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Viewtran Group, Inc. 10-Q 2008

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
Form 10-Q
Table of Contents

 

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2008.

or

 

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from              to             .

Commission File Number 000-02642

 

 

COGO GROUP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   52-0466460

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

Room 1001, Tower C, Skyworth Building

High-Tech Industrial Park

Nanshan, Shenzhen 518057, PRC

(Address of Principal Executive Offices including zip code)

011-86-755-267-43210

(Registrant’s Telephone Number, Including Area Code)

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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  x    No  ¨

Indicate by check mark if the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company

 

Large Accelerated Filer   ¨    Accelerated Filer   x
Non-Accelerated Filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act). Yes  ¨    No  x

There were 35,478,107 shares of the Registrant’s Common Stock issued and outstanding on November 5, 2008.

 

 

 


Table of Contents

Cogo Group, Inc.

Index to Form 10-Q

 

          Page
Part I.   

Financial Information

   3
  

Item 1. Condensed Financial Statements (unaudited)

   3
  

Condensed Consolidated Balance Sheets
as of September 30, 2008 and December 31, 2007

   3
  

Condensed Consolidated Statements of Income
for the Three months ended September 30, 2008 and 2007

   4
  

Condensed Consolidated Statements of Income
for the Nine months ended September 30, 2008 and 2007

   5
  

Condensed Consolidated Statements of Cash Flows
for the Nine months ended September 30, 2008 and 2007

   6
  

Notes to Condensed Consolidated Financial Statements

   7
  

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

   15
  

Item 3. Quantitative and Qualitative Disclosures About Market Risk

   27
  

Item 4. Controls and Procedures

   28
Part II.   

Other Information

   29
  

Item 1. Legal Proceedings

   29
  

Item 1A. Risk Factors

   29
  

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

   29
  

Item 3. Defaults Upon Senior Securities

   30
  

Item 4. Submission of Matters to a Vote of Security Holders

   30
  

Item 5. Other Information

   30
  

Item 6. Exhibits

   31
SIGNATURES    32

 

2


Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

COGO GROUP INC. and SUBSIDIARIES

Unaudited Condensed Consolidated Balance Sheet

As of September 30, 2008 and December 31, 2007

 

     September 30, 2008     September 30, 2008     December 31, 2007  
     $’000     RMB’000     RMB’000  

Assets

      

Current assets:

      

Cash

   117,070     794,894     919,650  

Pledged bank deposits

   7,000     47,529     51,603  

Accounts receivable, net of allowance for doubtful accounts

   73,730     500,616     418,329  

Bills receivable

   4,561     30,968     35,300  

Inventories

   20,916     142,015     129,892  

Prepaid expenses and other receivables

   3,343     22,701     18,306  
                  

Total current assets

   226,620     1,538,723     1,573,080  

Property and equipment, net

   2,803     19,032     17,848  

Intangible assets, net

   22,826     154,985     148,659  

Investment in an affiliated company

   61     416     416  

Goodwill

   17,165     116,549     99,474  

Other assets

   209     1,423     1,063  
                  

Total Assets

   269,684     1,831,128     1,840,540  
                  

Liabilities and stockholders’ equity

      

Current liabilities:

      

Trade accounts payable

   30,542     207,379     174,628  

Bank borrowings

   —       —       9,080  

Amounts due to related parties

   —       —       1,403  

Income taxes payable

   1,737     11,792     6,957  

Accrued expenses and other liabilities

   22,056     149,759     169,046  

Deferred income taxes

   721     4,896     4,071  
                  

Total current liabilities

   55,056     373,826     365,185  
                  

Deferred income taxes

   2,997     20,351     21,487  
                  

Total liabilities

   58,053     394,177     386,672  

Minority interest

   728     4,944     —    

Stockholders’ equity

      

Common stock Par value: USD 0.01 Authorized: 200,000,000 shares; Issued and outstanding:

      

38,676,072 shares in 2008 and 38,496,167 shares in 2007

   466     3,162     3,150  

Treasury Stock – 2,515,036 shares, at cost

   (17,149 )   (116,441 )   —    

Additional paid-in capital

   167,398     1,136,616     1,085,459  

Retained earnings

   76,446     519,062     428,333  

Accumulated other comprehensive loss

   (16,258 )   (110,392 )   (63,074 )
                  

Total stockholders’ equity

   210,903     1,432,007     1,453,868  
                  

Total liabilities and stockholders’ equity

   269,684     1,831,128     1,840,540  
                  

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

COGO GROUP INC. and SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Income

Three months ended September 30, 2008 and 2007

 

     Three Months
Ended
September 30,
2008
    Three Months
Ended
September 30,
2008
    Three Months
Ended
September 30,
2007
 
     $’000     RMB’000     RMB’000  

Net Revenue

      

Product sales

   74,099     503,128     398,319  

Services revenue

   695     4,717     22,029  
                  
   74,794     507,845     420,348  

Cost of sales

      

Cost of goods sold

   (63,912 )   (433,954 )   (323,106 )

Cost of services

   (541 )   (3,674 )   (15,409 )
                  
   (64,453 )   (437,628 )   (338,515 )

Gross profit

   10,341     70,217     81,833  

Selling, general and administrative expenses

   (8,058 )   (54,718 )   (34,101 )

Research and development expenses

   (2,143 )   (14,550 )   (10,732 )

Other operating income, net

   1     8     52  
                  

Income from operations

   141     957     37,052  

Interest expense

   (28 )   (191 )   (352 )

Interest income

   1,085     7,366     9,042  
                  

Income before income taxes and minority interests

   1,198     8,132     45,742  

Income tax benefit/(expense)

   285     1,936     (3,977 )
                  

Income before minority interests

   1,483     10,068     41,765  

Minority interests

   (106 )   (717 )   (727 )
                  

Net income

   1,377     9,351     41,038  
                  
     $     RMB     RMB  

Earnings per share

      

- Basic

   0.04     0.24     1.07  
                  

- Diluted

   0.04     0.24     1.04  
                  

Weighted average number of common shares outstanding

      

- Basic

     38,869,625     38,348,566  
              

- Diluted

     39,233,125     39,541,644  
              

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

COGO GROUP INC. and SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Income

Nine months ended September 30, 2008 and 2007

 

     Nine Months
Ended
September 30,
2008
    Nine Months
Ended
September 30,
2008
    Nine Months
Ended
September 30,
2007
 
     $’000     RMB’000     RMB’000  

Net Revenue

      

Product sales

   202,633     1,375,860     1,103,190  

Services revenue

   3,232     21,947     46,118  
                  
   205,865     1,397,807     1,149,308  

Cost of sales

      

Cost of goods sold

   (168,930 )   (1,147,019 )   (895,144 )

Cost of services

   (2,063 )   (14,005 )   (32,153 )
                  
   (170,993 )   (1,161,024 )   (927,297 )

Gross profit

   34,872     236,783     222,011  

Selling, general and administrative expenses

   (18,830 )   (127,860 )   (86,529 )

Research and development expenses

   (5,152 )   (34,983 )   (29,776 )

Other operating income, net

   11     78     438  
                  

Income from operations

   10,901     74,018     106,144  

Interest expense

   (149 )   (1,018 )   (2,105 )

Interest income

   3,236     21,974     17,791  
                  

Income before income taxes and minority interests

   13,988     94,974     121,830  

Income tax expense

   (520 )   (3,528 )   (10,521 )
                  

Income before minority interests

   13,468     91,446     111,309  

Minority interests

   (106 )   (717 )   (3,065 )
                  

Net income

   13,362     90,729     108,244  
                  
     $     RMB     RMB  

Earnings per share

      

- Basic

   0.34     2.32     3.00  
                  

- Diluted

   0.33     2.27     2.91  
                  

Weighted average number of common shares outstanding

      

- Basic

     39,181,116     36,079,006  
              

- Diluted

     39,935,533     37,246,314  
              

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

COGO GROUP INC. and SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows

Nine months ended September 30, 2008 and 2007

 

     Nine Months
Ended
September 30, 2008
    Nine Months
Ended
September 30, 2008
    Nine Months
Ended
September 30, 2007
 
     $’000     RMB’000     RMB’000  

Cash flows from operating activities:

      

Net income

   13,362     90,729     108,244  

Adjustments to reconcile net income to net cash provided by operating activities:

      

Depreciation expense

   950     6,454     3,396  

Amortization of intangible assets

   4,784     32,484     5,802  

Loss on disposal of property and equipment

   7     50     —    

Minority interests

   106     717     3,065  

Deferred income taxes

   (885 )   (6,011 )   —    

Share-based compensation

   4,487     30,464     25,795  

Change in current assets and liabilities:

      

Accounts receivable

   (13,718 )   (93,145 )   (164,585 )

Prepaid expenses and other receivables

   (974 )   (6,616 )   (8,751 )

Bill receivables

   638     4,332     11,540  

Inventories

   (907 )   (6,158 )   (34,876 )

Trade accounts payable

   5,937     40,309     35,402  

Amounts due to related parties

   (198 )   (1,343 )   —    

Income taxes payable

   760     5,158     (606 )

Accrued expenses and other liabilities

   (2,971 )   (20,173 )   (13,413 )
                  

Net cash provided by/(used in) operating activities

   11,378     77,251     (28,987 )
                  

Cash flows used in investing activities:

      

Payment for acquisitions of subsidiaries

   (5,637 )   (38,275 )   (72,080 )

Decrease/(increase) in pledged bank deposits

   75     518     (999 )

Purchases of property and equipment

   (927 )   (6,294 )   (7,080 )
                  

Net cash used in investing activities

   (6,489 )   (44,051 )   (80,159 )
                  

Cash flows provided by financing activities:

      

Purchase of treasury stock

   (17,149 )   (116,441 )   —    

Proceeds from issuance of new shares, net of offering costs

   —       —       641,868  

Proceeds from exercise of stock warrants and options

   —       —       2,490  

Repayment of bank borrowings

   (1,280 )   (8,692 )   (22,386 )
                  

Net cash (used in)/provided by financing activities

   (18,429 )   (125,133 )   621,972  
                  

Effect of exchange rate changes on cash

   (4,834 )   (32,823 )   (28,781 )
                  

Net (decrease)/increase in cash

   (18,374 )   (124,756 )   484,045  

Cash at beginning of the period

   135,444     919,650     375,147  
                  

Cash at end of the period

   117,070     794,894     859,192  
                  

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

COGO GROUP INC. and SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

Nine months ended September 30, 2008 and 2007

Note 1 - Basis Of Presentation

The accompanying unaudited condensed consolidated financial statements of Cogo Group, Inc., (formerly Comtech Group, Inc, (the “Company”)) and its subsidiaries (together, “we,” “us” or “our”)) have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements prepared in accordance with United States generally accepted accounting principles have been condensed or omitted. For a summary of our accounting principles, and other footnote information, reference is made to the Company’s 2007 audited consolidated financial statements included in our Annual Report on Form 10-K (the “10-K”) filed with the Securities and Exchange Commission on March 17, 2008. The accompanying unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes included in that 10-K. All adjustments necessary for the fair presentation of the results of operations for the interim periods covered by this report have been included. All such adjustments are of a normal and recurring nature. The results of operations for the three and nine months ended September 30, 2008 are not necessarily indicative of the operating results for the full year.

The accompanying unaudited condensed consolidated financial statements are expressed in Renminbi (“RMB”), the national currency of the People’s Republic of China (the “PRC”). Solely for the convenience of the reader, the September 30, 2008 unaudited condensed consolidated financial statements have been translated into United States dollars (“USD” or “$”) at the closing rate in New York City on September 30, 2008 for cable transfers in RMB as certified for customers purposes by the Federal Reserve Bank of New York of USD 1.00 = RMB6.7899. No representation is made that the RMB could have been, or could be, converted into USD at that rate or at any other certain rate on September 30, 2008, or at any other certain date.

The value of the RMB is subject to changes in the PRC’s central government policies and to international economic and political developments affecting supply and demand in the China Foreign Exchange Trading System market. Since 1994, the conversion of RMB into foreign currencies, including USD, has been based on rates set by the People’s Bank of China, which are set daily based on the previous day’s interbank foreign exchange market rates and current exchange rates on the world financial markets. From 1994 until July 2005, the official exchange rate generally had been stable, but the Chinese government announced in July 2005 that it would no longer peg its currency exclusively to the USD. Although currently the RMB exchange rate versus the USD is restricted to a rise or fall of no more than 0.3% per day and the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the policy would increase the volatility of RMB as compared to USD.

Note 2 - Organization And Nature Of Business

The Company and its subsidiaries are principally engaged in the sale of component parts for electronic devices and equipment, such as liquid crystal display, cameras, persistent storage and peripheral devices for wireless handsets and fixed-line telecommunications to manufacturers in the PRC and other overseas countries. The Company and its subsidiaries also provide technology and engineering, business process outsourcing and other related services in the PRC.

Note 3 - Summary Of Principal Accounting Policies

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).

 

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Table of Contents

Revenue recognition

Sales of components

The Company recognizes revenue when the components are delivered and the customer takes ownership and assumes risk of loss, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable.

Sales of components represent the invoiced value of goods, net of value added taxes (“VAT”), sales returns, trade discounts and allowances.

In the PRC, VAT at a general rate of 17% on invoice amount is collected on behalf of tax authorities in respect of the sales of products and is not recorded as revenue. VAT collected from customers, net of VAT paid for purchases, is recorded as a liability in the consolidated balance sheets until it is paid to the authorities.

Engineering Services

Revenue for services is generally recognized when services are performed.

Recently Issued Accounting Pronouncements

In February 2008, FASB issued FASB Staff Position (“FSP”) FAS 157-1 “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements. That Address Fair Value Measurement for Purposes of Lease Classification or Measurement under Statement 13,” and FSP FAS 157-2, “Effective Date of FASB Statement No. 157.” FSP FAS 157-1 amends the scope of SFAS No. 157 and other accounting standards that address fair value measurements for purpose of lease classification or measurement under Statement 13. The FSP is effective on initial adoption of Statement 157, FSP FAS 157-2 defers the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. We do not expect the adoption of FSP FAS 157-1 and FSP FAS 157-2 will have a material impact on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” and SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment to ARB No. 51”. SFAS No. 141(R) and SFAS No. 160 require most identifiable assets, liabilities, noncontrolling interests and goodwill acquired in a business combination to be recorded at “full fair value” and require noncontrolling interests (previously referred to as minority interests) to be reported as a component of equity, which changes the accounting for transactions with noncontrolling interest holders. Both statements are effective for periods beginning on or after December 15, 2008, and earlier adoption is prohibited. SFAS No. 141(R) will be applied to business combinations occurring after the effective date. SFAS No. 160 will be applied prospectively to all noncontrolling interests, including any that arose before the effective date. We are currently evaluating the impact of adopting SFAS No. 160 on our consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities,” which requires enhanced disclosures about an entity’s derivative and hedging activities. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We do not expect the adoption of SFAS No. 161 will have a material impact on our results of operations and financial position.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”). This statement identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in accordance with generally accepted accounting principles (“GAAP”). With the issuance of this statement, the FASB concluded that the GAAP hierarchy should be directed toward the entity and not its auditor, and reside in the accounting literature established by the FASB as opposed to the American Institute of Certified Public Accountants “AICPA”) Statement on Auditing Standards No. 69, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” This statement is effective 60 days following the Securities and Exchange commission’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” We do not expect the adoption of SFAS No. 162 will have a material impact on our results of operations and financial position.

 

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Table of Contents

Note 4 - Bills Receivable

To reduce the Company’s credit risk, the Company requires certain customers to pay for the sale of the Company’s products by bills receivable. Bills receivable represents short-term notes receivable issued by a financial institution that entitles the Company to receive the full face amount from the financial institution at maturity, which generally ranges from 3 to 6 months from the date of issuance. Historically, the Company has experienced no losses on bills receivable.

In certain circumstances, the Company has arranged to transfer with recourse certain of its bills receivable to banks. Under this arrangement, the bank pays a discounted amount to the Group and collects the amounts owed from the customers’ banks. The discount typically ranges from 5% to 6% of the balance transferred, which is recorded as interest expense.

For bills receivable sold or transferred to banks that the Company has surrendered control, the Company derecognized the discounted bills receivable pursuant to the provisions of SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“SFAS No. 140”). As at September 30, 2008 and December 31, 2007, the Company has derecognized discounted bills receivable amounting to RMB20,859 thousand ($3,072 thousand) and RMB19,935 thousand, respectively in accordance with SFAS No. 140.

Note 5 - Inventories

Inventories by major categories are as follows:

 

     September 30,
2008
   September 30,
2008
   December 31,
2007
     USD ‘000    RMB ‘000    RMB ‘000

Raw materials

   1,585    10,762    15,534

Finished goods

   19,331    131,253    114,358
              
   20,916    142,015    129,892
              

Note 6 - Property and equipment, net

 

     September 30,
2008
    September 30,
2008
    December 31,
2007
 
     USD ‘000     RMB ‘000     RMB ‘000  

Property and equipment, at cost

   5,230     35,509     28,015  

Less: accumulated depreciation

   (2,427 )   (16,477 )   (10,167 )
                  

Property and equipment, net

   2,803     19,032     17,848  
                  

 

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Note 7 - Goodwill and Intangible assets, net

The Company accounts for goodwill and identifiable intangible assets in accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” (SFAS No. 142). Under this standard, the Company assesses the impairment of goodwill and indefinite-lived intangible assets at least annually and whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

During the third quarter of 2008, the tough end-market environment led to a reduction in demand on one of the components of the Component Sales segment. As a result of this reduced demand, management revised its future cash flow expectations for its businesses in this component in the third quarter of 2008, which lowered the fair value estimates of this component. Therefore, the Company compared the implied fair value of the goodwill in this component with its carrying value and recorded a RMB4,264 thousand ($628 thousand) impairment charge in the third quarter of 2008.

In conjunction with the goodwill impairment testing, the Company analyzed the valuation of its intangible assets in relation to this component and estimated the fair value of the component’s customer relationship by performing a discounted cash flow analysis. The analysis resulted in an impairment charge of RMB3,389 thousand ($499 thousand) in the third quarter of 2008.

There were no significant events or changes in circumstances to indicate that the carrying value of goodwill and intangible assets in other business components of the Company may not be recoverable.

The changes in the carrying amount of our goodwill and other intangible assets for the nine months ended September 30, 2008 are as follows:

 

     Nine months ended
September 30, 2008
 
     Goodwill     Intangible
Assets
    Total  
     RMB ‘000     RMB ‘000     RMB ‘000  

Balance as of January 1, 2008

   99,474     148,659     248,133  

Add: Acquisition of Long Rise (note 12)

   21,339     34,546     55,885  

Less: Amortization

   —       (24,831 )   (24,831 )

Less: Impairment charges

   (4,264 )   (3,389 )   (7,653 )
                  

Balance as of September 30, 2008

   116,549     154,985     271,534  
                  

Balance as of September 30, 2008 (in USD ‘000)

   17,165     22,826     39,991  
                  

 

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Note 8 - Share-Based Compensation

(a) Options and stock warrants assumed under the Share Exchange Agreement

Prior to the share exchange transaction between Trident Rowan Group Inc. (“Trident”) and the Company (the “Share Exchange Agreement”), the Board of Directors of Trident adopted, and the then stockholders of Trident approved, the 1995 Stock Option Plan for Outside Directors (the “Directors’ Plan”) under which 5,000 options would be granted annually to each non-employee director of Trident for each full year of service on the Board of Trident. As part of the Share Exchange Agreement, the Company assumed fully vested options under the Directors’ Plan to purchase 115,000 shares of the Company’s common stock. The options granted under the Directors’ Plan have a weighted average exercise price per option of $3.00 each and expire on July 1, 2009. Since the Share Exchange Agreement, the Company has not granted additional options under the Directors’ Plan. None of the options exercisable under the Directors’ Plan was exercised in the nine months periods ended September 30, 2008 or 2007. As of September 30, 2008, 100,000 options under the Directors’ Plan were outstanding with a weighted average exercise price per share of $3.00 and aggregate intrinsic value of $227 thousand.

Prior to the Share Exchange Agreement, Trident granted fully exercisable stock warrants to purchase up to 925,417 shares of its common stock which were assumed by the Company as a part of the Share Exchange Agreement. The stock warrants assumed by the Company have a weighted average exercisable price per stock warrant of $2.76 each and expire on July 1, 2009. During the nine months ended September 30, 2008 and 2007, Nil and 145,105 stock warrants with weighted average exercisable price per stock warrant of Nil and $2.62 each were exercised respectively. As of September 30, 2008, 19,999 exercisable stock warrants remained outstanding with a weighted average exercisable price per share of 3.00 and aggregate intrinsic value of $45 thousand, respectively.

(b) 2004 Incentive Plan

On August 3, 2004, the Board of Directors adopted the Cogo Group, Inc. 2004 Stock Incentive Plan (the “2004 Incentive Plan”) pursuant to which 2,500,000 shares of the Company’s common stock are reserved for issuance upon exercise of stock options, and for the issuance of stock appreciation rights, non-vested shares and performance shares. The purpose of the 2004 Incentive Plan is to provide additional incentive to employees, directors, advisors and consultants. Unless the 2004 Incentive Plan is early terminated by the Board, the 2004 Incentive Plan provides for a term of 10 years from the date of its adoption by the Board of Directors, after which no awards may be made.

Stock options

A summary of stock option activity is as follows:

 

     Number
of options
   Weighted
average
exercise price
   Weighted
average
remaining
contractual
term
   Aggregate
intrinsic
value
          USD    Years    USD ‘000

Balance as of December 31, 2007

   1,192,269    4.09      
               

Granted

   —      —        

Exercised

   —      —        

Forfeited

   —      —        

Balance as of September 30, 2008

   1,192,269    4.09    6.27    1,432
                   

Exercisable as of September 30, 2008

   1,192,269    4.09    6.27    1,432
                   

 

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Non-vested equity share unit

A summary of non-vested equity share unit activity is as follows:

 

     Shares     Weighted average
Grant-date fair value
           USD

Balance as of January 1, 2008

   2,964     9.14

Vested

   (1,875 )   9.14
          

Balance as of September 30, 2008

   1,089     9.14
          

The total fair value of non-vested equity share units vested during the nine months ended September 30, 2008 was $17 thousand. As of September 30, 2008, the aggregate unamortized fair value of non-vested equity share units was $10 thousand, which is expected to be amortized on a straight-line basis over a weighted average period of approximately 5 months.

(c) 2006 Incentive Plan

On December 20, 2006, the Board of Directors adopted the 2006 Equity Incentive Plan (the “2006 Incentive Plan”) pursuant to which 4,800,000 shares of the Company’s common stock are reserved for issuance upon exercise of stock options, and for the issuance of stock appreciation rights, restricted stock awards and performance shares. The purpose of the 2006 Incentive Plan is to provide additional incentive to employees, directors, advisors and consultants. Unless the 2006 Incentive Plan is early terminated by the Board, the 2006 Incentive Plan provides for a term of 10 years from the date of its adoption by the Board of Directors, after which no awards may be made.

Non-vested equity share unit

A summary of non-vested equity share unit issued under the 2006 Incentive Plan is as follows:

 

     Shares     Weighted average
Grant-date fair value
           USD

Balance as of January 1, 2008

   127,484     15.94

Granted on January 28, 2008 (note i)

   962,700     9.67

Granted on March 27, 2008 (note i)

   80,000     10.85

Granted on August 4, 2008 (note ii)

   280,000     4.52

Vested

   (500,336 )   7.39
          

Balance as of September 30, 2008

   949,848     10.29
          

 

Note i:   The stock awards vest in equal quarterly installments over a period of three years from the date of grant.
Note ii:   The stock awards were fully vested on the date of grant.

The total fair value of non-vested equity share units vested during the nine months ended September 30, 2008 was $3,697 thousand. As of September 30, 2008, the aggregate unamortized fair value of non-vested equity share units was $9,778 thousand, which is expected to be amortized on a straight-line basis over a weighted average period of approximately 27 months.

Performance shares

A summary of performance shares activity is as follows:

 

     Shares    Weighted average
Grant-date fair value
          USD

Balance as of January 1, 2008

   270,000    16.03

Granted on March 27, 2008 (note i)

   160,000    10.85

Vested

   —      —  
         

Balance as of September 30, 2008

   430,000    14.1
         

 

Note i:   The performance awards vest in three equal installments on December 31, 2008, December 31, 2009 and December 31, 2010 and is subject to the Company meeting certain earnings and other performance measures in 2008, 2009 and 2010.

 

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The total fair value of non-vested performance shares granted through September 30, 2008 was $1,736 thousand. Performance-based non-vested share awards are recognized as compensation expense based on the fair value on the date of grant, the number of shares ultimately expected to vest and the vesting period.

Note 9 - Earnings Per Share

Basic earnings per share is computed by dividing net income by the weighted average number of common stock outstanding, including contingently issuable shares when all necessary conditions have been satisfied, during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of common and dilutive potential common shares outstanding during the period. Dilutive potential common shares consist of common shares issuable upon the exercise of stock options, non-vested equity share unit, including performance shares, and warrants using the treasury stock method.

 

     Three months
ended
September 30,
2008
   Three months
ended
September 30,
2007
   Nine months
ended
September 30,
2008
   Nine months
ended
September 30,
2007

Weighted average number of common shares outstanding – basic

   38,869,625    38,348,566    39,181,116    36,079,006

Effect of diluted securities

   363,500    1,193,078    754,417    1,167,308
                   

Weighted average number of common shares outstanding – diluted

   39,233,125    39,541,644    39,935,533    37,246,314
                   

Note 10 - Operating Segment Information

The Component Sales segment primarily consists of the sale of components for the mobile handset, telecommunications system equipment, industrial business and digital media and other (such as network protection devices and data storage) markets. The Engineering Services segment primarily consists of the provision of technology and engineering services, business process outsourcing, network system integration and related training and maintenance services. There was no inter-segment revenue during the periods reported. Unallocated includes items such as corporate staff and overhead.

The following is the segment information for the three and nine month period ended September 30, 2008.

 

     Three months
ended
September 30,
2008
    Three months
ended
September 30,
2007
    Nine months
ended
September 30,
2008
    Nine months
ended
September 30,
2007
 
     RMB’000     RMB’000     RMB’000     RMB’000  

Net revenue

        

Component sales

        

Mobile handset

   177,597     173,146     510,178     466,843  

Telecommunications equipment

   151,841     123,224     401,121     351,688  

Industrial business

   20,921     —       41,120     —    

Digital media and others

   152,769     101,949     423,441     284,659  
                        
   503,128     398,319     1,375,860     1,103,190  

Engineering services

   4,717     22,029     21,947     46,118  

Total net revenue

   507,845     420,348     1,397,807     1,149,308  

Income from operations

        

Component sales

   17,318     48,803     106,596     142,664  

Engineering services

   (3,211 )   779     5,434     1,967  

Unallocated

   (13,150 )   (12,530 )   (38,012 )   (38,487 )
                        

Total income from operations

   957     37,052     74,018     106,144  

Interest income

   7,366     9,042     21,974     17,791  

 

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     Three months
ended
September 30,
2008
    Three months
ended
September 30,
2007
    Nine months
ended
September 30,
2008
    Nine months
ended
September 30,
2007
 
     RMB’000     RMB’000     RMB’000     RMB’000  

Interest expense

   (191 )   (352 )   (1,018 )   (2,105 )

Income before income taxes and minority Interests

   8,132     45,742     94,974     121,830  
                        

 

     September 30,
2008
   December 31,
2007
     RMB’000    RMB’000

Total assets

     

Component sales

   1,579,041    1,716,207

Engineering services

   249,091    121,763

Unallocated

   2,996    2,570
         
   1,831,128    1,840,540
         

Note 11 - Comprehensive income

A reconciliation of net income to comprehensive income is presented in the table below.

 

     Three months
ended
September 30,
2008
    Three months
ended
September 30,
2007
    Nine months
ended
September 30,
2008
    Nine months
ended
September 30,
2007
 
     RMB’000     RMB’000     RMB’000     RMB’000  

Net income

   9,351     41,038     90,729     108,244  

Other comprehensive loss

        

Foreign currency translation adjustments

   (5,270 )   (12,153 )   (47,318 )   (25,477 )
                        

Comprehensive income/(loss)

   4,081     (28,885 )   43,411     82,767  
                        

Note 12 - Acquisition

On July 31, 2008, the Group entered into a stock purchase agreement with Faith Grace Investments Limited (“Seller”) to acquire 70% of the outstanding shares of Long Rise Holdings Limited (“Long Rise”) and its subsidiary, for a consideration of US$8.75 million in cash, subject to certain payment schedule and conditions between the Group and the Seller. The principal activities of Long Rise and its subsidiary are the provision of design and distribution of mobile phone modules.

The Group is in the process of finalizing the purchase price allocation; thus, the allocation of the purchase price is subject to refinement. The acquisition of Long Rise resulted in the recognition of goodwill of RMB21,339 thousand ($3,143 thousand) and recording net identifiable assets of RMB38,775 thousand ($5,711 thousand) at the date of the acquisition. This acquisition is expected to extend Cogo’s product offerings to address the demands of the expanding CDMA market, stimulated by China Telecom’s entrance into the CDMA market in the second half of 2008 following the restructuring of China’s telecommunications industry.

No supplemental financial information on a pro forma basis as if the consummation had occurred on January 1, 2007 is provided since the effect would be not material to the Company’s consolidated financial condition or results of operations.

 

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Portions of the discussion and analysis below contain certain statements that are not descriptions of historical facts, but are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. These forward-looking statements may include statements about our plans and objectives for future expansion, including into our new digital consumer electronic and storage solution products; expectations for the domestic wireless handset, telecommunications equipment, consumer electronic and storage solution end-markets in the PRC; anticipated margins for our solutions; general and cyclical economic and business conditions, and, in particular, those in the PRC’s wireless handset, telecommunications equipment and consumer electronics industries; our ability to enter into and renew key corporate and strategic relationships with our customers and suppliers; changes in the favorable tax incentives enjoyed by our PRC operating companies; and other statements containing forward looking terminology such as “may”, “expects”, “believes”, “anticipates”, “intends”, “projects”, “looking forward” or similar terms, variations of such terms or the negative of such terms. Such information is based upon various assumptions made by, and expectations of, our management that were reasonable when made but may prove to be incorrect. All of such assumptions are inherently subject to uncertainties and contingencies beyond our control and upon assumptions with respect to future business decisions which are subject to change. Accordingly, there can be no assurance that actual results will meet expectations and actual results may vary (perhaps materially) from certain of the results anticipated herein. For a further description of these and other risks and uncertainties, see our most recent Annual Report filed with the Securities and Exchange Commission (SEC) on Form 10-K, and our subsequent SEC filings. The following discussion of our financial condition and results of operations should also be read in conjunction with our unaudited condensed consolidated financial statements and the notes to those financial statements appearing elsewhere in this Form 10-Q.

Overview

We provide customized module design solutions for a diverse set of applications and end markets, serving as a gateway for our technology component suppliers to access leading electronics manufacturers in China. Our customized module design solutions allow our customers to take advantage of technology components from reputable suppliers in an efficient and cost-effective manner, thus reducing their time-to-market and lowering their overall costs. Our close collaboration with our customers’ product development teams provides us with a unique understanding of their needs, enabling us to customize our suppliers’ technology components with module designs that meet our customers’ needs. In addition, since 2006, we began offering technology and engineering, and software design services in China.

We are focused on the mobile handset, telecommunications equipment and digital media end-markets in China. In the mobile handset end-market, we provide module solutions for functionalities such as LCD, camera, power supply and Bluetooth; in the telecommunications equipment end-market, we provide solutions for PSTN switching, optical transmitters, electrical signal processing and optical signal amplification; and in the digital media end-market, we provide solutions for digital set-top boxes and GPS applications. Over the course of our operating history, we have worked with over 1,000 customers, including a majority of the most established manufacturers in the mobile handset, telecommunications equipment and digital media end-markets in China such as ZTE, Huawei and Lenovo. In addition to these original equipment manufacturers, or OEMs, our other customers include industry participants that support these OEMs, such as subsystem designers and contract manufacturers. In developing customized module design solutions for use in our customers’ products, we collaborate closely with over 30 suppliers of technology components,

 

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Table of Contents

including many large multinational companies such as Broadcom, JDS Uniphase, Matsushita and Foxconn. In addition, in October 2006, we became one of the first China-based companies to license software technology and have access to selected source codes directly from Microsoft.

For the nine months ended September 30, 2008, we have two reportable operating segments: component sales, consisting of revenues generated by providing customized module design solutions focusing primarily in the mobile handset, telecommunications equipment, digital media and industrial business end-markets, and services revenue, generated by providing technology and engineering services, network system integration and related training and maintenance services.

Principal Factors Affecting Our Results of Operations

The major factors affecting our results of operations and financial condition include:

Revenue mix. Our net revenue and gross profit are affected by our product mix. Over the last year, digital media related sales, which have generally higher profit margins than our mobile handset module related sales and our telecommunications equipment module related sales, have constituted a significantly greater portion of our total net revenue as compared to previous years.

Growth in end-markets. The rapid growth of the domestic mobile handset, telecommunications equipment, digital media and industrial business end-markets have been important growth drivers for China’s electronics manufacturing industries. Specific markets that we expect to experience continued growth are the data communications market, consisting of asymmetric digital subscriber line (ADSL) modems and Voice over Internet Protocol (VoIP) equipment; the routers and network security equipment markets; the optical transmission systems market; the fixed line telecommunications network market; the digital media market particularly relating to digital TV and GPS applications, as well as industrial solutions. Increased domestic consumer spending power has contributed to rapid growth in these markets. This growth in domestic consumer spending power in turn has driven, and we believe will continue to drive, growth in the electronics manufacturing businesses supporting hardware OEMs, including those engaged in the customized design of module solutions such as ourselves. However, these industries and the respective domestic manufacturers that operate in these industries may not continue to grow their sales at historical levels, if at all. The stagnation or reduction in overall demand for mobile handset, telecommunications equipment, digital media and industrial business products could materially affect our results of operations.

Increase in exports. We believe that the development of a highly-skilled, low-cost manufacturing base has also enabled China’s domestic mobile handset, telecommunications equipment and digital consumer electronics manufacturers to be competitive in the global marketplace. As an example, Huawei has become a major supplier of telecommunications equipment to international customers, while ZTE, a major manufacturer of mobile handset and telecommunications equipment in China, as well as other telecommunications equipment and mobile handset manufacturers, have also begun to expand overseas. We believe that growth in the export market will likely have a positive effect on our results of operations and financial condition, as it should increase the demand for our solutions, particularly among our mobile handset and digital media clients.

Growth by entering new end-markets, strengthening in-house capabilities and leveraging our customer base. In 2005, we began targeting the digital media end-market and, over time, we intend to develop integrated circuit and application software design capabilities and provide solutions based on our own proprietary technology. In the first quarter of 2005, we began generating sales from customized module design solutions for digital home entertainment products, primarily for digital set-top boxes, through sales to

 

16


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our existing end-customers, Haier, Konka, Lenovo and TCL. We have since then grown our revenues generated from this market from constituting 10.8% of our 2005 revenue to 30.3% of our revenue for the first nine months of 2008. We anticipate that sales related to the digital media end-markets will generally have higher profit margins than our mobile handset and telecommunications equipment modules related sales, though such higher margins may decline over time as this industry mature. We will also look for opportunities to expand into new end markets that we believe represent significant growth opportunities.

Our success in the digital media end-market will depend, in significant part, on our ability to leverage our existing customer base. We expect to continue to incur additional research and development expenses, through hiring additional engineering personnel to develop new solutions and expanding our intellectual property and technological capabilities, to meet the needs of our customers that have expanded into or are expected to expand into the digital media end-market.

General economic and market conditions. Due to a tough end-market environment, the level of consumer and information technology spending has reduced the demand for our mobile handsets business in the third quarter of 2008. Furthermore, profit margins are pressured and we also strategically lowered our pricing in order to grow business in a slowing economic environment. For other end-market businesses, such as telecommunications and digital media products, there continues to be solid growth, driven by stable infrastructure investments in the PRC.

Net Revenue

Product sales

For our component sales segment, we do not charge our customers an independent design fee. Instead, our business model is to generate revenue by reselling a limited number of specific components required in our module reference design. The difference between the purchase price we pay our suppliers for these components and our sales price to the customer for these components compensates us for our design, technical support and distribution services. Our net revenue includes a 17% value-added tax, or VAT.

Our broad and diversified customer base includes many of the major domestic mobile handset, telecommunications equipment, digital consumer electronics and industrial manufacturers in China. In addition, our customers include industry participants supporting these OEMs, such as subsystem designers and contract manufacturers in China, as well as international manufacturers who have begun to manufacture end-products in China for the domestic and international market.

Our net revenues are subject to seasonal fluctuation and periods of increased demand. All product module sales are typically highest in the fourth quarter of the year due to the desire by OEMs to spend remaining budgets allocated for a given period, usually on an annual basis. Net revenues have historically been lowest in the first quarter of the year due to the Chinese New Year holiday and the general reduction in sales following the holiday season. The digital media industry also experiences cyclical fluctuations, as well as fluctuations in how quickly certain new digital media products and technologies are adopted by the market. These sales patterns may not be indicative of future sales performance.

Services Revenue

We provide software design technology and engineering services, and related training and maintenance services to our customers. We generate revenue when our services are rendered and acknowledged by our customers.

 

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Table of Contents

Cost of Sales

Our cost of sales comprises cost of goods sold and cost of services.

Cost of Goods Sold

Cost of goods sold primarily consists of the purchase of components from suppliers. We develop our customized module design solutions based on specific technology components purchased from suppliers in our target end-markets. Our list of over 30 key suppliers includes Broadcom (integrated circuit and Bluetooth), Foxconn (LCD display), JDS Uniphase (optoelectronic components), M-Systems (flash memory, DiskOnChip), Matsushita (switches), Sambu (speakers) and Freescale Semiconductor (automotive solutions). We typically issue purchase orders to our suppliers only after we receive customer orders, enabling us to maintain low inventory levels and, in turn, minimize risks typically associated with holding inventory. If we lose a key supplier, or a supplier reduces the quantity of products it sells to us, does not maintain a sufficient inventory level of products required by us or is otherwise unable to meet our demands for its components, we may have to expend significant time, effort and other resources to locate a suitable alternative supplier and secure replacement components. Even if we are able to find a replacement supplier, we may be required to redevelop the customized module design solution to effectively incorporate the replacement components.

Cost of Services

Cost of services consists of direct staff costs and other direct related costs for providing engineering and technology services including training and materials.

Operating Expenses

Selling, General and Administrative Expenses

Our selling expenses include expenditures to promote our new module solutions and gain a larger customer base, personnel expenses and travel and entertainment costs related to sales and marketing activities, and freight charges. We expense all these expenditures as they are incurred. Selling expenses are expected to continue to grow in the future as we diversify by developing and acquiring new design capabilities and expanding into new end-markets.

General and administrative expenses include compensation and benefits for our general and administrative staff, professional fees, and general travel and entertainment costs. We expense all general and administrative expenses as they are incurred. We expect that general and administrative expenses will continue to increase for the foreseeable future as a result of our expected continued growth and the continuing costs of complying with U.S. rules and regulations necessary to maintain our listing in the United States.

Research and Development Expenses

Research and development expenses consist primarily of salaries and related costs of the employees engaged in research, design and development activities; the costs for design and testing; the cost of parts for prototypes; equipment depreciation; and third party development expenses. We expense research and development expenses as they are incurred. As of September 30, 2008, we had approximately 276 engineers and other technical employees engaged in research and development related activities to develop new customized module design solutions targeted at the mobile handset, telecommunications equipment, digital media and industrial business industries. As a result of additional costs incurred in developing new customized module design solutions, and an increasing

 

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headcount in our R&D department, we expect that our research and development expenses, including those relating to the planned hiring of additional research and development personnel, will increase in the future as we seek to expand our business by developing new customized module design solutions and penetrating new end-markets, and as we seek to grow our engineering services business.

Taxation

We are a holding company incorporated in the State of Maryland and conduct substantially all our operations through our PRC operating companies. Although we are subject to United States taxation, we do not anticipate incurring significant United States income tax liability for the foreseeable future because:

 

   

we do not conduct any material business in the United States,

 

   

the earnings generated from our non-U.S. operating companies are generally eligible for a deferral from United States taxation until such earnings are repatriated to the United States, and

 

   

we believe that we will not generate any significant amount of income under the income imputation rules applicable to a United States company that owns “controlled foreign corporations” for United States federal income tax purposes.

Our subsidiaries that are incorporated in Cayman Islands and the British Virgin Islands are not subject to income taxes in those jurisdictions.

Our subsidiaries incorporated in Hong Kong, are subject to a 16.5% tax on their profits in Hong Kong for 2008 and a 17.5% tax on their profits for 2007.

Prior to January 1, 2008, the PRC statutory tax rate was 33%. Our subsidiaries located in the Shenzhen Special Economic Zone in the PRC (“Shenzhen Subsidiaries”), were subject to a reduced tax rate of 15%. Since the Shenzhen Subsidiaries have agreed to operate for a minimum of 10 years in the PRC, the Shenzhen Subsidiaries were entitled to a tax holiday of a two-year tax exemption followed by three-year 50% tax reduction from the first profit making year after offsetting accumulated tax losses of the respective Shenzhen Subsidiaries.

On March 16, 2007, the Fifth Plenary Session of the Tenth National People’s Congress passed the Corporate Income Tax Law of the PRC (“new tax law”), which took effect on January 1, 2008. According to the new tax law, the corporate income tax rate applicable to all of our subsidiaries in the PRC is revised to 25%. However, the Shenzhen Subsidiaries are subject to the transitional tax rates during which the income tax rate will gradually increase to the unified rate of 25% from January 1, 2008. The transitional tax rate is 18%, 20%, 22%, 24% and 25% for 2008, 2009, 2010, 2011 and 2012 onwards, respectively (“the transitional tax rates”). For the Shenzhen Subsidiaries that were entitled to a tax holiday such as the two-year tax exemption followed by three-year 50% tax reduction from the first profit making year after offsetting accumulated tax losses, the Shenzhen Subsidiaries continue to be entitled to the tax holiday and for Comloca and Huameng PRC which had not commenced their respective tax holiday as of December 31, 2007, the new tax law requires the tax exemption period to begin on January 1, 2008. Under the new tax law, it allows entities that qualify as high-technology enterprises to be taxed at a reduced tax rate of 15%. None of the PRC subsidiaries are eligible for the reduced tax rate of 15% as of September 30, 2008. Accordingly, none of the PRC subsidiaries have used the reduced tax rate of 15% in determining their deferred taxes as of September 30, 2008.

 

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As a result of the incentives above, our operations have been subject to relatively low tax liabilities. There was a net income tax benefit of RMB1,936 thousand ($285 thousand) in the third quarter of 2008, as compared to an income tax expense of RMB3,977 thousand in the same period of 2007. The significant change in our income taxes was mostly due to the settlement of deferred tax liabilities of RMB2,691 thousand ($396 thousand) for the quarter ended September 30, 2008.

Three months ended September 30, 2008 compared to three months ended September 30, 2007

Overview

The following table sets forth information regarding the breakdown of revenues and income for the three months ended September 30:

 

     2008
RMB’000
   2007
RMB’000

Net revenue

     

Component Sales

     

Mobile handset

   177,597    173,146

Telecommunications equipment

   151,841    123,224

Industrial business

   20,921    —  

Digital media and others

   152,769    101,949

Services revenue

   4,717    22,029
         

Total net revenue

   507,845    420,348
         

Net Revenue. Total net revenue increased RMB87,497 thousand ($12,886 thousand), or 20.8% for the three months ended September 30, 2008 when compared to the corresponding period in 2007. The increase was mainly due to an increase in component sales by approximately RMB104,809 thousands ($15,436 thousand), offset by a decrease in services revenue by RMB17,312 thousand ($2,550 thousand).

Component Sales

Details of component sales by market type for the three months ended September 30, 2008 and 2007 were as follows:

 

     Three months ended September 30,  
     2008
Amount
   2008
% of Net
Revenue
    2007
Amount

RMB ‘000
   2007
% of Net

Revenue
    %
change
 
     $ ‘000    RMB ‘000          

Mobile handset

   26,156    177,597    35.0 %   173,146    41.2 %   2.6 %

Telecommunications equipment

   22,363    151,841    29.9 %   123,224    29.3 %   23.2 %

Industrial business

   3,081    20,921    4.1 %   —      —      

Digital media and other (1)

   22,499    152,769    30.1 %   101,949    24.3 %   49.8 %
                                 

Total component sales

   74,099    503,128    99.1 %   398,319    94.8 %   26.3 %
                                 

 

(1) Other includes sales of lightning protection devices for wireless base stations.

Component sales for the three months ended September 30, 2008 was RMB503,128 thousand ($74,099 thousand), or RMB104,809 thousand or 26.3% higher than the corresponding period in 2007. Mobile handset related sales increased by RMB4,451

 

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thousand ($656 thousand), or 2.6%; telecommunications equipment related sales increased by RMB28,617 thousand ($4,215 thousand), or 23.2%; and digital media and other sales increased by RMB50,820 thousand ($7,485 thousand), or 49.8%. In 2008, we have a new market, industrial business, which has contributed RMB20,921 thousand ($3,081 thousand) of sales for the three months ended September 30, 2008.

This increase in component sales was mainly attributable to the growth in sales volume particularly for digital media market. The wider variety of telecommunications equipment and digital media related sales also drove the increase in the sales orders from some large existing customers, such as ZTE and T&W. Although there was weaker demand in the mobile handset market, lower selling prices increased quantities sold, resulting in a 2.6% increase in the related sales for the quarter ended September 30, 2008 when compared to the same period for 2007. The contribution to total net revenue by digital media and other sales for the three months ended September 30, 2008 increased to RMB152,769 thousand ($22,499 thousand), or 30.1% of total net revenue, from RMB101,949 thousand or 24.3% of total net revenue, in the corresponding period in 2007. Revenue from telecommunications equipment related sales increased in 2008, and its contribution to total net revenue increased from 29.3% for the three months ended September 30, 2007 to 29.9% for the three months ended September 30, 2008. The contribution to total net revenue by mobile handsets decreased from 41.2% for the three months ended September 30, 2007 to 35.0% for the three months ended September 30, 2008. The decrease in contribution to total net revenue by mobile handsets related sales was due to significant growth in our digital media business and the emerging new market of industrial business.

Services Revenue. Services revenue for the three months ended September 30, 2008 and 2007 was as follows:

 

     Three months ended September 30,  
     2008     2007     %
Change
 
     Amount
RMB’000
   % of Net
Revenue
    Amount
RMB’000
   % of Net
Revenue
   

Services revenue

   4,717    0.9 %   22,029    5.2 %   (78.6 )%
                            

Services revenue was derived from the provision of technology and engineering services, software design, network system integration and related training and maintenance services commencing from January 2006. The decrease of RMB17,312 thousand ($2,550 thousand), or 78.6%, was mainly attributable to less sales generated from software design services as a result of our strategic focus on lower-end product markets.

Gross Profit. Gross profit was RMB70,217 thousand ($10,341 thousand) for the three months ended September 30, 2008, a decrease of RMB11,616 thousand ($1,711 thousand), or 14.2% when compared to RMB81,833 thousand in the corresponding period in 2007. The decrease in gross profit amount was primarily attributable to the lower pricing strategy for mobile handset related sales, despite the increase in sales volumes for all markets related sales. Gross margin was 13.8% for the quarter ended September 30, 2008, compared to 19.5% for the same period in 2007. The decrease in gross margin was mainly due to the decreased selling prices for mobile handset related sales.

Selling, General, Administrative, and Research & Development Expenses. Selling, general and administrative and R&D expenses were RMB69,268 thousand ($10,202 thousand) in the three months ended September 30, 2008, or 54.5% higher than those of the same period the prior year. The expenses for the three month periods ended September 30, 2008 and 2007 were as follows:

 

     Three months ended September 30,  
     2008     2007     %
Change
 
     Amount
RMB’000
   % of Net
Revenue
    Amount
RMB’000
   % of Net
Revenue
   
              

Selling expenses

   10,712    2.1 %   17,108    4.1 %   (37.4 )%

General and administrative expenses

   44,006    8.6 %   16,993    4.0 %   159.0 %

R&D expenses

   14,550    2.9 %   10,732    2.6 %   35.6 %
                            

Total

   69,268    13.6 %   44,833    10.7 %   54.5 %
                            

 

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Selling, General and Administrative Expenses. The decrease in selling expenses for the three months ended September 30, 2008 of RMB6,396 thousand ($942 thousand), or 37.4%, was mainly attributable to the fact that no allowance for doubtful accounts was made for the quarter ended September 30, 2008 compared to RMB9.2 million made during the same period last year. The decrease was offset in part by an increase in sales-related expenses of RMB2.8 million as a result of the increase in sales volume.

The increase in general and administrative expenses of RMB27,013 thousand ($3,978 thousand), or 159.0%, was primarily attributable to increased amortization of intangible assets of RMB13.1 million, exchange loss of RMB11.7 million and impairment of goodwill of RMB4.3 million. The increase was offset in part by a decease in stock-based compensation cost and other general administrative expenses of RMB2.1 million.

R&D Expenses. Research and development expenses increased in the three month period ended September 30, 2008 by RMB3,818 thousand ($562 thousand), or 35.6% as compared to the corresponding time period in 2007. The increase was primarily attributable to the increase in R&D personnel and additional research expenditures spent for potential new markets, such as industrial business and digital media solutions.

Interest Expense. Interest expense decreased for the three month period ended September 30, 2008 by RMB161 thousand ($24 thousand) or 45.7%, as compared to the corresponding period in 2007. The decrease was attributable to the decrease in less than average bank borrowings.

Interest Income. Interest income for the three month period ended September 30, 2008 amounted to RMB7,366 thousand ($1,085 thousand), compared to RMB9,042 thousand in the corresponding period in 2007. The decrease by RMB1,676 thousand ($247 thousand) or 18.5% was attributable to the decrease in average bank balance.

Income Tax. There was a net income tax benefit of RMB1,936 thousand ($285 thousand) in the third quarter of 2008 as compared to an income tax expense of RMB3,977 thousand in the same period of 2007. The change in income taxes was mostly due to the settlement of deferred tax liabilities of RMB2,691 thousand ($396 thousand) for the quarter ended September 30, 2008.

Net Income; Earnings per share. As a result of the above items, net income for the three months ended September 30, 2008 was RMB9,351 thousand ($1,377 thousand), compared to net income of RMB41,038 thousand in the corresponding period in 2007. We reported basic per share earnings of RMB0.24 ($0.04) for the three months ended September 30, 2008 diluted per share earnings of RMB0.24 ($0.04) compared to basic per share earnings of RMB1.07 for the same period of 2007, and diluted per share earnings of RMB1.04.

 

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Nine months ended September 30, 2008 compared to Nine months ended September 30, 2007

Overview

The following table sets forth information regarding the breakdown of revenues and income from the nine months ended September 30:

 

     2008
RMB’000
   2007
RMB’000

Net revenue

     

Component Sales

     

Mobile handset

   510,178    466,843

Telecommunications equipment

   401,121    351,688

Industrial business

   41,120    —  

Digital media and others

   423,441    284,659

Services revenue

   21,947    46,118
         

Total net revenue

   1,397,807    1,149,308
         

Net Revenue. Total net revenue increased RMB248,499 thousand ($36,598 thousand), or 21.6% for the nine months ended September 30, 2008 when compared to the corresponding period in 2007. The increase was mainly due to an increase in component sales by approximately RMB272,670 thousand ($40,158 thousand), but partly offset by a decrease in services revenue of RMB24,171 thousand ($3,560 thousand).

Component Sales

Details of component sales by market type for the nine months ended September 30, 2008 and 2007 were as follows:

 

     Nine months ended September 30,  
     2008
Amount
   2008
% of Net

Revenue
    2007
Amount

RMB ‘000
   2007
% of Net

Revenue
    %
Change
 
     $ ‘000    RMB ‘000          

Mobile handset

   75,138    510,178    36.5 %   466,843    40.6 %   9.3 %

Telecommunications equipment

   59,076    401,121    28.7 %   351,688    30.6 %   14.1 %

Industrial business

   6,056    41,120    2.9 %   —      —      

Digital media and other (1)

   62,363    423,441    30.3 %   284,659    24.8 %   48.8 %
                                 

Total component sales

   202,633    1,375,860    98.4 %   1,103,190    96.0 %   24.7 %
                                 

 

(1) Other includes sales of lightning protection devices for wireless base stations.

Component sales for the nine months ended September 30, 2008 was RMB1,375,860 thousand ($202,633 thousand), or RMB272,670 thousand or 24.7% higher than the corresponding period in 2007. Mobile handset related sales increased by RMB43,335 thousand ($6,382 thousand), or 9.3%; telecommunications equipment related sales increased by RMB49,433 thousand ($7,280 thousand) or 14.1%; and digital media and other sales increased by RMB138,782 thousand ($20,439 thousand), or 48.8%. In 2008, we have a new market, industrial business, which has contributed RMB41,120 thousand ($6,056 thousand) of sales for the nine months ended September 30, 2008. The increase in component sales was mainly attributable to increased sales volume, which resulted from an increase in our customer base, an increase in our product types for all markets and lower selling prices, particularly for mobile handset products. The wider variety of component solutions drove the increase in sales orders from some existing

 

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customers such as ZTE and T&W. The newly introduced business lines in digital media markets, such as digital TV solutions also contributed to the increase. The contribution to total net revenue by digital media and other sales for the nine months ended September 30, 2008 increased to RMB423,441 thousand ($62,363 thousand), or 30.3% of total net revenue, from RMB284,659 thousand, or 24.8% of total net revenue, in the corresponding period in 2007. Although revenue from telecommunications equipment related sales increased in 2008, its contribution to total net revenue decreased from 30.6% for the nine months ended September 30, 2007 to 28.7% for the nine months ended September 30, 2008. The contribution to total net revenue by mobile handsets decreased from 40.6% for the nine months ended September 30, 2007 to 36.5% for the nine months ended September 30, 2008. The decrease in contribution to total net revenue by mobile handset and telecommunications equipment related sales was due to significant growth in our digital media business and the introduction of industrial business in 2008.

Services Revenue. Services revenue for the nine months ended September 30, 2008 and 2007 was as follows:

 

     Nine months ended September 30,  
     2008    2007     %
Change
 
     Amount
RMB’000
   % of Net
Revenue
   Amount
RMB’000
   % of Net
Revenue
   

Services revenue

   21,947    1.6    46,118    4.0 %   (52.4 )%
                           

Services revenue was derived from the provision of technology and engineering services, software design, network system integration and related training and maintenance services commencing from January 2006. The decrease of RMB24,171 thousand ($3,560 thousand), or 52.4%, was mainly attributable to less sales generated from software design services as a result of our strategic focus on lower-end product markets.

Gross Profit. Gross profit was RMB236,783 thousand ($34,872 thousand) for the nine months ended September 30, 2008, an increase of RMB14,772 thousand ($2,176 thousand), or 6.7% when compared to RMB222,011 thousand in the corresponding period in 2007. The increase in gross profit amount is primarily attributable to the increase in revenue. Gross margin was 16.9% for the nine months ended September 30, 2008, compared to 19.3% for the corresponding period in 2007. The decrease in gross margin was due to reduced selling prices for mobile handset products and a decrease in services revenue, which has a higher margin.

Selling, General, Administrative, and Research & Development Expenses. Selling, general and administrative and R&D expenses were RMB162,843 thousand ($23,983 thousand) in the nine months ended September 30, 2008, or 40.0% higher than those of the same period the prior year. The expenses for the nine month periods ended September 30, 2008 and 2007 were as follows:

 

     Nine months ended September 30,  
     2008     2007     %
Change
 
     Amount
RMB’000
   % of Net
Revenue
    Amount
RMB’000
   % of Net
Revenue
   

Selling expenses

   34,417    2.5 %   37,340    3.2 %   (7.8 )%

General and administrative expenses

   93,443    6.6 %   49,189    4.3 %   90.0 %

R&D expenses

   34,983    2.5 %   29,776    2.6 %   17.5 %
                            

Total

   162,843    11.6 %   116,305    10.1 %   40.0 %
                            

 

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Selling, General and Administrative Expenses. The decrease in selling expenses for the nine months ended September 30, 2008 of RMB2,923 thousand ($430 thousand), or 7.8%, was mainly attributable to an additional allowance for doubtful accounts of RMB6.9 million that was made for the nine months ended September 30, 2008, compared to RMB15.3 million made during the same period last year. The decrease was offset in part by an increase in other indirect selling expenses such as freight charges of approximately RMB5.5 million as a result of increased sales volume.

The increase in general and administrative expenses of RMB44,254 thousand ($6,158 thousand), or 90.0%, was primarily attributable to an increase in amortization of intangible assets of RMB22.4 million, foreign exchange loss of approximately RMB8.1 million, an increase in stock-based compensation cost of RMB5.5 million and an impairment of goodwill of RMB 4.3 million. The increase was offset in part by a decrease in general administrative expenses of RMB4.0 million.

R&D Expenses. Research and development expenses increased in the nine month period ended September 30, 2008 by RMB5,207 thousand ($767 thousand), or 17.5%, as compared to the corresponding time period in 2007. The increase was primarily attributable to the increase in R&D personnel and engineers and additional research expenditures spent for patent new markets, such as industrial businesses and digital media solutions.

Interest Expense. Interest expense decreased for the nine month period ended September 30, 2008 by RMB1,087 thousand ($160 thousand) or 51.6%, as compared to the corresponding period in 2007. The decrease in interest expense was attributable to a decrease in average interest rate and the average bank borrowing balances.

Interest Income. Interest income for the nine month period ended September 30, 2008 amounted to RMB21,974 thousand ($3,236 thousand), compared to RMB17,791 thousand in the corresponding period in 2007. The increase was mainly attributable to the net proceeds of approximately $83.3 million from the underwritten offering described below.

Income Tax. The effective tax rate for the nine months ended September 30, 2008 was 3.7% compared to 8.6% for the comparable period in 2007. The decrease in the effective tax rate was primarily due to settlement of deferred tax liabilities of RMB6.0 million for the nine months ended September 30, 2008.

Net Income; Earnings per share. As a result of the above items, net income for the nine months ended September 30, 2008 was RMB90,729 thousand ($13,362 thousand), compared to net income of RMB108,244 thousand in the corresponding period in 2007. We reported basic per share earnings of RMB2.32 ($0.34) for the nine months ended September 30, 2008 diluted per share earnings of RMB2.27 ($0.33) compared to basic per share earnings of RMB3.00 for the same period of 2007, and diluted per share earnings of RMB2.91.

Liquidity and Capital Resources

Cash flows and working capital

Our accounts payable cycle typically averages approximately one month, whereas our receivables cycle typically averages approximately three months. Accordingly, working capital is needed to fund this time difference.

As at September 30, 2008, apart from the amounts payable in relation to our acquisition of the subsidiaries, we had no material commitments for capital expenditures.

 

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As of September 30, 2008, the Company had approximately RMB794,894 thousand ($117,070 thousand) in cash. We regularly review our cash funding requirements and attempt to meet those requirements through a combination of cash on hand, cash provided by operations and available borrowings under bank lines of credit. At times, we evaluate possible acquisitions of, or investments in, businesses that are complementary to those of ours, which transactions may require the use of cash. We believe that our cash, other liquid assets, operating cash flows and credit facility arrangements, taken together, provide adequate resources to fund ongoing operating expenditures. In the event that they do not, we may require additional funds in the future to support our working capital requirements or for other purposes and may seek to raise such additional funds through the sale of public or private equity as well as from other sources.

We regularly review our cash funding requirements and attempt to meet those requirements through a combination of cash on hand, cash provided by operations, and available borrowings under bank lines of credit and factoring facilities. At times, we may evaluate possible acquisitions of, or investments in, businesses that are complementary to ours, which may require the use of cash. We believe that our existing cash position, operating cash flows and credit facility arrangements, taken together, provide adequate resources to fund our ongoing operating expenditures for the next 12 months. In the event that they do not, we may require additional funds in the future to support our working capital requirements or for other purposes and may seek to raise such additional funds through the sale of public or private equity, as well as from other sources.

As of September 30, 2008, we had working capital of RMB1,164,897 thousand ($171,563 thousand) as compared with working capital of RMB1,207,895 thousand ($176,101 thousand) at December 31, 2007.

Operating activities generated cash of RMB77,251 thousand ($11,378 thousand) for the first nine months of the period ended September 30, 2008, compared to cash used of RMB28,987 ($4,269) in the corresponding period in 2007. The increase in cash generated from operating activities as compared to the prior year is primarily due to an increase in trade accounts payable of RMB40,309 thousand ($5,937 thousand) and a decrease in bill receivables of RMB4,332 thousand ($638 thousand). Cash provided by operating activities was offset in part due to an increase in trade accounts receivables of RMB93,145 thousand ($13,718 thousand), which resulted from increase in revenue.

Investing activities used RMB44,051 thousand ($6,489 thousand) for the first nine months of the period ended September 30, 2008, mainly for payment for acquisitions of subsidiaries of RMB38,275 thousand ($5,637 thousand). The remaining major investing activities were the purchase of property and equipment of RMB6,294 thousand ($927 thousand).

Financing activities used RMB125,133 thousand ($18,429 thousand) for the first nine months of the period ended September 30, 2008, primarily for purchase of treasury stock of RMB116,441 thousand ($17,149 thousand) and repayment of bank borrowings of RMB8,692 thousand ($1,280 thousand).

Indebtedness

On October 7, 2005, Comtech International (Hong Kong) Limited (“Comtech Hong Kong”) entered into a RMB39,972 thousand ($5,000 thousand) U.S. dollar denominated credit facility with Standard Chartered Bank (Hong Kong) Limited (“SCB”), and a RMB71,949 thousand ($9,000 thousand) U.S. dollar denominated facility with Bank of China (“BOC”). On January 17, 2008, the facility with the BOC was amended in which Comtech Hong Kong, Comtech Broadband Corporation Limited, Keen Awards Limited and Hong Kong JJT Limited jointly entered into a RMB98,168 thousand ($14,000 thousand) revised credit facility with the BOC and on October 10, 2008, BOC increased the credit facility to RMB278,386 thousand ($41,000 thousand). Both of the SCB and BOC facilities are guaranteed by Cogo Group, Inc. Apart from cash generated from operations, these revolving credit facilities serve as our principal source of liquidity to fund our working capital needs.

 

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As of the date of this filing, there was no outstanding loan balance under the SCB facility. This facility is secured by funds on deposit in an amount not less than $2,000,000 (as of September 30, 2008: $2,000,000), and bears interest ranging from LIBOR +1.5% to USD Prime per annum (as of September 30, 2008: HIBOR +1.5% to USD Prime per annum), depending on the different kinds of borrowings made. The SCB facility is repayable on demand and SCB may immediately terminate the facility without our consent or that of any third party. Interest on this facility accrues until payment is demanded by SCB.

As of the date of this filing, there was no outstanding loan balance under the BOC facility. This facility is secured by funds on deposit in an amount not less than $15,000,000 (as of September 30, 2008: $5,000,000), and bears interest from LIBOR +2.25% per annum (as of September 30, 2008: LIBOR +1.75% to 2% per annum), depending on the different kinds of borrowings made and is used to settle foreign exchange obligations to the extent needed. The BOC facility is repayable on demand and BOC may increase, reduce and/or cancel the facility by notice to us. Interest on this facility accrues until payment is demanded by BOC. Based on a variable return on interest, the bank borrowings amounted to fair value.

Some of our customers enter into arrangements with their respective banks for the purpose of settling their bills. Under such arrangements, we are entitled to collect the amounts owed directly from the customers’ banks when the invoice becomes due. In certain circumstances, we have arranged to transfer with recourse certain of our bills receivable to the bank. Under this discounting arrangement, the bank pays a discounted amount to us and collects the amounts owed from the customers’ banks. The discount typically ranges from 5% to 6% of the balance transferred, which is recorded as interest expense. During the quarter ended September 30, 2008, we discounted bills receivable amounting to approximately RMB20,859 thousand ($3,072 thousand).

 

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Exchange Risk

Our reporting currency is the Renminbi. Transactions in other currencies are recorded in Renminbi at the rates of exchange prevailing when the transactions occur. Monetary assets and liabilities denominated in other currencies are remeasured into Renminbi at rates of exchange in effect at the balance sheet dates. Exchange gains and losses are recorded in our statements of operations as a component of current period earnings.

The PRC State Administration for Foreign Exchange, under the authority of the People’s Bank of China, controls the conversion of Renminbi into foreign currencies. The principal regulation governing foreign currency exchange in China is the Foreign Currency Administration Rules (1996), as amended, or the “Rules.” Under the Rules, once various procedural requirements are met, Renminbi is convertible for current account transactions, including trade and service-related foreign exchange transactions and dividend payments, but not for capital account transactions, including direct investment, loans or investments in securities outside China, without prior approval of the State Administration of Foreign Exchange of the People’s Republic of China, or its local counterparts.

Since July 2005, the Renminbi has no longer been pegged to the U.S. dollar. Although currently the Renminbi exchange rate versus the U.S. dollar is restricted to a rise or fall of no more than 0.3% per day and the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the Renminbi may appreciate or

 

27


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depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future, the PRC authorities may lift restrictions on fluctuations in the Renminbi exchange rate and lessen intervention in the foreign exchange market. As of September 30, 2008, the exchange rate between RMB and U.S. dollar was $1 to RMB6.7899.

We conduct substantially all of our operations through our PRC operating companies, and their financial performance and position are measured in terms of Renminbi. Our solutions are primarily procured, sold and delivered in the PRC for Renminbi. The majority of our net revenue are denominated in Renminbi.

Any devaluation of the Renminbi against the U.S. dollar would consequently have an adverse effect on our financial performance and asset values when measured in terms of U.S. dollars. On the other hand, the appreciation of the Renminbi could make our customers’ products more expensive to purchase because many of our customers are involved in the export of goods, which may have an adverse impact on their sales. A decrease in sales by our customers could have an adverse effect on our operating results. In addition, from time to time we may have U.S. dollar denominated borrowings, and therefore a decoupling of the Renminbi many affect our financial performance in the future.

We recognized a foreign currency translation adjustment of approximately RMB5,270 thousand ($776 thousand) for the quarter ended September 30, 2008 and RMB47,318 thousand ($6,969 thousand) for the nine months ended September 30, 2008. We do not currently engage in hedging activities, as such, we may in the future experience economic loss as a result of any foreign currency exchange rate fluctuations.

Interest Rate Risk

We are exposed to interest rate risk arising from short-term variable rate borrowings from time to time. Our future interest expense will fluctuate in line with any change in our borrowing rates. We do not have any derivative financial instruments and believe our exposure to interest rate risk and other relevant market risks is not material. We did not have any bank borrowings as of September 30, 2008.

The potential change in cash flows and earnings is calculated based on the change in the net interest expense over a one year period due to an immediate 1% change in rates.

Inflation

In recent years, the Chinese economy has experienced periods of rapid expansion and significant change in inflation rates. These factors have led to the adoption by the Chinese government, from time to time, of various corrective measures designed to restrict the availability of credit or to regulate growth and contain inflation. While inflation has been more moderate since 1995, significant change in inflation may in the future cause the Chinese government to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China, and thereby harm the market for our products.

 

Item 4. CONTROLS AND PROCEDURES

Disclosure controls and procedures

We maintain controls and procedures designed to ensure that we are able to collect the information we are required to disclose in the reports we file with the SEC and to record, process, summarize, and disclose this information within the time periods specified in

 

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the rules of the SEC. Based on an evaluation of our disclosure controls and procedures as of the end of the period covered by this report conducted by our management, our chief executive and chief financial officers have concluded these controls and procedures are effective to ensure we are able to record, collect, process, and disclose the information we are required to disclose in the reports we file with the SEC within the required time periods.

Internal control over Financial Reporting

There were no changes in our internal controls or in other factors during the most recent quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II - OTHER INFORMATION

 

Item 1. LEGAL PROCEEDINGS

There have been no material developments in the Company’s legal proceedings from those previously disclosed in the Company’s Form 10-K for the year ended December 31, 2007.

 

Item 1A. RISK FACTORS

Except for the last paragraph in Part I, Item 2, Principal Factors Affecting Our Results of Operation, there have been no material changes in the Company’s risk factors from those previously disclosed in the Company’s Form 10-K for the year ended December 31, 2007.

 

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

In March 2008, the Company’s Board of Directors had authorized a stock repurchase program. Pursuant to the authorization of the Board of Directors, the Company was authorized to repurchase up to 5 million shares of its outstanding common stock on the open market or in negotiated transactions. The timing and the amount of any repurchases will be determined by the Company’s management, based on its evaluation of market conditions and other factors. Under the stock repurchase program, there is no time limit for the stock repurchases, nor is there a minimum number of shares that the Company intends to repurchase. The stock repurchase program may be suspended or discontinued at any time without prior notice.

The Company made its first purchases under the program in the third quarter of this year. Since the introduction of the stock repurchase program, the Company repurchased a total of 3,735,354 shares with a weighted average price of $6.1 per share of which a total of 2,110,036 shares were repurchased during the third quarter of 2008 with a weighted average price of $5.7 per share (which does not include the 1,220,318 shares purchased in October of 2008). Approximately 1,264,646 shares remain available for repurchase by the Company. The following table provides certain additional information relating to the repurchases.

 

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Issuer Purchases of Equity Securities

 

Period

   (a) Total
Number of
Shares (or
Units)
Purchased
   (b) Average Price
Paid per Share (or
Unit)
   (c) Total Number
of Shares (or
Units) Purchased
as Part of Publicly
Announced Plans
or Programs
   (d) Maximum Number
(or Approximate Dollar
Value) of Shares (or
Units) that May Yet Be
Purchased Under the
Plans or Programs

Month #1 (July1 to July 31)

   —      —      —      4,595,000

Month #2 (August 1 to August 31)

   100,000    5.4    100,000    4,495,000

Month #3 (September 1 – September 30)

   2,010,036    5.7    2,010,036    2,484,964

Total

   2,110,036    5.7    2,110,036    2,484,964

 

Item 3. DEFAULTS UPON SENIOR SECURITIES

None.

 

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

 

Item 5. OTHER INFORMATION

None.

 

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Item 6. EXHIBITS

 

(b) Exhibits

 

31.1    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

    COGO GROUP, INC.
November 7, 2008     By:  

/s/ Jeffrey Kang

      Jeffrey Kang
     

Chairman and Chief Executive Officer

(Principal Executive Officer)

November 7, 2008     By:  

/s/ Frank Zheng

      Frank Zheng
     

Chief Financial Officer

(Principal Financial Officer)

 

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