this segment declined.
(v) General and administrative expenses including stock-based compensation
Our general and administrative expenses primarily consisted of share-based compensation,
salaries, benefits and other expenses for our administrative personnel, expenses relating to legal,
accounting and other professional
services, travel and entertainment, depreciation and amortization
charges and bad debt provisions. General and administrative expenses increased by Rmb207.7 million
from Rmb131.1 million in fiscal year 2007 to Rmb338.8 million in fiscal year 2008, representing an
increase of 158.4%.
The increase of general and administrative expenses primarily related to COSUN-branded mobile
phones and the indoor phone business. With the recession in the economy, the financial position of
the low-revenue customers deteriorated and the collection of accounts receivable from these
customers became difficult. In fiscal year 2008, the Company recognized Rmb232.8 million in
provisions for doubtful debts on accounts receivable, compared with Rmb3.0 million in fiscal year
2007. Among this, the provisions for doubtful debts related to COSUN-branded mobile phones and
indoor phone section amounted to Rmb232.2 million in 2008. These provisions for doubtful debts were
included in general and administrative expenses.
Regarding the CECT-branded mobile phone business, general and administrative expenses in 2008
were Rmb44.2 million, compared to Rmb69.0 million in 2007. The decrease was primarily due to lower
share-based compensation expenses recognized in 2008, which decreased from Rmb36.3 million in 2007
to Rmb12.2 million in 2008. As a result of the initial public offering of Qiao Xing Mobile
Communication Co., Ltd in May 2007, the Company incurred a higher level of expenses relating to
legal, accounting, financial compliance and other professional services. These charges for services
decreased in 2008.
(vi) Research and development
Research and development expenses increased by Rmb9.5 million from Rmb34.5 million for fiscal
year 2007 to Rmb44.0 million for fiscal year 2008. The increase consisted mainly of the increase
of Rmb10.6 million relating to the CECT-branded mobile phone handset business and a decrease of
Rmb1.1 million relating to the COSUN-branded mobile phone handset business.
Research and development expenses primarily consist of share-based compensation, salaries,
benefits and other staff-related expenses for our research and development personnel, office
expenses and related cost of materials and product testing expenses. We expect our research and
development expenses to increase in the future as we intend to recruit more research and
development engineers and acquire new technologies and testing equipment in CECT-branded mobile
phone section to strengthen our in-house design and development capabilities, particularly our
capability to develop higher-end and differentiated products.
(vii) Amortization of intangible assets
Amortization of other intangible assets was Rmb32.3 million in 2007 and Rmb11.7 million in
2008. The higher amortization of other intangible assets in 2007 arose as a result of the Companys
acquisition of the remaining 20% interest in QXMC on November 30, 2006. Amortization expense
decreased in 2008 because certain acquired intangible assets had been fully amortized during 2007
and early 2008.
(viii) Impairment of acquired intangible assets
52
For the year ended December 31, 2008, as a result of the projected decrease in future cash
flows, the Company determined that the estimated fair value of the CECT brand was less than its
carrying amount, and an impairment loss was recognized at the amount of Rmb26.2 million. The
impairment tests conducted by the Company on the CECT brand for the year ended December 31, 2007
did not result in any impairment charge.
(ix) Interest income
Interest income increased by Rmb28.9 million from Rmb42.1 million in 2007 to Rmb71.0 million
in 2008. The increase was mainly attributable to:
Interest income in 2008 of Rmb36.5 million came from loans to a third party at an interest
rate of 5% per annum, compared with Rmb17.7 million in 2007, as the loan period of these loans in
2008 is longer than that in 2007. In addition, the Company also accrued Rmb2.9 million in 2008 at
an interest rate of 7% per annum from a note receivable on the disposal of certain parcels of land.
Interest income of Rmb31.6 million in 2008 came from bank deposits.
(x) Exchange difference
Assets and liabilities which are denominated in foreign currencies are translated into the
functional currencies at the rates of exchange prevailing at the balance sheet date. Foreign
currency transactions are translated using the exchange rates prevailing at the date of
transactions. Foreign exchange gains or losses arising from the translation at year-end exchange
rates of foreign currency intercompany balances that are of a long-term investment nature are
included in shareholders equity separately as cumulative translation adjustments. All other
foreign exchange gains or losses resulting from the settlement of foreign currency transactions and
from the translation at financial year-end exchange rates of assets and liabilities denominated in
foreign currencies are included in the consolidated statements of operations.
We recognized a foreign currency exchange loss of Rmb5.4 million in 2008 and a foreign
currency exchange gain of Rmb28.3 million in 2007, primarily resulting from the translation of
foreign currency denominated assets and liabilities.
(xi) Interest expenses
Interest expenses increased by Rmb93.6 million from Rmb248.0 million in 2007 to
Rmb341.6 million in 2008. The increase related mainly to the convertible bonds and interest
expense for bank loans.
In Qiao Xing Universal Telephone, Inc., we recorded interest expenses of Rmb193.0 million
relating to two convertible bonds issued in 2006, and one convertible bond issued in 2007.
Coupon interest for the three convertible bonds amounted to Rmb15.4 million in 2007.
The discount associated with the three convertible notes arising from the Investors Warrants
and the embedded derivatives on initial recognition and from the beneficial conversion amount on a
conversion price reset, which totaled Rmb300.9 million, was accreted to interest expense over the
expected terms of the Notes using the effective interest method. The related interest expenses
amounted to Rmb140.3 million and were recognized in 2007.
The deferred debt issuance costs associated with the three convertible notes, which totaled
Rmb90.4 million on initial recognition, were amortized to expense over the expected term of the
Notes using the effective interest method. The related interest expenses amounted to Rmb37.3
million and were recognized in 2007.
53
In Qiao Xing Universal Telephone, Inc. for the year 2008, we recorded interest expenses of
Rmb145.8 million relating to two convertible bonds issued in 2006 and 2007. Coupon interest for
these two convertible bonds amounted to Rmb14.2 million in 2008.
In addition, one major subsidiary of the Company, Qiao Xing Mobile Communication Co., Ltd.
(QXMC) issued US$70,000,000 senior convertible notes on May 15, 2008 and recorded interest
expense of Rmb92.9 million in 2008. Coupon interest for these QXMC convertible notes amounted to
Rmb11.6 million.
The discounts associated with the three convertible notes arising from the Investors Warrants
and the embedded derivatives on initial recognition and from the beneficial conversion amount on a
conversion price reset were accreted to interest expense at the amount of Rmb188.2 million in 2008.
The deferred debt issuance costs associated with the three convertible notes were amortized to
interest
expense at the amount of Rmb24.7 million in 2008.
In 2008, interest expense related to bank loans and other bank borrowings amounted to Rmb102.5
million, compared to Rmb54.6 million in 2007.
(xii) Gain/Loss on re-measurement of embedded derivatives
We recognized a loss on re-measurement of embedded derivatives relating to the convertible
bonds of Rmb129.1 million in 2007 and a gain of Rmb160.0 million in 2008, the fair value of the
embedded derivative being most sensitive to the market price on the re-measurement date of the
shares of the Company into which the bonds are convertible. The fair values of these embedded
derivatives relating to the convertible bonds were appraised by a third party valuator.
(xiii) Loss on extinguishment of convertible debts
On May 3, 2007, the purchasers of US$40,000,000 senior convertible notes issued by the Company
exercised an option to exchange the entire US$40,000,000 notes into 7,800,000 ordinary shares of
QXMC that were owned by the Company (the Exchange). The fair value of the shares of QXMC given
up by the Company in the Exchange was estimated to be approximately Rmb721.2 Million. The Exchange
resulted in a loss on the extinguishment of the US$40,000,000 senior convertible notes of Rmb142.1
million during the year ended December 31, 2007.
On August 19, 2008, the holders of the QXMC US$70,000,000 senior convertible notes exercised
the option to convert US$8.3 million of the principal amount of the notes and accrued interest
thereon of US$0.5 million into 1,511,397 ordinary shares of QXMC at a conversion price of US$5.49
per share. The extinguishment of the convertible debts that arose from the conversion resulted in
a loss of RMB10.6 million during the year ended December 31, 2008.
(xiv) Gain on disposal of interests in subsidiaries
On May 3, 2007, the purchasers of US$40,000,000 senior convertible notes issued by the Company
exercised an option to exchange the entire US$40,000,000 notes into 7,800,000 ordinary shares of
QXMC that were owned by the Company. The fair value of the shares of QXMC given up by the Company
in the Exchange was estimated to be approximately Rmb721.2 million.
The gain on the disposal of the 7,800,000 shares equity interest in QXMC of Rmb482.6 million
was
54
recognized for the year ended December 31, 2007.
For the year ended December 31, 2008, the Company only recorded a gain on disposal of
interests in subsidiaries at amount of Rmb2.3 million, relating to the disposal of subsidiaries by
QXMC during the year ended December 31, 2008.
(xv) Gain on issue/repurchase of stocks by subsidiary
As a consequence of the QXMC IPO on May 8, 2007, the Company recorded a gain of Rmb384.0
million in 2007
.
On January 7, 2008, QXMC issued 565,000 new ordinary shares at US$7.50 per share upon the
exercise of share options granted to its director and certain employees. On May 15, 2008, QXMC
repurchased 6,966,666 of its issued ordinary shares at US$6.94 per share from two existing
shareholders of QXMC through the issuance of the QXMC US$70,000,000 senior convertible notes. All
ordinary shares repurchased were subsequently cancelled.
On August 19, 2008, the holders of the QXMC US$70,000,000 senior convertible notes exercised
the option to
convert US$8,251,000 of the principal amount of the notes and accrued interest thereon of
US$46,000 into 1,511,397 ordinary shares of QXMC at a conversion price of US$5.49 per share. The
stock price of QXMCs ordinary shares was US$5.31 at the date of exercise of the option to convert.
In 2008, the Company recorded a total gain of Rmb4.4 million on these issuances and repurchase
of stocks transactions by QXMC. As a consequence of these transactions, the Companys equity
interest in QXMC was changed from 61.3% as of December 31, 2007 to 67.6% as of December 31, 2008.
(xvi) Income tax expense
Income tax expense increased by Rmb40.1 million from Rmb124.1 million in 2007 to Rmb164.2
million in 2008. The increase consisted mainly of the increase of Rmb42.3 million relating to the
CECT-branded mobile phone handset business carried out by our subsidiary CEC Telecom Co., Ltd.
Income tax expense in CEC Telecom Co., Ltd. increased by Rmb48.7 million from Rmb113.4 million
in 2007 to Rmb162.1 million in 2008, primarily due to the increase of income tax rate from 15% to
25% in the PRC.
Qiao Xing Communication Holdings, Ltd. recorded a loss before taxation in 2008. However, in
connection with the valuation allowance provided on deferred tax assets and the accrued income
taxes for the profitable subsidiaries, it recognized an income tax expense at amount of Rmb8.5
million in 2008. Compared to Rmb10.7 million in 2007, income tax expense in Qiao Xing Communication
Holdings, Ltd. decreased by Rmb2.2 million.
(xvii) Minority interests
Minority interest charges decreased by Rmb24.2 million from Rmb168.6 million for 2007 to
Rmb144.4 million for 2008. The change related primarily to the minority shareholders share of the
consolidated results of QXMC. This mainly related to the decrease of income before minority
interest and the changes of the shareholding percentage. The Company owned 61.3% of QXMC for the
last eight months of 2007, while this figure changed to 60.8% in January 2008, then changed to
69.9% in May 2008, and 67.6% since August 2008.
(xviii) Net results
As a result of the foregoing, our net earnings decreased by Rmb1,040.7 million from a net
income of Rmb903.9 million in 2007 to a net loss of Rmb136.8 million in 2008. Our basic earnings
per share after extraordinary
gain was Rmb24.95 in 2007, while our basic loss per share after extraordinary gain was Rmb4.42 in
2008.
55
B. LIQUIDITY AND CAPITAL RESOURCES.
During fiscal year 2009, we were principally engaged in (i) the production and sales of mobile
phones and accessories in Mainland China; and (ii) the production and sales of molybdenum
concentrate in Mainland China. We did not declare or pay dividends in fiscal year 2009.
In summary, about Rmb872.6 million (US$127.8 million) was provided by operating activities,
about Rmb597.9 million (US$87.6 million) was used in investing activities and about Rmb310.1
million (US$45.4 million) was provided by financing activities during the year ended December 31,
2009. Consequently, cash and cash equivalents increased by Rmb592.0 million (US$86.7 million) from
Rmb3,117.5 million at the beginning to Rmb3,709.5 million (US$543.4 million) at the end of fiscal
year 2009.
(i) Cash flows from operating activities
There was a net operating cash inflow of Rmb872.6 million (US$127.8 million) while the loss
before minority interests and extraordinary gain was
Rmb202.6 million (US$29.7 million) for the
fiscal year 2009. The difference of Rmb1,075.2 million (US$ 157.5 million) stemmed mainly from the
following:
|
|
|
Interest expense relating to the accretion of convertible note discounts of Rmb158.8
million (US$23.3 million) which did not involve any outflow of cash
|
|
|
|
|
Stock-based compensation of Rmb60.9 million (US$8.9 million) which did not involve
any outflow of cash
|
|
|
|
|
Decrease in accounts and bills receivable of Rmb370.3 million (US$54.3 million)
|
|
|
|
|
Decrease in prepaid expenses of Rmb197.6 million (US$28.9 million)
|
|
|
|
|
Decrease in inventories of Rmb86.5 million (US$12.7 million)
|
|
|
|
|
Decrease in other current assets of Rmb454.5 million (US$66.6 million)
|
|
|
|
|
Increase in other payables of Rmb148.9 million (US$21.8 million)
|
|
|
|
|
Cash used in operating activities of discontinued operations of QXCH of Rmb436.5
million (US$63.9 million)
|
In 2009, due to the deterioration of the economy and the effect it had on consumers, the sales
of QXMC declined 24.2%. Accordingly, QXMC shrank its operation and focused on cash collection.
(ii) Cash flows from investing activities
Net cash used in investing activities amounted to Rmb597.9 million (US$87.6 million) during
the year ended December 31, 2009. This was mainly attributable to a cash outflow of Rmb203.4
million (US$29.8 million) in connection with the acquisition of CLJC and cash outflow of Rmb162.4
million (US$23.8 million) in investing activities of discontinued operations of QXCH.
In 2009, the Company used Rmb114.3 million (US$16.7 million) on the purchase of property,
machinery and equipment and construction in progress, which mainly related to the construction of
the molybdenum mine in CLJC. The disposal of QXCH resulted in a net cash outflow of Rmb60.2 million
(US$8.8 million). Restricted cash increased by Rmb115.4 million (US$16.9 million).
In November 2009, the Companys subsidiary, QXMC, entered into an agreement for the sale of
property and the associated land use rights to a third party for a total consideration of
RMB163,000,000 (US$23,880,000). The sale was completed in the second quarter of 2010. As of
December 31, 2009, a deposit of Rmb49 million (US$7.2 million) was received.
(iii) Cash flows from financing activities
56
Net cash inflow from financing activities amounted to Rmb310.1 million (US$45.4 million) for
the year ended December 31, 2009. It related mainly to the net financing cash inflow in QXCH
before its disposal at an amount of Rmb531.2 million (US$77.8 million).
In 2009, the Company repurchased US$30 million principal of QXMC convertible notes from three
notes holders, which resulted in a net cash outflow of Rmb164.0 million (US$24.0 million). Some
warrants holders exercised their outstanding warrants in 2009 and provided cash inflow of Rmb42.1
million (US$6.2 million). Short-term borrowings decreased by Rmb99.2 million (US$14.5 million).
For the year ended December 31, 2009, we financed our operations and investments principally
through cash generated from operating activities. Outstanding bank borrowings accounted for 13.9%
and 15.0% of our total assets as of December 31, 2008 and December 31, 2009, respectively.
Seasonal working capital needs have been met through short- term borrowings under revolving lines
of credit. As of December 31, 2009, our consolidated working capital was Rmb3,400.8 million (US$
498.2 million) as compared to Rmb3,552.1 million as of December 31, 2008. We believe that our
working capital is sufficient for our present requirements.
Critical Accounting Policies and Estimates
In preparing our consolidated financial statements in conformity with accounting principles
generally accepted in the United States, we must make a variety of estimates that affect the
reported amounts and related disclosures. The following accounting policies are currently
considered most critical to the preparation of our consolidated financial statements.
Basis of consolidation
The consolidated financial statements are prepared in accordance with accounting principles
generally accepted in the United States (U.S. GAAP). The preparation of financial statements in
conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The consolidated financial statements include the accounts of the Company, its subsidiaries
and a variable interest entity (VIE) for which the Company is the primary beneficiary. All
significant intercompany accounts and transactions have been eliminated. A VIE is required to be
consolidated by a company if that company is required to absorb the majority of the losses of the
VIE, is entitled to receive a majority of the VIEs residual returns, or both.
To comply with the PRCs laws and regulations, the Company produces molybdenum concentrates
in China via its VIE, Haozhou. Haozhou is 90% owned by Mr. Wu Ruilin, the Chairman of the Company,
and the remaining 10% equity interest is owned by a relative of Mr. Wu Ruilin. The capital for
Haozhou was funded by the Company and has been recorded as interest-free loans to Haozhou. These
loans were eliminated against the debt of Haozhou in consolidation. Under various contractual
agreements, Haozhou is required to sell all of its products to Zhongtai at cash cost. Furthermore,
all future cash flows generated from the operation and disposal of Haozhou will belong to the
Company. All voting rights of the VIE are assigned to the Company, and the Company has the right to
appoint all directors and senior management personnel of the VIE. In addition, shareholders of the
Haozhou have pledged their shares in the VIE as collateral for performance under these contractual
agreements. As of December 31, 2009, the total amount of interest-free loans to Haozhou was RMB
200 million (US$29.3 million), and the aggregate accumulated losses of Haozhou of approximately
RMB4.3 million (US$0.6 million) have been included in the consolidated financial statements.
Haozhou is a large copper-molybdenum poly-metallic mining company in China. Haozhou owns the
57
exploration license of a mine covering 53.9 square kilometers in the Inner Mongolia Autonomous
Region in the PRC. Through exploration of 32.34 square kilometers, Haozhou concluded that there is
a reserve of 30,985 tons of molybdenum metal and an abundance of other types of multi-metal
reserves, as determined by Behre Dolbear Asia, Inc, an independent mine consulting firm. The
remaining 21.56 square meters are also expected to be explored.
The operating results of Haozhou have been consolidated with those of the Group since April 6,
2009, when the Company acquired CLJC from Mr. Wu Ruilin. (Note 3(c))
A subsidiary is a company, including equity joint ventures, in which the Company holds,
directly or indirectly, more than a 50% equity interest and over which it can exercise control, as
defined under U.S. GAAP.
Sales recognition
Sales represent the invoiced value of goods, net of value added tax (VAT), discounts,
returns and price guarantees supplied to customers, and are recognized upon delivery of goods and
passage of title. For telecommunication products, liability for sales returns and price guarantees
is estimated taking into consideration historical experience and current conditions. For mineral
products, the Company recognizes revenue from molybdenum concentrate sales when persuasive evidence
of an arrangement exists, the price is fixed and determinable, the product has been delivered,
title has transferred, and collection is reasonably assured.
All of the Groups sales made in the PRC are subject to PRC VAT. Such output VAT is payable
after offsetting VAT paid by the Group on its purchases (input VAT).
Trade accounts receivable
Trade accounts receivable are recorded at invoiced amounts less allowances for doubtful
accounts. The Group reviews its accounts receivables on a periodic basis and makes allowances when
there is doubt as to the collectibility of the balances. In evaluating the collectibility of a
receivable balance, the Company considers many factors, including the age of the balance, the
customers historical payment history, its current credit-worthiness and
current economic trends. Account balances are charged off against the allowance after all
means of collection have been exhausted and the potential for recovery is considered remote.
Inventories
Inventories are stated at the lower of cost or net realizable value. Work-in-process and
finished goods are composed of direct materials, direct labor and an attributable portion of
manufacturing overhead. Net realizable value is the estimated selling price in the ordinary course
of business less the estimated cost of completion and the estimated costs necessary to make the
sale, and after making allowances for damaged, obsolete and slow-moving items. Allowances for
damaged, obsolete and slow-moving items are determined by management based on a consideration of
several factors, including the aging of the inventories, current and expected market trends and
conditions, and the physical condition of the goods observed during periodic inventory counts.
For mine products, cost is comprised of production costs for ore extracted and processed from
the Companys mines. Production costs included the costs of materials, cost of processing and
direct labor, mine site and processing facility overhead costs and depreciation, depletion and
amortization. Stripping costs incurred during the production phase are included as a component of
inventory produced during the period in which stripping costs are incurred.
58
When inventories are sold, their carrying amount is charged to expense in the period in which
the associated revenue is recognized. Write-downs for declines in net realizable value or for
losses of inventories are recognized as an expense in the year the impairment or loss occurs.
Exploration
Exploration costs include geological and geophysical work on areas without identified reserves
together with drilling and other related costs. Exploration costs incurred for the purpose of
converting mineral resources to proven and probable reserves or identifying new mineral resources
at development or production stage properties are charged to expense as incurred.
Product warranties
The Group guarantees that products will meet the stated functionality as agreed to in each
sales arrangement. The Company provides for the estimated warranty costs under these guarantees
based upon historical experience and managements estimate of the level of future claims, and
accrues for specific items at the time their existence is known and the amounts are estimable.
Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the net
assets acquired in business combinations accounted for under the purchase method. Goodwill is
tested for impairment annually or more frequently if events or changes in circumstances indicate
that it might be impaired, using the prescribed two-step process under U.S. GAAP. The first step
screens for potential impairment of goodwill to determine if the fair value of the reporting unit
is less than its carrying value, while the second step measures the amount of goodwill impairment,
if any, by comparing the implied fair value of goodwill to its carrying value.
Other acquired intangible assets
Intangible assets acquired in a business combination are recognized as assets apart from
goodwill if they satisfy either the contractual-legal or separability criterion. Such
intangible assets are initially measured and recorded at fair value. As a result of the application
of purchase accounting to account for the Companys acquisition of an additional 20% interest in
QXMC on November 30, 2006, other acquired intangible assets have been adjusted to
a new cost basis, which reflects the Companys original 80% interest at amortized cost and the
20% acquired interest at fair value as of November 30, 2006.
Intangible assets with determinable useful lives are amortized as follows:
|
|
|
|
|
Customer relationships
|
|
3 5 years
|
Completed technology
|
|
1.8 5 years
|
Core technology
|
|
4 5 years
|
Backlog
|
|
4 5 months
|
Licenses
|
|
5 years
|
The Company has determined that the Groups CECT brand held by its subsidiary, CECT, does
not have a determinable useful life. Consequently, the carrying amount of this brand name is not
amortized but rather tested for
59
impairment annually or more frequently if events or changes in
circumstances indicate that the assets might be impaired. Such impairment test consists of a
comparison of the fair value of the brand name with its carrying amount and an impairment loss is
recognized if and when the carrying amount of the brand name exceeds its fair value.
Asset Retirement Obligation
In connection with the mine operation, the Company is required to make payments for
restoration and rehabilitation. Provision for restoration cost is required when the Company has a
present obligation as a result of past events and it is probable that the Company will be required
to settle that obligation. Provision is measured in accordance with the relevant rules and
regulations applicable in the PRC at the balance sheet date, and is discounted to their present
value where the effect is material.
According to the relevant rules and regulations applicable in the PRC, the Company accrues an
asset retirement obligation related to sewage based on the tonnes of ore produced; accrues an asset
retirement obligation related to land restoration obligation based on the underground hectares of
area that have been mined. As the accrued liabilities are paid to relevant government agencies,
the recorded amount of the liability is reduced.
Depreciation, depletion and amortization of long-lived assets
We have a substantial amount of property, machinery and equipment, and intangible assets, and
the depreciation/amortization of these assets constitutes a significant operating cost for us. The
useful lives of our long-lived assets represent our estimate of the periods during which we expect
to derive economic benefits from the assets. In estimating the useful lives and also the
recoverable salvage values of these assets and in determining whether subsequent revisions to the
useful lives and salvage values are necessary, we consider the likelihood of technological
obsolescence arising from changes in production techniques, technology, market demand and intended
use. We routinely review the remaining estimated useful lives and salvage values of our long-lived
assets to determine if such lives and values should be adjusted. However, actual economic lives and
salvage values may differ from our estimates and any future revisions to these estimates will
impact our depreciation/amortization expenses, and hence our operating results, in future periods.
In the years ended December 31, 2007, 2008 and 2009, we have not made any changes to the estimated
useful lives or salvage values for our long-lived assets.
In connection with the Companys acquisition of CLJC, the Company capitalized the costs to
acquire proven and probable reserves and value beyond proven and probable reserves. The Company
estimated the fair value of proven and probable mineral reserves as well as the value beyond proven
and probable mineral reserves and recorded these amounts as assets at the date of acquisition.
Proven and probable mineral reserves are depleted over the life of the mine using the
units-of-production method based on the volume of mineral produced in relation to the total
estimated proven and probable mineral reserves. Fixed plant, facilities, mobile and other equipment
are depreciated on a straight-line basis over the shorter of their estimated useful life or the
life of the mine. Mine development costs include costs incurred from mine pre-production activities
undertaken to gain access to proven and probable reserves
including shafts, adits, drifts, ramps, permanent excavations, infrastructure and are
capitalized once all operating permits have been secured, mineralized material is classified as
proven and probable reserves and a final feasibility study has been completed. Mine development
costs incurred to access specific areas of the ore body are depreciated using the
units-of-production method over the estimated life of the mine based on the volume of mineral to be
produced from proven and probable reserves in the area of the ore body to which the development
activities provide access. Proven and probable reserves and general mine development costs are
depleted or depreciated, respectively,
using the units-of-production method based on the volume of mineral to be produced from proven
and probable reserves over the estimated life of the mine. The cost assigned to value beyond
proven and probable mineral reserves
60
is not depleted. However, as the Company obtains new
information, mineralized material relating to value beyond proven and probable reserves may be
converted into proven and probable mineral reserves at which time the associated capitalized cost
would become subject to depletion on a units-of-production basis.
Impairment of long-lived assets with determinable useful lives
Long-lived assets with determinable useful lives, including property, machinery and equipment,
proven and probable reserves, value beyond proven and probable reserves and amortizable intangible
assets, are tested for impairment whenever events or changes in circumstances indicate that the net
carrying amount may not be recoverable. Recoverability of such assets to be held and used is
measured by a comparison of the carrying amount of the asset to the estimated undiscounted future
cash flows expected to result from its use and eventual disposition. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by
which the carrying value of the asset exceeds its fair value. If a readily determinable market
price does not exist, fair value is estimated using discounted expected cash flows attributable to
the assets. Future cash flow from mineral properties include estimates of recoverable pounds,
molybdenum prices (considering current and historical prices, price trends and related factors),
production levels and capital, all based on life-of-mine plans and projections.
Assumptions underlying future cash flow estimates are subject to risks and uncertainties. Any
differences between significant assumptions and market conditions and/or the Companys operating
performance could have a material effect on the Companys determination of ore reserves, or its
ability to recover the carrying amounts of its long-lived assets resulting in impairment charges. A
prolonged decline in the molybdenum price could trigger an impairment.
Stripping cost
The process of mining overburden and waste materials is referred to as stripping. During the
development stage of a mine before production commences, the Company capitalizes stripping costs as
part of mine development costs.
Stripping costs incurred during the production phase of a mine are considered variable costs
and are included as a component of inventory produced during the period in which stripping costs
are incurred.
Stock-based compensation
Share-based compensation is measured based on the fair value of all share-based awards on the
dates of grant and is recognized using the straight-line method over the requisite service period,
which is generally the same as the vesting period.
The Company values share-based awards issued using either the Black-Scholes option-pricing
model or the binomial option pricing model, and recognizes the value over the period in which the
awards vest.
Debt issuance costs and borrowing costs
Costs related to the issuance of debt are capitalized and amortized to interest expense using
the effective interest method over the expected term of the related debt. All other borrowing costs
are recognized as an expense in
the period in which they are incurred, except to the extent that they are attributable to the
acquisition, construction or production of an asset that necessarily involves a substantial period
of time before the asset is ready for its intended use
61
or sale, in which case the borrowing costs
are capitalized as part of the costs of the asset.
Income taxes
Deferred income taxes are provided using an asset and liability method. Under this method,
deferred tax assets and liabilities are recognized for all significant temporary differences
between the tax and financial statement bases of assets and liabilities. Deferred tax assets and
liabilities are measured using enacted tax rates currently applicable to taxable income in the
years in which those temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates or laws is recognized in the statement
of operations in the period that the change in tax rates or tax laws is enacted. A valuation
allowance is provided for deferred tax assets if it is more likely than not that these items will
either expire before the Group is able to realize their benefits or that future deductibility is
uncertain.
The Company recognizes in the consolidated financial statements the impact of a tax position,
if that position is more likely than not of being sustained upon examination, based on the
technical merits of the position. The Company has elected to classify interest and penalties
related to income tax matters, if and when imposed, as part of income tax expense in the statement
of operations.
As of December 31, 2008 and 2009, the Company has no material
unrecognized tax benefits which would favorably affect the
effective income tax rate in future periods and does not believe
that there will be any significant increases or decreases of
unrecognized tax benefits within the next twelve months. No
interest or penalties relating to income tax matters have been
imposed on the Company during the year ended December 31, 2007,
2008 and 2009, and no provision for interest and penalties is
deemed necessary as of December 31, 2008 and 2009.
According to the PRC Tax Administration and Collection Law, the
statute of limitations is three years if the underpayment of taxes
is due to computational errors made by the taxpayer or its
withholding agent. The statute of limitations extends to five years
under special circumstances, which are not clearly defined. In the
case of a related party transaction, the statute of limitation is
ten years. There is no statute of limitation in the case of tax
evasion.
Financial instruments
All derivative financial instruments are recognized in the financial statements and maintained
at fair value regardless of the purpose or intent for holding them. Changes in fair value of
derivative financial instruments are either recognized periodically in income or shareholders
equity (as a component of comprehensive income) depending on whether the derivative is being used
to hedge changes in fair value or cash flows.
The carrying amounts for cash and bank deposits, restricted cash, bills receivable, accounts
receivable, prepaid and other assets, short-term borrowings, accounts payable, other payables,
accrued liabilities and customer deposits approximate their fair values because of the short
maturity or nature of these instruments. The carrying amounts of shareholders loans approximate
their fair value because the imputed interest rate on these instruments fluctuates with market
interest rates.
Segment information
The Company adopted management approach to determine the information related to reporting of
financial and descriptive information about reportable operating segments, including segment profit
or loss, certain specific
revenue and expense items, and segment assets, as well as information about the revenues
derived from the Groups products and services, the countries in which the Group earns revenues and
holds assets, and major customers. The
62
management approach is based on the way management organizes the enterprise to assess
performance and makes operating decisions regarding the allocation of resources. The Group
classifies its operations into two core business segments, namely mobile phones and mining. In view
of the fact that the Group operates principally in the PRC, no geographical segment information is
presented.
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) No. 2009-17 (ASU 2009-17), which amends guidance regarding consolidation of
variable interest entities to address the elimination of the concept of a qualifying special
purpose entity. It replaces the quantitative-based risks and rewards calculation for determining
which enterprise has a controlling financial interest in a variable interest entity with an
approach focused on identifying which enterprise has the power to direct the activities of the
variable interest entity, and the obligation to absorb losses of the entity or the right to receive
benefits from the entity. Additionally, it requires any enterprise that holds a variable interest
in a variable interest entity to provide enhanced disclosures that will provide users of financial
statements with more transparent information about an enterprises involvement in a variable
interest entity. It is effective for interim and annual reporting periods beginning after November
30, 2009. The adoption is not expected to have a material impact on the Groups consolidated
financial statements.
In October 2009, the FASB issued ASU No. 2009-13 (ASU 2009-13), regarding revenue
arrangements with multiple deliverables. These updates addresses how to determine whether an
arrangement involving multiple deliverables contains more than one unit of accounting, and how the
arrangement consideration should be allocated among the separate units of accounting. These updates
are effective for fiscal years beginning after June 15, 2010 and to be applied retrospectively or
prospectively for new or materially modified arrangements. In addition, early adoption is
permitted. The adoption is not expected to have a material impact on the Groups consolidated
financial statements.
In October 2009, the FASB issued ASU No. 2009-14 (ASU 2009-14), to exclude all tangible
products containing both software and non-software components that function together to deliver the
products essential functionality. The effective date for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010 and is to be applied on a
prospective basis. Early application is permitted as of the beginning of an entitys fiscal year.
The adoption is not expected to have a material impact on the Groups consolidated financial
statements.
In January 2010, the FASB issued ASU No. 2010-06 (ASU 2010-06), which requires a number of
additional disclosures regarding (1) the different classes of assets and liabilities measured at
fair value, (2) the valuation techniques and inputs used, (3) the activity in Level 3 fair value
measurements, and (4) the transfers between Levels 1, 2, and 3. The new disclosures and
clarifications of existing disclosures are effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances,
and settlements in the roll forward of activity in Level 3 fair value measurements. Those
disclosures are effective for fiscal years beginning after December 15, 2010, and for interim
periods within those fiscal years. The adoption is not expected to have a material impact on the
Groups consolidated financial statements.
63
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
During each of the last three fiscal years, we spent the following amounts on
company-sponsored research
and development activities:
|
|
|
|
|
Year ended December 31, 2009
|
|
Rmb36,404,000
|
Year ended December 31, 2008
|
|
Rmb29,242,000
|
Year ended December 31, 2007
|
|
Rmb18,599,000
|
D. TREND INFORMATION.
For the past four or so years, we have considered exiting the telecommunications industry in
China due to the continuing increase in competition and decrease in profitability regarding
telecommunications products. Since around 2000, many competitors entered the telecommunications
products manufacturing arena in China, causing the profitability of the industry as a whole to
decline dramatically. Faced with this continuing decrease in profitability and increase in
competition, we formed a project team about four years ago to investigate and evaluate the
possibility of diversifying into another industry.
The project team suggested that, with the boom of the Chinese economy, the demand for natural
resources had begun to increase dramatically, and we expected that trend to continue. Therefore,
we decided to consider diversifying into the natural resources industry.
Except as set forth above or disclosed elsewhere in this annual report, we are not aware of
any known 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 adverse effect on our net sales
or 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 off-balance sheet arrangements that have or are reasonably likely to have a
current or future effect on our financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital resources that is
material to investors.
F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS.
(a) Capital commitments
Capital commitments not provided for in the consolidated financial statements include the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
|
RMB000
|
|
|
RMB000
|
|
|
US$000
|
|
Capital expenditures authorized and
contracted for:
|
|
|
|
|
|
|
|
|
|
|
|
|
- Construction of mine properties
|
|
|
|
|
|
|
50,459
|
|
|
|
7,392
|
|
- Purchase of machinery and equipment
|
|
|
130
|
|
|
|
3,000
|
|
|
|
440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130
|
|
|
|
53,459
|
|
|
|
7,832
|
|
|
|
|
|
|
|
|
|
|
|
64
(b) Operating lease commitments
The Group has operating lease agreements for office and factory premises, which extend through
December 2011. As of December 31, 2009, the Groups future minimum lease payments required under
non-cancelable operating leases are as follows:
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
|
RMB000
|
|
|
US$000
|
|
For the years ending December 31,
|
|
|
|
|
|
|
|
|
- 2010
|
|
|
6,448
|
|
|
|
944
|
|
- 2011
|
|
|
945
|
|
|
|
138
|
|
|
|
|
|
|
|
|
Total
|
|
|
7,393
|
|
|
|
1,082
|
|
|
|
|
|
|
|
|
(c) Service of debt
i) On October 31, 2006, pursuant to a securities purchase agreement dated October 31, 2006,
the Company issued and sold to two institutional investors US$26 million aggregate principal amount
of 4.5% unsecured senior convertible notes (the 4.5% Note).
ii) On November 3, 2009, the Company signed an Amendment and Exchange Agreement with two
institutional investors of the 4.5% Notes and issued US$24 million aggregate principle amount of 0%
unsecured restated senior convertible notes (0% Restated Notes) to these two institutional
investors in exchange for the 4.5% Notes.
In 2009, the holders of the 0% Restated Notes exercised the option to convert US$6,000,000 of
the principal amount of the notes into 3,319,171 shares of the Company at an average conversion
price of US$1.81 per share.
In 2010, the holders of the 0% Restated Notes exercised the option to convert US$17,220,000 of
the principal amount of the notes into 9,077,280 ordinary shares of the Company at an average
conversion price of US$1.90 per share.
In May 2010, the Company paid the remaining US$780,000 outstanding balance of the principal
amount of the 0% Restated Notes.
iii) On May 15, 2008, pursuant to a securities purchase agreement dated May 15, 2008, Qiao
Xing Mobile Communication Co., Ltd., a subsidiary of the Company, issued and sold to two
institutional investors US$70 million aggregate principal amount of 4.0% unsecured senior
convertible notes (the QXMC 4.0% Note).
In 2008, the holders of the QXMC unsecured senior convertible notes exercised the option to
convert US$8,251,000 of the principal amount of the notes and accrued interest thereon of US$46,000
into 1,511,397 ordinary shares of QXMC at a conversion price of US$5.49 per share.
On March 31, 2009, the Company signed an agreement to purchase from three note holders
US$30,000,000 of the outstanding QXMC 4.0% Notes for an aggregate purchase price of US$24,000,000.
In 2009, the holders of the QXMC 4.0% Notes exercised the option to convert US$16,073,000 of
the principal amount of the notes and accrued interest thereon of US$590,000 into 4,114,286
ordinary shares of QXMC at a conversion price of US$4.05 per share.
The Groups total future payments relating to the service of debt of the QXMC 4.0% notes
assuming that the remained notes are repaid at maturity are as follows:
65
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
|
Rmb000
|
|
|
US$000
|
|
For the years ending December 31,
|
|
|
|
|
|
|
|
|
- 2011
|
|
|
109,214
|
|
|
|
16,000
|
|
|
|
|
|
|
|
|
Total
|
|
|
109,214
|
|
|
|
16,000
|
|
|
|
|
|
|
|
|
(d) Asset retirement Obligation
According to the relevant rules and regulations applicable in the PRC, the Company accrues
asset retirement obligation related to sewage based on the output of ore production, and land
restoration obligation based on the underground hectares of area that have been mined as operating
costs. As the accrued liabilities are paid to relevant government agencies, the recorded amount of
the liability is reduced.
The assets retirement obligation included in the consolidated financial statements for the
year ended December 31, 2009 is analyzed as followings:
|
|
|
|
|
|
|
|
|
|
|
RMB000
|
|
|
US$000
|
|
Accrued liabilities payable for sewage
|
|
|
3,688
|
|
|
|
540
|
|
Accrued liabilities payable for land restoration
|
|
|
325
|
|
|
|
48
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
4,013
|
|
|
|
588
|
|
|
|
|
|
|
|
|
66
ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT.
Our current senior management and directors are as follows:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
Rui Lin Wu
|
|
|
58
|
|
|
Chairman and Chief Executive Officer
|
Zhi Yang Wu
|
|
|
37
|
|
|
Vice Chairman
|
Aijun Jiang
|
|
|
38
|
|
|
Chief Financial Officer
|
Rick Wenjun Xiao
|
|
|
39
|
|
|
Vice President and Secretary
|
Ze Yun Mu
|
|
|
44
|
|
|
Non-Executive Director
|
Edward Tsai
|
|
|
53
|
|
|
Non-Executive Director
|
Yi Hong Zhang
|
|
|
68
|
|
|
Non-Executive Director
|
Zhi Min Guo
|
|
|
46
|
|
|
Non-Executive Director
|
None of our directors and officers was selected pursuant to any agreement or understanding
with any other person. There is no family relationship between any director or executive officer
and any other director or executive officer, except Rui Lin Wu and his son Zhi Yang Wu.
Mr. Rui Lin Wu
is our chairman and chief executive officer. He is our founder and has over 20
years of experience in the telecommunication industry. He is responsible for our overall strategic
planning, policy making and finance. Prior to his career in the telecommunications industry, he
was a general manager of a fashion and garment factory from 1980 to 1986. Currently, Mr. Wu is the
executive commissioner of the China National Association of Industry and Commerce, senior analyst
of the China National Condition and Development Research Center, and a member of the Poverty Fund
of China. Mr. Wu also serves as the vice chairman of QX Mobile (NYSE: QXM) and a director of CECT
since February 2003.
Mr. Zhi Yang Wu
is our vice chairman and the eldest son of Mr. Rui Lin Wu. Mr. Wu received a
diploma in enterprise management from Huizhou University in China. He joined us in 1992 and is
responsible for our overall strategic planning, policy making and the overseas market development.
Mr. Wu also serves as the chairman of QX Mobile (NYSE: QXM) and CECT since February 2003.
Mr. Aijun Jiang
has served as our chief financial officer since his appointment in August
2008. Mr. Jiang served as the head of finance for Tiens Biotech Group, Inc., a company traded on
American Stock Exchange (AMEX:TBV), from September 2005 until July 2008. From July 2003 to August
2005, he served as a consultant (diplomat) in the Economic and Commercial Representation of China
in Tanzania, the Economic Section of the Chinese Embassy in Tanzania, and was mainly responsible
for providing commercial and financial consultation to Chinese companies conducting business in
Tanzania. He is a registered member of the Association of Corporate Treasurers (ACT), Great
Britain since 2006, a registered member of the Association of Chartered Certified Accountants
(ACCA), Great Britain since 2004, and a registered member of the Chinese Institute of Certified
Public Accountants (CICPA), Peoples Republic of China since 2001.
Mr. Rick Wenjun Xiao
has served as our vice president and secretary since his appointment on
May 20, 2009. Mr. Xiao has previously served as our investor relations officer and assistant to
the Chairman for nearly seven years. He is a member of the Accounting Society of Hubei and a
member of Translation Association of Huizhou.
Mr. Ze Yun Mu
has served as a non-executive director since September 15, 2003. Mr. Mu had
also served since 1998 as the external affairs director for Huizhou Wei Guo Machinery Factory and
served as a technician for them from 1990 to 1998.
Dr. Edward Tsai
has served as a non-executive director since December 2007. Dr. Tsai is the
chairman of Paradigm Venture Partners L.L.C. since August 2000, a business engaged in venture
capital funds management. From February 1997 to February 2000, he served as president of Allianz
President General Insurance Co. Dr. Tsai was
67
president and chief executive officer of President Investment Trust Corp. from January 1994 to
February 1997 engaged in mutual funds management. He was an attorney-at-law with Baker & McKenzie
from October 1989 to January 1994 and with Diepenbrock, Wolff, Plant & Hannagen from August 1988
to October 1989. Dr. Tsai received his J.D. degree from Santa Clara University in 1988, his LL.M.
degree from Tulane University in 1983, his LL.B.
degree from Chinese Culture University in 1979 and the Executive Program of Business
Management from National Cheng-Chi University in 1998.
Mr. Yi Hong Zhang
has served as a non-executive director since December 2004. Since 2004, he
has served as senior advisor and independent director of Guangzhou Hualin Enterprise Group. From
2001 through 2003, Mr. Zhang was the standing deputy director of the leadership panel for technical
assessment under the Guangdong Science and Technology Institute. From 2000 to 2001, he served as
chairman and general manager of Guangdong Zhongping Yueke Appraisal Co., Ltd. From 1994 to 1999,
Mr. Zhang served as head of the Guangdong Science and Technology Appraisal Center.
Mr. Zhi Min Guo
was appointed to serve as a non-executive director effective June 7, 2010.
From January 2009 to March 2010, Mr. Guo served as Vice President of Mining Operations and Director
of Investments at Shanghai Fosun High Technology (Group) Co., Ltd. (Fosun), a Chinese
conglomerate with a mining division spanning iron ore, steel, coking coal and gold. Fosuns holding
company is listed on the Hong Kong Stock Exchange (HKSE). From January 2008 to December 2008, he
served as Vice General Manager at Shanghai Gangtai Mining Co., Ltd. From August 2006 to December
2007, he was Vice General Manager at Zijin International (Beijing) Mining Co., Ltd., a subsidiary
of Zijin Mining Group Co., Ltd. (Zijin Mining) that is dually listed on the HKSE and the Shanghai
Stock Exchange. From January 2007 to December 2007, he also served as chairman of Zijin Minings
Shanxi subsidiary and Rushan subsidiary in Shandong. From January 2006 to August 2006, he served as
Standing Vice General Manager of Longkou Jintai Mining Co., Ltd. affiliated with Zijin Mining. From
July 1986 to December 2005, Mr. Guo served the Gold Detachment of the Chinese Peoples Armed Police
Forces from the beginning to senior positions.
B. COMPENSATION.
The aggregate compensation which we paid to all of our directors and executive officers as a
group with respect to our fiscal year ended December 31, 2009 on an accrual basis, for services in
all capacities, was Rmb2,468,112 (US$361,580). During the fiscal year ended December 31, 2009, we
contributed an aggregate amount of Rmb30,000 (US$4,395) toward the pension plans of our directors
and executive officers.
We have not entered into an employment agreement with Mr. Rui Lin Wu. Currently, Mr. Wu
serves as our chairman and chief executive officer at a director fee of Rmb223,560 (US$32,752) and
a salary of Rmb0 (US$ 0) for 2009. Mr. Wus remuneration package includes benefits with respect to
a motor car.
C. BOARD PRACTICES.
Each of our current directors (other than Zhi Min Guo) was elected at our last annual meeting
of shareholders held on December 18, 2009 to serve a one-year term or until their successor is
elected and qualified.
There are no directors service contracts with us or any of our subsidiaries providing for
benefits upon termination of employment.
Our board of directors has the responsibility for establishing broad corporate policies and
for our overall performance, although it is not involved in day-to-day operating details. The
board meets regularly throughout the year, including the annual organization meeting following the
annual meeting of shareholders, to review significant developments affecting us and to act upon
matters requiring board approval. It also holds special meetings as required from time to time
when important matters arise requiring board action between scheduled meetings.
68
Audit Committee
We have established an audit committee, which currently consists of Dr. Edward Tsai, Ze Yun Mu
and Yi Hong Zhang. Its functions are to:
|
|
|
recommend annually to our board of directors the appointment of our independent
public accountants;
|
|
|
|
|
discuss and review the scope and the fees of the prospective annual audit and review
the results with the independent public accountants;
|
|
|
|
|
review and approve non-audit services of the independent public accountants;
|
|
|
|
|
review compliance with our existing accounting and financial policies;
|
|
|
|
|
review the adequacy of our financial organization; and
|
|
|
|
|
review our managements procedures and policies relative to the adequacy of our
internal accounting controls and compliance with U.S. federal and state laws relating
to financial reporting.
|
Nominating Committee
We have established a nominating committee, which currently consists of Dr. Edward Tsai, Ze
Yun Mu and Yi Hong Zhang. Its purpose and functions are to:
|
|
|
assess the size and composition of the board of directors in light of our operating
requirements and existing social attitudes and trends;
|
|
|
|
|
develop membership qualifications for the board of directors and all board
committees;
|
|
|
|
|
monitor compliance with board of director and board committee membership criteria;
|
|
|
|
|
review and recommend directors for continued service as required based on our
evolving needs;
|
|
|
|
|
coordinate and assist management and the board of directors in recruiting new
members to the board of directors; and
|
|
|
|
|
investigate suggestions for candidates for membership on the board of directors and
recommend prospective directors, as required, to provide an appropriate balance of
knowledge, experience and capability on the board of directors, including stockholder
nominations for the board of directors.
|
Compensation Committee
We have established a compensation committee, which currently consists of Dr. Edward Tsai, Ze
Yun Mu and Yi Hong Zhang. Its purpose and functions are to:
|
|
|
review and approve corporate goals and objectives relevant to the compensation of
the chief executive officer and other executive officers;
|
|
|
|
|
evaluate the chief executive officers performance in light of such goals and
objectives at least annually and communicate the results to the chief executive officer
and the board of directors;
|
|
|
|
|
set the chief executive officers compensation levels based on the foregoing
evaluation (including annual salary, bonus, stock options and other direct and indirect
benefits), with ratification by the independent directors of the full board of
directors; and
|
|
|
|
|
set the other executive officers compensation levels (including annual salary,
bonus, stock options and other direct and indirect benefits).
|
Nasdaq Requirements
Our common shares are currently listed on the Nasdaq Global Market and, for so long as our
securities continue to be listed, we will remain subject to the rules and regulations established
by Nasdaq as being applicable to listed companies. Nasdaq has adopted its Rule 5600 Series to
impose various corporate governance requirements on listed securities. Rule 5615 provides that
foreign private issuers such as our company are required to comply with certain specific
requirements of the Rule 5600 Series, but, as to the balance of the Rule 5600 Series, foreign
private issuers are not required to comply if the laws of their home country do not otherwise
require compliance.
69
We currently comply with the specifically mandated provisions of the Rule 5600 Series. In
addition, we have elected to voluntarily comply with certain other requirements of the Rule 5600
Series, notwithstanding that our home country does not mandate compliance; although we may in the
future determine to cease voluntary compliance with those provisions of the Rule 5600 Series.
However, we have determined not to comply with the following provisions of the Rule 5600 Series
since the laws of the British Virgin Islands do not require compliance:
|
|
|
our independent directors do not hold regularly scheduled meetings in executive
session (Rule 5605(b)(2));
|
|
|
|
|
the compensation of our executive officers is not determined by an independent
committee of the board or by the independent members of the board of directors, and our
CEO may be present and participate in the deliberations concerning his compensation
(Rule 5605(d));
|
|
|
|
|
related party transactions are not required to be reviewed or approved by our audit
committee or other independent body of the board of directors (Rule 5630); and
|
|
|
|
|
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 (Rule 5635).
|
We may in the future determine to voluntarily comply with one or more of the foregoing provisions
of the Rule 5600 Series.
D. EMPLOYEES
.
As of December 31, 2009 and giving effect to the staff of CECT and Haozhou, our indirectly
majority-owned subsidiaries, we had a total of 775 full time employees, of which 11 are key
management staff. In CECT, 42 are engaged in sales and marketing, 47 are engaged in finance and
administration, 378 are engaged in production and 133 are engaged in research and development. In
Haozhou, 27 are engaged in finance and administration, 137 are engaged in milling of molybdenum
concentrate and the mining operation is outsourced to third parties contractors. None of our
employees is represented by a labor union and we believe that our working relationship with our
employees is good.
E. SHARE OWNERSHIP.
The following table sets forth certain information regarding the beneficial ownership of our
shares of common stock as of June 30, 2010 by:
|
|
|
each person who is known by us to own beneficially more than 5% of our outstanding
common stock;
|
|
|
|
|
each of our current executive officers and directors; and
|
|
|
|
|
all current directors and executive officers as a group.
|
As of June 30, 2010, we had 92,093,426 shares of our common stock issued and outstanding.
This information gives effect to securities deemed outstanding pursuant to Rule 13d-3(d)(l)
under the Securities Exchange Act of 1934, as amended. The address for each person named below is
c/o Qiao Xing Universal Resources, Inc., Qiao Xing Science Industrial Park, Tang Quan, Huizhou
City, Guangdong, Peoples Republic of China 516023.
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
Percent
|
Name of Beneficial Holder
|
|
Shares Beneficially Owned
|
Wu Holdings Limited
|
|
|
6,819,000
|
(1)
|
|
|
7.4
|
|
Rui Lin Wu
|
|
|
39,819,000
|
(1)
|
|
|
43.2
|
|
Zhi Yang Wu
|
|
|
0
|
|
|
|
0
|
|
Aijun Jiang
|
|
|
0
|
|
|
|
0
|
|
Rick Wenjun Xiao
|
|
|
0
|
|
|
|
0
|
|
70
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
Percent
|
Name of Beneficial Holder
|
|
Shares Beneficially Owned
|
Ze Yun Mu
|
|
|
0
|
|
|
|
0
|
|
Edward Tsai
|
|
|
0
|
|
|
|
0
|
|
Yi Hong Zhang
|
|
|
0
|
|
|
|
0
|
|
Zhi Min Guo
|
|
|
0
|
|
|
|
0
|
|
All directors and executive officers as a group (8 persons)
|
|
|
39,819,000
|
|
|
|
43.2
|
|
|
|
|
(1)
|
|
Wu Holdings Limited is a British Virgin Islands corporation which is wholly owned by the Qiao
Xing Trust. The Qiao Xing Trust is a Cook Islands trust which was formed for the primary
benefit of Zhi Jian Wu Li, the youngest son of Rui Lin Wu, our chairman. The 6,819,000 shares
of common stock owned of record and beneficially by Wu Holdings Limited may be deemed to also
be beneficially owned by Rui Lin Wu (within the meaning of Rule 13d-3 under the Securities
Exchange Act of 1934, as amended) since he may be deemed to have and/or share the power to
direct the voting and disposition of such shares.
|
Other Options and Warrants Outstanding
As of June 30, 2010, the following options and warrants to purchase shares of our common stock
were outstanding:
|
|
|
warrants to purchase an aggregate of 514,822 shares of common stock at US$14.30 per
share at any time until October 31, 2010 which we granted to two accredited investors
and the placement agent in October 2006 in connection with the sale of 2,000,000 shares
of our common stock at US$12.00 per share (October 2006 SPA Warrants)
|
|
|
|
|
warrants to purchase an aggregate of 545,455 shares of common stock at US$14.30 per
share at any time until October 31, 2011 which we granted to two accredited investors
and the placement agent in October 2006 in connection with the sale of US$26,000,000 of
our senior convertible notes (October 2006 CB Warrants)
|
|
|
|
|
warrants to purchase an aggregate of 736,016 shares of common stock at US$10.19 per
share at any time until August 17, 2012 which we granted to two accredited investors
and the placement agent in August 2007 in connection with the sale of US$25,000,000 of
our senior convertible notes (August 2007 CB Warrants)
|
Each of the foregoing warrants contains provisions for the adjustment of exercise price and
number of warrant shares in the event of Dilutive Issuances as defined therein.
Accordingly, the number of warrants and the exercise price of the following warrants have been
adjusted pursuant to the Dilutive Issuances provisions thereof as follows:
1.
|
|
October 2006 SPA Warrants 4,243,202 warrants at US$1.735 per warrant
|
2.
|
|
October 2006 CB Warrants 4,495,681 warrants at US$1.735 per warrant
|
3.
|
|
August 2007 CB Warrants 4,322,768 warrants at US$1.735 per warrant
|
71
ITEM 7.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS.
Please see Item 6.E. for share ownership information regarding our major shareholders. Our
major shareholders do not have different voting rights.
We do not have available information as to the portion of our common stock held in the host
country and the number of record holders in the host country.
As
of December 31, 2009, we had 72 record holders of our common stock. Of the 82,327,993
shares outstanding as of December 31, 2009, 35,439,212 shares were held by CEDE & Co.
To the extent known to us, we are not directly or indirectly owned or controlled by another
corporation, by any foreign government or by any other natural or legal persons severally or
jointly.
To our knowledge, there are no arrangements the operation of which may at a subsequent date
result in a change in control of our company.
B. RELATED PARTY TRANSACTIONS.
Name and relationship of related parties:
|
|
|
Name of related parties
|
|
Existing relationship with the Company
|
Mr. Zhi Jian Wu Li
|
|
Major shareholder
|
Mr. Rui Lin Wu
|
|
Director and father of Mr. Zhi Jian Wu Li
|
Wu Holdings Limited
|
|
Intermediate holding company
|
Exquisite Jewel Limited
|
|
Minority shareholder
|
Metrolink Holdings Limited
|
|
Minority shareholder
|
Specialist Consultants Limited
|
|
Minority shareholder
|
Qiao Xing Group Limited (QXGL)
|
|
Common
director and minority shareholder of CECT, QXCI and QXPL
|
Huizhou Qiaoxing Famous Science & Technology Co., Ltd. (QFST)
|
|
A company 80% owned by QXGL
|
Summary of related party transactions is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
RMB000
|
|
|
RMB000
|
|
|
RMB000
|
|
|
US$000
|
|
Property management fee
paid and payable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- QXGL
|
|
|
100
|
|
|
|
119
|
|
|
|
55
|
|
|
|
8
|
|
Sales to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- QFST
|
|
|
95,514
|
|
|
|
133,611
|
|
|
|
63,616
|
|
|
|
9,315
|
|
Mr. Rui Lin Wu (held in trust for Mr. Zhi Jian Wu Li), Exquisite Jewel Limited, Metrolink
Holdings Limited and Specialist Consultants Limited, the Companys shareholders provided
shareholders loan to the Company at
72
amount of RMB6,729,000. The loans are denominated in United States Dollar and are non-interest
bearing. The shareholders have agreed not to make demand on the Group for repayment before January
1, 2010. For financial reporting purposes for the year ended December 31, 2009, interest expense of
approximately RMB437,000 (US$64,000) (2008: RMB437,000; 2007: RMB487,000) was imputed based on the
cost of borrowings of approximately 6.5% (2008: 6.5%; 2007: 6.5%) per annum and was recorded as
interest expense and shareholders contribution in the consolidated financial statements.
During each of the periods presented, the Company entered into various loan agreements with
commercial banks in the PRC at terms ranging from three months to one year. The principal amounts
of these short-term loans are repayable at the end of the loan period, while the related interest
expense is payable on a monthly or quarterly basis.
Short-term bank borrowings are secured by the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
|
RMB000
|
|
|
RMB000
|
|
|
US$000
|
|
Pledged of:
|
|
|
|
|
|
|
|
|
|
|
|
|
- Bank deposits of the Group
|
|
|
136,299
|
|
|
|
251,720
|
|
|
|
36,877
|
|
- Bills receivable of the Group
|
|
|
40,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantees provided by:
|
|
|
|
|
|
|
|
|
|
|
|
|
- QXGL
|
|
|
160,000
|
|
|
|
50,000
|
|
|
|
7,321
|
|
- QXGL and directors
|
|
|
360,000
|
|
|
|
290,000
|
|
|
|
42,463
|
|
- Directors
|
|
|
218,500
|
|
|
|
68,500
|
|
|
|
10,030
|
|
Please refer to Item 4.A. Acquisition of China Luxuriance Jade Company, Ltd. and
commencement of diversification into the resources industry for information regarding the
acquisition of China Luxuriance Jade Company, Ltd. by the Company from Rui Lin WU.
C. INTERESTS OF EXPERTS AND COUNSEL.
Not applicable.
73
ITEM 8.
FINANCIAL INFORMATION
A.
|
|
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION.
|
The
Consolidated Financial Statements are filed in this annual report as
Item 18.
Export
sales do not constitute a significant portion of our total sales
volume.
Except as set forth below, there are no legal or arbitration proceedings, including those
relating to bankruptcy, receivership or similar procedures and those involving any third party,
which may have, or have had in the recent past, significant effects on our financial position or
profitability. We are not aware of any material governmental proceedings pending or known to be
contemplated.
In August and September 2007, we were named as a defendant in five putative class actions
filed in United States District Court for the Southern District of New York. Various of the
lawsuits also named Rui Lin Wu, Albert Leung, Zhi Yang Wu, Sonny Kwok Wing Hung, Ze Yun Mu and Yi
Hong Zhang as individual defendants. Grobstein, Horwath & Company LLP was also named as a
defendant in two of the complaints. The allegations in the complaint relate to the Companys
restatement of prior financial statements that was disclosed on July 16, 2007 in the Form 20-F and
in a press release on July 17, 2007. The Company and the individual defendants were named in all
five of the cases pursuant to Section 10(b) of the Securities Exchange Act of 1934, and other
related provisions. The complaints seek unspecified damages, attorney fees, and other unspecified
litigation costs. By Order, dated November 1, 2007, Judge Denise Cote consolidated the five cases
and appointed lead plaintiff and lead plaintiffs counsel. A mediation was held on January 10,
2008 in front of Magistrate Judge Henry Pitman and the parties agreed to settle the case for US$2.4
million. The Companys D&O insurance carrier agreed to contribute US$300,000 to the settlement. A
Stipulation of Settlement was executed on February 25, 2008. The Stipulation of Settlement was
filed with the Court on February 26, 2008 and the preliminary approval order was signed on April 2,
2008.
The final fairness hearing was held on July 11, 2008. At that time, the Court gave final
approval of the settlement of the class action without any admission of wrongdoing by the
defendants in the settlement.
We have no direct business operations, other than the ownership of our subsidiaries. While we
have no current intention of paying dividends, should we decide in the future to do so, our ability
to pay dividends and meet other obligations depends upon the receipt of dividends or other payments
from our operating subsidiaries and other
holdings and investments. In addition, our operating subsidiaries may be subject to
restrictions on their ability to make distributions to us, including as a result of restrictive
covenants in loan agreements, restrictions on the conversion of local currency into U.S. dollars or
other hard currency and other regulatory restrictions.
B. SIGNIFICANT CHANGES.
Except as otherwise disclosed herein, we do not believe that any significant change has
occurred since the date of the annual financial statements included in this annual report.
74
ITEM 9.
THE OFFER AND LISTING
A. OFFER AND LISTING DETAILS.
Our common stock is listed and quoted for trading on The Nasdaq Global Market under the symbol
XING. The following table sets forth, during the periods indicated, the high and low last sale
prices for the common stock as reported by Nasdaq:
|
|
|
|
|
|
|
|
|
Period
|
|
High
|
|
Low
|
Year ended December 31, 2005
|
|
US$
|
8.50
|
|
|
US$
|
5.04
|
|
Year ended December 31, 2006
|
|
US$
|
17.09
|
|
|
US$
|
6.49
|
|
Year ended December 31, 2007
|
|
US$
|
19.56
|
|
|
US$
|
7.16
|
|
Year ended December 31, 2008
|
|
US$
|
8.11
|
|
|
US$
|
1.44
|
|
Year ended December 31, 2009
|
|
US$
|
2.46
|
|
|
US$
|
0.93
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31, 2008
|
|
US$
|
8.11
|
|
|
US$
|
5.18
|
|
Quarter ended June 30, 2008
|
|
US$
|
7.52
|
|
|
US$
|
4.39
|
|
Quarter ended September 30, 2008
|
|
US$
|
5.44
|
|
|
US$
|
2.35
|
|
Quarter ended December 31, 2008
|
|
US$
|
2.63
|
|
|
US$
|
1.44
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31, 2009
|
|
US$
|
2.12
|
|
|
US$
|
0.93
|
|
Quarter ended June 30, 2009
|
|
US$
|
2.46
|
|
|
US$
|
1.18
|
|
Quarter ended September 30, 2009
|
|
US$
|
2.35
|
|
|
US$
|
1.61
|
|
Quarter ended December 31, 2009
|
|
US$
|
2.42
|
|
|
US$
|
1.81
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31, 2010
|
|
US$
|
2.73
|
|
|
US$
|
1.73
|
|
Quarter ended June 30, 2010
|
|
US$
|
1.93
|
|
|
US$
|
1.40
|
|
|
|
|
|
|
|
|
|
|
Month ended December 31, 2009
|
|
US$
|
2.42
|
|
|
US$
|
1.97
|
|
Month ended January 31, 2010
|
|
US$
|
2.73
|
|
|
US$
|
2.05
|
|
Month ended February 28, 2010
|
|
US$
|
2.03
|
|
|
US$
|
1.73
|
|
Month ended March 31, 2010
|
|
US$
|
2.00
|
|
|
US$
|
1.86
|
|
Month ended April 30, 2010
|
|
US$
|
1.93
|
|
|
US$
|
1.70
|
|
Month ended May 31, 2010
|
|
US$
|
1.72
|
|
|
US$
|
1.45
|
|
Month ended June 30, 2010
|
|
US$
|
1.73
|
|
|
US$
|
1.40
|
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B. PLAN OF DISTRIBUTION.
Not applicable.
C. MARKETS.
Our common stock is listed and quoted for trading on The Nasdaq Global Market System (formerly
the Nasdaq National Market System) since February 16, 1999.
D. SELLING SHAREHOLDERS.
Not applicable.
75
E.
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DILUTION.
|
|
|
|
Not applicable.
|
|
F.
|
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EXPENSES OF THE ISSUE.
|
|
|
|
Not applicable.
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ITEM 10.
ADDITIONAL INFORMATION
A.
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SHARE CAPITAL.
|
|
|
|
Not applicable.
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B.
|
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MEMORANDUM AND ARTICLES OF ASSOCIATION.
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Corporate Powers
. We have been registered in the British Virgin Islands since
December 6, 1994, under British Virgin Islands International Business Companies number 135241.
Clause 4 of our Memorandum of Association states that the objects for which we are established are
to engage in any businesses which are not prohibited by law in force in the British Virgin Islands.
Directors
. A director who is materially interested in any transaction with us shall
declare the material facts of and nature of his interest at the meeting of the Board of Directors.
A director may vote or be counted as the quorum on any resolution of the Board in respect of any
transaction in which he is materially interested. With the prior or subsequent approval by a
resolution of members, the directors may, by a resolution of directors, fix the emoluments of
directors with respect to services to be rendered in any capacity to us. The directors may, by a
resolution of directors, exercise all the powers of the Company to borrow money. There is no age
limit requirement for retirement or non-retirement of directors. A director shall not require a
share qualification.
Share Rights, Preferences and Restrictions
. Our authorized share capital consists of
200 million shares of par value US$0.001 per share. All dividends unclaimed for three years after
having been declared may be forfeited by resolution of the directors for our benefit. All shares
vote as one class and each whole share has one vote. We may redeem any of our own shares for such
fair value as we by a resolution of directors determine. All shares have the same rights with
regard to dividends and distributions upon our liquidation.
Changing Share Rights
. The rights of each class and series of shares that we are
authorized to issue shall be fixed by the resolution of directors. If the authorized capital is
divided into different classes, the rights attached to any class may be varied with the consent in
writing of the holders of not less than three-fourths of the issued shares of that class and of the
holders of not less than three-fourths of the issued shares of any other class which may be
affected by such variation.
Shareholder Meetings
. The directors may convene meetings of our members at such times
and in such manner and places as the directors consider necessary or desirable. The directors
shall convene such a meeting upon the written request of members holding 10 percent or more of our
outstanding voting shares. At least seven days notice of the meeting shall be given to the
members whose name appears on the share register.
Restrictions on Rights to Own Securities
. There are no limitations on the rights to
own our securities.
Change in Control Provisions
. There are no provisions of our Memorandum of
Association and Articles of Association that would have an effect of delaying, deferring or
preventing a change in our control and that would have operated only with respect to a merger,
acquisition or corporate restructuring involving us.
Disclosure of Share Ownership
. There are no provisions governing the ownership
threshold above which shareholder ownership must be disclosed.
76
Applicable Law
. Under the laws of most jurisdictions in the US, 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. BVI law protecting
the interests of minority shareholders may not be as protective in all circumstances as the law
protecting minority shareholders in US jurisdictions.
While BVI law does permit a shareholder of a BVI company to sue its directors derivatively,
that is, in the name of and for the benefit of our company and to sue a company and its directors
for his benefit and for the benefit of others similarly situated, the circumstances in which any
such action may be brought, and the procedures and defenses that may be available in respect of any
such action, may result in the rights of shareholders of a BVI company being more limited than
those of shareholders of a company organized in the US.
Our directors have the power to take certain actions without shareholder approval, including
an amendment of our Memorandum of Association or Articles of Association or an increase or
reduction in our authorized capital, which would require shareholder approval under the laws of
most US jurisdictions. In addition, the directors of a BVI corporation, subject in certain cases
to court approval but without shareholder approval, may, among other things, implement a
reorganization, certain mergers or consolidations, the sale, transfer, exchange or disposition of
any assets, property, part of the business, or securities of the corporation, or any combination,
if they determine it is in the best interests of the corporation, its creditors, or its
shareholders. Our ability to amend our Memorandum of Association and Articles of Association
without shareholder approval could have the effect of delaying, deterring or preventing a change in
our control without any further action by the shareholders, including a tender offer to purchase
our common stock at a premium over then current market prices.
The International Business Companies Act of the British Virgin Islands permits the creation in
our Memorandum and Articles of Association of staggered terms of directors, cumulative voting,
shareholder approval of corporate matters by written consent, and the issuance of preferred shares.
Currently, our Memorandum and Articles of Association only provide for shareholder approval of
corporate matters by written consent, but not for staggered terms of directors, cumulative voting
or the issuance of preferred shares.
As in most US jurisdictions, the board of directors of a BVI corporation is charged with the
management of the affairs of the corporation. In most US jurisdictions, directors owe a fiduciary
duty to the corporation and its shareholders, including a duty of care, under which directors must
properly apprise themselves of all reasonably available information, and a duty of loyalty, under
which they must protect the interests of the corporation and refrain from conduct that injures the
corporation or its shareholders or that deprives the corporation or its shareholders of any profit
or advantage. Many US jurisdictions have enacted various statutory provisions which permit the
monetary liability of directors to be eliminated or limited. Under BVI law, liability of a
corporate director to the corporation is primarily limited to cases of willful malfeasance in the
performance of his duties or to cases where the director has not acted honestly and in good faith
and with a view to the best interests of the corporation. However, under our Articles of
Association, we are authorized to indemnify any director or officer who is made or threatened to be
made a party to a legal or administrative proceeding by virtue of being one of our directors or
officers, provided such person acted honestly and in good faith and with a view to our best
interests and, in the case of a criminal proceeding, such person had no reasonable cause to believe
that his conduct was unlawful. Our Articles of Association also enable us to indemnify any
director or officer who was successful in such a proceeding against expense and judgments, fines
and amounts paid in settlement and reasonably incurred in connection with the proceeding.
The above description of certain differences between BVI and US corporate laws is only a
summary and does not purport to be complete or to address every applicable aspect of such laws.
However, we believe that all material differences are disclosed above.
Changes in Capital
. Requirements to effect changes in capital are not more stringent
than is required by law.
77
C. MATERIAL CONTRACTS.
Except for (i) the purchase of US$30,000,000 aggregate principal amount of outstanding
convertible notes of QX Mobile pursuant to a Sale and Purchase Agreement dated March 31, 2008 and
(ii) the agreement dated March 24, 2009 relating to our acquisition of China Luxuriance Jade
Company, Ltd, all as described in Item 4. Information on the Company, we did not enter into any
other material contracts for the years ended December 31, 2008 and 2009.
D. EXCHANGE CONTROLS.
There are no exchange control restrictions in China on the repatriation of dividends by our
subsidiaries. In addition, there are no material British Virgin Islands laws that impose foreign
exchange controls on us or that affect the payment of dividends, interest or other payments to
nonresident holders of our capital stock. British Virgin Islands law and our Memorandum of
Association and Articles of Association impose no limitations on the right of nonresident or
foreign owners to hold or vote our common stock.
E. TAXATION.
The following is a summary of anticipated material U.S. federal income and British Virgin
Islands tax consequences of an investment in our common stock. The summary does not deal with all
possible tax consequences relating to an investment in our common stock and does not purport to
deal with the tax consequences applicable to all categories of investors, some of which, such as
dealers in securities, insurance companies and tax-exempt entities, may be subject to special
rules. In particular, the discussion does not address the tax consequences under state, local and
other non-U.S. and non-British Virgin Islands tax laws. Accordingly, each prospective investor
should consult its own tax advisor regarding the particular tax consequences to it of an investment
in the common stock. The discussion below is based upon laws and relevant interpretations in
effect as of the date of this annual report, all of which are subject to change.
United States Federal Income Taxation
The following discussion addresses only the material U.S. federal income tax consequences to a
U.S. person, defined as a U.S. citizen or resident, a U.S. corporation, or an estate or trust
subject to U.S. federal income tax on all of its income regardless of source, making an investment
in the common stock. For taxable years beginning after December 31, 1996, a trust will be a U.S.
person only if:
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a court within the United States is able to exercise primary supervision over its
administration; and
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|
|
one or more United States persons have the authority to control all of its
substantial decisions.
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In addition, the following discussion does not address the tax consequences to a person who
holds or will hold, directly or indirectly, 10% or more of our common stock, which we refer to as a
10% Shareholder. Non-U.S. persons and 10% Shareholders are advised to consult their own tax
advisors regarding the tax considerations incident to an investment in our common stock.
A U.S. investor receiving a distribution of our common stock will be required to include such
distribution in gross income as a taxable dividend, to the extent of our current or accumulated
earnings and profits as determined under U.S. federal income tax principles. Any distributions in
excess of our earnings and profits will first be treated, for U.S. federal income tax purposes, as
a nontaxable return of capital, to the extent of the U.S. investors adjusted tax basis in our
common stock, and then as gain from the sale or exchange of a capital asset, provided that our
common stock constitutes a capital asset in the hands of the U.S. investor. U.S. corporate
shareholders will not be entitled to any deduction for distributions received as dividends on our
common stock.
Gain or loss on the sale or exchange of our common stock will be treated as capital gain or
loss if our common stock is held as a capital asset by the U.S. investor. Such capital gain or
loss will be long-term capital gain or loss if the U.S. investor has held our common stock for more
than one year at the time of the sale or exchange.
78
A holder of common stock may be subject to backup withholding at the rate of 31% with
respect to dividends paid on our common stock if the dividends are paid by a paying agent, broker
or other intermediary in the United States or by a U.S. broker or certain United States-related
brokers to the holder outside the United States. In addition, the proceeds of the sale, exchange
or redemption of common stock may be subject to backup withholding, if such proceeds are paid by a
paying agent, broker or other intermediary in the United States.
Backup withholding may be avoided by the holder of common stock if such holder:
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is a corporation or comes within other exempt categories; or
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|
|
|
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provides a correct taxpayer identification number, certifies that such holder is not
subject to backup withholding and otherwise complies with the backup withholding rules.
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In addition, holders of common stock who are not U.S. persons are generally exempt from backup
withholding, although they may be required to comply with certification and identification
procedures in order to prove their exemption.
Any amounts withheld under the backup withholding rules from a payment to a holder will be
refunded or credited against the holders U.S. federal income tax liability, if any, provided that
amount withheld is claimed as federal taxes withheld on the holders U.S. federal income tax return
relating to the year in which the backup withholding occurred. A holder who is not otherwise
required to file a U.S. income tax return must generally file a claim for refund or, in the case of
non-U.S. holders, an income tax return in order to claim refunds of withheld amounts.
British Virgin Islands Taxation
Under the International Business Companies Act of the British Virgin Islands as currently in
effect, a holder of common stock who is not a resident of BVI is exempt from BVI income tax on
dividends paid with respect to the common stock and all holders of common stock are not liable for
BVI income tax on gains realized during that year on sale or disposal of such shares; BVI does not
impose a withholding tax on dividends paid by a company incorporated under the International
Business Companies Act.
There are no capital gains, gift or inheritance taxes levied by BVI on companies incorporated
under the International Business Companies Act. In addition, the common stock is not subject to
transfer taxes, stamp duties or similar charges.
There is no income tax treaty or convention currently in effect between the United States and
the British Virgin Islands.
F. DIVIDENDS AND PAYING AGENTS.
Not applicable.
G. STATEMENT BY EXPERTS.
Not applicable.
H. DOCUMENTS ON DISPLAY.
The documents concerning our company which are referred to in this annual report may be
inspected at our principal executive offices at Qiao Xing Science Industrial Park, Tang Quan,
Huizhou City, Guangdong, Peoples Republic of China 516023.
79
I. SUBSIDIARY INFORMATION.
Not applicable.
ITEM 11.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary risk exposures arise from changes in interest rates and foreign currency exchange
rates.
As of December 31, 2009, our aggregate bank loans, at various fixed interest rates, amounted
to Rmb 885 million (US$130 million). Due to the relatively stable interest rate in the PRC, we do
not believe that material risk on interest rates exists.
For the year ended December 31, 2009, about 100% of our products were sold in Mainland China
and the great majority of our sales are denominated in Rmb. Our major expenses are also
denominated in Rmb. Accordingly, we believe that we are not exposed to material risk from changing
foreign currency exchange rates so far as our operating activities are concerned. We have,
however, a contractual obligation denominated in US$ of service of debt relating to the convertible
notes outstanding as at December 31, 2009 in the amount of Rmb232 million (US$34 million). If the
debt is to be serviced by cash in Rmb provided by operating activities, any appreciation of US$
with respect to Rmb will have an adverse effect on our cash flow.
Although we cannot accurately determine the precise effect of inflation on our operations, we
do not believe inflation has had a material effect on our sales or results of operations.
ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART II
ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14.
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
None.
ITEM 15.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this report, our management, with the participation of
our chief executive officer and chief financial officer, has performed an evaluation of the
effectiveness of our disclosure controls and procedures within the meaning of Rules 13a-15(e) of
the Exchange Act.
Based upon that evaluation, our management has concluded that, as of December 31, 2009, 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 Exchange Act was recorded,
processed, summarized and reported, within the time periods specified in the SECs rules and forms.
80
Managements 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
companys 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 evaluation, our
management has concluded that our internal control over financial reporting was effective as of
December 31, 2009.
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.
Based on this assessment, management concluded that our internal control over financial
reporting was not effective as of December 31, 2009.
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 place to provide reasonable assurance that newly issued accounting pronouncements are completely and properly implemented.
In December 2009, a subsidiary of the Company executed a financing transaction which reduced the level of ownership of the Company.
The impact of this reduction in ownership was recorded by the Company as an expense rather than as an equity transaction, as
required by a new accounting pronouncement that went into effect on January 1, 2009. To correct this accounting error, the
Company reduced pretax losses and net expense by Rmb98.1 million (US$14.4 million). An audit adjustment was made to correct the
error and is reflected in the December 31, 2009 financial statements. This error has no impact on the December 31, 2008 or 2007
financial statements.
The effectiveness of our internal control over financial reporting as of December 31, 2009 has
been audited by Crowe Horwath LLP, an independent registered public accounting firm, who has also
audited our consolidated financial statements for the year ended December 31, 2009.
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
There were no changes in our internal controls over financial reporting that occurred during
the period covered by this annual report on Form 20-F that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16A.
AUDIT COMMITTEE FINANCIAL EXPERT
Our Board of Directors has determined that we currently have two audit committee financial
experts serving on our audit committee, both of whom are independent as defined by the Nasdaq
Stock Market listing standards: Dr. Edward Tsai and Yi Hong Zhang.
ITEM 16B.
CODE OF ETHICS
We have adopted a code of ethics that applies to all of our employees, including our chief
executive officer and our chief financial officer.
ITEM 16C.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Audit Committee has selected Crowe Horwath LLP as our independent accountants for the
fiscal year ended December 31, 2009.
81
(a) Audit Fees.
The aggregate fees billed for each of the last two fiscal years for
professional services rendered by our principal accountants for the audit of our annual financial
statements or services that are normally provided by the accountants in connection with statutory
and regulatory filings or engagements for those fiscal years were US$480,000 for the fiscal year
ended December 31, 2008 and US$500,000 for the fiscal year ended December 31, 2009.
(b) Audit Related Fees.
The aggregate fees billed in each of the last two fiscal years
for assurance and related services by our principal accountants that are reasonably related to the
performance of the audit or review of our financial statements and are not reported under paragraph
(a) of this Item were US$40,000 for the fiscal year ended December 31, 2008 and US$10,000 for the
fiscal year ended December 31, 2009.
(c) Tax Fees.
The aggregate fees billed in each of the last two fiscal years for
professional services rendered by our principal accountants for tax compliance, tax advice, and tax
planning were US$0 for the fiscal years ended December 31, 2008 and December 31, 2009.
(d) All Other Fees.
The aggregate fees billed in each of the last two fiscal years for
products and services provided by our principal accountants, other than the services reported in
paragraphs (a) through (c) of this Item, were US$0 for the fiscal years ended December 31, 2008 and
December 31, 2009.
(e) Audit Committee Pre-Approval Policies and Procedures.
To ensure continuing auditor
objectivity and to safeguard the independence of our auditors, our audit committee has determined a
framework for the type and authorization of non-audit services which our auditors may provide. The
audit committee has adopted policies for the pre-approval of specific services that may be provided
by our auditors. The dual objectives of these policies are to ensure that we benefit in a cost
effective manner from the cumulative knowledge and experience of our auditors, while also ensuring
that the auditors maintain the necessary degree of independence and objectivity.
Our audit committee approved the engagement of Crowe Horwath LLP render audit and non-audit
services before they were engaged by us.
All of the services described in each of paragraphs (b) through (d) of this Item were approved
by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
(f).
Not applicable.
ITEM 16D.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.
None.
ITEM 16E.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
ITEM 16F.
CHANGE IN REGISTRANTS CERTIFYING ACCOUNTANT.
Not applicable.
ITEM 16G.
CORPORATE GOVERNANCE.
Our common shares are currently listed on the Nasdaq Global Market and, for so long as our
securities continue to be listed, we will remain subject to the rules and regulations established
by Nasdaq as being applicable to listed companies. Nasdaq has adopted its Rule 5600 Series to
impose various corporate governance requirements on
82
listed securities. Rule 5615 provides that foreign private issuers such as our company are
required to comply with certain specific requirements of the Rule 5600 Series, but, as to the
balance of the Rule 5600 Series, foreign private issuers are not required to comply if the laws of
their home country do not otherwise require compliance.
We currently comply with the specifically mandated provisions of the Rule 5600 Series. In
addition, we have elected to voluntarily comply with certain other requirements of the Rule 5600
Series, notwithstanding that our home country does not mandate compliance; although we may in the
future determine to cease voluntary compliance with those provisions of the Rule 5600 Series.
However, we have determined not to comply with the following provisions of the Rule 5600 Series
since the laws of the British Virgin Islands do not require compliance:
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our independent directors do not hold regularly scheduled meetings in executive
session (Rule 5605(b)(2));
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the compensation of our executive officers is not determined by an independent
committee of the board or by the independent members of the board of directors, and our
CEO may be present and participate in the deliberations concerning his compensation
(Rule 5605(d));
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related party transactions are not required to be reviewed or approved by our audit
committee or other independent body of the board of directors (Rule 5630); and
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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 (Rule 5635).
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We may in the future determine to voluntarily comply with one or more of the foregoing provisions
of the Rule 5600 Series.
83
PART III
ITEM 17.
FINANCIAL STATEMENTS
Not applicable.
ITEM 18.
FINANCIAL STATEMENTS
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Qiao Xing Universal Resources, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Qiao Xing Universal Resources, Inc.
and Subsidiaries as of December 31, 2008 and 2009, and the related consolidated statements of
operations and comprehensive income (loss), cash flows and changes in shareholders equity, for the
years then ended. We also have audited the Qiao Xing Universal Resources, Inc. and Subsidiaries
internal control over financial reporting as of December 31, 2009, based on criteria established in
Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Qiao Xing Universal Resources, Inc. and Subsidiaries management is
responsible for these financial statements, for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Managements Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on these financial statements and an opinion
on the companys internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material misstatement and
whether effective internal control over financial reporting was maintained in all material
respects. 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 audit of internal control over financial reporting included obtaining
an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. 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 opinions.
A companys 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. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of 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 or procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies,
in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the
Companys annual or interim financial statements will not be prevented or detected on a timely basis. The following material
weakness has been identified and included in managements report. The Company did not maintain adequate controls in place to
provide reasonable assurance that newly issued accounting pronouncements are completely and properly implemented.
In December 2009, a subsidiary of the Company executed a financing transaction which reduced the level of ownership of the
Company. The impact of this reduction in ownership was recorded by the Company as an expense rather than as an equity transaction,
as required by a new accounting pronouncement that went into effect on January 1, 2009. To correct this accounting error, the
Company reduced pretax losses and net expense by Rmb98.1 million (US$14.4 million). This material weakness was considered in
determining the nature, timing, and extent of audit tests applied in our audit of the 2009 consolidated financial statements,
and our opinion regarding the effectiveness of the Companys internal control over financial reporting does not affect our
opinion on those consolidated financial statements.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of the Qiao Xing Universal Resources, Inc. and
Subsidiaries as of December 31, 2008 and 2009, and the consolidated results of its operations and
its cash flows for the years then ended in conformity with accounting principles generally accepted
in the United States of America. Also in our opinion, Qiao Xing Universal Resources, Inc. and
Subsidiaries has not maintained, effective internal control over financial
reporting as of December 31, 2009, based on criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
F-2
As discussed in Note 2(m), effective January 1, 2009, the Company adopted new accounting guidance
on reporting of noncontrolling interests which included retrospective application.
As discussed in Note 19, effective January 1, 2009, the Company adopted new accounting guidance
relating to determining whether an instrument (or embedded feature) is indexed to an entitys own
stock.
Our audits also included the translation of Renminbi (RMB) amounts into United States dollar (US$)
amounts and, in our opinion, such translation, where provided, has been made in conformity with the
basis stated in the last paragraph of Note 2(y) to the consolidated financial statements. Such
United States dollar amounts are presented for the convenience of the readers.
Crowe Horwath LLP
Sherman Oaks, California
July 15, 2010
F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Qiao Xing Universal Resources, Inc. and Subsidiaries
We have audited the accompanying consolidated statements of operations and comprehensive income,
cash flows and changes in shareholders equity, for the year ended December 31, 2007 of Qiao Xing
Universal Resources, Inc. and Subsidiaries (the Company). These consolidated financial statements
are the responsibility of the Companys management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated results of the operations and the cash flows of Qiao Xing Universal Resources, Inc. and Subsidiaries for the year ended
December 31, 2007 in conformity with
accounting principles generally accepted in the United States.
Grobstein, Horwath & Company LLP
Sherman Oaks, California
July 8, 2008, except for Note 2(m) which
the date is July 15, 2010
F-4
QIAO XING UNIVERSAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2008 AND 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
|
|
2008
|
|
2009
|
|
|
|
|
|
|
RMB000
|
|
RMB000
|
|
US$000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Note 2(y))
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
2,908,343
|
|
|
|
3,709,503
|
|
|
|
543,445
|
|
Restricted cash
|
|
13
|
|
|
136,299
|
|
|
|
251,720
|
|
|
|
36,877
|
|
Accounts receivable, net
|
|
4
|
|
|
462,282
|
|
|
|
123,082
|
|
|
|
18,032
|
|
Bills receivable
|
|
|
|
|
|
|
43,516
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
5
|
|
|
183,169
|
|
|
|
98,012
|
|
|
|
14,359
|
|
Prepaid expenses
|
|
7
|
|
|
390,490
|
|
|
|
184,339
|
|
|
|
27,006
|
|
Other current assets
|
|
8
|
|
|
595,717
|
|
|
|
37,025
|
|
|
|
5,424
|
|
Due from related parties
|
|
27
|
|
|
25
|
|
|
|
25
|
|
|
|
4
|
|
Deferred income taxes
|
|
20
|
|
|
6,994
|
|
|
|
15,942
|
|
|
|
2,335
|
|
Deferred debt issuance costs, net
|
|
15
|
|
|
34,689
|
|
|
|
|
|
|
|
|
|
Assets held for sale
|
|
6
|
|
|
|
|
|
|
163,000
|
|
|
|
23,880
|
|
Due from discontinued operations
|
|
3(d)
|
|
|
730,610
|
|
|
|
200,000
|
|
|
|
29,300
|
|
Current assets of discontinued operations
|
|
3(d)
|
|
|
1,146,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
|
|
|
|
6,638,233
|
|
|
|
4,782,648
|
|
|
|
700,662
|
|
Property, machinery and equipment, net
|
|
9
|
|
|
167,366
|
|
|
|
170,485
|
|
|
|
24,976
|
|
Proven and probable reserves
|
|
10
|
|
|
|
|
|
|
712,121
|
|
|
|
104,326
|
|
Construction in progress
|
|
|
|
|
|
|
|
|
|
|
86,591
|
|
|
|
12,685
|
|
Land use rights, net
|
|
|
|
|
|
|
35,305
|
|
|
|
|
|
|
|
|
|
Investment at cost
|
|
|
|
|
|
|
7,802
|
|
|
|
5,000
|
|
|
|
733
|
|
Goodwill
|
|
11
|
|
|
82,058
|
|
|
|
82,058
|
|
|
|
12,022
|
|
Value beyond proven and probable reserves
|
|
10
|
|
|
|
|
|
|
67,295
|
|
|
|
9,859
|
|
Other acquired intangible assets, net
|
|
12
|
|
|
22,766
|
|
|
|
4,433
|
|
|
|
649
|
|
Non-current assets of discontinued operations
|
|
3(d)
|
|
|
127,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
|
|
|
|
7,081,088
|
|
|
|
5,910,631
|
|
|
|
865,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term bank borrowings
|
|
13
|
|
|
983,950
|
|
|
|
884,708
|
|
|
|
129,610
|
|
Accounts payable
|
|
|
|
|
|
|
52,047
|
|
|
|
60,750
|
|
|
|
8,900
|
|
Other payables
|
|
|
|
|
|
|
5,917
|
|
|
|
57,238
|
|
|
|
8,385
|
|
Accrued liabilities
|
|
14
|
|
|
62,017
|
|
|
|
40,472
|
|
|
|
5,929
|
|
Deposits received
|
|
|
|
|
|
|
1,310
|
|
|
|
1,310
|
|
|
|
192
|
|
Deferred revenues
|
|
|
|
|
|
|
42,551
|
|
|
|
16,370
|
|
|
|
2,398
|
|
Due to related parties
|
|
27
|
|
|
8,941
|
|
|
|
5,118
|
|
|
|
750
|
|
Taxation payable
|
|
20
|
|
|
38,462
|
|
|
|
15,016
|
|
|
|
2,200
|
|
Embedded derivative liability
|
|
15
|
|
|
127,080
|
|
|
|
63,096
|
|
|
|
9,244
|
|
Convertible notes
|
|
15
|
|
|
383,596
|
|
|
|
233,716
|
|
|
|
34,240
|
|
Assets retirement obligation
|
|
16
|
|
|
|
|
|
|
4,013
|
|
|
|
588
|
|
Current liabilities of discontinued operations
|
|
|
|
|
|
|
1,380,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
|
|
|
|
3,086,163
|
|
|
|
1,381,807
|
|
|
|
202,436
|
|
Shareholders loans
|
|
17
|
|
|
6,729
|
|
|
|
6,732
|
|
|
|
986
|
|
Warrants liabilities
|
|
19
|
|
|
|
|
|
|
148,921
|
|
|
|
21,817
|
|
Deferred income taxes
|
|
20
|
|
|
320
|
|
|
|
175,281
|
|
|
|
25,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
|
|
|
|
3,093,212
|
|
|
|
1,712,741
|
|
|
|
250,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
XING equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, par value RMB0.008 (equivalent
of US$0.001); authorized 50,000,000 shares as of December 31, 2008
and 200,000,000
shares as of December 31, 2009; outstanding and fully paid - 30,948,836
as of December 31, 2008 and 82,327,993 as of
December 31,2009
|
|
18
|
|
|
251
|
|
|
|
602
|
|
|
|
88
|
|
Additional paid-in capital
|
|
|
|
|
|
|
1,867,512
|
|
|
|
2,404,998
|
|
|
|
352,334
|
|
Retained earnings
|
|
|
|
|
|
|
1,189,190
|
|
|
|
796,736
|
|
|
|
116,722
|
|
Cumulative translation adjustments
|
|
|
|
|
|
|
(75,623
|
)
|
|
|
(160,532
|
)
|
|
|
(23,518
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total XING equity
|
|
|
|
|
|
|
2,981,330
|
|
|
|
3,041,804
|
|
|
|
445,626
|
|
Noncontrolling interest
|
|
|
|
|
|
|
1,006,546
|
|
|
|
1,156,086
|
|
|
|
169,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
|
|
|
|
3,987,876
|
|
|
|
4,197,890
|
|
|
|
614,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders
equity
|
|
|
|
|
|
|
7,081,088
|
|
|
|
5,910,631
|
|
|
|
865,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-5
QIAO XING UNIVERSAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
RMB000
|
|
|
RMB000
|
|
|
RMB000
|
|
|
US$000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Note 2(y))
|
Net sales
|
|
|
|
|
|
|
3,141,094
|
|
|
|
2,153,873
|
|
|
|
1,826,799
|
|
|
|
267,628
|
|
Cost of goods sold
|
|
|
|
|
|
|
(2,255,844
|
)
|
|
|
(1,287,096
|
)
|
|
|
(1,474,930
|
)
|
|
|
(216,078
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
885,250
|
|
|
|
866,777
|
|
|
|
351,869
|
|
|
|
51,550
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
|
|
|
|
(36,322
|
)
|
|
|
(146,551
|
)
|
|
|
(110,444
|
)
|
|
|
(16,180
|
)
|
General and administrative expenses
|
|
|
|
|
|
|
(86,479
|
)
|
|
|
(59,794
|
)
|
|
|
(114,807
|
)
|
|
|
(16,819
|
)
|
Research and development
|
|
|
|
|
|
|
(18,599
|
)
|
|
|
(29,242
|
)
|
|
|
(36,404
|
)
|
|
|
(5,334
|
)
|
Amortization of acquired intangible assets
|
|
12
|
|
|
(32,281
|
)
|
|
|
(11,727
|
)
|
|
|
(4,733
|
)
|
|
|
(693
|
)
|
Impairment of assets held for sale
|
|
6
|
|
|
|
|
|
|
|
|
|
|
(5,957
|
)
|
|
|
(873
|
)
|
Impairment of acquired intangible assets
|
|
12
|
|
|
|
|
|
|
(26,235
|
)
|
|
|
(13,600
|
)
|
|
|
(1,992
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
|
|
|
|
711,569
|
|
|
|
593,228
|
|
|
|
65,924
|
|
|
|
9,659
|
|
Interest income
|
|
|
|
|
|
|
28,441
|
|
|
|
54,821
|
|
|
|
28,641
|
|
|
|
4,196
|
|
Exchange (loss) gain, net
|
|
|
|
|
|
|
15,168
|
|
|
|
(16,971
|
)
|
|
|
406
|
|
|
|
60
|
|
Interest expense
|
|
29
|
|
|
(240,498
|
)
|
|
|
(311,710
|
)
|
|
|
(222,804
|
)
|
|
|
(32,641
|
)
|
(Loss) gain on remeasurement of embedded
derivatives
|
|
15
|
|
|
(129,084
|
)
|
|
|
160,036
|
|
|
|
(8,258
|
)
|
|
|
(1,210
|
)
|
Gain on disposal of interests
in subsidiaries
|
|
3
|
|
|
482,614
|
|
|
|
2,269
|
|
|
|
|
|
|
|
|
|
Gain (loss) on issue/repurchase of stocks
by subsidiaries
|
|
3
|
|
|
383,965
|
|
|
|
4,351
|
|
|
|
|
|
|
|
|
|
(Loss) on extinguishment of convertible
notes
|
|
15
|
|
|
(142,090
|
)
|
|
|
(10,634
|
)
|
|
|
(15,261
|
)
|
|
|
(2,236
|
)
|
Provision for litigation settlement
|
|
|
|
|
|
|
(15,319
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of investment at cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,802
|
)
|
|
|
(411
|
)
|
Unrealized gain (loss) on derivatives
|
|
19
|
|
|
|
|
|
|
|
|
|
|
(4,673
|
)
|
|
|
(685
|
)
|
Other income (loss), net
|
|
|
|
|
|
|
6,462
|
|
|
|
(3,700
|
)
|
|
|
166
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before income tax
|
|
|
|
|
|
|
1,101,228
|
|
|
|
471,690
|
|
|
|
(158,661
|
)
|
|
|
(23,244
|
)
|
Provision for income tax
|
|
20
|
|
|
(113,377
|
)
|
|
|
(155,717
|
)
|
|
|
(43,939
|
)
|
|
|
(6,437
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations, net of tax
|
|
|
|
|
|
|
987,851
|
|
|
|
315,973
|
|
|
|
(202,600
|
)
|
|
|
(29,681
|
)
|
Discontinued operations, net of tax
|
|
3(d)
|
|
|
63,033
|
|
|
|
(290,953
|
)
|
|
|
(139,782
|
)
|
|
|
(20,478
|
)
|
Extraordinary items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains on acquisitions of minority
interests, net of nil tax
|
|
3(a)
|
|
|
28,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) for the year
|
|
|
|
|
|
|
1,079,573
|
|
|
|
25,020
|
|
|
|
(342,382
|
)
|
|
|
(50,159
|
)
|
Net (income) loss attributable to the
noncontrolling interest
|
|
|
|
|
|
|
(175,625
|
)
|
|
|
(161,814
|
)
|
|
|
82,486
|
|
|
|
12,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
903,948
|
|
|
|
(136,794
|
)
|
|
|
(259,896
|
)
|
|
|
(38,075
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) -
Translation adjustments
|
|
|
|
|
|
|
(50,106
|
)
|
|
|
(33,815
|
)
|
|
|
(85,883
|
)
|
|
|
(12,582
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
|
|
|
|
|
853,842
|
|
|
|
(170,609
|
)
|
|
|
(345,779
|
)
|
|
|
(50,657
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
22
|
|
RMB
|
22.73
|
|
|
RMB
|
4.98
|
|
|
RMB
|
(1.91
|
)
|
|
US$
|
(0.28
|
)
|
Discontinued operations
|
|
|
|
|
|
RMB
|
1.73
|
|
|
RMB
|
(9.40
|
)
|
|
RMB
|
(2.22
|
)
|
|
US$
|
(0.33
|
)
|
Extraordinary gain
|
|
22
|
|
RMB
|
0.49
|
|
|
RMB
|
|
|
|
RMB
|
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
22
|
|
RMB
|
24.95
|
|
|
RMB
|
(4.42
|
)
|
|
RMB
|
(4.13
|
)
|
|
US$
|
(0.61
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
22
|
|
RMB
|
22.45
|
|
|
RMB
|
3.51
|
|
|
RMB
|
(1.91
|
)
|
|
US$
|
(0.28
|
)
|
Discontinued operations
|
|
|
|
|
|
RMB
|
1.72
|
|
|
RMB
|
(9.40
|
)
|
|
RMB
|
(2.22
|
)
|
|
US$
|
(0.33
|
)
|
Extraordinary gain
|
|
22
|
|
RMB
|
0.48
|
|
|
RMB
|
|
|
|
RMB
|
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
22
|
|
RMB
|
24.65
|
|
|
RMB
|
(5.89
|
)
|
|
RMB
|
(4.13
|
)
|
|
US$
|
(0.61
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares
outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
22
|
|
|
29,836,000
|
|
|
|
30,949,000
|
|
|
|
62,837,000
|
|
|
|
62,837,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
22
|
|
|
30,200,000
|
|
|
|
30,949,000
|
|
|
|
62,837,000
|
|
|
|
62,837,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts attributable to shareholders
|
|
|
|
|
|
RMB000
|
|
|
RMB000
|
|
|
RMB000
|
|
|
US$000
|
|
Income (loss) from continuing
operations, net of taxes
|
|
|
|
|
|
|
678,026
|
|
|
|
154,159
|
|
|
|
(120,114
|
)
|
|
|
(17,597
|
)
|
Discontinued operations, net of taxes
|
|
|
|
|
|
|
51,909
|
|
|
|
(290,953
|
)
|
|
|
(139,782
|
)
|
|
|
(20,478
|
)
|
Extraordinary gain, net of taxes
|
|
|
|
|
|
|
14,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
744,426
|
|
|
|
(136,794
|
)
|
|
|
(259,896
|
)
|
|
|
(38,075
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-6
QIAO XING UNIVERSAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2008
|
|
2009
|
|
|
RMB000
|
|
RMB000
|
|
RMB000
|
|
US$000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Note 2(y))
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
|
987,851
|
|
|
|
315,973
|
|
|
|
(202,600
|
)
|
|
|
(29,681
|
)
|
Adjustments to reconcile net income (loss) to net cash
flows from operating activities -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation of property, machinery and equipment
|
|
|
15,381
|
|
|
|
15,488
|
|
|
|
14,077
|
|
|
|
2,062
|
|
Depletion of proven and probable reserves
|
|
|
|
|
|
|
|
|
|
|
22,034
|
|
|
|
3,228
|
|
Amortization of land use right
|
|
|
4,539
|
|
|
|
803
|
|
|
|
|
|
|
|
|
|
Bad debt expense
|
|
|
2,961
|
|
|
|
232,841
|
|
|
|
12,400
|
|
|
|
1,817
|
|
Amortization of other acquired intangible assets
|
|
|
32,280
|
|
|
|
11,727
|
|
|
|
4,733
|
|
|
|
693
|
|
Stock-based compensation
|
|
|
38,626
|
|
|
|
14,669
|
|
|
|
60,935
|
|
|
|
8,927
|
|
Foreign exchange loss (gain)
|
|
|
(27,447
|
)
|
|
|
5,355
|
|
|
|
(406
|
)
|
|
|
(60
|
)
|
Interest expense on shareholders loans
|
|
|
487
|
|
|
|
437
|
|
|
|
437
|
|
|
|
64
|
|
Amortization of deferred debt issuance costs
|
|
|
37,321
|
|
|
|
24,738
|
|
|
|
21,031
|
|
|
|
3,081
|
|
Accretion of convertible note discounts
|
|
|
140,251
|
|
|
|
188,201
|
|
|
|
137,782
|
|
|
|
20,185
|
|
Loss (gain) on remeasurement of embedded derivatives
|
|
|
129,084
|
|
|
|
(160,036
|
)
|
|
|
8,258
|
|
|
|
1,210
|
|
Loss on extinguishment of convertible debts
|
|
|
142,090
|
|
|
|
10,634
|
|
|
|
15,261
|
|
|
|
2,236
|
|
(Gain) on disposal of interests in subsidiaries
|
|
|
(482,614
|
)
|
|
|
(2,269
|
)
|
|
|
|
|
|
|
|
|
Loss (gain) on issue/repurchse of stocks by subsidiary
|
|
|
(383,965
|
)
|
|
|
(4,351
|
)
|
|
|
|
|
|
|
|
|
Provision for litigation settlement
|
|
|
15,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss (gain) on disposal of property, machinery and
equipment
|
|
|
99
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
Net gain on disposal of land use rights and
construction-in-progress
|
|
|
(4,279
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax
|
|
|
(6,237
|
)
|
|
|
(6,550
|
)
|
|
|
(6,843
|
)
|
|
|
(1,003
|
)
|
Extraordinary gains on acquisitions of noncontrolling
interests
|
|
|
(28,689
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of assets
|
|
|
|
|
|
|
26,235
|
|
|
|
19,557
|
|
|
|
2,865
|
|
Impairment of investment at cost
|
|
|
|
|
|
|
|
|
|
|
2,802
|
|
|
|
410
|
|
Unrealized gain (loss) on derivatives
|
|
|
|
|
|
|
|
|
|
|
4,673
|
|
|
|
685
|
|
Changes in operating assets and liabilities -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
125,369
|
|
|
|
(276,560
|
)
|
|
|
326,800
|
|
|
|
47,876
|
|
Bills receivable
|
|
|
27,635
|
|
|
|
(43,516
|
)
|
|
|
43,516
|
|
|
|
6,375
|
|
Inventories
|
|
|
(12,944
|
)
|
|
|
(5,891
|
)
|
|
|
86,461
|
|
|
|
12,667
|
|
Prepaid expenses
|
|
|
86,977
|
|
|
|
(217,443
|
)
|
|
|
197,586
|
|
|
|
28,947
|
|
Other current assets
|
|
|
561,806
|
|
|
|
55,874
|
|
|
|
454,481
|
|
|
|
66,582
|
|
Accounts payable
|
|
|
(166,240
|
)
|
|
|
(55,944
|
)
|
|
|
8,703
|
|
|
|
1,275
|
|
Other payables
|
|
|
(274,335
|
)
|
|
|
(304,530
|
)
|
|
|
148,864
|
|
|
|
21,809
|
|
Accrued liabilities
|
|
|
19,440
|
|
|
|
(8,101
|
)
|
|
|
(21,849
|
)
|
|
|
(3,201
|
)
|
Deposits received
|
|
|
|
|
|
|
(200
|
)
|
|
|
|
|
|
|
|
|
Deferred revenues
|
|
|
(10,803
|
)
|
|
|
37,965
|
|
|
|
(26,180
|
)
|
|
|
(3,835
|
)
|
Taxation payable
|
|
|
25,509
|
|
|
|
(20,378
|
)
|
|
|
(23,447
|
)
|
|
|
(3,435
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
provided (used) by operating activities- continuing
operations
|
|
|
995,472
|
|
|
|
(164,840
|
)
|
|
|
1,309,066
|
|
|
|
191,779
|
|
Cash
provided (used) by operating activities- discontinued
operations
|
|
|
(40,818
|
)
|
|
|
(58,048
|
)
|
|
|
(436,488
|
)
|
|
|
(63,946
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
provided (used) by operating activities
|
|
|
954,654
|
|
|
|
(222,888
|
)
|
|
|
872,578
|
|
|
|
127,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2008
|
|
2009
|
|
|
RMB000
|
|
RMB000
|
|
RMB000
|
|
US$000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Note 2(y))
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions of property, machinery and equipment
|
|
|
(8,017
|
)
|
|
|
(14,225
|
)
|
|
|
(19,914
|
)
|
|
|
(2,917
|
)
|
Expenditures on construction-in-progress
|
|
|
|
|
|
|
|
|
|
|
(94,347
|
)
|
|
|
(13,822
|
)
|
Net cash flow on disposal of subsidiaries by QXMC
|
|
|
|
|
|
|
(1,162
|
)
|
|
|
8,764
|
|
|
|
1,284
|
|
Deposit received on disposal of land and building
|
|
|
|
|
|
|
|
|
|
|
49,000
|
|
|
|
7,179
|
|
Net cash outflow on acquisition of subsidiary
|
|
|
|
|
|
|
|
|
|
|
(203,404
|
)
|
|
|
(29,799
|
)
|
Net cash outflow from disposal of subsidiaries
|
|
|
|
|
|
|
|
|
|
|
(60,180
|
)
|
|
|
(8,817
|
)
|
Proceeds from disposal of property, machinery and
equipment
|
|
|
209
|
|
|
|
12,900
|
|
|
|
|
|
|
|
|
|
Proceeds from disposal of land use rights and
construction-in-progress
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing advances to a third party
|
|
|
(998,331
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Refund of interest-bearing advances
|
|
|
|
|
|
|
408,658
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in restricted cash
|
|
|
(11,580
|
)
|
|
|
(5,418
|
)
|
|
|
(115,421
|
)
|
|
|
(16,909
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
provided (used) by investing activities-continuing
operations
|
|
|
(1,017,719
|
)
|
|
|
400,753
|
|
|
|
(435,502
|
)
|
|
|
(63,801
|
)
|
Cash
provided (used) by investing activities-discontinued
operations
|
|
|
367,402
|
|
|
|
(60,431
|
)
|
|
|
(162,359
|
)
|
|
|
(23,786
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
provided (used) by investing activities
|
|
|
(650,317
|
)
|
|
|
340,322
|
|
|
|
(597,861
|
)
|
|
|
(87,587
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in short-term borrowings
|
|
|
388,132
|
|
|
|
2,582,231
|
|
|
|
(99,243
|
)
|
|
|
(14,539
|
)
|
Repayment of short-term borrowings
|
|
|
|
|
|
|
(2,577,399
|
)
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of convertible notes (Note 15
(b))
|
|
|
175,088
|
|
|
|
125,722
|
|
|
|
|
|
|
|
|
|
Net proceeds from exercise of options and warrants
|
|
|
30,911
|
|
|
|
|
|
|
|
42,058
|
|
|
|
6,162
|
|
Repayment of convertible notes
|
|
|
|
|
|
|
(171,763
|
)
|
|
|
(163,990
|
)
|
|
|
(24,025
|
)
|
Net proceeds from issuance of common stock by the Company
|
|
|
114,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from IPO of common stock by a subsidiary
|
|
|
1,026,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital contributed by noncontrolling shareholders of a
subsidiary
|
|
|
2,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net advances from related parties
|
|
|
3,495
|
|
|
|
297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
provided (used) by financing activities-continuing
operations
|
|
|
1,740,870
|
|
|
|
(40,912
|
)
|
|
|
(221,175
|
)
|
|
|
(32,402
|
)
|
Cash
provided (used) by financing activities-discontinued
operations
|
|
|
(64,950
|
)
|
|
|
29,355
|
|
|
|
531,233
|
|
|
|
77,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
provided by (used) financing activities
|
|
|
1,675,920
|
|
|
|
(11,557
|
)
|
|
|
310,058
|
|
|
|
45,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of translation adjustments on cash
|
|
|
(43,724
|
)
|
|
|
(21,360
|
)
|
|
|
7,201
|
|
|
|
1,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
1,936,533
|
|
|
|
84,517
|
|
|
|
591,976
|
|
|
|
86,725
|
|
Cash and cash equivalents, beginning of year
|
|
|
1,096,477
|
|
|
|
3,033,010
|
|
|
|
3,117,527
|
|
|
|
456,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
|
3,033,010
|
|
|
|
3,117,527
|
|
|
|
3,709,503
|
|
|
|
543,445
|
|
Less: cash and cash equivalents of discontinued operations
|
|
|
(298,309
|
)
|
|
|
(209,184
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents of continuing operations at end
of year
|
|
|
2,734,701
|
|
|
|
2,908,343
|
|
|
|
3,709,503
|
|
|
|
543,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
|
60,459
|
|
|
|
115,696
|
|
|
|
75,665
|
|
|
|
11,085
|
|
Income tax paid
|
|
|
103,834
|
|
|
|
162,527
|
|
|
|
105,433
|
|
|
|
15,446
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Consideration for acquisition of subsidiary paid in
the form of common stock
|
|
|
|
|
|
|
|
|
|
|
472,982
|
|
|
|
69,200
|
|
- Consideration for extinguishment of convertible notes
liability paid in the form of common stock of a
subsidiary
|
|
|
721,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Stock issuance costs paid in the form of share-based
payment
|
|
|
8,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Subsidiary repurchased ordinary shares through the
issuance of convertible notes
|
|
|
|
|
|
|
338,165
|
|
|
|
|
|
|
|
|
|
- Consideration for extinguishment of convertible notes
liability paid in the form of common stock
|
|
|
|
|
|
|
|
|
|
|
45,967
|
|
|
|
6,734
|
|
- Subsidiary issued ordinary shares on partial conversion
of convertible notes
|
|
|
|
|
|
|
55,054
|
|
|
|
126,650
|
|
|
|
18,555
|
|
- Warrant issuance costs paid in the form of share-based
payment
|
|
|
769
|
|
|
|
2,500
|
|
|
|
|
|
|
|
|
|
- Convertible note issuance costs paid in the form of
share-based payment
|
|
|
9,891
|
|
|
|
31,451
|
|
|
|
|
|
|
|
|
|
Additional supplemental disclosure of cash flow information is set out in Note 26.
The accompanying notes are an integral part of these consolidated financial statements.
F-8
QIAO XING UNIVERSAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income (loss) -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
Additional
|
|
|
|
|
|
|
cumulative
|
|
|
Noncontrol-
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
paid-in
|
|
|
Retained
|
|
|
translation
|
|
|
ling
|
|
|
|
|
|
|
Note
|
|
|
of shares
|
|
|
Amount
|
|
|
capital
|
|
|
earnings
|
|
|
adjustments
|
|
|
interest
|
|
|
Total
|
|
|
|
|
|
|
|
000
|
|
|
RMB000
|
|
|
RMB000
|
|
|
RMB000
|
|
|
RMB000
|
|
|
RMB000
|
|
|
RMB000
|
|
Balance as
of January 1, 2007
|
|
|
|
|
|
|
29,605
|
|
|
|
242
|
|
|
|
1,439,473
|
|
|
|
422,036
|
|
|
|
8,298
|
|
|
|
99,793
|
|
|
|
1,969,842
|
|
Issuance of common stock
|
|
18
|
|
|
1,344
|
|
|
|
9
|
|
|
|
115,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115,384
|
|
Stock issuance costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,032
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,032
|
)
|
Issue of stock purchase
warrants to investors and
external consultants
|
|
19
|
|
|
|
|
|
|
|
|
|
|
32,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,546
|
|
Warrant issuance costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,838
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,838
|
)
|
Share-based compensation
expense
|
|
19
|
|
|
|
|
|
|
|
|
|
|
39,209
|
|
|
|
|
|
|
|
|
|
|
|
12,276
|
|
|
|
51,485
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
903,948
|
|
|
|
|
|
|
|
175,625
|
|
|
|
1,079,573
|
|
Reclassification of
embedded derivative
relating to 4.5% Notes
|
|
15(a)
|
|
|
|
|
|
|
|
|
|
|
89,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89,531
|
|
Beneficial conversion
amount relating to 5.5%
Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,790
|
|
Acquisition and disposal of
equity interest in
subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
797,498
|
|
|
|
797,498
|
|
Shareholders contribution
|
|
17
|
|
|
|
|
|
|
|
|
|
|
487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
487
|
|
Translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50,106
|
)
|
|
|
(8,924
|
)
|
|
|
(59,030
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
2007
|
|
|
|
|
|
|
30,949
|
|
|
|
251
|
|
|
|
1,737,541
|
|
|
|
1,325,984
|
|
|
|
(41,808
|
)
|
|
|
1,076,268
|
|
|
|
4,098,236
|
|
Issue of stock purchase
warrants to investors and
external consultants
|
|
19
|
|
|
|
|
|
|
|
|
|
|
48,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,904
|
|
Warrant issuance costs
|
|
19
|
|
|
|
|
|
|
|
|
|
|
(2,907
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,907
|
)
|
Share-based compensation
expense
|
|
19
|
|
|
|
|
|
|
|
|
|
|
9,604
|
|
|
|
|
|
|
|
|
|
|
|
5,065
|
|
|
|
14,669
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(136,794
|
)
|
|
|
|
|
|
|
161,814
|
|
|
|
25,020
|
|
Beneficial conversion
amount relating to 5.5%
Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73,933
|
|
|
|
|
|
|
|
|
|
|
|
19,853
|
|
|
|
93,786
|
|
Acquisition and disposal of
equity interest in
subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(253,261
|
)
|
|
|
(253,261
|
)
|
Shareholders contribution
|
|
17
|
|
|
|
|
|
|
|
|
|
|
437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
437
|
|
Translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(33,815
|
)
|
|
|
(3,193
|
)
|
|
|
(37,008
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
|
|
|
|
|
30,949
|
|
|
|
251
|
|
|
|
1,867,512
|
|
|
|
1,189,190
|
|
|
|
(75,623
|
)
|
|
|
1,006,546
|
|
|
|
3,987,876
|
|
Cumulative effect of change
of accounting principle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(142,393
|
)
|
|
|
(34,455
|
)
|
|
|
974
|
|
|
|
(4,989
|
)
|
|
|
(180,863
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2009
|
|
|
|
|
|
|
30,949
|
|
|
|
251
|
|
|
|
1,725,119
|
|
|
|
1,154,735
|
|
|
|
(74,649
|
)
|
|
|
1,001,557
|
|
|
|
3,807,013
|
|
Issuance of common stocks
|
|
18
|
|
|
51,379
|
|
|
|
351
|
|
|
|
656,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
657,174
|
|
Share-based compensation
expense
|
|
19
|
|
|
|
|
|
|
|
|
|
|
22,618
|
|
|
|
|
|
|
|
|
|
|
|
12,303
|
|
|
|
34,921
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(259,896
|
)
|
|
|
|
|
|
|
(82,486
|
)
|
|
|
(342,382
|
)
|
Acquisition and disposal of
equity interest in
subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(98,103
|
)
|
|
|
|
|
|
|
224,753
|
|
|
|
126,650
|
|
Shareholders contribution
|
|
17
|
|
|
|
|
|
|
|
|
|
|
438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
438
|
|
Translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(85,883
|
)
|
|
|
(41
|
)
|
|
|
(85,924
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2009
|
|
|
|
|
|
|
82,328
|
|
|
|
602
|
|
|
|
2,404,998
|
|
|
|
796,736
|
|
|
|
(160,532
|
)
|
|
|
1,156,086
|
|
|
|
4,197,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
2009 (in US$000)
|
|
|
|
|
|
|
|
|
|
|
88
|
|
|
|
352,334
|
|
|
|
116,722
|
|
|
|
(23,518
|
)
|
|
|
169,368
|
|
|
|
614,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-9
QIAO XING UNIVERSAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS
Qiao Xing Universal Resources Inc. (the Company) was incorporated in the British Virgin
Islands (the BVI) on December 6, 1994. Its shares were listed on the Nasdaq National Market in
February 1999.
The Company and its subsidiaries (the Group) are principally engaged in (i) the sale of
telecommunication terminals and equipment, including cord and cordless telephone sets, in the
Peoples Republic of China (the PRC); (ii) the production and sale of mobile phones and
accessories in the PRC; and (iii) the production and sale of molybdenum concentrates in the PRC.
Details of the Groups subsidiaries and equity joint ventures are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of equity
|
|
|
|
|
|
|
|
|
interest attributable
|
|
|
|
|
|
|
Place of
|
|
to the Group as of
|
|
|
Name
|
|
Note
|
|
incorporation
|
|
December 31,
|
|
Principal activities
|
|
|
|
|
|
|
2008
|
|
2009
|
|
|
Qiao Xing Mobile Communication Co., Ltd. (QXMC)
|
|
(a)
|
|
BVI
|
|
|
67.6
|
%
|
|
|
61.1
|
%
|
|
Investment holding
|
Qiao Xing Communication Holdings Limited (QXCH)
|
|
(b)
|
|
BVI
|
|
|
100.0
|
%
|
|
|
|
|
|
Investment holding
|
China Luxuriance Jade Company Ltd (CLJC)
|
|
(c)
|
|
BVI
|
|
|
|
|
|
|
100
|
%
|
|
Investment holding
|
CEC Telecom Co., Ltd. (CECT)
|
|
(d)
|
|
PRC
|
|
|
65.3
|
%
|
|
|
59.0
|
%
|
|
Manufacture and sales of mobile phones and accessories
|
Hui Zhou Qiao Xing Communication Industry Limited (QXCI)
|
|
(e)
|
|
PRC
|
|
|
90.0
|
%
|
|
|
|
|
|
Manufacture and sales of mobile phones and indoor phones
|
Hui Zhou Qiao Xing Property Limited (QXPL)
|
|
(f)
|
|
PRC
|
|
|
90.0
|
%
|
|
|
|
|
|
Property and investment holding
|
F-10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of equity
|
|
|
|
|
|
|
|
|
interest attributable
|
|
|
|
|
|
|
Place of
|
|
to the Group as of
|
|
|
Name
|
|
Note
|
|
incorporation
|
|
December 31,
|
|
Principal activities
|
|
|
|
|
|
|
2008
|
|
2009
|
|
|
Chifeng Sanchuan Mining Co., Ltd. (CSMC)
|
|
(g)
|
|
PRC
|
|
|
90.0
|
%
|
|
|
|
|
|
Investment holding
|
Huizhou Taiherui Information Technology Co., Ltd (Taiherui)
|
|
(h)
|
|
PRC
|
|
|
|
|
|
|
100
|
%
|
|
Investment holding
|
Chifeng Zhongtai Mining Company Ltd (Zhongtai)
|
|
(i)
|
|
PRC
|
|
|
|
|
|
|
100
|
%
|
|
Investment holding
|
Chifeng Haozhou Mining Company Ltd (Haozhou)
|
|
(j)
|
|
PRC
|
|
|
|
|
|
|
100
|
%
|
|
Producing and sales of molybdenum concentrates
|
Beijing VEVA Technology Co., Ltd
|
|
(k)
|
|
PRC
|
|
|
|
|
|
|
59.0
|
%
|
|
sales of mobile phone and accessories
|
Notes
(a) QXMC was incorporated in the BVI on January 31, 2002 by the Group and Galbo Enterprises
Limited (Galbo), an independent third party. QXMC became a wholly-owned subsidiary of the
Company on November 30, 2006 when the Company acquired the remaining 20% equity interest in QXMC
from Galbo at a total consideration of RMB356,064,000.
Pursuant to a shareholders resolution of January 8, 2007, the par value of QXMCs ordinary
shares was reduced to nil and the company was authorized to issue an unlimited number of ordinary
shares. On April 13, 2007, QXMC executed a 40-for-one split of its ordinary shares and, as a
result, its issued and paid-up capital, all of which were then fully-owned by the Company, became
converted into 40,000,000 ordinary shares of nil par value each.
As more fully described in Note 3(b), due to the exchange of US$40,000,000 senior convertible
notes into 7,800,000 ordinary shares of QXMC that were owned by the Company and the initial public
offering (IPO) of 12,500,000 new ordinary shares issued by QXMC during the year ended December
31, 2007, the Companys equity interest in QXMC was reduced to approximately 61.3% as of December
31, 2007.
On January 7, 2008 QXMC issued 565,000 ordinary shares to its management team upon the
exercise of stock options. On May 15, 2008, QXMC repurchased 6,966,666 ordinary shares of QXMC from
two shareholders. All shares repurchased by QXMC were cancelled. On August 21, 2008, QXMC issued
1,511,397 ordinary shares to two investors upon the conversion of convertible notes issued by QXMC.
As a result, the Companys equity interest in QXMC changed to approximately 67.6% as of December
31, 2008.
F-11
On November 23 and December 9, 2009, QXMC issued 4,114,286 ordinary shares to two investors
upon the conversion of convertible notes issued by QXMC. On December 4, 2009 QXMC issued 960,884
ordinary shares to its management team in replace of all of their existing stock option. As a
result, the Companys equity interest in QXMC declined to approximately 61.1% as of December 31,
2009.
(b) QXCH
was incorporated in the BVI on May 21, 2002. Its authorized capital is US$50,000, of
which US$1 was issued and paid up on June 8, 2002. On November 30, 2009, the Company disposed QXCH
to a third party (See Note 3(d)).
(c) CLJC is a limited liability company incorporated in the British Virgin Islands with a
registered share capital of US$ 50,000. CLJC was incorporated in the British Virgin Islands on May
4, 2000.
CLJC has one direct subsidiary, Huizhou Taiherui Information Technology Company Limited
(Taiherui) and one indirect subsidiary, Chifeng Zhongtai Mining Company Limited (Zhongtai).
Zhongtai has entered into Long-Term Cooperation Agreement and Supplemental Agreement with Chifeng
Haozhou Mining Company, Ltd. (Haozhou), a large copper-molybdenum poly-metallic mining company in
China. CLJC, through its wholly owned Chinese subsidiaries, owns the right to receive 100% of the
expected residual returns from Haozhou.
The Company purchased 100% equity interest in CLJC from Mr. Wu Ruilin on April 6, 2009 at an
aggregate consideration of cash US$30,000,000 and 40,000,000 common shares of the Company(See Note
3(c)).
(d) CECT is a limited liability company established in the PRC on May 22, 2000 with an initial
permitted operating period of 30 years. QXMC completed the acquisition of an initial 65% equity
interest in CECT from Tianjin Economic-Technological Development Area Co., Ltd. (TEDA), China
Electronics Corporation (CEC) and other group companies of CEC for aggregate cash consideration
of RMB312,750,000 on February 8, 2003. Upon the acquisition, the permitted operating period of CECT
was to February 7, 2033.
On July 31, 2005, QXMC completed the acquisition of an additional 25% equity interest in CECT
from CEC via QXCI. The Group structured the acquisition of the additional equity interest in CECT
by QXMC through QXCI to facilitate the governmental approval process for the acquisition.
On July 31, 2006, QXMC injected additional capital of US$18,750,000 (RMB149,600,000) into CECT
in the form of cash. The minority shareholder did not participate in the capital injection and as a
result, QXMCs equity interest in CECT was increased from 90% to 93.4%, which was accounted for
under the purchase method of accounting .
In December 2006, TEDA disposed of its remaining 6.6% interest in CECT to Qiao Xing Group
Limited (QXGL), a company beneficially owned by Mr. Rui Lin Wu, and as of December 31, 2006, CECT
was owned as to 93.4% by QXMC and 6.6% by QXGL.
On June 30, 2007, QXMC injected additional capital of US$50,000,000 (RMB380,425,000) into CECT
in the form of cash. The minority shareholder did not participate in the capital injection and as
a result, QXMCs equity interest in CECT increased from 93.4% to 96.6%, which was accounted for
under the purchase method of accounting (Note 3(a)).
(e) QXCI is an equity joint venture established in the PRC on December 2, 2002 between QXCH
and QXGL to be operated for a term of 15 years until December 1, 2017. Its registered capital is
RMB187,485,500 which was fully paid up on June 19, 2006. On November 30, 2009, QXCI was disposed by
the Company together with the disposal of QXCH.
(f) QXPL is an equity joint venture established in the PRC on December 17, 2002 between QXCH
and QXGL to be operated for a term of 15 years until December 16, 2017. Its registered capital is
RMB2,125,800 which
F-12
was fully paid up on March 28, 2003. On November 30, 2009, QXCI was disposed by the Company
together with the disposal of QXCH.
(g) CSMC is a limited liability company established in the PRC on June 22, 2007 with a
permitted operating period that ends on December 31, 2022. Its registered capital is RMB10,000,000
which was fully paid up on June 15, 2007. The Groups interest in CSMC through December 31, 2007
was held through QXPL, which owns a 100% equity interest in CSMC. On November 30, 2009, CSMC was
disposed by the Company together with the disposal of QXPL.
(h) Taiherui is a limited liability company established in the PRC on November 10, 2008 with
a permitted operating period that ends on November 10, 2018. Its registered capital is
HK$6,000,000 which was fully paid up on January 23, 2009. The Groups interest in Taiherui through
December 31, 2009 was held through CLJC, which owns a 100% equity interest in Taiherui.
(i) Zhongtai is a limited liability company established in the PRC on November 1, 2006 with
a permitted operating period that ends on December 31, 2026. Its registered capital is
RMB5,100,000 which was fully paid up on November 1, 2006. On February 6, 2009, the Company acquired
a 100% equity interest in Zhongtai through Taiherui for cash consideration of RMB2,291,436.
(j) Haozhou is a limited liability company established in the PRC on November 4, 2004 with
a permitted operating period that ends on November 3, 2014. Its registered capital is RMB3,000,000
which was fully paid up on November 4, 2004. Haozhou operates a molybdenum mine in Inner Mongolia,
PRC. According to Chinese laws and regulations, the molybdenum mine can not be owned directly by
foreign companies. The Company could not acquire Haozhou directly. The owners of Haozhou are Mr. Wu
Ruilin and his relative.
On November 27, and November 28, 2008, Haozhou signed Long-term Cooperation Agreement and
Supplemental Agreement to Long-term Cooperation Agreement with Zhongtai. According to these
agreements, Zhongtai will provide RMB300 million working capital to Haozhou and Haozhou agreed to
sell all of its products to Zhongtai at cash cost. Furthermore, all cash flows generated from the
operation and disposal of Haozhou will belong to Zhongtai. Thus when the Company acquired Zhongtai
through the acquisition of CLJC, the Company got the right to receive 100% of the expected residual
returns from Haozhou. Creditors of Haozhou have no recourse to the general credit of Zhongtai (Note 3(c))
(k) BVT was incorporated in March 2009 and was owned 100% by CECT. BVT are principally
engaged in the sale of mobile phones and accessories in the PRC.
The Group is subjected to, among others, the following operating risks:
Concentration of credit risk
The Group performs ongoing credit evaluations of each customers financial condition. It
maintains reserves for potential credit losses. Such losses in the aggregate have not exceeded
managements expectations. As of December 31, 2008 and 2009, the Groups five largest accounts
receivable accounted for approximately 60.7% and 93.7% of the Groups total accounts receivable,
respectively.
Commodity price risk
Fluctuations in the market price of molybdenum could adversely affect the value of the
Company. The profitability of our mining operations will be directly related to the market price of
molybdenum. The market prices of molybdenum fluctuate widely and are affected by numerous factors
beyond the control of any mining company. Any drop in the price of the molybdenum important to our
mining operations would adversely impact our revenues, profits and cash flows.
F-13
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of consolidation
The consolidated financial statements are prepared in accordance with accounting principles
generally accepted in the United States (U.S. GAAP). The preparation of financial statements in
conformity with U.S. GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as
of the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
The consolidated financial statements include the accounts of the Company, its subsidiaries
and a variable interest entity (VIE) for which the Company is the primary beneficiary. All
significant intercompany accounts and transactions have been eliminated. A VIE is required to be
consolidated by a company if that company is required to absorb the majority of the losses of the
VIE, is entitled to receive a majority of the VIEs residual returns, or both.
To comply with the PRCs laws and regulations, the Company produces molybdenum concentrates in
China via its VIE, Haozhou. Haozhou is 90% owned by Mr. Wu Ruilin, the Chairman of the Company, and
the remaining 10% equity interest is owned by a relative of Mr. Wu Ruilin. The capital for the
Haozhou was funded by the Company and has been recorded as interest-free loans to Haozhou. These
loans were eliminated against the debt of Haozhou in consolidation. Under various contractual
agreements, Haozhou is required to sell all of its products to Zhongtai at cash cost. Furthermore,
all future cash flows generated from the operation and disposal of Haozhou will belong to the
Company. All voting rights of the VIE are assigned to the Company, and the Company has the right to
appoint all directors and senior management personnel of the VIE. In addition, shareholders of the
Haozhou have pledged their shares in the VIE as collateral for performance under these contractual
agreements. As of December 31, 2009, the total amount of interest-free loans to Haozhou was RMB 200
million (US$29.3 million), and the aggregate accumulated losses of Haozhou of approximately RMB4.3
million (US$0.6 million) have been included in the consolidated financial statements.
Haozhou is a large copper-molybdenum poly-metallic mining company in China. Haozhou owns the
exploration license of a mine covering 53.9 square kilometers in the Inner Mongolia Autonomous
Region in the PRC. Through exploration of 32.34 square kilometers, Haozhou concluded that there is
a reserve of 30,985 tons of molybdenum metal and an abundance of other types of multi-metal
reserves, as determined by Behre Dolbear Asia, Inc, an independent mine consulting firm. The
remaining 21.56 square meters are also expected to be explored.
The operating results of Haozhou have been consolidated with those of the Group since April 6,
2009, when the Company acquired CLJC from Mr. Wu Ruilin. (Note 3(c))
A subsidiary is a company, including equity joint ventures, in which the Company holds,
directly or indirectly, more than a 50% equity interest and over which it can exercise control, as
defined under U.S. GAAP.
(b) Cash and cash equivalents
Cash and cash equivalents include cash on hand, amounts on deposit with banks and all highly
liquid investments with maturity dates of three months or less at the time of acquisition.
Cash that is restricted as to withdrawal for use or pledged as security is disclosed
separately on the face of the consolidated balance sheet, and is not included in cash in the
consolidated statements of cash flows.
(c) Accounts and bills receivable
Accounts receivable are recorded at invoiced amounts less allowances for doubtful accounts.
The Group reviews its accounts receivable on a periodic basis and makes allowances when there is
doubt as to the collectibility of
F-14
the balances. In evaluating the collectibility of a receivable balance, the Company considers
many factors, including the age of the balance, the customers payment history, its current
credit-worthiness and current economic conditions and trends. Account balances are charged off
against the allowance after all reasonable means of collection have been exhausted and the
potential for recovery is considered remote.
To reduce the Groups credit risk, the Group has required certain customers to purchase the
Groups products using bills. Bills receivable represent non-interest bearing, short-term notes
issued by financial institutions that entitle the Group to receive the full face amount of the
bills from the issuing financial institutions at stated maturity dates.
In certain circumstances, the Group has sold, with recourse, bills receivable to banks. The
recourse obligation represents the amount that the Group would be obligated to repay to the extent
that the issuing financial institution does not make payment upon maturity. Because the discounted
bills have not been legally isolated from the Group, the discounted bills sold with recourse have
been accounted for as short-term secured borrowings until the bills receivable are paid. Upon
payment of bills receivable, the discounted bills receivables and the related short-term secured
borrowings are eliminated. Historically, the Group has experienced no losses on bills receivable.
(d) Inventories
Inventories are stated at the lower of cost or net realizable value. Work-in-process and
finished goods are composed of direct materials, direct labor and an attributable portion of
manufacturing overhead. Net realizable value is the estimated selling price in the ordinary course
of business less the estimated cost of completion and the estimated costs necessary to make the
sale, and after making allowances for damaged, obsolete and slow-moving items. Allowances for
damaged, obsolete and slow-moving items are determined by management based on a consideration of
several factors, including the aging of the inventories, current and expected market trends and
conditions, and the physical condition of the goods observed during periodic inventory counts.
For mine products, cost is comprised of production costs for ore extracted and processed from
the Companys mines. Production costs included the costs of materials, cost of processing and
direct labor, mine site and processing facility overhead costs and depreciation, depletion and
amortization. Stripping costs incurred during the production phase are included as a component of
inventory produced during the period in which stripping costs are incurred.
When inventories are sold, their carrying amount is charged to expense in the period in which
the associated revenue is recognized. Write-downs for declines in net realizable value or for
losses of inventories are recognized as an expense in the year the impairment or loss occurs.
(e) Exploration
Exploration costs include geological and geophysical work on areas without identified reserves
together with drilling and other related costs. Exploration costs incurred for the purpose of
converting mineral resources to proven and probable reserves or identifying new mineral resources
at development or production stage properties are charged to expense as incurred.
(f) Property, machinery, equipment, mineral reserves, mineralized material and
construction-in-progress
Property, machinery and equipment are stated at cost less accumulated depreciation and
accumulated impairment losses. Property, machinery and equipment acquired in a purchase business
combination are initially recorded at fair value. Major expenditures for improvements that increase
the useful life or the productive capacity of an asset are capitalized. All ordinary repair and
maintenance costs are expensed as incurred.
F-15
In connection with the Companys acquisition of additional equity interests in CECT (Note
3(a)), the value assigned to the portion of property, machinery and equipment acquired from the
minority interest owner has been reduced to nil due to the excess of the fair value of the acquired
additional net assets of CECT over the acquisition cost. In addition, as a result of the
application of purchase accounting to account for the Companys acquisition of an additional 20%
interest in QXMC on November 30, 2006, the Groups interests in QXMCs and CECTs property,
machinery and equipment have been adjusted to a new cost basis which reflects the Companys
original 80% interest at depreciated cost and the 20% acquired interest at the fair value of the
assets as of November 30, 2006. Depreciation for financial reporting purpose is provided using the
straight-line method over the estimated useful lives of the assets after taking into account the
assets estimated residual value. Leasehold improvements are amortized over the lease term if
shorter than the assets useful life. The estimated useful lives are as follows: leasehold
improvements 5 years (or over the lease term, if shorter), buildings 8 to 30 years, machinery
and equipment 5 to 12 years, furniture and office equipment 5 to 10 years, and motor vehicles
5 to 8 years.
In connection with the Companys acquisition of CLJC, the Company capitalized the costs to
acquire proven and probable reserves and value beyond proven and probable reserves. The Company
estimated the fair value of proven and probable mineral reserves as well as the value beyond proven
and probable mineral reserves and recorded these amounts as assets at the date of acquisition.
Proven and probable mineral reserves are depleted over the life of the mine using the
units-of-production method based on the volume of mineral produced in relation to the total
estimated proven and probable mineral reserves. Fixed plant, facilities, mobile and other equipment
are depreciated on a straight-line basis over the shorter of their estimated useful life or the
life of the mine. Mine development costs include costs incurred from mine pre-production activities
undertaken to gain access to proven and probable reserves including shafts, adits, drifts, ramps,
permanent excavations, infrastructure and are capitalized once all operating permits have been
secured, mineralized material is classified as proven and probable reserves and a final feasibility
study has been completed. Mine development costs incurred to access specific areas of the ore body
are depreciated using the units-of-production method over the estimated life of the mine based on
the volume of mineral to be produced from proven and probable reserves in the area of the ore body
to which the development activities provide access. Proven and probable reserves and general mine
development costs are depleted or depreciated, respectively, using the units-of-production method
based on the volume of mineral to be produced from proven and probable reserves over the estimated
life of the mine. The cost assigned to value beyond proven and probable mineral reserves is not
depleted. However, as the Company obtains new information, mineralized material relating to value
beyond proven and probable reserves may be converted into proven and probable mineral reserves at
which time the associated capitalized cost would become subject to depletion on a
units-of-production basis.
Construction-in-progress represents factory, office buildings and mining plant and facilities
under construction. When material, the Company capitalizes interest during the construction phase
of qualifying assets. No interest has been capitalized in construction-in-progress during the years
ended December 31, 2007, 2008 and 2009.
Assets the Company intends to disposed of are presented separately in the balance sheet and
reported at the lower of their carrying amount or fair value less costs to sell, and are no longer
depreciated.
(g) Stripping cost
The process of mining overburden and waste materials is referred to as stripping. During the
development stage of a mine before production commences, the Company capitalizes stripping costs
as part of mine development costs.
Stripping costs incurred during the production phase of a mine are considered variable costs
and are included as a component of inventory produced during the period in which stripping costs
are incurred.
(h) Land use rights
F-16
Land use rights represent the exclusive right to occupy and use a piece of land in the PRC
during the contractual period of the rights. Land use rights are carried at cost, subject to
adjustments resulting from the effects of purchase accounting, and are charged to expense on a
straight-line basis over the terms of the rights.
(i) Investments at cost
Investments in which the Group does not have control or significant influence are carried at
cost less impairment for declines in value that are deemed to be other than temporary. Income from
the investments is accounted for to the extent of dividends received and receivable.
(j) Goodwill
Goodwill arose from the acquisition of equity interests in CECT (Note 3 (a)) and additional
equity interest in QXMC (Note 3(b)). Goodwill represents the excess of the cost of an acquisition
over the fair value of the net assets acquired in business combinations accounted for under the
purchase method. Goodwill is tested for impairment annually or more frequently if events or
changes in circumstances indicate that it might be impaired, using the prescribed two-step process
under U.S. GAAP. The first step screens for potential impairment of goodwill to determine if the
fair value of the reporting unit is less than its carrying value, while the second step measures
the amount of goodwill impairment, if any, by comparing the implied fair value of goodwill to its
carrying value.
The Group completed its annual goodwill impairment test for the years ended December 31, 2007,
2008 and 2009 and determined that no adjustment to the carrying value of goodwill was required.
(k) Other acquired intangible assets
Intangible assets acquired in a business combination are recognized as assets apart from
goodwill if they satisfy either the contractual-legal or separability criterion. Such
intangible assets are initially measured and recorded at fair value. As a result of the application
of purchase accounting to account for the Companys acquisition of an additional 20% interest in
QXMC on November 30, 2006, other acquired intangible assets have been adjusted to a new cost basis,
which reflects the Companys original 80% interest at amortized cost and the 20% acquired interest
at fair value as of November 30, 2006.
Intangible assets with determinable useful lives are amortized in straight line as follows:
|
|
|
Customer relationships
|
|
3 5 years
|
Completed technology
|
|
1.8 5 years
|
Core technology
|
|
4 5 years
|
Backlog
|
|
4 5 months
|
Licenses
|
|
5 years
|
The Company has determined that the Groups CECT brand held by its subsidiary, CECT, does
not have a determinable useful life. Consequently, the carrying amount of this brand name is not
amortized but rather tested for impairment annually or more frequently if events or changes in
circumstances indicate that the assets might be impaired. Such impairment test consists of a
comparison of the fair value of the brand name with its carrying amount and an impairment loss is
recognized if and when the carrying amount of the brand name exceeds its fair value.
(l) Impairment of long-lived assets with determinable useful lives
F-17
Long-lived assets with determinable useful lives, including property, machinery and equipment,
proven and probable reserves, value beyond proven and probable reserves and amortizable intangible
assets, are tested for impairment whenever events or changes in circumstances indicate that the net
carrying amount may not be recoverable. Recoverability of such assets to be held and used is
measured by a comparison of the carrying amount of the asset to the estimated undiscounted future
cash flows expected to result from its use and eventual disposition. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by
which the carrying value of the asset exceeds its fair value. If a readily determinable market
price does not exist, fair value is estimated using discounted expected cash flows attributable to
the assets. Future cash flow from mineral properties include estimates of recoverable pounds,
molybdenum prices (considering current and historical prices, price trends and related factors),
production levels and capital, all based on life-of-mine plans and projections. Assumptions
underlying future cash flow estimates are subject to risks and uncertainties. Any differences
between significant assumptions and market conditions and/or the Companys operating performance
could have a material effect on the Companys determination of ore reserves, or its ability to
recover the carrying amounts of its long-lived assets resulting in impairment charges.
(m) Noncontrolling interest
Effective January 1, 2009, the Company adopted an authoritative pronouncement issued by the
FASB regarding noncontrolling interests in consolidated financial statements. The pronouncement
requires noncontrolling interests to be separately presented as a component of equity in the
consolidated financial statements. The presentation regarding noncontrolling interest was
retroactively applied for all the presented periods.
(n) Asset retirement obligation
In connection with the mining operation, the Company is required to make payments for
restoration and rehabilitation. Provision for restoration cost is required when the Company has a
present obligation as a result of past event, and it is probable that the Company will be required
to settle that obligation. Provision is measured in accordance with the relevant rules and
regulations applicable in the PRC at the balance sheet date, and is discounted to their present
value where the effect is material.
According to the relevant rules and regulations applicable in the PRC, the Company accrues an
asset retirement obligation related to sewage based on the tonnes of ore produced; accrues an asset
retirement obligation related to land restoration obligation based on the underground hectares of
area that have been mined. As the accrued liabilities are paid to relevant government agencies,
the recorded amount of the liability is reduced.
(o) Sales recognition
Sales represent the invoiced value of goods, net of value added tax (VAT), discounts,
returns and price guarantees supplied to customers, and are recognized upon delivery of goods and
passage of title. For telecommunication products, liability for sales returns and price guarantees
is estimated taking into consideration historical experience and
current conditions. Price guarantees are monetary compensation for
distributors when the retail prices of our products fall below certain
pre-agreed levels. For mineral
products, the Company recognizes revenue from molybdenum concentrate sales when persuasive evidence
of an arrangement exists, the price is fixed and determinable, the product has been delivered,
title has transferred, and collection is reasonably assured.
All of the Groups sales made in the PRC are subject to PRC VAT at a rate of 3% (output VAT)
on mining products and 17% on other products. Such output VAT is payable after offsetting VAT paid
by the Group on its purchases (input VAT).
(p) Product warranties
F-18
The Group guarantees that its telecommunication products will meet the stated functionality as
agreed to in each sales arrangement. The Group provides for the estimated warranty costs under
these guarantees based upon historical experience and managements estimate of the level of future
claims, and accrues for specific items at the time their existence is known and the amounts are
estimable. Provisions for product warranty costs are charged to cost of goods sold and are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2009
|
|
|
RMB000
|
|
RMB000
|
|
US$000
|
Balance at beginning of year
|
|
|
11,123
|
|
|
|
7,973
|
|
|
|
1,168
|
|
Adjust: disposal of QXCH
|
|
|
|
|
|
|
(2,944
|
)
|
|
|
(431
|
)
|
Provision
|
|
|
23,101
|
|
|
|
2,831
|
|
|
|
415
|
|
Utilized
|
|
|
(26,251
|
)
|
|
|
(5,936
|
)
|
|
|
(870
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
7,973
|
|
|
|
1,924
|
|
|
|
282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(q) Shipping and handling costs
The Group has recorded its shipping and handling costs as a component of cost of sales.
(r) Advertising costs
Costs incurred for producing and communicating advertising are charged to expenses when
incurred.
(s) Research and development expenditures
Research and development expenditures are charged to expenses as incurred.
(t) Operating leases
Operating leases represent those leases under which substantially all the risks and rewards of
ownership of the leased assets remain with the lessors. Rental payments under operating leases are
charged to expense on a straight-line basis over the contractual term of the leases.
(u) Stock-based compensation
Share-based compensation is measured based on the fair value of all share-based awards on the
dates of grant and is recognized using the straight-line method over the requisite service period,
which is generally the same as the vesting period.
The Company values share-based awards issued using either the Black-Scholes option-pricing
model or the binomial option pricing model, and recognizes the value over the period in which the
awards vest.
(v) Debt issuance costs and borrowing costs
Costs related to the issuance of debts are capitalized and amortized to interest expense using
the effective interest method over the contractual term of the related debt. All other borrowing
costs are recognized as an expense in the period in which they are incurred, except to the extent
that they are attributable to the acquisition, construction or production of an asset that
necessarily involves a substantial period of time before the asset is ready for its intended use or
sale, in which case the borrowing costs are capitalized as part of the costs of the asset.
F-19
(w) Income taxes
Deferred income taxes are provided using an asset and liability method. Under this method,
deferred tax assets and liabilities are recognized for all significant temporary differences
between the tax and financial statement bases of assets and liabilities. Deferred tax assets and
liabilities are measured using enacted tax rates currently applicable to taxable income in the
years in which those temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates or laws is recognized in the statement
of operations in the period that the change in tax rates or tax laws is enacted. A valuation
allowance is provided for deferred tax assets if it is more likely than not that these items will
either expire before the Group is able to realize their benefits or that future deductibility is
uncertain.
The Company recognizes in the consolidated financial statements the impact of a tax position,
if that position is more likely than not of being sustained upon examination, based on the
technical merits of the position. The Company has elected to classify interest and penalties
related to income tax matters, if and when imposed, as part of income tax expense in the statement
of operations.
As of December 31, 2008 and 2009, the Company has no material
unrecognized tax benefits which would favorably affect the
effective income tax rate in future periods and does not believe
that there will be any significant increases or decreases of
unrecognized tax benefits within the next twelve months. No
interest or penalties relating to income tax matters have been
imposed on the Company during the year ended December 31, 2007,
2008 and 2009, and no provision for interest and penalties is
deemed necessary as of December 31, 2008 and 2009.
According to the PRC Tax Administration and Collection Law, the
statute of limitations is three years if the underpayment of taxes
is due to computational errors made by the taxpayer or its
withholding agent. The statute of limitations extends to five years
under special circumstances, which are not clearly defined. In the
case of a related party transaction, the statute of limitation is
ten years. There is no statute of limitation in the case of tax
evasion.
(x) Segment information
The Company adopted management approach to determine the information related to reporting of
financial and descriptive information about reportable operating segments, including segment profit
or loss, certain specific revenue and expense items, and segment assets, as well as information
about the revenues derived from the Groups products and services, the countries in which the Group
earns revenues and holds assets, and major customers. The management approach is based on the way
management organizes the enterprise to assess performance and makes operating decisions regarding
the allocation of resources. The Group classifies its operations into two core business segments,
namely mobile phones and mining. In view of the fact that the Group operates principally in the
PRC, no geographical segment information is presented.
(y) Foreign currency translation
The reporting currency of the Group is Renminbi (RMB).
The Companys functional currency is the United States dollar (U.S. dollar or US$) as a
majority of its financing and cash is denominated in U.S. dollars. Through May 2, 2007, the
functional currency of the Companys subsidiary, QXMC, was Renminbi. Effective May 3, 2007, QXMC
changed its functional currency to U.S. dollars due to the significant changes in the companys
economic facts and circumstances upon the completion of its listing on the NYSE, which resulted in
the companys financing activity being predominately denominated in and expected to continue to be
predominately denominated in U.S. dollars. All other subsidiaries of the Company consider Renminbi
to be their functional currency as they operate primarily in the PRC and most of their business
activities are based in Renminbi.
F-20
Assets and liabilities which are denominated in foreign currencies are translated into the
functional currencies at the rates of exchange prevailing at the balance sheet date. Foreign
currency transactions are translated using the exchange rates prevailing at the date of
transactions. Foreign exchange gains or losses arising from the translation at year-end exchange
rates of foreign currency intercompany balances that are of a long-term investment nature are
included in shareholders equity separately as cumulative translation adjustments. All other
foreign exchange gains or losses resulting from the settlement of foreign currency transactions and
from the translation at financial year-end exchange rates of assets and liabilities denominated in
foreign currencies are included in the consolidated statements of operations.
The translation of the Companys and QXMCs financial statements into Renminbi is performed
for balance sheet accounts using the closing exchange rate in effect at each of the balance sheet
dates and for revenue and expense accounts using the average exchange rate during each reporting
period. Gains and losses resulting from translation are included in shareholders equity separately
as cumulative translation adjustments. Total cumulative adjustments at December 31, 2009 and 2008 were RMB 172,691,000 and RMB 87,741,000, respectively. Including amounts related to noncontrolling interest at December 31, 2009 and 2008 were
RMB 12,118,000 and RMB 12,159,000, respectively.
For the convenience of readers, certain 2009 Renminbi amounts included in the accompanying
consolidated financial statements have been translated into United States dollars at the rate of
US$1.00 = RMB6.8259, which was the noon buying rate in New York City for cable transfers in foreign
currencies as certified for custom purposes by the Federal Reserve Bank of New York on December 31,
2009. No representation is made that the Renminbi amounts could have been, or could be, converted
into United States Dollars at that rate or at any other rate on December 31, 2009, or at any other
date.
(z) Comprehensive income
The Group reported all changes in equity during a period, except for those resulting from
investment by owners and distribution to owners, in the consolidated financial statements as
comprehensive income for the period in which they are recognized. The Group has presented
comprehensive income, which encompasses net income and currency translation adjustments, in the
consolidated statements of operations and comprehensive income (loss).
(aa) Earnings (loss) per common share
Basic earnings (loss) per common share is computed using the two-class method by dividing
earnings allocated to common stockholders by the weighted average number of shares of common stock
outstanding during the period. Diluted earnings (loss) per common share is computed by using the
weighted average number of common shares outstanding adjusted to include the potentially dilutive
effect of outstanding stock options, warrants and convertible debentures to the extent such
instruments are dilutive during the period.
(bb) Financial instruments
All derivative financial instruments are recognized in the financial statements and maintained
at fair value regardless of the purpose or intent for holding them. Changes in fair value of
derivative financial instruments are either recognized periodically in income or shareholders
equity (as a component of comprehensive income) depending on whether the derivative is being used
to hedge changes in fair value or cash flows.
The carrying amounts for cash and bank deposits, restricted cash, bills receivable, accounts
receivable, prepaid and other assets, short-term borrowings, accounts payable, other payables,
accrued liabilities and customer deposits approximate their fair values because of the short
maturity or nature of these instruments. The carrying amounts of shareholders loans approximate
their fair value because the imputed interest rate on these instruments fluctuates with market
interest rates.
The Company has adopted accounting guidance that defines fair value as the exchange price that
would be received for an asset or paid to transfer a liability (an exit price) in the principal or
most advantageous market for the
F-21
asset or liability in an orderly transaction between market participants on the measurement
date. The guidance also establishes a fair value hierarchy which requires classification based on
observable and unobservable inputs when measuring fair value. The fair value hierarchy
distinguishes between assumptions based on market data (observable inputs) and an entitys own
assumptions (unobservable inputs). The hierarchy consists of three levels:
|
Level one Quoted market prices in active markets for identical assets or liabilities;
|
|
|
Level two Inputs other than level one inputs that are either directly or indirectly
observable; and
|
|
|
Level three Unobservable inputs developed using estimates and assumptions, which
are developed by the reporting entity and reflect those assumptions that a market
participant would use.
|
Determining which category an asset or liability falls within the hierarchy requires
significant judgment
(cc) Issuance/repurchase of stock by QXMC to/from third parties
Gain (loss) on the issuance/repurchase of stock by QXMC to/from third parties were recognized
when the Groups share of net assets in QXMC after the deemed disposal/acquisition exceeds (is less
than) the Groups share of net assets in QXMC before the deemed disposal/acquisition.
(dd) Recently issued accounting standards
In June 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) No. 2009-17 (ASU 2009-17), which amends guidance regarding consolidation of
variable interest entities to address the elimination of the concept of a qualifying special
purpose entity. It replaces the quantitative-based risks and rewards calculation for determining
which enterprise has a controlling financial interest in a variable interest entity with an
approach focused on identifying which enterprise has the power to direct the activities of the
variable interest entity, and the obligation to absorb losses of the entity or the right to receive
benefits from the entity. Additionally, it requires any enterprise that holds a variable interest
in a variable interest entity to provide enhanced disclosures that will provide users of financial
statements with more transparent information about an enterprises involvement in a variable
interest entity. It is effective for interim and annual reporting periods beginning after November
30, 2009. The adoption is not expected to have a material impact on the Groups consolidated
financial statements.
In October 2009, the FASB issued ASU No. 2009-13 (ASU 2009-13), regarding revenue
arrangements with multiple deliverables. These updates addresses how to determine whether an
arrangement involving multiple deliverables contains more than one unit of accounting, and how the
arrangement consideration should be allocated among the separate units of accounting. These updates
are effective for fiscal years beginning after June 15, 2010 and to be applied retrospectively or
prospectively for new or materially modified arrangements. In addition, early adoption is
permitted. The adoption is not expected to have a material impact on the Groups consolidated
financial statements.
In October 2009, the FASB issued ASU No. 2009-14 (ASU 2009-14), to exclude all tangible
products containing both software and non-software components that function together to deliver the
products essential functionality with respect to certain
revenue arrangements that include software elements. The effective date for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010 and is to be applied on a
prospective basis. Early application is permitted as of the beginning of an entitys fiscal year.
The adoption is not expected to have a material impact on the Groups consolidated financial
statements.
In January 2010, the FASB issued ASU No. 2010-06 (ASU 2010-06), which requires a number of
additional disclosures regarding (1) the different classes of assets and liabilities measured at
fair value, (2) the valuation techniques and inputs used, (3) the activity in Level 3 fair value
measurements, and (4) the transfers between Levels 1, 2, and 3. The new disclosures and
clarifications of existing disclosures are effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances,
and settlements in the roll forward of activity in Level 3 fair value measurements. Those
disclosures are effective for fiscal years beginning after December 15, 2010, and for interim
periods within those fiscal years. The adoption is not expected to have a material impact on the
Groups consolidated financial statements.
F-22
3. ACQUISITIONS AND DISPOSALS
(a) Acquisition of additional equity interests in CECT
Subsequent to the acquisition of an initial 65% equity interest in CECT on February 8, 2003,
QXMC completed the following acquisitions of additional equity interests in CECT:
(i) On July 31, 2005, QXMC completed the acquisition of an additional 25% equity interest in
CECT from QXCI, a subsidiary of the Company, for a total consideration of RMB75,000,000. QXCI
acquired the 25% equity interest in CECT from CEC at the same consideration of RMB75,000,000 on
July 29, 2005 on behalf of QXMC and in contemplation that the 25% equity interest in CECT acquired
would be transferred to QXMC on the same terms shortly after the purchase. The transaction was
structured to facilitate the governmental approval process for the acquisition.
(ii) On July 31, 2006, QXMC injected additional capital of US$18,750,000 (RMB149,600,000) into
CECT in the form of cash. The minority shareholder did not participate in the capital injection
and as a result, QXMCs equity interest in CECT was increased from 90% to 93.4%.
(iii) On June 30, 2007, QXMC injected additional capital of US$50,000,000 (RMB380,425,000)
into CECT in the form of cash. The minority shareholder did not participate in the capital
injection and as a result, QXMCs equity interest in CECT was increased from 93.4% to 96.6%.
The Group has accounted for QXMCs step-up acquisitions of additional equity interests in CECT
using the purchase method. This method requires the acquisition cost to be allocated to the assets
acquired (including separately identifiable intangible assets) and liabilities assumed, based on a
pro-rata share of their estimated fair values. For each of the acquisitions of additional equity
interests in CECT completed during the years ended December 31, 2005, 2006 and 2007, the fair value
of the underlying net assets, representing QXMCs additional equity interest acquired in CECT,
exceeded QXMCs purchase price, giving rise to excess fair value over cost. Such excess fair value
over cost was first allocated to reduce the purchase price allocated to certain non-financial
assets. The remaining unallocated excess fair value over cost, net of minority interests, has been
recognized as an extraordinary gain in the consolidated statements of operations of the Group in
the year of acquisition.
During the year ended December 31, 2007, the Company recorded an extraordinary gain at amount
of RMB28,689,000 in the consolidated statements of operations in relation to the acquisition of
additional equity interest in CECT on June 30, 2007.
F-23
(b) Change of equity interests in QXMC
QXMC became a wholly-owned subsidiary of the Company since November 30, 2006, when the Company
acquired the remaining 20% equity interest in QXMC from the minority shareholder, Galbo, at a total
consideration of RMB356,064,000. On May 3, 2007, QXMC, completed a listing of its ordinary shares
on the New York Stock Exchange (the NYSE). On May 8, 2007, QXMC and certain selling shareholders
completed an IPO, priced at US$12.00 per share, of 12,500,000 new ordinary shares issued by QXMC
and 833,334 ordinary shares offered by the selling shareholders. The Company did not receive any
proceeds from the IPO. Immediately prior to the listing of QXMCs ordinary shares on the NYSE on
May 3, 2007, the investors of US$40,000,000 senior convertible notes issued by the Company
exercised an option to exchange the entire US$40,000,000 notes into 7,800,000 ordinary shares of
QXMC that were owned by the Company (the Exchange) and as a result, the Companys equity interest
in QXMC was decreased from 100.0%, or 40,000,000 shares, to 80.5%, or 32,200,000 shares,
representing a disposal of 19.5% interest in QXMC. Based on the issue price of US$12.00 per share
that was obtained during QXMCs IPO, the fair value of QXMCs shares given up by the Company in the
Exchange was estimated to be approximately US$93,600,000 (RMB721,188,000).
The Exchange resulted in a loss on the extinguishment of the US$40,000,000 senior convertible
notes of RMB142,090,000 (US$19,479,000) during the year ended December 31, 2007, which is
calculated as follows:
|
|
|
|
|
|
|
RMB000
|
Cost of extinguishment (7,800,000 shares @ US$12.00 per share)
|
|
|
721,188
|
|
(Less) add: Carrying value of:
|
|
|
|
|
- Convertible notes
|
|
|
(238,325
|
)
|
- Embedded derivatives
|
|
|
(365,476
|
)
|
- Deferred debt issuance costs
|
|
|
24,703
|
|
|
|
|
|
|
Loss on extinguishment
|
|
|
142,090
|
|
|
|
|
|
|
The gain on disposal of the 19.5% equity interest in QXMC of RMB482,614,000
(US$66,160,000), as recognized in the consolidated statements of operations for the year ended
December 31, 2007, is calculated as follows:
|
|
|
|
|
|
|
RMB000
|
Deemed proceeds from disposal (7,800,000 shares @ US$12.00 per share)
|
|
|
721,188
|
|
Less: Share of net assets relating to minority interest disposed of
|
|
|
(221,659
|
)
|
Less: Goodwill relating to minority interest disposed of
|
|
|
(16,915
|
)
|
|
|
|
|
|
Gain on disposal
|
|
|
482,614
|
|
|
|
|
|
|
F-24
As a consequence of the QXMCs IPO on May 8, 2007, the Companys equity interest in QXMC
was further diluted from approximately 80.5% immediately prior to the IPO to approximately 61.3%
upon the completion of the IPO. In connection with this reduction in the Companys ownership
interest in QXMC, the Company recorded a gain of RMB383,965,000 (US$52,637,000), which is
calculated as follows:
|
|
|
|
|
|
|
RMB000
|
Share of net assets of QXMC after IPO
|
|
|
1,315,647
|
|
Less: Share of net assets of QXMC before IPO
|
|
|
(915,057
|
)
|
|
|
|
|
|
Increase in share of net assets after IPO
|
|
|
400,590
|
|
Less: Goodwill relating to equity interest deemed disposed of
|
|
|
(16,625
|
)
|
|
|
|
|
|
Gain on deemed disposal
|
|
|
383,965
|
|
|
|
|
|
|
On January 7, 2008, QXMC issued 565,000 new ordinary shares at US$7.50 per share upon the
exercise of share options granted to its director and certain employees.
On May 15, 2008, QXMC repurchased 6,966,666 of its issued ordinary shares at US$6.94 per share
from two existing shareholders of QXMC through the issuance of the 4.0% unsecured senior
convertible notes (Note 15(b)). All ordinary shares repurchased were subsequently cancelled.
On August 19, 2008, the holders of the QXMC unsecured senior convertible notes exercised the
option to convert US$8,251,000 of the principal amount of the notes and accrued interest thereon of
US$46,000 into 1,511,397 ordinary shares of QXMC at a conversion price of US$5.49 per share. The
stock price of QXMCs ordinary shares was US$5.31 at the date of exercise of the option to convert.
As a consequence of the QXMC share issue and repurchase in 2008, the Companys equity interest
in QXMC was changed to 67.6%. In connection with the exercise of shares options, repurchase of
issued ordinary shares and conversion of convertible notes, the Company recorded a gain of RMB
4,351,000 (US$638,000), which is calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of
|
|
Repurchase
|
|
Conversion
|
|
|
|
|
share options
|
|
of shares
|
|
of notes
|
|
Total
|
|
|
RMB000
|
|
RMB000
|
|
RMB000
|
|
RMB000
|
Share of net assets
of QXMC after
transaction
|
|
|
1,584,925
|
|
|
|
1,706,718
|
|
|
|
1,838,425
|
|
|
|
5,130,068
|
|
Less: Share of net
assets of QXMC
before transaction
|
|
|
(1,583,087
|
)
|
|
|
(1,687,850
|
)
|
|
|
(1,860,245
|
)
|
|
|
(5,131,182
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase of net
assets after
transaction
|
|
|
1,838
|
|
|
|
18,868
|
|
|
|
(21,820
|
)
|
|
|
(1,114
|
)
|
Less: Goodwill
relating to equity
interest deemed
disposed/acquired
(Note 11)
|
|
|
(566
|
)
|
|
|
7,954
|
|
|
|
(1,923
|
)
|
|
|
5,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on
deemed
disposal/acquisition
|
|
|
1,272
|
|
|
|
26,822
|
|
|
|
(23,743
|
)
|
|
|
4,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On November 23, 2009, the holders of the QXMC unsecured senior convertible notes exercised the
option to convert US$8,187,000 of the principal amount of the notes and US$293,000 of accrued
interest thereon into 2,093,996 ordinary shares of QXMC at a conversion price of US$4.05 per share.
The stock price of QXMCs ordinary shares was US$4.66 at the date of exercise of the option to
convert.
F-25
On December 4, 2009 QXMC issued 960,884 ordinary shares to its management team in replace of
all of the outstanding stock options held by the management team.
On December 9, 2009, the holders of the QXMC unsecured senior convertible notes exercised the
option to convert US$7,886,000 of the principal amount of the notes and US$297,000 of accrued
interest thereon into 2,020,290 ordinary shares of QXMC at a conversion price of US$4.05 per share.
The stock price of QXMCs ordinary shares was US$4.35 at the date of exercise of the option to
convert.
As a consequence of the QXMC share issue in 2009, the Companys equity interest in QXMC was
changed to 61.1%. In connection with the conversion of convertible notes and the exchange of stock
options to ordinary shares, the Company debited to retained earnings
at an amount of RMB 98,103,000 (US$14,372,000), which is
calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
|
|
Exchange
|
|
Conversion
|
|
|
|
|
of notes
|
|
Stock option
|
|
of notes
|
|
Total
|
|
|
RMB000
|
|
RMB000
|
|
RMB000
|
|
RMB000
|
Share of net assets of
QXMC after transaction
|
|
|
1,729,877
|
|
|
|
1,692,779
|
|
|
|
1,676,529
|
|
|
|
5,099,185
|
|
Less: Share of net
assets of QXMC before
transaction
|
|
|
(1,760,885
|
)
|
|
|
(1,725,504
|
)
|
|
|
(1,705,248
|
)
|
|
|
(5,191,637
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) of
net assets after
transaction
|
|
|
(31,008
|
)
|
|
|
(32,725
|
)
|
|
|
(28,719
|
)
|
|
|
(92,452
|
)
|
Less:
Amount attributable to noncontrolling interest
relating to equity
interest deemed
disposed
|
|
|
(2,472
|
)
|
|
|
(1,066
|
)
|
|
|
(2,113
|
)
|
|
|
(5,651
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debit to
retain earnings on deemed disposal
|
|
|
(33,480
|
)
|
|
|
(33,791
|
)
|
|
|
(30,832
|
)
|
|
|
(98,103
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No deferred income tax benefit has been recognized, as the Company and QXMC
were incorporated under the International Business Companies Act of the BVI and accordingly, are
exempted from BVI income taxes.
(c) Acquisition of CLJC
On April 6, 2009, the Company acquired a 100% equity interest in CLJC in a cash-and-stock
transaction from Mr. Wu Rui Lin, the president of the Company. CLJC was valued at approximately
US$110 million. The Company paid US$30 million in cash and issued 40,000,000 shares of the
Companys common stock valued at US$2.00 per share to Mr. Wu Rui Lin. The pricing of the Companys
common stock at US$2.00 per share was a result of the negotiation between the Company and Mr. Wu
Rui Lin. The close share price of the Company as of the acquisition date was US$1.73 per share. The
Company also issued 2,100,000 shares to a financial consulting firm and 100,000 shares to a law
firm for services in connection with the acquisition.
CLJC, through its wholly owned Chinese subsidiaries, owns the right to receive the expected
residual returns from Haozhou, a large copper-molybdenum poly-metallic mining company in China.
Haozhou owns the exploration license of a mine covering 53.9 square kilometers (the Mine) in the
Inner Mongolia Autonomous Region in the Peoples Republic of China. As of the acquisition date,
Haozhou was still under construction and had no operating revenue. With the continuing decrease of
profitability in the telecommunication terminals and equipment industry, the Company regarded this
acquisition as the first step for its diversification strategy.
The table below details the consideration transferred to acquire CLJC:
F-26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of
|
|
|
Fair value of
|
|
|
|
|
|
|
consideration
|
|
|
consideration
|
|
|
|
Shares issued
|
|
|
RMB000
|
|
|
US$000
|
|
Shares issued as the consideration of the
acquisition
|
|
|
40,000,000
|
|
|
|
|
|
|
|
|
|
Multiplied by XINGs share price as of the
acquisition date
|
|
$
|
1.73
|
|
|
|
472,982
|
|
|
|
69,200
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of the shares issued
|
|
|
|
|
|
|
472,982
|
|
|
|
69,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid as the consideration of the acquisition
|
|
|
|
|
|
|
205,050
|
|
|
|
30,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value of consideration transferred
|
|
|
|
|
|
|
678,032
|
|
|
|
99,200
|
|
|
|
|
|
|
|
|
|
|
|
|
The transaction has been accounted for using the acquisition method which requires, among
other things, that assets acquired and liabilities assumed be recognized at their fair values as of
the acquisition date. The following table summarizes the purchase price allocation for assets
acquired and liabilities assumed as of the acquisition date.
|
|
|
|
|
|
|
RMB000
|
Net current (liabilities)
|
|
|
(75,254
|
)
|
Property, machinery and equipment
|
|
|
65,743
|
|
Construction in progress
|
|
|
59,690
|
|
Proven and probable reserves and other mineralized material*
|
|
|
801,450
|
|
Net deferred income tax liabilities
|
|
|
(173,597
|
)
|
|
|
|
|
|
Fair value of net assets acquired
|
|
|
678,032
|
|
Total purchase consideration
|
|
|
678,032
|
|
|
|
|
|
|
|
|
|
*
|
|
Include value beyond proven and probable mineral reserves (VBPP).
|
The following table presents information for CLJL that is included in the Companys
consolidated statements of income from the acquisition date, April 6, 2009, for the year ended
December 31, 2009.
|
|
|
|
|
|
|
RMB000
|
Net sales
|
|
|
193,887
|
|
Net income attributable to XING common shareholders
|
|
|
64,207
|
|
(d) Disposal of QXCH by XING
On November 30, 2009, the Company sold QXCH to Dragon Fu Investment Limited (DFIL) for a
total consideration of RMB75,000,000 (US$10,989,000). As the Company intends to become a large
resources company and QXCHs performance declined quickly during the past two years, the Company
began to negotiate with DFIL regarding the selling of QXCH in early September, 2009. The total
consideration was paid before December 31, 2009. In addition, in accordance with the sales
agreement, DFIL will undertake to repay as a primary obligor, or to cause QXCHs subsidiary to
repay, the outstanding loan of RMB236,102,000 which is due from a QXCHs subsidiary to the Company,
in three installments but no later than November 30, 2010. As of December 31, 2009, this
outstanding loan amounted to RMB200,000,000. The loan is unsecured and non-interest bearing.
The condensed historical balances of QXCHs assets and liabilities that were disposed of are
as followings:
F-27
|
|
|
|
|
|
|
|
|
|
|
November 30, 2009
|
|
November 30, 2009
|
|
|
RMB000
|
|
US$000
|
Net sale proceeds
|
|
|
75,000
|
|
|
|
10,988
|
|
Less:
|
|
|
|
|
|
|
|
|
Cash
|
|
|
135,180
|
|
|
|
19,804
|
|
Other current assets
|
|
|
1,127,894
|
|
|
|
165,237
|
|
Property, machinery and equipment
|
|
|
13,694
|
|
|
|
2,006
|
|
Other non-current assets
|
|
|
118,741
|
|
|
|
17,396
|
|
Current liabilities*
|
|
|
(1,461,889
|
)
|
|
|
(214,167
|
)
|
Noncontrolling interests
|
|
|
(2,806
|
)
|
|
|
(411
|
)
|
|
|
|
|
|
|
|
|
|
Net (liabilities) disposed
|
|
|
(69,186
|
)
|
|
|
(10,135
|
)
|
Foreign currency realignment
|
|
|
49
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
Net gain on disposals
|
|
|
144,235
|
|
|
|
21,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Current liabilities include borrowings by QXCH from the Company totaling RMB236,102,000 as of
the date of the sale.
|
The results of the discontinued businesses of QXCH are shown below:
|
|
|
|
|
|
|
|
|
|
|
RMB000
|
|
US$000
|
Sales, net
|
|
|
165,265
|
|
|
|
24,211
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued
operations of QXCH
before income tax and
noncontrolling interest
|
|
|
(369,708
|
)
|
|
|
(54,162
|
)
|
Income tax expense
|
|
|
(1,902
|
)
|
|
|
(279
|
)
|
Net income attributable
to the noncontrolling
interest
|
|
|
(566
|
)
|
|
|
(83
|
)
|
|
|
|
|
|
|
|
|
|
Loss from discontinued
operations of QXCH
before disposal
|
|
|
(372,176
|
)
|
|
|
(54,524
|
)
|
Gain on disposal of QXCH
|
|
|
144,235
|
|
|
|
21,130
|
|
Realization of foreign
currency translation
gain relating to QXCH
|
|
|
88,159
|
|
|
|
12,916
|
|
|
|
|
|
|
|
|
|
|
Total loss for the
financial year
discontinued operations
of QXCH
|
|
|
(139,782
|
)
|
|
|
(20,478
|
)
|
|
|
|
|
|
|
|
|
|
The net cash outflow in respect of the disposal of subsidiaries during the year ended December
31, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
RMB000
|
|
US$000
|
Consideration
|
|
|
75,000
|
|
|
|
10,988
|
|
Cash disposed of
|
|
|
(135,180
|
)
|
|
|
(19,805
|
)
|
Unpaid
consideration as at December 31, 2009
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
Net cash outflow
|
|
|
(60,180
|
)
|
|
|
(8,817
|
)
|
|
|
|
|
|
|
|
|
|
The Company has accounted for the QXCH business in the consolidated financial statements as a
discontinued operation. Accordingly, assets and liabilities, revenues and expenses, and cash flows
related to the QXCH business have been appropriately reclassified in the consolidated financial
statements as discontinued operations for all periods presented.
The following revenue and expense items have been reclassified and included in income from
discontinued operations in the consolidated income statements for the years ended December 31, 2008
and 2007:
F-28
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
|
RMB000
|
|
RMB000
|
Sales, net
|
|
|
441,075
|
|
|
|
733,013
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) from
discontinued
operations of
QXCH before
income tax and
noncontrolling
interest
|
|
|
(299,892
|
)
|
|
|
77,798
|
|
Income tax expense
|
|
|
(8,471
|
)
|
|
|
(10,743
|
)
|
Net (income) loss
attributable to
the
noncontrolling
interest
|
|
|
17,410
|
|
|
|
(4,022
|
)
|
|
|
|
|
|
|
|
|
|
Loss from
discontinued
operations of
QXCH, net of tax
|
|
|
(290,953
|
)
|
|
|
63,033
|
|
The assets and liabilities of QXCH have been classified as discontinued operations in the
consolidated balance sheets presented herein. The following assets and liabilities have been
reclassified and included in assets and liabilities of the discontinued operations in the
consolidated balance sheet as of December 31, 2008:
|
|
|
|
|
|
|
2008
|
|
|
RMB000
|
ASSETS
|
|
|
|
|
Current assets:
|
|
|
|
|
Cash and cash equivalents
|
|
|
209,183
|
|
Restricted cash
|
|
|
127,501
|
|
Accounts receivable, net
|
|
|
471,825
|
|
Bills receivable
|
|
|
158,658
|
|
Inventories
|
|
|
58,140
|
|
Prepaid expenses
|
|
|
107,276
|
|
Other current assets
|
|
|
13,516
|
|
|
|
|
|
|
Total current assets
|
|
|
1,146,099
|
|
|
|
|
|
|
Property, machinery and equipment, net
|
|
|
15,772
|
|
Other non-current assets
|
|
|
111,786
|
|
|
|
|
|
|
Total non-current assets
|
|
|
127,558
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Short-term bank borrowings
|
|
|
516,905
|
|
Accounts payable
|
|
|
60,910
|
|
Other payables
|
|
|
8,207
|
|
Accrued liabilities
|
|
|
25,747
|
|
Deposits received
|
|
|
1,925
|
|
Deferred revenues
|
|
|
16,009
|
|
Due to (from) related parties
|
|
|
(8,036
|
)
|
Due to holding company
|
|
|
730,610
|
|
Taxation payable
|
|
|
25,775
|
|
Noncontrolling interest
|
|
|
2,240
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,380,292
|
|
|
|
|
|
|
F-29
(e) Disposal of BCYT and HCECT by QXMC
QXMC disposed of its interests in BCYT and HCECT during the year ended December 31, 2008.
Total gain at amount of RMB2,269,000 on disposal of BCYT and HCECT was reflected in the
consolidated statement of operations for the year ended December 31, 2008. The unpaid consideration
of RMB8,764,000 relating to the disposal of HCECT that was outstanding as of December 31, 2008 was
fully repaid during the year ended December 31, 2009.
Accounts receivable consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2009
|
|
|
RMB000
|
|
RMB000
|
|
US$000
|
Trade receivables
|
|
|
|
|
|
|
|
|
|
|
|
|
- third parties
|
|
|
468,325
|
|
|
|
141,524
|
|
|
|
20,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
468,325
|
|
|
|
141,524
|
|
|
|
20,733
|
|
Less: Allowance for doubtful accounts
|
|
|
(6,043
|
)
|
|
|
(18,442
|
)
|
|
|
(2,701
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
462,282
|
|
|
|
123,082
|
|
|
|
18,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in the allowance for doubtful accounts are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2009
|
|
|
RMB000
|
|
RMB000
|
|
US$000
|
Beginning of year
|
|
|
5,428
|
|
|
|
6,043
|
|
|
|
885
|
|
Bad debt expense
|
|
|
1,277
|
|
|
|
12,938
|
|
|
|
1,895
|
|
Bad debt recovery
|
|
|
(662
|
)
|
|
|
(539
|
)
|
|
|
(79
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
|
6,043
|
|
|
|
18,442
|
|
|
|
2,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-30
Inventories consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2009
|
|
|
RMB000
|
|
RMB000
|
|
US$000
|
Raw materials
|
|
|
130,477
|
|
|
|
94,459
|
|
|
|
13,838
|
|
Finished goods
|
|
|
78,817
|
|
|
|
42,917
|
|
|
|
6,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
209,294
|
|
|
|
137,376
|
|
|
|
20,125
|
|
Less: Reserve for obsolescence
|
|
|
(26,125
|
)
|
|
|
(39,364
|
)
|
|
|
(5,766
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Inventories
|
|
|
183,169
|
|
|
|
98,012
|
|
|
|
14,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in the reserve for obsolescence are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2009
|
|
|
RMB000
|
|
RMB000
|
|
US$000
|
Beginning of year
|
|
|
24,010
|
|
|
|
26,125
|
|
|
|
3,827
|
|
Provision for obsolescence for the year
|
|
|
2,115
|
|
|
|
13,239
|
|
|
|
1,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
|
26,125
|
|
|
|
39,364
|
|
|
|
5,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In November 2009, the Companys subsidiary, QXMC, entered into an agreement for the sale of
property and the associated land use rights to a third party for a total consideration of
RMB163,000,000 (US$23,880,000). The sale was completed in the second quarter of 2010. As of
December 31, 2009, the land and property have been reclassified from non-current assets to current
assets as assets held for sale. In addition, an impairment charge of RMB5,957,000 (US$873,000) was
made during the year ended December 31, 2009 to write down the value of the assets to their fair
value which was estimated based on the expected net sales proceeds.
F-31
Prepaid expenses consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2009
|
|
|
RMB000
|
|
RMB000
|
|
US$000
|
Advances to suppliers
|
|
|
363,907
|
|
|
|
181,550
|
|
|
|
26,597
|
|
Prepaid design, licensing and tooling fees
|
|
|
25,364
|
|
|
|
2,458
|
|
|
|
360
|
|
Current portion of land use rights
|
|
|
829
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
390
|
|
|
|
331
|
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
390,490
|
|
|
|
184,339
|
|
|
|
27,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current assets consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2009
|
|
|
RMB000
|
|
RMB000
|
|
US$000
|
Advances to staff
|
|
|
42
|
|
|
|
|
|
|
|
|
|
Advances to a third party (Note (a))
|
|
|
547,412
|
|
|
|
|
|
|
|
|
|
Interest receivable on advances to a
third party (Note (a))
|
|
|
35,501
|
|
|
|
|
|
|
|
|
|
Short-term investment
|
|
|
734
|
|
|
|
1,044
|
|
|
|
153
|
|
Other
|
|
|
12,028
|
|
|
|
35,981
|
|
|
|
5,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
595,717
|
|
|
|
37,025
|
|
|
|
5,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note -
(a) Advances to a third party in 2008 are secured by a floating charge over all the assets of
the borrower, bear interest at 5.0% per annum and are repayable on demand.
F-32
|
9.
|
|
PROPERTY, MACHINERY AND EQUIPMENT
|
Property, machinery and equipment consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2009
|
|
|
RMB000
|
|
RMB000
|
|
US$000
|
Buildings and improvements
|
|
|
149,037
|
|
|
|
130,223
|
|
|
|
19,077
|
|
Machinery, equipment and software
|
|
|
32,554
|
|
|
|
54,659
|
|
|
|
8,008
|
|
Furniture and office equipment
|
|
|
2,501
|
|
|
|
3,845
|
|
|
|
563
|
|
Motor vehicles
|
|
|
3,483
|
|
|
|
4,878
|
|
|
|
715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
187,575
|
|
|
|
193,605
|
|
|
|
28,363
|
|
Less: Accumulated depreciation
|
|
|
(20,209
|
)
|
|
|
(23,120
|
)
|
|
|
(3,387
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, machinery and equipment, net
|
|
|
167,366
|
|
|
|
170,485
|
|
|
|
24,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All the Groups property, machinery and equipment are principally located in
the PRC.
Depreciation charge for the continuing operations for each of the year was allocated to the
following expenses items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2007
|
|
2008
|
|
2009
|
|
|
RMB000
|
|
RMB000
|
|
RMB000
|
|
US$000
|
Cost of goods sold
|
|
|
9,192
|
|
|
|
10,134
|
|
|
|
13,576
|
|
|
|
1,989
|
|
Selling and distribution expenses
|
|
|
6
|
|
|
|
4
|
|
|
|
7
|
|
|
|
1
|
|
General and administrative
expenses
|
|
|
1,590
|
|
|
|
1,849
|
|
|
|
2,572
|
|
|
|
377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
10,788
|
|
|
|
11,987
|
|
|
|
16,155
|
|
|
|
2,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-33
|
10.
|
|
PROVEN AND PROBABLE RESERVES
|
On April 6, 2009, the Company acquired a 100% equity interest in CLJC, In connection with the
acquisition of CLJC, the Company capitalized the costs to acquire mineral reserves and other
mineralized material. The Company estimated the fair value of proven and probable mineral reserves
as well as the value beyond proven and probable mineral reserves and recorded these costs as assets
at the date of acquisition. Proven and probable mineral reserves are depleted over the life of the
mine using the units-of-production method based on the volume of mineral produced in relation to
the total estimated proven and probable mineral reserves. The cost assigned to value beyond proven
and probable mineral reserves is not amortized. The details are as followings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2009
|
|
|
RMB000
|
|
RMB000
|
|
US$000
|
Cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proven and probable reserves
|
|
|
|
|
|
|
734,155
|
|
|
|
107,554
|
|
Value beyond proven and probable reserves
|
|
|
|
|
|
|
67,295
|
|
|
|
9,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
801,450
|
|
|
|
117,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Accumulated depletion
|
|
|
|
|
|
|
|
|
|
|
|
|
- Proven and probable reserves
|
|
|
|
|
|
|
(22,034
|
)
|
|
|
(3,228
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proven and probable reserves
|
|
|
|
|
|
|
712,121
|
|
|
|
104,326
|
|
Value beyond proven and probable reserves
|
|
|
|
|
|
|
67,295
|
|
|
|
9,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill is analyzed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2009
|
|
|
RMB000
|
|
RMB000
|
|
US$000
|
Beginning of year
|
|
|
76,593
|
|
|
|
82,058
|
|
|
|
12,022
|
|
Amount deemed disposed of due to the
conversion of Notes by QXMC (Note 3
(b))
|
|
|
(1,923
|
)
|
|
|
|
|
|
|
|
|
Amount increased due to repurchase
of stock by QXMC (Note 3 (b)
|
|
|
7,954
|
|
|
|
|
|
|
|
|
|
Amount disposed of due to the
exchange of options to stock in QXMC
(Note 3 (b))
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount deemed disposed of due to the
sale of stock by QXMC (Note 3 (b))
|
|
|
(566
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
|
82,058
|
|
|
|
82,058
|
|
|
|
12,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All goodwill is allocated to the mobile phones business segment.
F-34
|
12.
|
|
OTHER ACQUIRED INTANGIBLE ASSETS, NET
|
Other acquired intangible assets, which arose from the acquisition by QXMC of its initial
65.0% equity interest in CECT on February 8, 2003, and as subsequently adjusted for the purchase
accounting of the Companys acquisition of the remaining 20.0% interest in QXMC on November 30,
2006, consist of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2009
|
|
|
RMB000
|
|
RMB000
|
|
US$000
|
Cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
- CECT brand
|
|
|
39,835
|
|
|
|
39,835
|
|
|
|
5,836
|
|
- Customer relationship
|
|
|
5,418
|
|
|
|
5,418
|
|
|
|
794
|
|
- Completed technology
|
|
|
16,950
|
|
|
|
16,950
|
|
|
|
2,483
|
|
- Core technology
|
|
|
24,193
|
|
|
|
24,193
|
|
|
|
3,544
|
|
- Backlog
|
|
|
9,175
|
|
|
|
9,175
|
|
|
|
1,344
|
|
- License
|
|
|
1,725
|
|
|
|
1,725
|
|
|
|
253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97,296
|
|
|
|
97,296
|
|
|
|
14,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Accumulated impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
-CECT brand
|
|
|
26,235
|
|
|
|
39,835
|
|
|
|
5,836
|
|
Less: Accumulated amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
- Customer relationship
|
|
|
5,118
|
|
|
|
5,418
|
|
|
|
794
|
|
- Completed technology
|
|
|
16,950
|
|
|
|
16,950
|
|
|
|
2,483
|
|
- Core technology
|
|
|
15,327
|
|
|
|
19,760
|
|
|
|
2,895
|
|
- Backlog
|
|
|
9,175
|
|
|
|
9,175
|
|
|
|
1,344
|
|
- License
|
|
|
1,725
|
|
|
|
1,725
|
|
|
|
253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74,530
|
|
|
|
92,863
|
|
|
|
13,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other acquired intangible assets, net
|
|
|
22,766
|
|
|
|
4,433
|
|
|
|
649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of the CECT brand name was estimated using the Relief-from-Royalty
Method, a discounted cash flow approach which brings into play, in the case of CECT, a single set
of estimated cash flows and a discount rate commensurate with the risk. The cash flow contribution
from the brand name comes from savings in royalty that CECT would have to pay to a third party for
the use of its brand name if CECT had not had the right to use it but nevertheless had wanted its
products to have a recognized brand. The cash flow contribution of the CECT brand name is linked
to the cash inflow from the sales revenue of CECT. As there is a lack of publicly available
information about comparable licensing transactions in the PRC suitable for the Groups purpose,
the royalty savings as a percentage of sales revenue is estimated by comparing the operational
profit margin as a percentage of sales revenue of CECT with its superior CECT brand name with
those of comparable companies in the PRC which operate on an OEM sub-contractor basis or with an
inferior brand. Also, marketing expense is required to maintain the brand name for CECT. An
average of marketing expense as a percentage of sales revenue is taken from the statements of
operations of CECT in the medium term forecast. This percentage is then used to estimate cash
outflow relating to marketing expense in the cash flow forecast under the Relief-from-Royalty
Method.
For the year ended December 31, 2008, due to the Groups strategic shift to focus more on its
high-end VEVA-branded handsets, the Group recorded an impairment charge of RMB26,235,000 on its
CECT brand name in 2008 and an impairment charge of RMB13,600,000 (US$1,992,000) in 2009. The
impairment tests conducted by the Group on the CECT brand name for the years ended December 31,
2007 did not result in any impairment charges.
F-35
The expected future amortization expense of other acquired intangible assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
RMB000
|
|
US$000
|
Year ending December 31, 2010
|
|
|
4,433
|
|
|
|
649
|
|
|
13.
|
|
SHORT-TERM BANK BORROWINGS
|
Short-term bank borrowings consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2009
|
|
|
RMB000
|
|
RMB000
|
|
US$000
|
Bills payable
|
|
|
39,850
|
|
|
|
191,200
|
|
|
|
28,011
|
|
Bank loans
|
|
|
944,100
|
|
|
|
693,508
|
|
|
|
101,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
983,950
|
|
|
|
884,708
|
|
|
|
129,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bills payable are a form of bank borrowing with payment terms of not more than 180 days
and are non-interest bearing unless they become trust receipt loans which then bear interest at the
prevailing interest rate of bank loans.
During each of the periods presented, the Group entered into various loan agreements with
commercial banks in the PRC at terms ranging from three months to one year. The weighted average
interest rate on these bank loans was 6.4%, 7.1% and 6.0% per annum during the years ended December
31, 2007, 2008 and 2009, respectively. The principal amounts of these short-term loans are
repayable at the end of the loan period, while the related interest expense is payable on a monthly
or quarterly basis.
Short-term bank borrowings are secured by the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2009
|
|
|
RMB000
|
|
RMB000
|
|
US$000
|
Pledged of:
|
|
|
|
|
|
|
|
|
|
|
|
|
- Bank deposits of the Group
|
|
|
136,299
|
|
|
|
251,720
|
|
|
|
36,877
|
|
- Bills receivable of the Group
|
|
|
40,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantees provided by:
|
|
|
|
|
|
|
|
|
|
|
|
|
- QXGL
|
|
|
160,000
|
|
|
|
50,000
|
|
|
|
7,321
|
|
- QXGL and directors
|
|
|
360,000
|
|
|
|
290,000
|
|
|
|
42,463
|
|
- Directors
|
|
|
218,500
|
|
|
|
68,500
|
|
|
|
10,030
|
|
F-36
Accrued liabilities consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2009
|
|
|
RMB000
|
|
RMB000
|
|
US$000
|
Accruals for:
|
|
|
|
|
|
|
|
|
|
|
|
|
- Design, licensing and tooling fees
|
|
|
23,653
|
|
|
|
102
|
|
|
|
15
|
|
- Salaries
|
|
|
2,780
|
|
|
|
3,932
|
|
|
|
576
|
|
- Staff benefits
|
|
|
2,035
|
|
|
|
1,774
|
|
|
|
260
|
|
- Advertising
|
|
|
35
|
|
|
|
18,296
|
|
|
|
2,680
|
|
- Warranty
|
|
|
5,029
|
|
|
|
1,923
|
|
|
|
282
|
|
- Interest
|
|
|
14,254
|
|
|
|
5,966
|
|
|
|
874
|
|
- Professional service fees
|
|
|
11,114
|
|
|
|
6,329
|
|
|
|
927
|
|
- Others
|
|
|
3,117
|
|
|
|
2,150
|
|
|
|
315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,017
|
|
|
|
40,472
|
|
|
|
5,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-37
Convertible notes consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2009
|
|
|
RMB000
|
|
RMB000
|
|
US$000
|
4.5% unsecured senior convertible notes (Note (a))
|
|
|
177,385
|
|
|
|
|
|
|
|
|
|
QXMC 4.0% unsecured senior convertible notes
(Note (b))
|
|
|
206,211
|
|
|
|
112,162
|
|
|
|
16,432
|
|
0% new unsecured senior convertible notes (Note
(c))
|
|
|
|
|
|
|
121,554
|
|
|
|
17,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debts
|
|
|
383,596
|
|
|
|
233,716
|
|
|
|
34,240
|
|
Less: Amount classified as current liabilities
|
|
|
(383,596
|
)
|
|
|
(233,716
|
)
|
|
|
(34,240
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount classified as non-current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes -
(a) 4.5% unsecured senior convertible notes
On October 31, 2006, the Company issued and sold to two institutional investors US$26,000,000
aggregate principal amount of 4.5% unsecured senior convertible notes (the 4.5% Notes). In
addition, the Company also issued common stock purchase warrants to the investors (the October
Investor Warrants) and its placement agent (the October Agent Warrants) to purchase up to
363,637 and 181,818 shares of common stock of the Company, respectively.
The material terms and conditions of the 4.5% Notes are summarized as follows:
|
|
|
the notes bear interest at the rate of 4.5% per annum, payable in cash in arrears on
a calendar quarterly basis beginning December 31, 2006;
|
|
|
|
|
the notes mature on April 30, 2009;
|
|
|
|
|
the notes are convertible, at the investors option, into common stock of the
Company at an initial conversion price of US$14.30 per share. The conversion price for
the Companys common stock is subject to reset when the volume weighted average price
(VWAP) of the Companys common stock for the five trading days ending on each
six-month anniversary from October 31, 2006 until maturity of the Notes (each a Reset
Date) is less than US$13.00 (or such previously reset price). In the event of a
reset, the conversion price will be set equal to the greater of US$7.80 or 100% of the
VWAP of the Companys common stock for the five trading days ending on the applicable
Reset Date. As of December 31, 2008, the conversion price of the 4.5% Notes had been
reset to US$5.56 per share due to dilutive issuance adjustments related to the issuance
and price reset of the 5.5% unsecured senior convertible notes issued on August 17,
2007;
|
|
|
|
|
the notes will not be convertible to the extent that after giving effect to such
conversion, the investors (together with their affiliates) would beneficially own in
excess of 9.99% of the Companys common stock outstanding immediately after giving
effect to the conversion; and
|
|
|
|
|
the holders of the notes have the right to require the Company to redeem the notes
after one year in an amount equal to the sum of (a) the outstanding principal of the
Notes, (b) the accrued and unpaid interest thereon, and (c) 3% on the sum of (a) and
(b).
|
F-38
The material terms and conditions of the warrants are summarized as follows:
|
|
|
the warrants have an initial exercise price of US$14.30 per share and may be
exercised at any time during a 5-year period commencing from October 31, 2006;
|
|
|
|
|
the warrants will not be exercisable to the extent that after giving effect to such
exercise, the holder (together with its affiliates) would beneficially own in excess of
9.99% of the Companys common stock outstanding immediately after giving effect to such
exercise; and
|
|
|
|
|
the warrants require an automatic repricing of the exercise price if the Company
makes certain sales of its common stock or common stock equivalents in a
capital-raising transaction at a price below the warrant exercise price.
|
On November 3, 2009, the Company signed AMENDMENT AND EXCHANGE AGREEMENT with two
institutional investors of the 4.5% Notes and issued US$24 million aggregate principle amount of 0%
unsecured restated senior convertible notes to these two institutional investors in exchange of the
4.5% Notes (Note 15 (c)). In addition, the Company has issued 2,400,000 shares of common stock of
the Company to these two institutional investors. The institutional investors have also waived the
interest accrued on the 4.5% Notes over the first four months of 2009 as part of the restructuring.
The
4.5% Notes included on the 2008 consolidated balance sheets are analyzed as follows:
|
|
|
|
|
|
|
2008
|
|
|
RMB000
|
Gross proceeds from 4.5% Notes
|
|
|
202,475
|
|
Discount on notes:
|
|
|
|
|
- Equity-classified October
Investor Warrants (Note (i))
|
|
|
(14,534
|
)
|
- Liability-classified embedded
derivatives (Note (ii))
|
|
|
(111,341
|
)
|
|
|
|
|
|
Value of debt component at date of issue
|
|
|
76,600
|
|
Foreign currency realignment
|
|
|
(22,517
|
)
|
Accretion of discount (Note (iii))
|
|
|
123,302
|
|
|
|
|
|
|
Value of debt component at end of year
|
|
|
177,385
|
|
|
|
|
|
|
Notes
(i) The terms and features of the October Investor Warrants were evaluated and the Company
concluded that all indicators for equity classification were present.
The gross proceeds of RMB202,475,000 from the issuance of the US$26,000,000 notes were
allocated to the October Investors Warrants and the 4.5% Notes on a relative fair value basis. The
fair value of the 363,637 October Investors Warrants applied for the purposes of the aforementioned
allocation was computed using the Black-Scholes option-pricing model on the grant date of the
warrants and amounted to approximately RMB22,686,000. As a result of the allocation, approximately
RMB14,534,000 of the gross proceeds from the issuance of the 4.5% Notes was allocated to the value
of the October Investor Warrants, which was recorded as a discount to the face value of the 4.5%
Notes and credited to additional paid-in capital. The following assumptions were used to value the
October Investor Warrants on the grant date: expected dividend yield of 0.00%, expected stock price
volatility of 67.52%, risk free interest rate of 4.60% and an expected life of 3.25 years.
F-39
(ii) The 4.5% Notes are a form of hybrid instrument that comes with embedded derivatives,
including the right to convert the notes by the note holders, an early redemption premium put, a
put option conditional upon certain events of default and a put option conditional upon a change of
control. The embedded derivatives were removed from the debt host and accounted for separately as
derivative instruments and were classified as liabilities on the balance sheet on the date of
initial recognition. The value of the embedded compound derivatives, which amounted to
approximately RMB111,341,000 on the date of initial recognition, has been deducted as a discount to
the face value of the 4.5% Notes and recorded as a liability on the balance sheet. Subsequent to
initial recognition, the liability-classified embedded derivatives are marked-to-market at the end
of each reporting period with the resulting gain or loss recognized in the consolidated statements
of operations. The valuation of the embedded derivatives at each period-end is derived from
various valuation methods which uses significant unobservable inputs (Level 3), including Monte
Carlo Simulation and Backward Dynamic Programming.
The liability-classified embedded derivatives included in the consolidated financial
statements for the years ended December 31, 2007, 2008 and 2009 is analyzed as followings:
|
|
|
|
|
|
|
|
|
|
|
RMB000
|
|
US$000
|
Balance at December 31, 2006
|
|
|
82,698
|
|
|
|
12,122
|
|
Foreign currency realignment
|
|
|
(3,318
|
)
|
|
|
(487
|
)
|
Gain on remeasurement included in earnings
|
|
|
18,865
|
|
|
|
2,765
|
|
*Reclassification
|
|
|
(89,531
|
)
|
|
|
(13,123
|
)
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
8,714
|
|
|
|
1,277
|
|
Foreign currency realignment
|
|
|
(468
|
)
|
|
|
(69
|
)
|
Gain on remeasurement included in earnings
|
|
|
(5,296
|
)
|
|
|
(776
|
)
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
2,950
|
|
|
|
432
|
|
Foreign currency realignment
|
|
|
3
|
|
|
|
|
|
Gain on remeasurement included in earnings
|
|
|
(2,953
|
)
|
|
|
(432
|
)
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Due to the expiration of the early redemption premium put in October 2007, the Company
reassessed the classification of the embedded conversion option of the 4.5% Notes and concluded
that the fair value of the embedded conversion option as of the date of expiration of the early
redemption premium put option, which amounted to approximately RMB89,531,000, was reclassified to
additional paid-in capital.
|
The liability-classified embedded derivatives are marked-to-market at the end of each
reporting period with the resulting gain or loss recognized in the statement of operations.
(iii) The discount arising from the October Investors Warrants and the embedded derivatives is
accreted to interest expense to the first put date of the 4.5% Notes using the effective interest
method.
F-40
Costs associated with the issuance of the 4.5% Notes, which have been classified as deferred
debt issuance costs on the consolidated balance sheet, are analyzed as follows:
|
|
|
|
|
|
|
2008
|
|
|
RMB000
|
Amount attributed to June Agent Warrants (Note (i))
|
|
|
10,529
|
|
Other cash costs
|
|
|
14,385
|
|
|
|
|
|
|
Total deferred debt issuance costs on initial
recognition
|
|
|
24,914
|
|
Foreign currency realignment
|
|
|
(510
|
)
|
Accumulated amortization (Note (ii))
|
|
|
(24,404
|
)
|
|
|
|
|
|
Net value at end of year
|
|
|
|
|
|
|
|
|
|
Notes
(i) The fair value of the October Agent Warrants, as computed using the Black-Scholes option
pricing model on the grant date, amounted to approximately RMB11,343,000. Of this amount,
RMB10,529,000 was capitalized as deferred debt issuance costs on the consolidated balance sheet
while the balance of RMB814,000 was debited to additional paid-in capital as cost associated with
the issuance of the October Investor Warrants. The following assumptions were used to value the
June Agent Warrants on the grant date: expected dividend yield of 0.00%, expected stock price
volatility of 67.52%, risk free interest rate of 4.60% and an expected life of 3.25 years.
(ii) The deferred debt issuance costs are amortized to expense to the first put date of the
4.5% Notes using the effective interest method.
For accounting purpose, during the 4.5% Notes restructuring, the 4.5% Notes are considered
extinguished. Loss from the extinguishment of 4.5% Notes included in the consolidated financial
statements for the years ended December 31, 2009 is analyzed as followings:
|
|
|
|
|
|
|
|
|
|
|
RMB000
|
|
US$000
|
Fair value of 4.5% Notes extinguished
|
|
|
|
|
|
|
|
|
Fair value of 4.5% Notes as of November 3, 2009
|
|
|
177,486
|
|
|
|
26,002
|
|
Interest accrued in year 2009
|
|
|
2,626
|
|
|
|
385
|
|
|
|
|
|
|
|
|
|
|
Total fair value of 4.5% Notes extinguished
|
|
|
180,112
|
|
|
|
26,387
|
|
Less:
|
|
|
|
|
|
|
|
|
Fair value of 0% Restated Notes issued (Note 15 (c))
|
|
|
|
|
|
|
|
|
Fair value of straight bonds
|
|
|
(161,405
|
)
|
|
|
(23,646
|
)
|
Fair value of embedded derivatives on November
3, 2009
|
|
|
(34,462
|
)
|
|
|
(5,049
|
)
|
Fair value of common shares issued (Note 18)
|
|
|
(33,422
|
)
|
|
|
(4,896
|
)
|
|
|
|
|
|
|
|
|
|
Loss on extinguishment of 4.5% Notes
|
|
|
(49,177
|
)
|
|
|
(7,204
|
)
|
|
|
|
|
|
|
|
|
|
F-41
(b) QXMC 4.0% unsecured senior convertible notes
On May 15, 2008, QXMC issued to the same investors of the 4.5% Notes US$70,000,000 aggregate
principal amount of 4.0% unsecured senior convertible notes (the QXMC 4.0% Notes) that came with
warrants to purchase 1,648,721 ordinary shares of QXMC (the QXMC Investor Warrants). The
consideration paid on May 15, 2008 by the investors for the QXMC 4.0% Notes comprised a combination
of 6,966,666 ordinary shares of QXMC that were owned by the investors, valued at approximately
US$48,349,000 based on the closing market price of the QXMCs ordinary shares on May 14, 2008, and
cash of US$21,651,000. All ordinary shares of QXMC submitted by the investors in exchange for the
QXMC 4.0% Notes were cancelled. In addition, QXMC also issued warrants to its placement agent to
purchase up to 942,127 ordinary shares of QXMC at terms identical to the QXMC Investor Warrants
(the QXMC Agent Warrants and collectively with the QXMC Investor Warrants, the QXMC Warrants).
The material terms and conditions of the QXMC 4.0% Notes are summarized as follows:
the notes are unsecured and mature on May 15, 2011;
the notes bear interest at a rate of 4.0% per annum, payable in cash in arrears on a
calendar semi-annual basis beginning June 30, 2008, and the default rate is 15%;
the notes are convertible at the holders option into ordinary shares of QXMC at an
initial conversion price of $7.43 per share. The conversion price is subject to reset if the
average of the daily volume weighted average price (VWAP) of QXMCs ordinary shares for the five
consecutive trading days ending on each three-month anniversary of the issuance date of the notes
until maturity (each a Reset Date) is less than $6.76. In that event, the conversion price is
reset to a price equal to the greater of US$4.05 or 92.5% of the arithmetic average of the daily
VWAP of QXMCs ordinary shares for the five trading days ending on the applicable Reset Date. The
conversion price of the notes was reset to US$4.05 on November 15, 2008;
the notes cannot be converted if, after giving effect to such conversion, the holders
of the notes (together with their affiliates) would beneficially own in excess of 9.99% of QXMCs
ordinary shares outstanding immediately after giving effect to the conversion;
the notes require an automatic re-pricing of the conversion price if QXMC make certain
sales of its ordinary shares or ordinary share equivalents in a capital-raising transaction at a
price below the conversion price;
the holders of the notes have the right to require QXMC to redeem the notes at any
time on or after the 18 month anniversary of the issuance date of the Notes in an amount equal to
the sum of (a) the outstanding principal of the Notes, and (b) the accrued and unpaid interest
thereon. Accordingly, the notes were classified as current liabilities on the consolidated balance
sheet as of December 31, 2008;
in the event of a default, change of control and certain other fundamental
transactions, the holders of the notes have the right to require QXMC to redeem all or any portion
of the notes at a price equal to the greater of (i) the amount to be redeemed multiplied by a
redemption premium of 125% and (ii) the amount to be redeemed multiplied by the quotient determined
by dividing the closing bid price of QXMCs ordinary shares on the date immediately preceding such
event by the conversion price of the notes;
all principal, interest, late charges and other amounts due under the notes that are
payable in cash shall be settled in U.S. dollars in an amount equal to the applicable U.S. dollar
cash payment due under the terms of the notes multiplied by 6.99 and divided by the exchange rate
of one U.S. dollar to RMB on the date such payment is due; and
QXMC is required under the terms of the Registration Rights Agreement to file with the
Securities and Exchange Commission (SEC) a registration statement to register the ordinary shares
issuable upon the conversion of the notes and the exercise of the Warrants to permit the resale of
such ordinary shares to the public. The registration statement was filed by QXMC on June 27, 2008
and was declared effective by the SEC on July 11, 2008.
The material terms and conditions of the QXMC Warrants are summarized as follows:
F-42
the initial exercise price of each QXMC Warrant is $8.91 per share, subject to
adjustments as provided for in the Warrant;
the QXMC Warrants are exercisable at any time during a period of five years from May
15, 2008;
the QXMC Warrants contain a cashless exercise feature if the registration statement
covering the shares underlying the QXMC Warrants is not available for the resale upon the exercise
of the QXMC Warrants;
the QXMC Warrants contain certain limitations on the exercise thereof in the event
that the holder would beneficially own in excess of 9.99% of QXMCs ordinary shares outstanding
immediately after giving effect to such exercise; and
the QXMC Warrants require an automatic re-pricing of the exercise price if QXMC makes
certain sales of its ordinary shares or ordinary share equivalents in a capital-raising transaction
at a price below the exercise price of the QXMC Warrants.
The notes included on the consolidated balance sheets are analyzed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2009
|
|
|
RMB000
|
|
RMB000
|
|
US$000
|
Gross proceeds from QXMC 4.0% Notes
|
|
|
489,601
|
|
|
|
489,601
|
|
|
|
71,727
|
|
Discount on notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
- Equity-classified October QXMC Investor Warrants
(Note (i))
|
|
|
(36,062
|
)
|
|
|
(36,062
|
)
|
|
|
(5,283
|
)
|
- Liability-classified embedded derivatives (Note (ii))
|
|
|
(304,037
|
)
|
|
|
(304,037
|
)
|
|
|
(44,542
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value of debt component at date of issue
|
|
|
149,502
|
|
|
|
149,502
|
|
|
|
21,902
|
|
Foreign currency realignment
|
|
|
7,484
|
|
|
|
6,612
|
|
|
|
969
|
|
Accretion of discount (Note (iii))
|
|
|
70,512
|
|
|
|
207,611
|
|
|
|
30,415
|
|
Partial conversion of Notes into ordinary shares
|
|
|
(21,287
|
)
|
|
|
(131,047
|
)
|
|
|
(19,198
|
)
|
Purchase of Notes
|
|
|
|
|
|
|
(120,516
|
)
|
|
|
(17,656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value of debt component at end of year
|
|
|
206,211
|
|
|
|
112,162
|
|
|
|
16,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes:
(i) The terms and features of the Investor Warrants were evaluated to determined whether they
were to be classified as equity or liability and the Company concluded that all indicators for
equity classification were present.
The gross proceeds from the issuance of the Notes were allocated to the Investors Warrants and
the Notes on a relative fair value basis. The fair value of the Investors Warrants applied for the
purposes of the aforementioned allocation was estimated using a multi-period binomial option
pricing model on the grant date of the warrants and amounted to approximately RMB59,415,000. As a
result of the allocation, approximately RMB36,062,000 of the gross proceeds from the issuance of
the Notes was allocated to the value of the Investor Warrants, which was recorded as a discount to
the face value of the Notes and credited to additional paid-in capital.
(ii) The Notes are a form of hybrid instrument that comes with embedded derivatives, including
the right to convert the Notes into ordinary shares of the Company by the note holders, a put
option conditional upon certain events of default and a put option conditional upon a change of
control. The embedded derivatives were removed from the debt host and accounted for separately as
derivative instruments. The embedded derivatives were determined to be classified as liabilities
on the balance sheet. Subsequent to initial recognition, the liability-classified embedded
derivatives are marked-to-market at the end of each reporting period with the resulting gain or
loss recognized in the consolidated statement of operations. The valuation of the embedded
derivatives at each period-end is derived from various valuation methods which uses significant
unobservable inputs (Level 3), including Monte Carlo Simulation and Backward Dynamic Programming.
F-43
The liability-classified embedded derivatives included on the consolidated balance sheet as of
December 31, 2009 and 2008 is analyzed as followings:
|
|
|
|
|
|
|
|
|
|
|
RMB000
|
|
US$000
|
Value on initial recognition
|
|
|
304,037
|
|
|
|
44,542
|
|
Foreign currency realignment
|
|
|
(6,551
|
)
|
|
|
(960
|
)
|
Gain on remeasurement included in earnings
|
|
|
(144,939
|
)
|
|
|
(21,234
|
)
|
Settled on conversion of Notes
|
|
|
(28,417
|
)
|
|
|
(4,163
|
)
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
124,130
|
|
|
|
18,185
|
|
Foreign currency realignment
|
|
|
87
|
|
|
|
13
|
|
Loss on remeasurement included in earnings
|
|
|
14,808
|
|
|
|
2,169
|
|
Settled on conversion of Notes
|
|
|
(59,158
|
)
|
|
|
(8,667
|
)
|
Settled on Purchase of Notes
|
|
|
(39,889
|
)
|
|
|
(5,844
|
)
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
39,978
|
|
|
|
5,856
|
|
|
|
|
|
|
|
|
|
|
Loss on remeasurement included in earnings attributable to the change in unrealized loss
of liabilities still outstanding at end of year 2009 was RMB1,129,000 (US$165,000). Gain on
remeasurement included in earnings attributable to the change in unrealized gain of liabilities
still outstanding at end of year 2008 was RMB138,206,000.
(iii) The discount arising from the Investors Warrants and the embedded derivatives is
accreted to interest expense to the first put date of the notes using the effective interest
method.
The carrying amount and the estimated fair value of the QXMC 4.0% Notes at December
31, 2009 were Rmb112,162,000 (US$16,432,000) (2008: RMB206,211,000) and RMB106,281,000
(US$15,562,000) (2008: RMB357,621,000), respectively.
Costs associated with the issuance of the notes, which have been classified as deferred debt
issuance costs on the consolidated balance sheet, are analyzed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2009
|
|
|
RMB000
|
|
RMB000
|
|
US$000
|
Amount attributed to Agent Warrants (Note (i))
|
|
|
31,451
|
|
|
|
31,451
|
|
|
|
4,608
|
|
Other cash costs
|
|
|
20,887
|
|
|
|
20,887
|
|
|
|
3,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred debt issuance costs on initial
recognition
|
|
|
52,338
|
|
|
|
52,338
|
|
|
|
7,668
|
|
Foreign currency realignment
|
|
|
(1,198
|
)
|
|
|
(1,180
|
)
|
|
|
(173
|
)
|
Accumulated amortization (Note (ii))
|
|
|
(10,851
|
)
|
|
|
(31,866
|
)
|
|
|
(4,668
|
)
|
Written-off on conversion of QXMC 4% Notes
|
|
|
(5,600
|
)
|
|
|
(5,600
|
)
|
|
|
(820
|
)
|
Purchase of Notes
|
|
|
|
|
|
|
(13,692
|
)
|
|
|
(2,007
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net value at end of year
|
|
|
34,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i) The fair value of the QXMC Agent Warrants on the grant date, which was estimated
using a multi-period binomial option pricing model, amounted to approximately RMB33,951,000. Of
this amount, RMB31,451,000 was debited to deferred debt issuance costs as cost associated with the
issuance of the notes, while the balance of RMB2,500,000 was debited to additional paid-in capital
as cost associated with the issuance of the QXMC Investor Warrants.
(ii) The deferred debt issuance costs are amortized to expense to the first put date of the
notes using the effective interest method.
F-44
In 2008, the holders of the notes exercised the option to convert US$8,251,000 of the
principal amount of the notes and accrued interest thereon of US$46,000 into 1,511,397 ordinary
shares of QXMC at a conversion price of US$5.49 per share. In 2009, the holders of the notes
exercised the option to convert US$16,073,000 of the principal amount of the notes and accrued
interest thereon of US$590,000 into 4,114,286 ordinary shares of QXMC at a conversion price of
US$4.05 per share. The extinguishment of the convertible debts that arose from the conversion
resulted in a gain of RMB46,351,000 (US$6,790,000) and RMB10,634,000 for the year ended December
31, 2009 and 2008 respectively, computed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2009
|
|
|
RMB000
|
|
RMB000
|
|
US$000
|
Fair value of ordinary shares issued
|
|
|
55,054
|
|
|
|
126,650
|
|
|
|
18,555
|
|
(Less) add: Carrying amount of:
|
|
|
|
|
|
|
|
|
|
|
|
|
- Notes
|
|
|
(21,287
|
)
|
|
|
(109,760
|
)
|
|
|
(16,080
|
)
|
- Accrued interest
|
|
|
(316
|
)
|
|
|
(4,028
|
)
|
|
|
(590
|
)
|
- Embedded derivatives
|
|
|
(28,417
|
)
|
|
|
(59,158
|
)
|
|
|
(8,667
|
)
|
- Deferred debt issuance costs
|
|
|
5,600
|
|
|
|
|
|
|
|
|
|
- Foreign currency realignment
|
|
|
|
|
|
|
(55
|
)
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss (gain) on extinguishment of
convertible debts
|
|
|
10,634
|
|
|
|
(46,351
|
)
|
|
|
(6,790
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On March 31, 2009, the Company purchased from three noteholders (DKR SoundShore Oasis
Holding Fund Ltd, CEDAR DKR Holding Fund Ltd and Chestnut Fund Ltd) US$30,000,000 of the
outstanding QXMC 4.0% Notes for an aggregate purchase price of US$24,000,000. On November 15, 2009,
the Company redeemed US$30,000,000 of the principal amount of the QXMC 4.0% Notes.
The carrying value of the QXMC 4.0% Notes purchased by the Company was estimated to be
approximately RMB146,713,000 (US$21,494,000) on March 31, 2009. The transaction resulted in a loss
on the extinguishment of the US$30,000,000 QXMC 4.0% Notes of RMB15,146,000 (US$2,219,000) for the
group, being the difference between the purchase price and the carrying value of the debt, the
accrued interest, the embedded derivatives and the unamortized deferred debt issuance costs
relating to the QXMC 4.0% Notes, computed as follows:
|
|
|
|
|
|
|
|
|
|
|
RMB000
|
|
US$000
|
Aggregate purchase price
|
|
|
163,822
|
|
|
|
24,000
|
|
Less: Carrying amount of:
|
|
|
|
|
|
|
|
|
- Notes
|
|
|
(120,516
|
)
|
|
|
(17,656
|
)
|
- Accrued interest
|
|
|
(1,963
|
)
|
|
|
(288
|
)
|
- Embedded derivatives
|
|
|
(39,889
|
)
|
|
|
(5,844
|
)
|
- Deferred debt issuance costs
|
|
|
13,692
|
|
|
|
2,007
|
|
|
|
|
|
|
|
|
|
|
Loss on extinguishment of convertible debts
|
|
|
15,146
|
|
|
|
2,219
|
|
|
|
|
|
|
|
|
|
|
F-45
(c) 0% unsecured restated senior convertible notes
On November 3, 2009, the Company signed AMENDMENT AND EXCHANGE AGREEMENT with two
institutional investors of the 4.5% Notes and issued US$24 million aggregate principle amount of 0%
unsecured restated senior convertible notes (the 0% Restated Notes) to these two institutional
investors in exchange of the 4.5% Notes. The Company is obligated to repay the principal of the 0%
Restated Notes in eight installments prior to the July 3, 2010 maturity date in the form of, at the
Companys option, cash or common stock. In addition, in connection with the restricting, the
Company has issued 2,400,000 shares of common stock of the Company to these two institutional
investors. The institutional investors have also waived the interest accrued on the 4.5% Notes over
the first four months of 2009 as part of the restructuring.
The material terms and conditions of the 0% Restated Notes are summarized as follows:
|
|
|
the notes is noninterest bearing;
|
|
|
|
|
the notes mature on July 3, 2010, with monthly installment at amount of the lesser
of US$ 3 million or the remaining principal. The installment payment starts on November
18, 2009 and continues first day of each month thereafter to maturity. For each
installment payments, the Company can elect to pay in common shares or cash;
|
|
|
|
|
the notes are convertible, at the investors option, into common stock of the
Company at an initial conversion price of US$2.00 per share. The conversion price for
the Companys common stock is subject to reset when the Company issues new shares below
conversion price, then the conversion price will be reduced to an amount equal to the
new issuance price. As of December 31, 2009, there was no conversion price reset.
|
|
|
|
|
If the Company elects to pay in common shares of the Company, it will be based on
the Company conversion price which is the lesser of (i) the then applicable conversion
price (calculated and adjusted as set forth above) and (ii) that price which is 91% of
the arithmetic average of the volume weighted average price (VWAP) of the Companys
common stock on each of the five consecutive trading day period;
|
|
|
|
|
the notes will not be convertible to the extent that after giving effect to such
conversion, the investors (together with their affiliates) would beneficially own in
excess of 9.99% of the Companys common stock outstanding immediately after giving
effect to the conversion; and
|
|
|
|
|
the holders of the notes have the right to require the Company to redeem the notes
in an amount equal to the sum of the outstanding principal of the notes upon an
acquisition made by the Company that is greater than 20% of the value of the Company.
In the event of default or there is a change of control of the Company, the holders of
the notes have the right to require the Company to redeem the noted in an amount equal
to 125% of the sum of the outstanding principal of the notes.
|
F-46
The 0% Restated Notes included on the consolidated balance sheets are analyzed as follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
RMB000
|
|
US$000
|
Par value of 0% Restated Notes
|
|
|
163,834
|
|
|
|
24,002
|
|
|
|
|
|
|
|
|
|
|
Discount on notes:
|
|
|
(2,429
|
)
|
|
|
(356
|
)
|
|
|
|
|
|
|
|
|
|
Value of debt component at date of issue
|
|
|
161,405
|
|
|
|
23,646
|
|
Foreign currency realignment
|
|
|
(9
|
)
|
|
|
(1
|
)
|
Extinguishment of notes
|
|
|
(40,959
|
)
|
|
|
(6,001
|
)
|
Accretion of discount (Note (iii))
|
|
|
1,117
|
|
|
|
164
|
|
|
|
|
|
|
|
|
|
|
Value of debt component at end of year
|
|
|
121,554
|
|
|
|
17,808
|
|
|
|
|
|
|
|
|
|
|
Notes
(i) The Company concluded that for accounting purpose, during the convertible notes exchange
transaction, the 4.5% Notes should be considered extinguished, and the 0% Restated Notes should be
initially recorded at fair value.
According to a valuation report issued by a third party consultant, the fair value of the
straight bonds within the 0% Restated Notes amounted to approximately RMB163,834,000. The straight
bond component of the 0% Restated Notes was estimated with a standard discounted cash flow
approach, but with the cash flows adjusted for the credit risk. The credit risk was derived by
using a Mertons option price model using information extracted from the Companys capital
structure and stock prices.
(ii) The 0% Restated Notes are a form of hybrid instrument that comes with embedded
derivatives, including the right to convert the notes by the note holders, a put option conditional
upon a change of control and a put option conditional upon certain events of default combining with
the options to change interest rate and extend maturity. The conversion option was bifurcated from
the host debt instrument and separately accounted for as a derivative and subsequently marked to
market through earnings. The put option conditional upon a change of control and the put option
conditional upon certain events of default were determined to be classified as liabilities on the
balance sheet on the date of initial recognition also. The value of the embedded compound
derivatives, which amounted to approximately RMB34,462,000 on the date of initial recognition, has
been included in the calculation of the loss on the extinguishment of the 4.5% Notes (Note 15 (a)).
Subsequent to initial recognition, the liability-classified embedded derivatives are
marked-to-market at the end of each reporting period with the resulting gain or loss recognized in
the consolidated statements of operations. The valuation of the embedded derivatives at each
period-end is derived from various valuation methods which uses significant unobservable inputs
(Level 3), including Monte Carlo Simulation and Backward Dynamic Programming.
F-47
The liability-classified embedded derivatives included in the consolidated financial
statements for the year ended December 31, 2009 is analyzed as followings:
|
|
|
|
|
|
|
|
|
|
|
RMB000
|
|
US$000
|
Value on initial recognition
|
|
|
34,462
|
|
|
|
5,049
|
|
Gain on remeasurement included in earnings
|
|
|
(3,637
|
)
|
|
|
(533
|
)
|
Foreign currency realignment
|
|
|
3
|
|
|
|
|
|
Extinguishment of notes
|
|
|
(7,710
|
)
|
|
|
(1,130
|
)
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
23,118
|
|
|
|
3,386
|
|
|
|
|
|
|
|
|
|
|
Gain on remeasurement included in earnings attributable to the change in unrealized loss of
liabilities still outstanding at end of year 2009 was RMB2,724,000 (US$399,000).
(iii) The discount is accreted to interest expense to the first put date of the 0% Restated
Notes using the effective interest method.
The carrying amount and the estimated fair value of the 0% Restated Notes at December
31, 2009 were Rmb121,554,000 (US$17,808,000) and RMB121,685,000 (US$17,827,000), respectively.
On November 18, 2009, the holders of the notes exercised the option to convert US$3,000,000 of
the principal amount of the notes into 1,624,256 ordinary shares of the Company at a conversion
price of US$2.09 per share. On December 1, 2009, the holders of the notes exercised the option to
convert US$3,000,000 of the principal amount of the notes into 1,694,915 ordinary shares of the
Company at a conversion price of US$1.97 per share. The extinguishment of the convertible debts
that arose from the conversion resulted in a gain of RMB2,711,000 (US$398,000) for the year ended
December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
RMB000
|
|
US$000
|
Fair value of ordinary shares issued
|
|
|
45,967
|
|
|
|
6,734
|
|
(Less) add: Carrying amount of:
|
|
|
|
|
|
|
|
|
- Notes
|
|
|
(40,968
|
)
|
|
|
(6,002
|
)
|
- Accrued interest
|
|
|
|
|
|
|
|
|
- Embedded derivatives
|
|
|
(7,710
|
)
|
|
|
(1,130
|
)
|
- Deferred debt issuance costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on extinguishment of convertible
debts
|
|
|
(2,711
|
)
|
|
|
(398
|
)
|
|
|
|
|
|
|
|
|
|
F-48
|
16.
|
|
ASSETS RETIREMENT OBLIGATION
|
According to the relevant rules and regulations applicable in the PRC, the Company accrues an
asset retirement obligation related to sewage based on the tonnes of ore produced and for land
restoration obligation based on the underground hectares of area that have been mined as operating
costs. As the accrued liabilities are paid to relevant government agencies, the recorded amount of
the liability is reduced.
The assets retirement obligation included in the consolidated financial statements for the
year ended December 31, 2009 is analyzed as followings:
|
|
|
|
|
|
|
|
|
|
|
RMB000
|
|
US$000
|
Accrued liabilities payable for sewage
|
|
|
3,688
|
|
|
|
540
|
|
Accrued liabilities payable for land restoration
|
|
|
325
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
4,013
|
|
|
|
588
|
|
|
|
|
|
|
|
|
|
|
These represent unsecured loans from Mr. Rui Lin Wu (held in trust for Mr. Zhi Jian Wu Li),
Exquisite Jewel Limited, Metrolink Holdings Limited and Specialist Consultants Limited, the
Companys shareholders. The loans are denominated in United States Dollar and are non-interest
bearing. The shareholders have agreed not to make demand on the Group for repayment before January
1, 2011. For financial reporting purposes for the year ended December 31, 2009, interest expense of
approximately RMB437,000 (US$64,000) (2008: RMB437,000; 2007: RMB487,000) was imputed based on the
cost of borrowings of approximately 6.5% (2008: 6.5%; 2007: 6.5%) per annum and was recorded as
interest expense and shareholders contribution in the consolidated financial statements.
|
18.
|
|
COMMON STOCK TRANSACTIONS
|
The Company issued common stock during the years ended December 31, 2007, 2008 and 2009 as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Number of
|
|
average issue
|
|
|
shares
|
|
price
|
|
|
|
|
|
|
US$
|
Balance of December 31, 2006
|
|
|
29,605,003
|
|
|
|
|
|
Issuance of shares to private investors
|
|
|
1,300,000
|
|
|
|
11.80
|
|
Issuance of shares to warrant holders (Note 19(c))
|
|
|
43,833
|
|
|
|
4.54
|
|
|
|
|
|
|
|
|
|
|
Balance of December 31, 2007
|
|
|
30,948,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance of December 31, 2008
|
|
|
30,948,836
|
|
|
|
|
|
Issuance of shares for the acquisition of CJLC (Note 3 (c))
|
|
|
40,000,000
|
|
|
|
1.73
|
|
Issuance of shares to consultants for the acquisition (Note 3 (c))
|
|
|
2,200,000
|
|
|
|
1.73
|
|
Issuance of shares for the CB exchange (Note 15(a))
|
|
|
2,400,000
|
|
|
|
2.04
|
|
Issuance of shares on conversion of CB (Note 15(c))
|
|
|
3,319,171
|
|
|
|
2.03
|
|
Issuance of shares on warrants exercise (Note 19)
|
|
|
3,459,986
|
|
|
|
1.78
|
|
|
|
|
|
|
|
|
|
|
Balance of December 31, 2009
|
|
|
82,327,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008, the authorized shares of the Company were 50,000,000 shares,
outstanding and fully paid shares were 30,948,836 shares. On January 9, 2009, in order to
facilitate the acquisition of China Luxuriance Jade Company, Ltd, the Company increased its
authorized shares to 200,000,000 shares.
F-49
|
19.
|
|
STOCK OPTIONS AND WARRANTS
|
(a) Stock purchase options of a subsidiary
Pursuant to a shareholders resolution passed on March 19, 2007, the Companys subsidiary,
QXMC, adopted an equity incentive plan (the QXMC 2007 Stock Plan) under which QXMC may grant
incentive stock options, nonstatutory stock options, restricted stock, stock appreciation rights,
restricted stock units, performance units, performance shares and other stock-based awards to
certain of its qualifying directors, employees and consultants.
The stock option activities of QXMC during the year ended December 31, 2009, 2008 and 2007
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
Weighted
|
|
|
|
|
|
|
|
|
average
|
|
average
|
|
|
|
|
Shares
|
|
exercise
|
|
remaining
|
|
Aggregate
|
|
|
Underlying
|
|
price
|
|
contractual
|
|
intrinsic
|
|
|
Options
|
|
per share
|
|
term
|
|
Value
|
|
|
|
|
|
|
US$
|
|
|
|
|
|
US$000
|
Balance as of January 1, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted on March 19, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- To a director and employees
(Note (i))
|
|
|
2,716,520
|
|
|
|
7.50
|
|
|
|
|
|
|
|
|
|
- To a consultant (Note (ii))
|
|
|
1,200,000
|
|
|
|
18.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
|
3,916,520
|
|
|
|
10.72
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(565,000
|
)
|
|
|
7.5
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(140,000
|
)
|
|
|
7.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
|
3,211,520
|
|
|
|
11.42
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(266,720
|
)
|
|
|
7.5
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(1,744,800
|
)
|
|
|
7.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2009
|
|
|
1,200,000
|
|
|
|
18
|
|
|
|
1.2 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of December 31, 2009
|
|
|
1,200,000
|
|
|
|
18
|
|
|
|
1.2 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
(i) On March 19, 2007, QXMC granted stock options to a director and various employees of
QXMC to purchase 2,716,520 shares of the QXMCs ordinary shares at an exercise price of US$7.50 per
share. The options granted have terms ranging from 2 to 6 years from the date of grant and vest on
various dates commencing from November 1, 2007.
The weighted-average fair value of the share options on the date of grant was US$5.23 per
share option, which was estimated by management using the Black-Scholes option pricing based on the
following assumptions:
|
|
|
|
|
Fair value of underlying ordinary shares on grant date
|
|
US$
|
10.43
|
|
Expected share price volatility
|
|
|
47.50
|
%
|
Expected dividend yield
|
|
|
0.0
|
%
|
Expected term (in years)
|
|
|
3.5
|
|
Risk-free interest rate
|
|
|
5.0
|
%
|
The estimated fair value of QXMCs underlying shares on the date of grant was determined by
management considering the valuation performed by an unrelated independent valuation firm.
Because the Company did not have a
F-50
trading history at the time the options were issued, the weighted average expected volatility
of 47.50% was estimated based on the average volatility of several comparable listed companies in
the telecommunication equipment sector. The risk-free rate for periods within the contractual life
of the options is based on the market yield of U.S. dollar China International Government Bonds in
effect at the time of grant. The expected dividend yield was based on historical dividends. The
expected term was estimated based on the average vesting and contractual terms as the Company does
not have sufficient data on which to estimate the expected future exercises of the option granted.
Changes in these subjective input assumptions could materially affect the fair value estimates.
Compensation expense is recognized based on the grant date fair value over the period that the
employees are required to provide services in exchange for the award. The amount of share-based
compensation expense recognized for the options was approximately US$5,119,000, US$2,111,000 and
US$1,767,000 (RMB12,070,000) during the years ended December 31, 2007, 2008 and 2009, respectively.
Of the expense recognized in 2007, 1% was charged to selling and distribution expenses, 94% to
general and administrative expenses and 5% to research and development expenses. Of the expense
recognized in 2008, 2% was charged to selling and distribution expenses, 83% to general and
administrative expenses and 15% to research and development expenses. Of the expense recognized in
2009, 1% was charged to selling and distribution expenses, 85% to general and administrative
expenses and 14% to research and development expenses.
(ii) On March 19, 2007, in consideration of services rendered in connection with its IPO, QXMC
granted an option to a consultant to purchase up to 1,200,000 shares of its common stock at an
exercise price of US$18.00 per share. The option, which has a term of four years commencing from
the grant date, vested on April 1, 2007. The estimated fair value of the option, which amounted to
approximately RMB12,859,000 (US$1,763,000) as computed using the Black-Scholes option-pricing model
on the grant date, has been accounted for by QXMC as ordinary shares issuance cost and was credited
to additional paid-in capital in the consolidated financial statements of the Group during the year
ended December 31, 2007.
The fair value of the option on the date of grant was US$1.385 per share which was estimated
by management using the Black-Scholes option pricing based on the following assumptions:
|
|
|
|
|
Fair value of QXMCs underlying ordinary share on grant date
|
|
US$
|
10.43
|
|
Risk-free interest rate
|
|
|
5.10
|
%
|
Expected dividend yield
|
|
|
0.00
|
%
|
Expected term
|
|
|
2.0
|
years
|
Expected stock price volatility
|
|
|
48.90
|
%
|
(iii) In December 2009, the QXMC granted 1,955,057 restricted shares to a director and
various employees and concurrently cancelled 1,744,800 of employee share options that were
outstanding under the QXMC 2007 Stock Plan. Of the 1,955,057 restricted shares that were granted,
960,884 shares vested immediately while the balance of 994,173 shares vest on various dates ending
April 1, 2012. The grant of restricted shares and cancellation of outstanding share options
resulted in a modification charge of approximately US$6,360,000, which is being recognized over the
vesting periods of the restricted shares. The modification charge recognized in 2009 amounted to
US$3,348,000 (RMB22,851,000), of which 1% was charged to selling and distribution expenses, 91% to
general and administrative expenses and 8% to research and development expenses.
F-51
The following table summarizes the activities for the QXMCs unvested restricted shares
for the year ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
average
|
|
|
|
|
|
|
grant date
|
|
|
Number of
|
|
fair
|
|
|
shares
|
|
value
|
|
|
|
|
|
|
US$
|
Balance as of January 1, 2009
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,955,057
|
|
|
|
4.60
|
|
Vested
|
|
|
(960,884
|
)
|
|
|
4.60
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2009
|
|
|
994,173
|
|
|
|
4.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected to vest after December 31, 2009
|
|
|
994,173
|
|
|
|
4.60
|
|
|
|
|
|
|
|
|
|
|
The fair value of restricted shares granted is determined based on the closing trading
price of the Companys shares on the grant date.
(b) Stock purchase warrants of the Company
The warrant activities of the Company during the years ended December 31, 2007, 2008 and 2009
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
average
|
|
|
|
Number of stock
|
|
|
exercise
|
|
|
|
warrants
|
|
|
price
|
|
|
|
|
|
|
|
US$
|
|
Outstanding as of December 31, 2006
|
|
|
2,158,134
|
|
|
|
11.385
|
|
Issued:
|
|
|
|
|
|
|
|
|
- To share investors and placement agents (Note (i))
|
|
|
473,814
|
|
|
|
13.000
|
|
- To 5.5% Notes investors and placement agent
|
|
|
736,016
|
|
|
|
10.190
|
|
Repricing adjustment (Note (ii))
|
|
|
1,555,191
|
|
|
|
|
|
Exercised (Note (iii))
|
|
|
(56,877
|
)
|
|
|
7.983
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2007
|
|
|
4,866,278
|
|
|
|
7.763
|
|
Repricing adjustment (Note (iv))
|
|
|
333,793
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2008
|
|
|
5,200,071
|
|
|
|
7.265
|
|
Repricing adjustment (Note (v))
|
|
|
12,800,930
|
|
|
|
|
|
Exercised
|
|
|
(3,459,979
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2009
|
|
|
14,541,022
|
|
|
|
2.174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of December 31, 2009
|
|
|
14,541,022
|
|
|
|
2.174
|
|
|
|
|
|
|
|
|
Exercisable as of December 31, 2008
|
|
|
5,200,071
|
|
|
|
7.265
|
|
|
|
|
|
|
|
|
Notes
(i)
The fair value of the 473,814 warrants, which amounted to approximately RMB8,183,000 as
computed using a multi-period binomial option pricing model on the grant date, was debited to
additional paid-in capital as stock issuance costs during the year
ended December 31, 2007.
(ii)
Due to the issuance of the 5.5% Notes, the exercise prices and the shares underlying
certain outstanding
F-52
warrants
were adjusted during the year ended December 31, 2007.
(iii)
Includes the cashless exercise of 30,000 warrants with an exercise price of US$8.50 per
share. An aggregate of 16,956 shares of common stock were issued at no consideration to the warrant
holder as settlement of the difference between the then quoted market price of the Companys stock
of US$19.55 per share and the warrant exercise price of US$8.50 per
share.
(iv)
Due to the price resetting of the 5.5% Notes, the exercise prices and the shares
underlying certain outstanding warrants were adjusted during the year
ended December 31, 2008.
(v)
Due to the acquisition of CJLC (note 3(c)) and the conversion of the 0% Restated Notes
(note 15 (c)), the exercise prices and the shares underlying certain outstanding warrants were
adjusted during the year ended December 31, 2009.
The following table summarizes information about the warrants described above that are
outstanding and exercisable at December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
|
|
|
|
|
|
|
|
|
remaining
|
|
|
Exercise price
|
|
Number of
|
|
contractual life
|
Warrants
|
|
(US$)
|
|
outstanding warrants
|
|
(years)
|
2006 Oct Placement Warrants
|
|
|
1.77
|
|
|
|
4,847,450
|
|
|
|
0.83
|
|
2006 Oct CB Warrants
|
|
|
1.77
|
|
|
|
4,406,783
|
|
|
|
1.83
|
|
2007 Aug CB Warrants
|
|
|
1.77
|
|
|
|
4,237,290
|
|
|
|
2.63
|
|
2006 Feb Placement Warrants
|
|
|
6.301
|
|
|
|
20,835
|
|
|
|
0.15
|
|
2006 Feb Montauk Warrants
|
|
|
6.864
|
|
|
|
42,020
|
|
|
|
0.05
|
|
2006 Jan Placement Warrants
|
|
|
6.684
|
|
|
|
473,462
|
|
|
|
0.05
|
|
2005 Apr Placement Warrants
|
|
|
7.925
|
|
|
|
46,646
|
|
|
|
0.28
|
|
2005 Feb Placement Warrants
|
|
|
7.925
|
|
|
|
466,536
|
|
|
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,541,022
|
|
|
|
1.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective January 1, 2009, the Company adopted the guidance provided in FASB ASC
815-40-15-5 through 815-40-15-8 (formerly EITF 07-5, Determining Whether an Instrument (or
Embedded Feature) is Indexed to an Entitys Own Stock). ASC 815-40-15-5 through 815-40-15-8
applies to any freestanding financial instruments or embedded features that have the
characteristics of a derivative, as defined in ASC paragraph 815-10-15-83 (formerly SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities,) and to any freestanding financial
instruments that are potentially settled in an entitys own common stock.
As a result of adopting ASC 815-40-15 through 815-40-15-8, the following warrants outstanding
at January 1, 2009 previously treated as equity pursuant to the scope exception in ASC 815-10-15-74
(formerly paragraph 11(a) of SFAS No. 133) were no longer afforded equity treatment. As such, as of
January 1, 2009, the Company reclassified the fair value of these 5,200,071 warrants from equity to
liability as if these warrants had been treated as a derivative liability since their date of
issue. On January 1, 2009, the Company recognized a cumulative-effect adjustment of RMB165,532,000, whereby RMB70,443,000 was reclassified from beginning retained
earnings and RMB95,089,000 from additional paid-in capital, to recognize the fair
value of the following warrants as warrant liability on such date.
F-53
The following table summarizes the warrants that are outstanding and exercisable as of
December 31, 2008 that were reclassified from equity to liability:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
|
|
|
|
|
|
|
|
|
|
|
remaining
|
|
|
Exercise price
|
|
Number of
|
|
contractual life
|
Warrants
|
|
(US$)
|
|
outstanding warrants
|
|
(years)
|
2006 Oct Placement Warrants
|
|
|
5.56
|
|
|
|
1,543,165
|
|
|
|
1.83
|
|
2006 Oct CB Warrants
|
|
|
5.56
|
|
|
|
1,402,879
|
|
|
|
2.83
|
|
2007 Aug CB Warrants
|
|
|
10.19
|
|
|
|
736,016
|
|
|
|
3.63
|
|
2007 Nov SPA Warrants
|
|
|
13.00
|
|
|
|
473,814
|
|
|
|
2.84
|
|
2006 Feb Placement Warrants
|
|
|
6.333
|
|
|
|
20,730
|
|
|
|
1.15
|
|
2006 Feb Montauk Warrants
|
|
|
6.899
|
|
|
|
41,808
|
|
|
|
1.05
|
|
2006 Jan Placement Warrants
|
|
|
6.899
|
|
|
|
471,070
|
|
|
|
1.05
|
|
2005 Apr Placement Warrants
|
|
|
7.966
|
|
|
|
46,410
|
|
|
|
1.28
|
|
2005 Feb Placement Warrants
|
|
|
7.966
|
|
|
|
464,179
|
|
|
|
1.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,200,071
|
|
|
|
2.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The above warrants are not considered indexed to the Companys own stock and have
been recorded at their fair value as derivative liabilities. In addition, they do not qualify for
hedge accounting, and as such, all changes in the fair value of these warrants have been recognized
as other income or expenses. These warrants will continue to be reported as liability until such
time as they are exercised or expire.
The Company estimates the fair value of the above warrants using Black-Scholes Model and
binomial option pricing model as of the issuance date and Monte Carlo simulations since January 1,
2009 based on the following assumptions (Level 2):
F-54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
|
|
Remaining
|
|
Dividend
|
|
Expected
|
|
Risk-free
|
|
Estimated fair
|
|
|
price
|
|
contractual
|
|
yield
|
|
volatility
|
|
interest
|
|
value
|
Warrants
|
|
(US$)
|
|
life (years)
|
|
(%)
|
|
(%)
|
|
rate (%)
|
|
(US$/warrant)
|
2006 Oct Placement Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oct 31, 2006 (date of issuance)
|
|
|
14.30
|
|
|
|
4.00
|
|
|
|
|
|
|
|
67.52
|
%
|
|
|
4.62
|
%
|
|
|
7.302
|
|
January 1, 2009
|
|
|
5.560
|
|
|
|
1.83
|
|
|
|
0.0
|
%
|
|
|
82.51
|
%
|
|
|
0.80
|
%
|
|
|
3.738
|
|
December 31, 2009
|
|
|
1.770
|
|
|
|
0.83
|
|
|
|
0.0
|
%
|
|
|
80.50
|
%
|
|
|
0.38
|
%
|
|
|
0.901
|
|
2006 Oct CB Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oct 31, 2006 (date of issuance)
|
|
|
14.30
|
|
|
|
5.00
|
|
|
|
|
|
|
|
67.52
|
%
|
|
|
4.62
|
%
|
|
|
8.011
|
|
January 1, 2009
|
|
|
5.560
|
|
|
|
2.83
|
|
|
|
0.0
|
%
|
|
|
77.50
|
%
|
|
|
1.10
|
%
|
|
|
4.650
|
|
December 31, 2009
|
|
|
1.770
|
|
|
|
1.83
|
|
|
|
0.0
|
%
|
|
|
88.11
|
%
|
|
|
1.03
|
%
|
|
|
1.536
|
|
2007 Aug CB Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aug 14, 2007 (date of issuance)
|
|
|
10.19
|
|
|
|
5.00
|
|
|
|
|
|
|
|
62.07
|
%
|
|
|
4.00
|
%
|
|
|
5.72
|
|
January 1, 2009
|
|
|
10.190
|
|
|
|
3.62
|
|
|
|
0.0
|
%
|
|
|
73.20
|
%
|
|
|
1.32
|
%
|
|
|
9.048
|
|
December 31, 2009
|
|
|
1.770
|
|
|
|
2.63
|
|
|
|
0.0
|
%
|
|
|
83.49
|
%
|
|
|
1.49
|
%
|
|
|
1.738
|
|
2007 Nov SPA Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aug 14, 2007 (date of issuance)
|
|
|
13.00
|
|
|
|
4.0
|
|
|
|
|
|
|
|
62.07
|
%
|
|
|
4.00
|
%
|
|
|
2.696
|
|
January 1, 2009
|
|
|
13.000
|
|
|
|
2.83
|
|
|
|
0.0
|
%
|
|
|
77.46
|
%
|
|
|
1.10
|
%
|
|
|
10.945
|
|
Nov 20, 2009 (date of exercise)
|
|
|
1.847
|
|
|
|
1.95
|
|
|
|
0.0
|
%
|
|
|
87.29
|
%
|
|
|
0.73
|
%
|
|
|
1.548
|
|
Dec 28, 2009 (date of exercise)
|
|
|
1.770
|
|
|
|
1.85
|
|
|
|
0.0
|
%
|
|
|
87.94
|
%
|
|
|
0.99
|
%
|
|
|
1.555
|
|
2006 Feb Placement Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Feb 22, 2006 (date of issuance)
|
|
|
7.00
|
|
|
|
4.0
|
|
|
|
|
|
|
|
49.57
|
%
|
|
|
4.67
|
%
|
|
|
2.42
|
|
January 1, 2009
|
|
|
6.633
|
|
|
|
1.14
|
|
|
|
0.0
|
%
|
|
|
90.55
|
%
|
|
|
0.47
|
%
|
|
|
0.154
|
|
December 31, 2009
|
|
|
6.301
|
|
|
|
0.15
|
|
|
|
0.0
|
%
|
|
|
52.54
|
%
|
|
|
0.05
|
%
|
|
|
0.000
|
|
2006 Feb Montauk Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Feb 3, 2006 (date of issuance)
|
|
|
8.125
|
|
|
|
3.95
|
|
|
|
|
|
|
|
56.36
|
%
|
|
|
4.52
|
%
|
|
|
3.038
|
|
January 1, 2009
|
|
|
6.899
|
|
|
|
1.04
|
|
|
|
0.0
|
%
|
|
|
92.25
|
%
|
|
|
0.42
|
%
|
|
|
0.118
|
|
December 31, 2009
|
|
|
6.864
|
|
|
|
0.05
|
|
|
|
0.0
|
%
|
|
|
46.79
|
%
|
|
|
0.02
|
%
|
|
|
0.000
|
|
2006 Jan Placement Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jan 17, 2006 (date of issuance)
|
|
|
8.125
|
|
|
|
4.0
|
|
|
|
|
|
|
|
47.17
|
%
|
|
|
4.30
|
%
|
|
|
2.27
|
|
January 1, 2009
|
|
|
6.899
|
|
|
|
1.04
|
|
|
|
0.0
|
%
|
|
|
92.25
|
%
|
|
|
0.42
|
%
|
|
|
0.118
|
|
December 31, 2009
|
|
|
6.864
|
|
|
|
0.05
|
|
|
|
0.0
|
%
|
|
|
46.79
|
%
|
|
|
0.02
|
%
|
|
|
0.000
|
|
2005 Apr Placement Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Apr 12, 2005 (date of issuance)
|
|
|
9.86
|
|
|
|
5.0
|
|
|
|
|
|
|
|
62.74
|
%
|
|
|
3.95
|
%
|
|
|
1.537
|
|
January 1, 2009
|
|
|
7.966
|
|
|
|
1.28
|
|
|
|
0.0
|
%
|
|
|
87.76
|
%
|
|
|
0.53
|
%
|
|
|
0.112
|
|
December 31, 2009
|
|
|
7.925
|
|
|
|
0.28
|
|
|
|
0.0
|
%
|
|
|
49.82
|
%
|
|
|
0.08
|
%
|
|
|
0.000
|
|
2005 Feb Placement Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Feb 16, 2005 (date of issuance)
|
|
|
9.86
|
|
|
|
5.0
|
|
|
|
|
|
|
|
67.49
|
%
|
|
|
3.67
|
%
|
|
|
2.677
|
|
January 1, 2009
|
|
|
7.966
|
|
|
|
1.13
|
|
|
|
0.0
|
%
|
|
|
90.18
|
%
|
|
|
0.46
|
%
|
|
|
0.096
|
|
December 31, 2009
|
|
|
7.925
|
|
|
|
0.13
|
|
|
|
0.0
|
%
|
|
|
54.70
|
%
|
|
|
0.05
|
%
|
|
|
0.000
|
|
The risk-free interest rate reflects the interest rate for U.S. Treasury Note with similar
time-to-maturity to those of the warrants.
On November 20 and December 28, 2009, the 2007 Nov SPA Warrants were fully exercised by
warrants holders. Accordingly, the Company reclassified the 2007 Nov SPA warrants at their
aggregate fair values of US$712,054 and US$4,664,994 as of November 20, 2009 and December 28, 2009
to equity.
F-55
The warrant liabilities included in the consolidated financial statements for the year ended
December 31, 2009 is analyzed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net value as
|
|
|
|
|
|
|
|
|
of January 1,
|
|
(Gain)/loss on
|
|
|
|
|
Warrants
|
|
2009
|
|
remeasurement
|
|
Exercised
|
|
Net value at December 31, 2009
|
|
|
(RMB000)
|
|
(RMB000)
|
|
(RMB000)
|
|
(RMB000)
|
|
(US$000)
|
2006 Oct Placement
Warrants
|
|
|
39,374
|
|
|
|
(9,562
|
)
|
|
|
|
|
|
|
29,812
|
|
|
|
4,368
|
|
2006 Oct CB
Warrants
|
|
|
44,528
|
|
|
|
1,675
|
|
|
|
|
|
|
|
46,203
|
|
|
|
6,769
|
|
2007 Aug CB
Warrants
|
|
|
45,457
|
|
|
|
4,812
|
|
|
|
|
|
|
|
50,269
|
|
|
|
7,364
|
|
2007 Nov SPA
Warrants
|
|
|
35,398
|
|
|
|
1,305
|
|
|
|
(36,703
|
)
|
|
|
|
|
|
|
|
|
2006 Feb Placement
Warrants
|
|
|
22
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 Feb Montauk
Warrants
|
|
|
34
|
|
|
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 Jan Placement
Warrants
|
|
|
380
|
|
|
|
(380
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 Apr Placement
Warrants
|
|
|
35
|
|
|
|
(35
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 Feb Placement
Warrants
|
|
|
304
|
|
|
|
(304
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
165,532
|
|
|
|
2,545
|
|
|
|
(36,703
|
)
|
|
|
126,284
|
|
|
|
18,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-56
(c) Stock purchase warrants of a subsidiary
On May 15, 2008, one subsidiary of the company, QXMC, issued to two investors of QXMC 4.0%
Notes (Note 15(b)). In connection with the issuance of the QXMC 4.0% Notes, QXMC issued warrants
to purchase 1,648,721 ordinary shares of QXMC to these two investors. In addition, QXMC also
issued warrants to its placement agent to purchase up to 942,127 ordinary shares of QXMC at terms
identical to the QXMC investor warrants. Information about these warrants outstanding as of
December 31, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
Weighted
|
|
|
|
|
|
|
average
|
|
average
|
|
|
|
|
|
|
exercise
|
|
remaining
|
|
|
Number of
|
|
price
|
|
contractual
|
|
|
warrants
|
|
per share
|
|
term
|
|
|
|
|
|
|
US$
|
|
|
|
|
Investor Warrants
|
|
|
1,648,721
|
|
|
|
8.91
|
|
|
3.4
|
years
|
Agent Warrants
|
|
|
942,127
|
|
|
|
8.91
|
|
|
|
3.4
|
years
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,590,848
|
|
|
|
8.91
|
|
|
|
3.4
|
years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of December 31, 2009
|
|
|
2,590,848
|
|
|
|
8.91
|
|
|
|
3.4
|
years
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of the QXMC Warrants on the date of grant was US$5.15 per warrant, which was
estimated by management using a multi-period binomial option pricing model based on the following
assumptions:
|
|
|
|
|
Stock price of underlying ordinary share on grant date
|
|
US$
|
7.45
|
|
Risk-free interest rate
|
|
|
4.3
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
Expected term
|
|
|
5
|
years
|
Expected stock price volatility
|
|
|
65.38
|
%
|
Effective January 1, 2009, QXMC adopted the guidance provided in FASB ASC 815-40-15-5 through
815-40-15-8. ASC 815-40-15-5 through 815-40-15-8 applies to any freestanding financial instruments
or embedded features that have the characteristics of a derivative, as defined in ASC paragraph
815-10-15-83 and to any freestanding financial instruments that are potentially settled in an
entitys own common stock.
As a result of adopting ASC 815-40-15 through 815-40-15-8, the Investors Warrants and the
Agent Warrants of QXMC outstanding at January 1, 2009, which were previously treated as equity
pursuant to the scope exception in ASC 815-10-15-74, were no longer afforded equity treatment. As
such, as of January 1, 2009, QXMC reclassified the fair value of the Warrants from equity to
liability as if the Warrants had been treated as a derivative liability since their date of issue.
On January 1, 2009, QXMC recognized a cumulative-effect adjustment of RMB15,414,000, whereby
RMB53,158,000 was reclassified to beginning retained earnings, RMB1,440,000 to foreign currency
translation adjustments, and RMB70,012,000 from additional paid-in capital, to recognize the fair
value of the Warrants as warrant liability on such date.
F-57
The warrant liability included on the consolidated balance sheet as of December 31, 2009 is
analyzed as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
RMB000
|
|
US$000
|
Recognized on January 1, 2009
|
|
|
15,414
|
|
|
|
2,258
|
|
Foreign currency realignment
|
|
|
4
|
|
|
|
1
|
|
Loss on remeasurement
|
|
|
7,219
|
|
|
|
1,057
|
|
|
|
|
|
|
|
|
|
|
Net value at end of year
|
|
|
22,637
|
|
|
|
3,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on remeasurement for the
period included in earnings
attributable to the change in
unrealized gain of liabilities
still outstanding at end of year
|
|
|
7,219
|
|
|
|
1,057
|
|
|
|
|
|
|
|
|
|
|
Changes in the fair value of the warrant liability subsequent to January 1, 20009 are
recognized in the consolidated statement of operations.
The fair value of the QXMC Warrants as of January 1 2009 and December 31, 2009 was US$0.87 per
warrant and US$1.28 per warrant, respectively, which was estimated by management using the
Black-Scholes option pricing model based on the following assumptions (Level 2):
|
|
|
|
|
|
|
|
|
|
|
January 1,
|
|
December
|
|
|
2009
|
|
31, 2009
|
Stock price of underlying ordinary share on grant date
|
|
US$
|
2.54
|
|
|
US$
|
3.66
|
|
Risk-free interest rate
|
|
|
1.54
|
%
|
|
|
1.88
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected term
|
|
|
4.37
|
years
|
|
|
3.37
|
years
|
Expected stock price volatility
|
|
|
79.21
|
%
|
|
|
80.55
|
%
|
F-58
20. INCOME TAXES
The Company and its subsidiaries are subject to income taxes on an entity basis on income
arising in or derived from the tax jurisdictions in which they operate. The Company, QXMC and CLJC
were incorporated under the International Business Companies Act of the BVI and, accordingly, are
exempted from the payment of BVI income taxes. The Companys branch office registered in Hong Kong
is subject to Hong Kong income taxes at a rate of 16.5% (2008:17.5%).
At present, substantially all of the Groups income is generated in the PRC by Zhongtai and
CECT. Zhongtai, being located in Chifeng, the PRC, is subject to PRC enterprise income taxes at a
rate of 25%. CECT was regarded as a Hi-tech enterprise by the PRC government and was subject to
PRC enterprise income taxes at a rate of 15% before January 1, 2008. CECT was exempted from PRC
enterprise income tax for the period from May 22, 2000 to December 31, 2002, and was entitled to a
50% reduction in state income tax and full exemption in local income tax for the following three
years.
On March 16, 2007, the Fifth Plenary Session of the Tenth National Peoples Congress passed
the PRC Enterprise Income Tax Law (the New Tax Law) which took effect on January 1, 2008.
According to the New Tax Law, from January 1, 2008, domestic enterprises and foreign investment
enterprises will be subject to a unified enterprise income tax rate of 25%.
Under the New Tax Law, CECT, is subject to the enterprise income tax rate of 25% commencing
from the year beginning January 1, 2008. The deferred tax assets and liabilities of CECT are
measured using the enacted tax rate of 25% that is expected to apply in the years in which those
temporary differences are expected to be recovered or settled.
The new Tax Law also imposes a 10% withholding income tax for dividends distributed by a
foreign invested enterprise to its immediate holding company outside China for distribution of
earnings generated after January 1, 2008. Under the New Tax Law, the distribution of earnings
generated prior to January 1, 2008 is exempt from the withholding tax. In addition, as Zhongtai
and CECT will not be distributing their earnings for the year ended December 31, 2008 and 2009 to
the Company, no deferred tax liability has been recognized for the undistributed earnings of
Zhongtai and CECT through December 31, 2009.
Provision
of income tax from continuing operations in the consolidated statement of operations and comprehensive
income consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2008
|
|
2009
|
|
|
RMB000
|
|
RMB000
|
|
RMB000
|
|
US$000
|
PRC income tax on current years profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- current
|
|
|
119,614
|
|
|
|
162,267
|
|
|
|
50,782
|
|
|
|
7,440
|
|
- deferred
|
|
|
(6,237
|
)
|
|
|
(6,550
|
)
|
|
|
(6,843
|
)
|
|
|
(1,003
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
|
113,377
|
|
|
|
155,717
|
|
|
|
43,939
|
|
|
|
6,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-59
The reconciliation of the PRC statutory income tax rate to the effective income tax rate
based on income before income tax stated in the consolidated statements of operations and
comprehensive income is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2008
|
|
2009
|
PRC statutory income tax rate
|
|
|
33.0
|
%
|
|
|
25.0
|
%
|
|
|
25.0
|
%
|
Tax effect of preferential tax rates
|
|
|
(12.2
|
%)
|
|
|
0.8
|
%
|
|
|
|
|
Losses (gains) of BVI companies not subject
to tax
|
|
|
(11.3
|
%)
|
|
|
4.9
|
%
|
|
|
(36.6
|
%)
|
Non-deductible activities
|
|
|
0.8
|
%
|
|
|
2.3
|
%
|
|
|
(11.4
|
%)
|
Deferred tax
not recognized
|
|
|
|
|
|
|
|
|
|
|
(5.8
|
%)
|
Effect of changes in expected future tax rates
|
|
|
|
|
|
|
|
|
|
|
1.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
10.3
|
%
|
|
|
33
|
%
|
|
|
(27.7
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax assets reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of those amounts shown on the consolidated
balance sheets as of December 31, 2008 and 2009 were as follows:
Deferred tax assets current portion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2009
|
|
|
RMB000
|
|
RMB000
|
|
US$000
|
Allowance for doubtful accounts
|
|
|
1,033
|
|
|
|
3,233
|
|
|
|
474
|
|
Write-off of obsolete and
slow-moving inventories
|
|
|
3,919
|
|
|
|
9,841
|
|
|
|
1,441
|
|
Provision for product warranties
|
|
|
754
|
|
|
|
481
|
|
|
|
70
|
|
Tax losses carried forward
|
|
|
1,288
|
|
|
|
|
|
|
|
|
|
Assets held for sale
|
|
|
|
|
|
|
2,831
|
|
|
|
415
|
|
Provision for maintenance & safe
production
|
|
|
|
|
|
|
(444
|
)
|
|
|
(65
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax assets
|
|
|
6,994
|
|
|
|
15,942
|
|
|
|
2,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-60
Deferred tax liabilities non-current portion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2009
|
|
|
RMB000
|
|
RMB000
|
|
US$000
|
Property, machinery and equipment
|
|
|
3,110
|
|
|
|
1,302
|
|
|
|
191
|
|
Land use rights
|
|
|
275
|
|
|
|
|
|
|
|
|
|
Proven and probable reserves and
value beyond proven and probable
reserves
|
|
|
|
|
|
|
(175,909
|
)
|
|
|
(25,771
|
)
|
Investment at cost
|
|
|
|
|
|
|
702
|
|
|
|
103
|
|
Other acquired intangible assets
|
|
|
(3,705
|
)
|
|
|
(1,376
|
)
|
|
|
(202
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities
|
|
|
(320
|
)
|
|
|
(175,281
|
)
|
|
|
(25,679
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxation payable comprises:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2009
|
|
|
RMB000
|
|
RMB000
|
|
US$000
|
PRC enterprise income tax
|
|
|
39,548
|
|
|
|
12,965
|
|
|
|
1,900
|
|
PRC value-added tax
|
|
|
(1,339
|
)
|
|
|
1,386
|
|
|
|
203
|
|
PRC other taxes
|
|
|
253
|
|
|
|
665
|
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,462
|
|
|
|
15,016
|
|
|
|
2,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, the Group has no material unrecognized tax benefit which would
favorably affect the effective income tax rate in future periods and does not believe that there
will be any significant increases or decreases of unrecognized tax benefits within the next twelve
months. No interest or penalties relating to income tax matters have been imposed on the Group
during the year ended December 31, 2009 and no provision for interest and penalties is deemed
necessary as of December 31, 2009.
According to the PRC Tax Administration and Collection Law, the statute of limitations is
three years if the underpayment of taxes is due to computational errors made by the taxpayer or its
withholding agent. The statute of limitations extends to five years under special circumstances,
which are not clearly defined. In the case of a related party transaction, the statute of
limitation is ten years. There is no statute of limitation in the case of tax evasion.
21. DISTRIBUTION OF INCOME
Substantially all of the Groups income is contributed by Zhongtai and CECT, equity joint
venture enterprises established in the PRC. Income of Zhongtai and CECT, as determined under PRC
GAAP, is distributable to their joint venture partners after transfer to dedicated reserves,
namely, the general reserve, the enterprise expansion fund and the staff welfare and bonus fund as
required under the PRC Company Law and the articles of association of the respective company.
Under the relevant regulations, Zhongtai and CECT are required to transfer at least 10% of their
annual PRC GAAP income to the general reserve until such reserve reaches 50% of their registered
capital. The accumulated balance of statutory reserve funds for both
Zhongtai and CECT as of December 31, 2009 and 2008 was RMB 192,485
and RMB 183,555, respectively.
F-61
22. EARNINGS (LOSS) PER COMMON SHARE
The following is a reconciliation from basic earnings (loss) per common share to diluted
earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2008
|
|
2009
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
US$
|
Net income (loss) from continuing operations
|
|
|
987,851,000
|
|
|
|
315,973,000
|
|
|
|
(202,600,000
|
)
|
|
|
(29,681,000
|
)
|
Less: Amount attributable to noncontrolling interest
|
|
|
(164,532,000
|
)
|
|
|
(161,814,000
|
)
|
|
|
82,486,000
|
|
|
|
12,084,000
|
|
Amount allocated to participating convertible notes
|
|
|
(145,293,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
attributable to common stockholders
|
|
|
678,026,000
|
|
|
|
154,159,000
|
|
|
|
(120,114,000
|
)
|
|
|
(17,597,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from discontinued operations
|
|
|
63,033,000
|
|
|
|
(290,953,000
|
)
|
|
|
(139,782,000
|
)
|
|
|
(20,478,000
|
)
|
Amount allocated to participating convertible notes
|
|
|
(11,124,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from discontinued operations
attributable to common stockholders
|
|
|
51,909,000
|
|
|
|
(290,953,000
|
)
|
|
|
(139,782,000
|
)
|
|
|
(20,478,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extraordinary items
|
|
|
28,689,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Amount attributable to noncontrolling interest
|
|
|
(11,093,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount allocated to participating convertible notes
|
|
|
(3,105,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extraordinary items attributable to common stockholders
|
|
|
14,491,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
|
|
744,426,000
|
|
|
|
(136,794,000
|
)
|
|
|
(259,896,000
|
)
|
|
|
(38,075,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
|
678,026,000
|
|
|
|
154,159,000
|
|
|
|
(120,114,000
|
)
|
|
|
(17,597,000
|
)
|
Less: Amount attributable to convertible notes holders
of QXMC
|
|
|
|
|
|
|
(45,528,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) from continuing operations
|
|
|
678,026,000
|
|
|
|
108,631,000
|
|
|
|
(120,114,000
|
)
|
|
|
(17,597,000
|
)
|
Net income (loss) from discontinued operations
|
|
|
51,909,000
|
|
|
|
(290,953,000
|
)
|
|
|
(139,782,000
|
)
|
|
|
(20,478,000
|
)
|
Extraordinary items attributable to common stockholders
|
|
|
14,491,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fully diluted net income (loss) after extraordinary
items attributable to common stockholders
|
|
|
744,426,000
|
|
|
|
(182,322,000
|
)
|
|
|
(259,896,000
|
)
|
|
|
(38,075,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares basic
|
|
|
29,836,000
|
|
|
|
30,949,000
|
|
|
|
62,837,000
|
|
|
|
62,837,000
|
|
Effect of dilutive stock options, warrants and
convertible notes
|
|
|
364,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares diluted
|
|
|
30,200,000
|
|
|
|
30,949,000
|
|
|
|
62,837,000
|
|
|
|
62,837,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
22.73
|
|
|
|
4.98
|
|
|
|
(1.91
|
)
|
|
|
(0.28
|
)
|
Discontinued operations
|
|
|
1.73
|
|
|
|
(9.40
|
)
|
|
|
(2.22
|
)
|
|
|
(0.33
|
)
|
Extraordinary items
|
|
|
0.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
24.95
|
|
|
|
(4.42
|
)
|
|
|
(4.13
|
)
|
|
|
(0.61
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings(loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
22.45
|
|
|
|
3.51
|
|
|
|
(1.91
|
)
|
|
|
(0.28
|
)
|
Discontinued operations
|
|
|
1.72
|
|
|
|
(9.40
|
)
|
|
|
(2.22
|
)
|
|
|
(0.33
|
)
|
Extraordinary items
|
|
|
0.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
24.65
|
|
|
|
(5.89
|
)
|
|
|
(4.13
|
)
|
|
|
(0.61
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-62
All outstanding warrants of the Company and common stock equivalents had an anti-dilutive
effect and accordingly, were excluded from the computation of diluted loss per share for the year
ended December 31, 2009. For the year ended December 31, 2008, all outstanding warrants of the
Company and common stock equivalents, except for the convertible notes issued by QXMC in May 2008,
had an anti-dilutive effect and accordingly, were excluded from the computation of diluted loss per
share. For the year ended December 31, 2007, except for certain outstanding warrants of the
Company, all common stock equivalents had an anti-dilutive effect and accordingly, were excluded
from the computation of diluted earnings per share.
23. RETIREMENT PLAN
Since December 1, 2000, the Group has arranged for its Hong Kong employees to join the
Mandatory Provident Fund Scheme (the MPF Scheme), a defined contribution scheme managed by an
independent trustee. Under the MPF Scheme, each company within the Group (employer) and their
employees make monthly contributions to the scheme at 5.0% of the employees earnings as defined
under the Mandatory Provident Fund legislation, subject to a maximum cap of HK$1,000 (RMB875) per
month and additional contributions thereafter are voluntary.
Presently, the Groups employees in the PRC are mainly employed by Zhongtai and CECT. As
stipulated by PRC regulations, Zhongtai and CECT maintained defined contribution retirement plans
for all of their employees who are residents of the PRC. All retired employees are entitled to an
annual pension equal to their basic annual salary upon retirement. Zhongtai and CECT contribute to
a state sponsored retirement plan with amounts stipulated by the local government of the PRC and
have no further obligations for the actual pension payments or post-retirement benefits beyond the
annual contributions. The state sponsored retirement plan is responsible for the entire pension
obligations payable to all employees.
For the year ended December 31, 2009, the aggregate employers contributions made by the Group
amounted to approximately RMB3,165,000 (US$464,000) (2008: RMB2,980,000; 2007: RMB1,438,000).
F-63
24. COMMITMENTS AND CONTINGENCIES
(a) Capital commitments
Capital commitments not provided for in the consolidated financial statements include the
followings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2009
|
|
|
RMB000
|
|
RMB000
|
|
US$000
|
Capital expenditures authorized and
contracted for:
|
|
|
|
|
|
|
|
|
|
|
|
|
- Construction of mine properties
|
|
|
|
|
|
|
50,459
|
|
|
|
7,392
|
|
- Purchase of machinery and equipment
|
|
|
130
|
|
|
|
3,000
|
|
|
|
440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130
|
|
|
|
53,459
|
|
|
|
7,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b) Operating lease commitments
The Group has operating lease agreements for office and factory premises, which extend through
December 2011. As of December 31, 2009, the Groups future minimum lease payments required under
non-cancelable operating leases are as follows:
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
RMB000
|
|
US$000
|
For the years ending December 31,
|
|
|
|
|
|
|
|
|
- 2010
|
|
|
6,448
|
|
|
|
944
|
|
- 2011
|
|
|
945
|
|
|
|
138
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
7,393
|
|
|
|
1,082
|
|
|
|
|
|
|
|
|
|
|
Lease expense of the Group for the year ended December 31, 2009 was approximately
RMB6,090,000 (US$892,000) (2008: RMB6,485,000; 2007: RMB6,413,000).
F-64
25. SUBSEQUENT EVENTS
(a) On May 5, 2010, with the final payment of US$780,000 in cash, all of the outstanding 0%
Restated Notes was redeemed or converted. The holders of the notes exercised the option to convert
US$17,220,000 of the principal amount of the notes into 9,077,280 ordinary shares of the Company at
an average conversion price of US$1.90 per share in 2010. The extinguishment of the convertible
debts that arose from the conversion will result in a gain of RMB8,803,000 (US$1,290,000) for the
year ended December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
RMB000
|
|
US$000
|
Fair value of ordinary shares issued
|
|
|
130,545
|
|
|
|
19,125
|
|
Plus: Cash paid
|
|
|
5,324
|
|
|
|
780
|
|
(Less) add: Carrying amount of:
|
|
|
|
|
|
|
|
|
- Notes
|
|
|
(121,554
|
)
|
|
|
(17,808
|
)
|
- Embedded derivatives
|
|
|
(23,118
|
)
|
|
|
(3,387
|
)
|
|
|
|
|
|
|
|
|
|
- Gain on extinguishment of convertible
debts
|
|
|
(8,803
|
)
|
|
|
(1,290
|
)
|
|
|
|
|
|
|
|
|
|
(b) On January 14, 2010, the Company issued 688,153 ordinary shares to a warrants holder on
the exercise of 688,153 shares of warrants, the exercise price of the warrants was US$1.77.
(c) In April 2010, QXMC issued 331,391 ordinary shares to a director and various employees of
the QXMC upon the vesting of restricted shares that were granted in 2009 under the QXMC 2007 Stock
Plan.
(d) In May 2010, CECT entered into an agreement to dispose of its 10% equity interest held in
CEC Mobile Co., Ltd. to a third party for a total consideration of RMB5,000,000 (US$733,000). An
impairment charge of RMB2,802,000 (US$411,000) was made during the year ended December 31, 2009 to
write down the carrying value of the investment to the value of the expected sales proceeds.
(e) On May 26, 2010, the Companys subsidiary signed a letter of intent with Chifeng Xingu Mining
Co., Ltd. (Chifeng Xingu), a non-affiliated third party, to acquire the 100% equity interest in
Balinzuo Banner Xinyuan Mining Co., Ltd. (Xinyuan Mining or the Mining Company). Xinyuan Mining
owns a relatively large-scale lead-zinc mine in Balinzuo Banner, in the Inner Mongolia Autonomous
Region of the Peoples Republic of China (the Xinyuan Lead-zinc Mine or the Mine). Based on the
preliminary due diligence and domestic geological exploration materials, Xinyuan Mining owns the
mining license of the Xinyuan Lead-zinc Mine, covering 3.3233 square kilometers. The reserves of
lead-zinc metal and copper metal, which are subject to verification, are estimated to be 825,000
tons and 109,000 tons, respectively, with average grade at 7.60% for lead-zinc and 1.01% for
copper. The Mine has current production capacity for processing 500 tons of ores per day, and is
now at the stage of trial operation. The Company will use its best efforts to complete the
acquisition of the Mining Company during 2010.
F-65
26. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
(a) On April 6, 2009, the Company acquired a 100% equity interest in CLJC in a cash-and-stock
transaction from Mr. Wu Rui Lin, the president of the Company (Note 3(c)). China Luxuriance was
valued at approximately US$110 million. The Company paid US$30 million (RMB205,050,000) in cash and
issued 40,000,000 shares of the Companys common stock valued at US$2.00 per share to Mr. Wu Rui
Lin. As of the acquisition date, the cash held in CLJC was RMB1,646,000. A net cash outflow at
amount of RMB203,404,000 (US$29,799,000) was recorded on the acquisition of CJLC.
(b) On November 3, 2009, the Company signed AMENDMENT AND EXCHANGE AGREEMENT with two
institutional investors of the 4.5% Notes and issued US$24 million aggregate principle amount of 0%
unsecured restated senior convertible notes to these two institutional investors in exchange of the
4.5% Notes (Note 15 (c)). In addition, in connection with the restructuring, the Company has issued
2,400,000 shares of common stock of the Company to these two institutional investors. The
institutional investors have also waived the interest accrued on the 4.5% Notes over the first four
months of 2009 as part of the restructuring.
(c) On November 30, 2009, the Company sold QXCH to Dragon Fu Investment Limited (DFIL) for a
total consideration of RMB75,000,000 (US$10,989,000) (Note 3(d)). The total consideration was paid
before December 31, 2009. As of the disposal date, total amount of cash held by QXCH group was
RMB135,180,000. A net cash outflow at amount of RMB60,180,000 (US$8,817,000) was recorded on the
disposal of QXCH.
(d) On November 18, 2009, the holders of the 0% Restated Notes exercised the option to convert
US$3,000,000 of the principal amount of the notes into 1,624,256 ordinary shares of the Company at
a conversion price of US$2.09 per share. On December 1, 2009, the holders of the notes exercised
the option to convert US$3,000,000 of the principal amount of the notes into 1,694,915 ordinary
shares of the Company at a conversion price of US$1.97 per share. (Note 15(c))
(e) In 2009, the holders of the QXMC 4.0% Notes exercised the option to convert US$16,073,000
of the principal amount of the notes and accrued interest thereon of US$590,000 into 4,114,286
ordinary shares of QXMC at a conversion price of US$4.05 per share. (Note 15 (b))
F-66
27. RELATED PARTY TRANSACTIONS
Name and relationship of related parties:
|
|
|
Name of related parties
|
|
Existing relationship with the Company
|
Mr. Zhi Jian Wu Li
|
|
Major shareholder
|
Mr. Rui Lin Wu
|
|
Director and father of Mr. Zhi Jian Wu Li
|
Wu Holdings Limited
|
|
Intermediate holding company
|
Exquisite Jewel Limited
|
|
Minority shareholder
|
Metrolink Holdings Limited
|
|
Minority shareholder
|
Specialist Consultants Limited
|
|
Minority shareholder
|
Qiao Xing Group Limited (QXGL)
|
|
Common director and minority shareholder
of CECT, QXCI and QXPL
|
Huizhou Qiaoxing Famous Science
& Technology Co., Ltd. (QFST)
|
|
A company 80% owned by QXGL
|
Summary of related party transactions is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2008
|
|
2009
|
|
|
RMB000
|
|
RMB000
|
|
RMB000
|
|
US$000
|
Property management fee paid or payable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- QXGL
|
|
|
100
|
|
|
|
119
|
|
|
|
55
|
|
|
|
8
|
|
Sales to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- QFST
|
|
|
95,514
|
|
|
|
133,611
|
|
|
|
63,616
|
|
|
|
9,315
|
|
Other transactions with related parties are set out in Note 1, 3(c), 13 and 17 to the
consolidated financial statements.
Summary of related party balances is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2009
|
|
|
RMB000
|
|
RMB000
|
|
US$000
|
Due from:
|
|
|
|
|
|
|
|
|
|
|
|
|
- Exquisite Jewel Limited
|
|
|
5
|
|
|
|
5
|
|
|
|
1
|
|
- Wu Holdings Limited
|
|
|
20
|
|
|
|
20
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
25
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to:
|
|
|
|
|
|
|
|
|
|
|
|
|
- Mr. Rui Lin Wu
|
|
|
8,941
|
|
|
|
5,118
|
|
|
|
750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable from:
|
|
|
|
|
|
|
|
|
|
|
|
|
- QFST*
|
|
|
179,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Accounts receivable from QFST was included in current assets of discontinued operations for
the year ended December 31, 2008.
|
Except for the balances owing to the Companys shareholders as disclosed in Note 17, all
other balances with related parties are unsecured, non-interest bearing and without pre-determined
repayment terms.
F-67
28. SEGMENT INFORMATION
An operating segment is defined as a component of an enterprise about which separate financial
information is available that is evaluated regularly by the chief decision maker, or
decision-making group, in deciding how to allocate resources and in assessing performance.
Prior to 2009, the Group operates in two principal business segments, consisting of mobile
phones and indoor phones, and do not capture the total assets for each segment. In 2009, since the
acquisition of CLJC and disposal of QXCH, in accordance with the Companys internal financial
reporting structure, the Company has determined that the business segments that constitute its
primary reporting segments are mobile phones and mining. The Company has restated the presentation
of its segments for prior periods to conform to the current presentation, and it will restate all
comparable periods hereafter.
As most of the Groups customers are located in the PRC and the Groups revenues are generated
in the PRC, no geographical segment information is presented.
The following tables present summary information by segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobile
|
|
|
|
|
|
|
|
|
|
Consolidation
|
|
|
|
|
Phones
|
|
Mining
|
|
Corporate
|
|
adjustment
|
|
Total
|
|
|
RMB000
|
|
RMB000
|
|
RMB000
|
|
RMB000
|
|
RMB000
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
1,632,912
|
|
|
|
193,887
|
|
|
|
|
|
|
|
|
|
|
|
1,826,799
|
|
Gross profits
|
|
|
251,449
|
|
|
|
100,552
|
|
|
|
|
|
|
|
(132
|
)
|
|
|
351,869
|
|
Interest revenue
|
|
|
18,850
|
|
|
|
455
|
|
|
|
9,336
|
|
|
|
|
|
|
|
28,641
|
|
Interest expense
|
|
|
(326,512
|
)
|
|
|
|
|
|
|
(4,149
|
)
|
|
|
107,857
|
|
|
|
(222,804
|
)
|
Income tax expenses
|
|
|
(13,667
|
)
|
|
|
(32,306
|
)
|
|
|
|
|
|
|
2,034
|
|
|
|
(43,939
|
)
|
Profit (loss) for the year
|
|
|
(235,512
|
)
|
|
|
64,207
|
|
|
|
(68,608
|
)
|
|
|
(102,469
|
)
|
|
|
(342,382
|
)
|
Cash
|
|
|
3,129,070
|
|
|
|
579,268
|
|
|
|
1,165
|
|
|
|
|
|
|
|
3,709,503
|
|
Inventories
|
|
|
97,146
|
|
|
|
866
|
|
|
|
|
|
|
|
|
|
|
|
98,012
|
|
Property, machinery and equipment
|
|
|
23,183
|
|
|
|
146,679
|
|
|
|
97
|
|
|
|
526
|
|
|
|
170,485
|
|
Expenditures for long-lived assets
|
|
|
912
|
|
|
|
113,349
|
|
|
|
|
|
|
|
|
|
|
|
114,261
|
|
F-68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobile
|
|
|
|
|
|
|
|
|
|
Consolidation
|
|
|
|
|
Phones
|
|
Mining
|
|
Corporate
|
|
adjustment
|
|
Total
|
|
|
RMB000
|
|
RMB000
|
|
RMB000
|
|
RMB000
|
|
RMB000
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
2,153,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,153,873
|
|
Gross profits
|
|
|
866,909
|
|
|
|
|
|
|
|
|
|
|
|
(132
|
)
|
|
|
866,777
|
|
Interest revenue
|
|
|
24,405
|
|
|
|
|
|
|
|
30,416
|
|
|
|
|
|
|
|
54,821
|
|
Interest expense
|
|
|
(165,506
|
)
|
|
|
|
|
|
|
(146,204
|
)
|
|
|
|
|
|
|
(311,710
|
)
|
Income tax expenses
|
|
|
(157,359
|
)
|
|
|
|
|
|
|
|
|
|
|
1,642
|
|
|
|
(155,717
|
)
|
Profit (loss) for the year
|
|
|
448,930
|
|
|
|
|
|
|
|
(116,466
|
)
|
|
|
(16,491
|
)
|
|
|
315,973
|
|
Cash
|
|
|
2,907,147
|
|
|
|
|
|
|
|
1,196
|
|
|
|
|
|
|
|
2,908,343
|
|
Inventories
|
|
|
183,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
183,169
|
|
Property, machinery and equipment
|
|
|
166,028
|
|
|
|
|
|
|
|
132
|
|
|
|
1,206
|
|
|
|
167,366
|
|
Expenditures for long-lived assets
|
|
|
14,907
|
|
|
|
|
|
|
|
49
|
|
|
|
|
|
|
|
14,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
3,141,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,141,094
|
|
Gross profits
|
|
|
885,382
|
|
|
|
|
|
|
|
|
|
|
|
(132
|
)
|
|
|
885,250
|
|
Interest revenue
|
|
|
16,373
|
|
|
|
|
|
|
|
12,068
|
|
|
|
|
|
|
|
28,441
|
|
Interest expense
|
|
|
(47,034
|
)
|
|
|
|
|
|
|
(193,464
|
)
|
|
|
|
|
|
|
(240,498
|
)
|
Income tax expenses
|
|
|
(116,469
|
)
|
|
|
|
|
|
|
|
|
|
|
3,092
|
|
|
|
(113,377
|
)
|
Profit (loss) for the year
|
|
|
615,314
|
|
|
|
|
|
|
|
127,320
|
|
|
|
245,217
|
|
|
|
987,851
|
|
Expenditures for long-lived assets
|
|
|
1,944
|
|
|
|
|
|
|
|
645
|
|
|
|
|
|
|
|
2,589
|
|
|
|
|
*
|
|
For 2008 and 2009, indoor phones business was a separate segment. However, due to the disposal
of QXCH group on November 30, 2009, indoor phones business was accounted for as a discontinued operation.
Therefore, there is only mobile phones segment in 2008 and 2007.
|
F-69
Major customers
(a) Mobile phones segment
Details of individual customers accounting for 10% or more of the Groups sales of mobile
phones are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2008
|
|
2009
|
Beijing U-life International
Technology Co., Ltd.
|
|
|
|
|
|
|
53
|
%
|
|
|
17
|
%
|
Beijing Jiasheng Ruitong Electronics
Co., Ltd
|
|
|
|
|
|
|
12
|
%
|
|
|
18
|
%
|
Beijing Beidou Communication &
Equipment Co., Ltd.
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
Shenzhen Laidi Technical Co., Ltd.
|
|
|
10
|
%
|
|
|
|
|
|
|
16
|
%
|
Shenzhen Siecom Communication
Technology Development Co., Ltd.
|
|
|
10
|
%
|
|
|
|
|
|
|
20
|
%
|
Beijing Jiusheng Technology Co., Ltd.
|
|
|
|
|
|
|
|
|
|
|
15
|
%
|
(b) Mining segment
Details of individual customers accounting for 10% or more of the Groups sales of molybdenum
concentrates are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2008
|
|
2009
|
Zhonggang LuLiao Co., Ltd
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
F-70
29. OTHER ADDITIONAL INFORMATION
The following items were included in the consolidated statements of operations and
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2008
|
|
2009
|
|
|
RMB000
|
|
RMB000
|
|
RMB000
|
|
US$000
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- bank loans
|
|
|
43,314
|
|
|
|
70,452
|
|
|
|
50,368
|
|
|
|
7,379
|
|
- other bank borrowings
|
|
|
3,720
|
|
|
|
2,110
|
|
|
|
|
|
|
|
|
|
- convertible notes
|
|
|
15,405
|
|
|
|
25,772
|
|
|
|
13,185
|
|
|
|
1,932
|
|
- accretion of discounts on
convertible notes (Note 15)
|
|
|
140,251
|
|
|
|
188,201
|
|
|
|
137,782
|
|
|
|
20,185
|
|
- amortization of deferred
debt issuance costs (Note
15)
|
|
|
37,321
|
|
|
|
24,738
|
|
|
|
21,031
|
|
|
|
3,081
|
|
- shareholders loans
(imputed interest) (Note 18)
|
|
|
487
|
|
|
|
437
|
|
|
|
438
|
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
240,498
|
|
|
|
311,710
|
|
|
|
222,804
|
|
|
|
32,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising expenses
|
|
|
26,445
|
|
|
|
137,166
|
|
|
|
92,263
|
|
|
|
13,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shipping and handling costs
|
|
|
9,923
|
|
|
|
7,054
|
|
|
|
5,467
|
|
|
|
801
|
|
F-71
ITEM 19.
EXHIBITS
(a) The following financial statements are being filed as part of this annual report on Form
20-F:
Reports of Independent Registered Public Accounting Firms
Consolidated statements of operations for the years ended December 31, 2007, 2008 and 2009
Consolidated balance sheets at December 31, 2008 and 2009
Consolidated statements of changes in shareholders equity for the years ended December 31,
2007, 2008 and 2009
Consolidated statements of cash flows for the years ended December 31, 2007, 2008 and 2009
Notes to and forming part of the consolidated financial statements
(b) The following exhibits are being filed as part of this annual report on Form 20-F:
|
|
|
Exhibit 1.1
|
|
Memorandum of Association of the Company incorporated by reference to the Exhibits to our Registration Statement
on Form F-1, SEC File No. 333-9274, declared effective on February 16, 1999.
|
|
|
|
Exhibit 1.2
|
|
Articles of Association of the Company incorporated by reference to the Exhibits to our Registration Statement
on Form F-1, SEC File No. 333-9274, declared effective on February 16, 1999.
|
|
|
|
Exhibit 1.3
|
|
Memorandum of Association of the Company, as amended on January 9, 2009*
|
|
|
|
Exhibit 1.4
|
|
Memorandum of Association of the Company, as amended on January 28, 2010
|
|
|
|
Exhibit 4.1
|
|
Securities Purchase Agreement dated as of August 17, 2007 covering the sale of US$25,000,000 of our 5.5% senior
convertible notes and common stock purchase warrants**
|
|
|
|
Exhibit 4.2
|
|
Form of 5.5% Senior Convertible Note issued pursuant to the Securities Purchase Agreement dated as of August 17,
2007**
|
|
|
|
Exhibit 4.3
|
|
Form of Warrant issued pursuant to the Securities Purchase Agreement dated as of August 17, 2007**
|
|
|
|
Exhibit 4.4
|
|
Non-competition Agreement, dated April 12, 2007, among Qiao Xing Universal Telephone, Inc., Huizhou Qiao Xing
Communication Industry, Ltd., Mr. Rui Lin Wu and Qiao Xing Mobile Communication Co., Ltd.***
|
|
|
|
Exhibit 4.5
|
|
Share Purchase Agreement By and Among the Company, China Luxuriance Jade Company, Ltd. and The China Luxuriance
Jade Company, Ltd. Sole Shareholder dated March 24, 2009 incorporated by reference to Exhibit 4.5 to our amended
report on Form 20-F/A for fiscal year ended December 31, 2008.
|
|
|
|
Exhibit 4.6
|
|
Sale and Purchase Agreement By and Among the Company, DKR SoundShore Oasis Holding Fund Ltd., CEDAR DKR Holding
Fund Ltd. and Chestnut Fund Ltd. dated March 31, 2009 incorporated by reference to Exhibit 99.2 to the Report on
Form 6-K dated April 6, 2009, SEC File No. 0-29946.
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Exhibit 8.1
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List of Significant Subsidiaries of the Company
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Exhibit 11.1
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Code of Ethics****
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Exhibit 12.1
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Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)
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Exhibit 12.2
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Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)
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84
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Exhibit 13.1
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Certification of Chief Executive
Officer Pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350
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Exhibit 13.2
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Certification of Chief Financial Officer Pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350
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Exhibit 15.1
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Consent of Grobstein, Horwath & Company LLP
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Exhibit 15.2
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Consent of Crowe Horwath LLP
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*
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- incorporated by reference to the Exhibits to our annual report on Form 20-F for the
fiscal year ended December 31, 2008.
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**
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|
- incorporated by reference to the Exhibits to our Report on Form 6-K filed with the SEC on
August 21, 2007, SEC File No. 000-29946.
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***
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|
- incorporated by reference to the Exhibits to our annual report on Form 20-F for the fiscal
year ended December 31, 2006.
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****
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- incorporated by reference to the Exhibits to our annual report on Form 20-F for the fiscal
year ended December 31, 2003.
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85
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F
and that it has duly caused and authorized the undersigned to sign this annual report on its
behalf.
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QIAO XING UNIVERSAL RESOURCES, INC.
(Registrant)
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Date: July 15, 2010
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By:
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/s/ RUI LIN WU
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Rui Lin Wu
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Chairman
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86
INDEX TO EXHIBITS
DESCRIPTION
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Exhibit 1.1
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Memorandum of Association of the Company incorporated by reference to the Exhibits to our Registration Statement
on Form F-1, SEC File No. 333-9274, declared effective on February 16, 1999.
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Exhibit 1.2
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Articles of Association of the Company incorporated by reference to the Exhibits to our Registration Statement
on Form F-1, SEC File No. 333-9274, declared effective on February 16, 1999.
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|
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Exhibit 1.3
|
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Memorandum of Association of the Company, as amended on January 9, 2009*
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|
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Exhibit 1.4
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Memorandum of Association of the Company, as amended on January 28, 2010
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Exhibit 4.1
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Securities Purchase Agreement dated as of August 17, 2007 covering the sale of US$25,000,000 of our 5.5% senior
convertible notes and common stock purchase warrants**
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|
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Exhibit 4.2
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Form of 5.5% Senior Convertible Note issued pursuant to the Securities Purchase Agreement dated as of August 17,
2007**
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Exhibit 4.3
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Form of Warrant issued pursuant to the Securities Purchase Agreement dated as of August 17, 2007**
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Exhibit 4.4
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Non-competition Agreement, dated April 12, 2007, among Qiao Xing Universal Telephone, Inc., Huizhou Qiao Xing
Communication Industry, Ltd., Mr. Rui Lin Wu and Qiao Xing Mobile Communication Co., Ltd.***
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|
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Exhibit 4.5
|
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Share Purchase Agreement By and Among the Company, China Luxuriance Jade Company, Ltd. and The China Luxuriance
Jade Company, Ltd. Sole Shareholder dated March 24, 2009 incorporated by reference to Exhibit 4.5 to our amended
report on Form 20-F/A for the fiscal year ended December 31, 2008.
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|
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Exhibit 4.6
|
|
Sale and Purchase Agreement By and Among the Company, DKR SoundShore Oasis Holding Fund Ltd., CEDAR DKR Holding
Fund Ltd. and Chestnut Fund Ltd. dated March 31, 2009 incorporated by reference to Exhibit 99.2 to the Report on
Form 6-K dated April 6, 2009, SEC File No. 0-29946.
|
|
|
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Exhibit 8.1
|
|
List of Significant Subsidiaries of the Company
|
|
|
|
Exhibit 11.1
|
|
Code of Ethics****
|
|
|
|
Exhibit 12.1
|
|
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)
|
|
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Exhibit 12.2
|
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Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)
|
|
|
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Exhibit 13.1
|
|
Certification of Chief Executive Officer Pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350
|
|
|
|
Exhibit 13.2
|
|
Certification of Chief Financial Officer Pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350
|
|
|
|
Exhibit 15.1
|
|
Consent of Grobstein, Horwath & Company LLP
|
|
|
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Exhibit 15.2
|
|
Consent of Crowe Horwath LLP
|
|
|
|
*
|
|
- incorporated by reference to the Exhibits to our annual report on Form 20-F for the fiscal
year ended December 31, 2008.
|
|
**
|
|
- incorporated by reference to the Exhibits to our Report on Form 6-K filed with the SEC on
August 21, 2007, SEC File No. 000-29946.
|
|
***
|
|
- incorporated by reference to the Exhibits to our annual report on Form 20-F for the fiscal
year ended December 31, 2006
|
|
****
|
|
- incorporated by reference to the Exhibits to our annual report on Form 20-F for the fiscal
year ended December 31, 2003
|